UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

ý~~(Mark One)~~

ýQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

~~For the quarterly period ended September 30, 2003~~

o ~~TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934~~

~~For the transition period from to~~

For the quarterly period ended March 31, 2004

oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File ~~File~~ Number	Registrant, State of Incorporation, Address and Telephone Number	I.R.S. Employer Identification No.

1-11377	CINERGY CORP.	~~31-1385023~~
	(A Delaware Corporation) 139 East Fourth Street Cincinnati, Ohio 45202 (513) 421-9500	31-1385023

1-1232	THE CINCINNATI GAS & ELECTRIC COMPANY	~~31-0240030~~
	(An Ohio Corporation) 139 East Fourth Street Cincinnati, Ohio 45202 (513) 421-9500	31-0240030

1-3543	PSI ENERGY, INC.	~~35-0594457~~
	(An Indiana Corporation) 1000 East Main Street Plainfield, Indiana 46168 (513) 421-9500	35-0594457

2-7793	THE UNION LIGHT, HEAT AND POWER COMPANY	~~31-0473080~~
	(A Kentucky Corporation) 139 East Fourth Street Cincinnati, Ohio 45202 (513) 421-9500	31-0473080

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 ý No o

Indicate by check mark whether ~~the~~each registrant is an accelerated filer (as defined in Rule 12b-2 of the ~~Exchange~~ Act).

~~Yes~~ ý No o

Cinergy Corp.	Yes	ý	No	o
The Cincinnati Gas & Electric Company	Yes	o	No	ý
PSI Energy, Inc.	Yes	o	No	ý
The Union Light, Heat and Power Company	Yes	o	No	ý

This combined Form 10-Q is separately filed by Cinergy Corp., The Cincinnati Gas & Electric Company, PSI Energy, Inc., and The Union Light, Heat and Power Company. Information contained herein relating to any individual registrant is filed by such registrant on its own behalf. Each registrant makes no representation as to information relating to the other registrants.

The Union Light, Heat and Power Company meets the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and is therefore filing its company specific information with the reduced disclosure format specified in General Instruction H(2) of Form 10-Q.

As of ~~October 31, 2003,~~April 30, 2004, shares of common stock outstanding for each registrant were as listed:

Registrant	Description	Shares

Cinergy Corp.	Par value $.01 per share	179,900,405

~~Cinergy Corp.~~	~~Par value $.01 per share~~	~~178,070,206~~

The Cincinnati Gas & Electric Company	Par value $8.50 per share	89,663,086

PSI Energy, Inc.	Without par value, stated value $.01 per share	53,913,701

The Union Light, Heat and Power Company	Par value $15.00 per share	585,333

TABLE OF CONTENTS

Item Number
PART I FINANCIAL INFORMATION

1		Financial Statements
		*Cinergy Corp.*

	Condensed Consolidated Statements of Income

	Condensed Consolidated Balance Sheets

	Condensed Consolidated Statements of Changes in Common Stock Equity

	Condensed Consolidated Statements of Cash Flows

		*The Cincinnati Gas & Electric Company*

	Condensed Consolidated Statements of Income and Comprehensive Income

	Condensed Consolidated Balance Sheets

	Condensed Consolidated Statements of Cash Flows

		*PSI Energy, Inc.*

	Condensed Consolidated Statements of Income and Comprehensive Income

	Condensed Consolidated Balance Sheets

	Condensed Consolidated Statements of Cash Flows

		*The Union Light, Heat and Power Company*

	Condensed Statements of Income

	Condensed Balance Sheets

	Condensed Statements of Cash Flows

		Notes to Condensed Financial Statements

		Cautionary Statements Regarding Forward-Looking Information

2		Management’s Discussion and Analysis of Financial Condition and Results of Operations

	Introduction

	Organization

	Liquidity and Capital Resources
		~~2003~~2004 Quarterly Results of Operations - Historical
		~~2003 Year to Date Results of Operations - Historical~~
			Results of Operations - Future

3		Quantitative and Qualitative Disclosures About Market Risk

4		Controls and Procedures

PART II OTHER INFORMATION

1		Legal Proceedings

2	Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities

4		Submission of Matters to a Vote of Security Holders

6		Exhibits and Reports on Form 8-K

		Signatures

CINERGY CORP.

AND SUBSIDIARY COMPANIES

CINERGY CORP.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

	Quarter Ended September 30					Year to Date September 30					Quarter Ended March 31
	2003		2002			2003		2002			2004			2003
	(dollars in thousands, except per share amounts) (unaudited)										(dollars in thousands, except per share amounts) (unaudited)
Operating Revenues (Note 1(g)(i))
Operating Revenues
Electric	$	920,638	$	965,435		$	2,512,954	$	2,531,283		$	878,128		$	823,059
Gas	124,533		104,073			638,378		374,345			350,846			398,913
Other	46,806		49,730			142,525		89,291			59,684			45,986
Total Operating Revenues	1,091,977		1,119,238			3,293,857		2,994,919			1,288,658			1,267,958

Operating Expenses
Fuel and purchased and exchanged power (Note 1(g)(i))	329,997		302,366			840,332		761,858
Gas purchased (Note 1(g)(i))	79,582		49,283			368,896		188,725
Fuel and purchased power											286,914			269,866
Gas purchased											223,516			235,995
Operation and maintenance	317,897		363,362			973,065		962,280			375,274			328,055
Depreciation	104,856		100,050			313,719		294,345			104,857			100,605
Taxes other than income taxes	55,828		64,890			200,535		201,559			82,247			77,749
Total Operating Expenses	888,160		879,951			2,696,547		2,408,767			1,072,808			1,012,270

Operating Income	203,817		239,287			597,310		586,152			215,850			255,688

Equity in Earnings of Unconsolidated Subsidiaries	4,956		3,248			11,652		7,356			2,748			592
Miscellaneous Income – Net	12,296		6,965			27,678		2,517
Miscellaneous (Expense) Income – Net (Note 8)											(15,508		)	7,492
Interest Expense	73,075		62,518			192,623		180,122			67,395			59,169
Preferred Dividend Requirement of Subsidiary Trust (Note 1(g)(iii))	—		5,966			11,940		17,847
Preferred Dividend Requirement of Subsidiary Trust											—			5,970
Preferred Dividend Requirements of Subsidiaries											858			858

Income Before Taxes	147,994		181,016			432,077		398,056			134,837			197,775

Income Taxes	35,155		47,799			102,121		123,641			31,822			57,982
Preferred Dividend Requirements of Subsidiaries	858		859			2,574		2,575

Income Before Discontinued Operations and Cumulative Effect of Changes in Accounting Principles	111,981		132,358			327,382		271,840
Income Before Discontinued Operations and Cumulative
Effect of Changes in Accounting Principles											103,015			139,793

Discontinued operations, net of tax (Note 8)	—		(1,790		)	8,875		(561		)	—			(170		)
Cumulative effect of changes in accounting principles, net of tax (Note 1(g)(vii))	—		—			26,462		(10,899		)
Cumulative effect of changes in accounting principles, net of tax (Note 1(e)(ii))											—			26,462
Net Income	$	111,981	$	130,568		$	362,719	$	260,380		$	103,015		$	166,085

Average Common Shares Outstanding	177,751		167,967			175,944		166,544			179,261			173,387

Earnings Per Common Share (Note 10)
Income Before Discontinued Operations and Cumulative Effect of Changes in Accounting Principles	$	0.63	$	0.79		$	1.86	$	1.63
Income before discontinued operations and cumulative effect of changes in accounting principles											$	0.57		$	0.81
Discontinued operations, net of tax	—		(0.01		)	0.05		—			—			—
Cumulative effect of changes in accounting principles, net of tax	—		—			0.15		(0.06		)	—			0.15
Net Income	$	0.63	$	0.78		$	2.06	$	1.57
Net income											$	0.57		$	0.96

Earnings Per Common Share - Assuming Dilution (Note 10)
Income Before Discontinued Operations and Cumulative Effect of Changes in Accounting Principles	$	0.62	$	0.78		$	1.84	$	1.61
Income before discontinued operations and cumulative effect of changes in accounting principles											$	0.57		$	0.80
Discontinued operations, net of tax	—		(0.01		)	0.05		—			—			—
Cumulative effect of changes in accounting principles, net of tax	—		—			0.15		(0.06		)	—			0.15
Net Income	$	0.62	$	0.77		$	2.04	$	1.55
Net income											$	0.57		$	0.95

Dividends Declared Per Common Share	$	0.46	$	0.45		$	1.38	$	1.35		$	0.47		$	0.46

The accompanying notes as they relate to Cinergy Corp. are an integral part of these condensed consolidated financial statements.

CINERGY CORP.

CONDENSED CONSOLIDATED BALANCE SHEETS

~~ASSETS~~

September 30
2003

December 31
2002

March 31
2004

December 31
2003

(dollars in thousands)
(unaudited)

ASSETS

Current Assets

Cash and cash equivalents

486,400

200,112

218,541

169,120

Restricted deposits

709

3,092

94,659

92,813

Notes receivable, current

63,594

135,873

74,916

189,854

Accounts receivable less accumulated provision for doubtful accounts of $10,873 at September 30, 2003, and $16,368 at December 31, 2002

1,029,127

1,280,810

Materials, supplies, and fuel (Note 1(d))

319,632

319,454

Energy risk management current assets (Note 1(c)(i))

224,299

464,028

Accounts receivable less accumulated provision for doubtful accounts of $ 7,853 at March 31, 2004, and $7,884 at December 31, 2003

1,162,871

1,074,518

Fuel, emission allowances, and supplies

275,372

357,625

Energy risk management current assets

352,235

305,058

Prepayments and other

138,236

107,086

88,022

53,609

Total Current Assets

2,261,997

2,510,455

2,266,616

2,242,597

Property, Plant, and Equipment - at Cost

Utility plant in service (Note 12)

9,557,536

8,641,351

Utility plant in service

9,835,661

9,732,123

Construction work in progress

288,069

469,300

279,782

275,459

Total Utility Plant

9,845,605

9,110,651

10,115,443

10,007,582

Non-regulated property, plant, and equipment (Note 12)

4,326,626

4,616,754

Accumulated depreciation (Note 1(g)(vi))

5,319,500

5,157,040

Non-regulated property, plant, and equipment

4,561,449

4,527,943

Accumulated depreciation

4,994,540

4,908,019

Net Property, Plant, and Equipment

8,852,731

8,570,365

9,682,352

9,627,506

Other Assets

Regulatory assets

1,012,457

1,022,696

1,006,879

1,012,151

Investments in unconsolidated subsidiaries

482,978

417,188

489,482

494,520

Energy risk management non-current assets (Note 1(c)(i))

127,407

162,773

Notes receivable, non-current (Note 4)

218,347

—

Energy risk management non-current assets

113,921

97,334

Notes receivable, non-current

209,001

213,853

Other investments

173,790

163,851

161,624

184,044

Goodwill (Note 1 (g)(v))

43,717

43,717

Other intangible assets

1,723

2,059

Goodwill and other intangible assets

53,041

45,349

Other

300,825

266,659

197,351

197,351

Total Other Assets

2,361,244

2,078,943

2,231,299

2,244,602

Assets of Discontinued Operations (Note 8)

7,187

147,265

4,343

4,501

Total Assets

13,483,159

13,307,028

14,184,610

14,119,206

The accompanying notes as they relate to Cinergy Corp. are an integral part of these condensed consolidated financial statements.

CINERGY CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS

~~LIABILITIES AND SHAREHOLDERS’ EQUITY~~

	September 30 2003			December 31 2002			March 31 2004			December 31 2003
	(dollars in thousands) (unaudited)						(dollars in thousands) (unaudited)

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current Liabilities
Accounts payable	$	947,882		$	1,318,379		$	1,364,327		$	1,240,423
Accrued taxes	228,225			258,613			228,798			217,993
Accrued interest	79,161			62,244			68,194			68,952
Notes payable and other short-term obligations (Note 5)	336,687			667,973
Notes payable and other short-term obligations (Note 4)							236,936			351,412
Long-term debt due within one year	1,113,319			176,000			729,793			839,103
Energy risk management current liabilities (Note 1(c)(i))	186,146			407,710
Energy risk management current liabilities							329,496			296,122
Other	133,677			105,026			106,170			107,438
Total Current Liabilities	3,025,097			2,995,945			3,063,714			3,121,443

Non-Current Liabilities
Long-term debt (Note 3)	4,129,946			4,011,568			4,133,169			4,131,909
Deferred income taxes	1,519,097			1,458,171			1,583,035			1,557,981
Unamortized investment tax credits	111,186			118,095			106,616			108,884
Accrued pension and other postretirement benefit costs	606,375			626,167			681,916			662,834
Energy risk management non-current liabilities (Note 1(c)(i))	117,777			143,991
Accrued cost of removal							501,025			490,856
Energy risk management non-current liabilities							88,221			64,861
Other	233,768			179,767			209,094			205,344
Total Non-Current Liabilities	6,718,149			6,537,759			7,303,076			7,222,669

Liabilities of Discontinued Operations (Note 8)	8,877			108,833			9,693			11,594

Commitments and Contingencies (Note 7)
Commitments and Contingencies (Note 6)

Total Liabilities	9,752,123			9,642,537			10,376,483			10,355,706

Preferred Trust Securities (Note 1(g)(iii))
Company obligated, mandatorily redeemable, preferred trust securities of subsidiary, holding solely debt securities of the company	—			308,187

Cumulative Preferred Stock of Subsidiaries
Not subject to mandatory redemption	62,818			62,828			62,818			62,818

Common Stock Equity (Note 2)
Common stock - $.01 par value; authorized shares - 600,000,000; outstanding shares - 177,899,822 at September 30, 2003, and 168,663,115 at December 31, 2002	1,779			1,687
Common stock - $.01 par value; authorized shares – 600,000,000; issued
shares – 179,665,285 at March 31, 2004, and 178,438,369 at December 31, 2003; outstanding shares – 179,544,917 at March 31, 2004, and 178,336,854 at December 31, 2003							1,797			1,784
Paid-in capital	2,170,392			1,918,136			2,220,748			2,195,985
Retained earnings	1,525,727			1,403,453			1,569,995			1,551,003
Treasury shares at cost – 120,368 shares at March 31, 2004, and 101,515 shares at December 31, 2003							(3,862		)	(3,255		)
Accumulated other comprehensive income (loss)	(29,680		)	(29,800		)	(43,369		)	(44,835		)
Total Common Stock Equity	3,668,218			3,293,476			3,745,309			3,700,682

Total Liabilities and Shareholders’ Equity	$	13,483,159		$	13,307,028		$	14,184,610		$	14,119,206

The accompanying notes as they relate to Cinergy Corp. are an integral part of these condensed consolidated financial statements.

CINERGY CORP.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCK EQUITY

Common
Stock

Paid-in
Capital

Retained
Earnings

Accumulated
Other
Comprehensive
Income/(Loss)

Total
Common
Stock
Equity

(dollars in thousands)
(unaudited)

Quarter Ended September 30, 2003

Balance at July 1, 2003 (176,947,118 shares)

$
1,769

$
2,135,968

$
1,495,502

$
(24,423
)
$
3,608,816

Comprehensive income:

Net income

111,981

111,981

Other comprehensive income (loss), net of tax effect of $2,532

Foreign currency translation adjustment

(8,365
)
(8,365
)
Minimum pension liability adjustment

26

26

Unrealized gain (loss) on investment trusts

32

32

Cash flow hedges (Note 1(c))

3,050

3,050

Total comprehensive income

106,724

Issuance of common stock - net (952,704 shares)

10

31,824

31,834

Dividends on common stock ($.46 per share)

(81,725
)

(81,725
)
Other (Note 2(b))

2,600

(31
)

2,569

Ending balance at September 30, 2003 (177,899,822 shares)

$
1,779

$
2,170,392

$
1,525,727

$
(29,680
)
$
3,668,218

Quarter Ended September 30, 2002

Balance at July 1, 2002 (167,486,129 shares)

$
1,675

$
1,861,689

$
1,319,881

$
(4,787
)
$
3,178,458

Comprehensive income:

Net income

130,568

130,568

Other comprehensive income (loss), net of tax effect of $12,501

Foreign currency translation adjustment

4,810

4,810

Unrealized gain (loss) on investment trusts

(3,003
)
(3,003
)
Cash flow hedges (Note 1(c))

(18,744
)
(18,744
)
Total comprehensive income

113,631

Issuance of common stock - net (781,597 shares)

8

22,888

22,896

Dividends on common stock ($.45 per share)

(75,469
)

(75,469
)
Other

4,542

8

4,550

Ending balance at September 30, 2002 (168,267,726 shares)

$
1,683

$
1,889,119

$
1,374,988

$
(21,724
)
$
3,244,066

	Common Stock		Paid-in Capital		Retained Earnings			Treasury Stock			Accumulated Other Comprehensive Income (Loss)			Total Common Stock Equity
	(dollars in thousands) (unaudited)

Quarter Ended March 31, 2004

Balance at January 1, 2004 (178,336,854 shares)	$	1,784	$	2,195,985	$	1,551,003		$	(3,255	)	$	(44,835	)	$	3,700,682
Comprehensive income:
Net income					103,015									103,015
Other comprehensive income (loss), net of tax effect of $(914)
Foreign currency translation adjustment											986			986
Unrealized gain (loss) on investment trusts											755			755
Cash flow hedges											(275		)	(275		)
Total comprehensive income														104,481

Issuance of common stock - net (1,226,916 shares)	13		21,082											21,095
Treasury shares purchased (18,853 shares)								(607		)				(607		)
Dividends on common stock ($0.47 per share)					(83,987		)							(83,987		)
Other			3,681		(36		)							3,645

Ending balance at March 31, 2004 (179,544,917 shares)	$	1,797	$	2,220,748	$	1,569,995		$	(3,862	)	$	(43,369	)	$	3,745,309

Quarter Ended March 31, 2003

Balance at January 1, 2003 (168,663,115 shares)	$	1,687	$	1,918,136	$	1,403,453		$	—		$	(29,800	)	$	3,293,476
Comprehensive income:
Net income					166,085									166,085
Other comprehensive income (loss), net of tax effect of $(275)
Foreign currency translation adjustment											2,090			2,090
Unrealized gain (loss) on investment trusts											(851		)	(851		)
Cash flow hedges											(452		)	(452		)
Total comprehensive income														166,872

Issuance of common stock - net (7,213,804 shares)	72		193,896					—						193,968
Dividends on common stock ($0.46 per share)					(77,685		)							(77,685		)
Other			4,190		8			—						4,198
Ending balance at March 31, 2003 (175,876,919 shares)	$	1,759	$	2,116,222	$	1,491,861		$	—		$	(29,013	)	$	3,580,829

The accompanying notes as they relate to Cinergy Corp. are an integral part of these condensed consolidated financial statements.

~~CINERGY CORP.~~
~~CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCK EQUITY~~

Common
Stock

Paid-in
Capital

Retained
Earnings

Accumulated
Other
Comprehensive
Income/(Loss)

Total
Common
Stock
Equity

(dollars in thousands)
(unaudited)

Year to Date September 30, 2003

Balance at January 1, 2003 (168,663,115 shares)

$
1,687

$
1,918,136

$
1,403,453

$
(29,800
)
$
3,293,476

Comprehensive income:

Net income

362,719

362,719

Other comprehensive income (loss), net of tax effect of $(26)

Foreign currency translation adjustment, net of reclassification adjustments of $6,134 (net of tax) (Note 8)

(2,312
)
(2,312
)
Minimum pension liability adjustment

26

26

Unrealized gain (loss) on investment trusts

2,551

2,551

Cash flow hedges (Note 1(c))

(145
)
(145
)
Total comprehensive income

362,839

Issuance of common stock - net (9,236,707 shares)

92

251,179

251,271

Dividends on common stock ($1.38 per share)

(240,402
)

(240,402
)
Other (Note 2(b))

1,077

(43
)

1,034

Ending balance at September 30, 2003 (177,899,822 shares)

$
1,779

$
2,170,392

$
1,525,727

$
(29,680
)
$
3,668,218

Year to Date September 30, 2002

Balance at January 1, 2002 (159,402,839 shares)

$
1,594

$
1,619,659

$
1,337,135

$
(16,929
)
$
2,941,459

Comprehensive income:

Net income

260,380

260,380

Other comprehensive income (loss), net of tax effect of $7,879

Foreign currency translation adjustment

20,123

20,123

Minimum pension liability adjustment

136

136

Unrealized gain (loss) on investment trusts

(4,637
)
(4,637
)
Cash flow hedges (Note 1(c))

(20,417
)
(20,417
)
Total comprehensive income

255,585

Issuance of common stock - net (8,864,887 shares)

89

258,300

258,389

Dividends on common stock ($1.35 per share)

(222,551
)

(222,551
)
Other

11,160

24

11,184

Ending balance at September 30, 2002 (168,267,726 shares)

$
1,683

$
1,889,119

$
1,374,988

$
(21,724
)
$
3,244,066

~~The accompanying notes as they relate to Cinergy Corp. are an integral part of these condensed consolidated financial statements.~~

CINERGY CORP.
~~CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS~~

Year to Date
September 30

2003

2002

(dollars in thousands)
(unaudited)

Cash Flows from Continuing Operations

Operating Activities

Net income

$
362,719

$
260,380

Items providing or (using) cash currently:

Depreciation

313,719

294,345

(Income) Loss of discontinued operations, net of tax

(8,875
)
561

Cumulative effect of changes in accounting principles, net of tax

(26,462
)
10,899

Change in net position of energy risk management activities

(18,097
)
(61,838
)
Deferred income taxes and investment tax credits – net

35,828

169,377

Equity in (earnings) losses of unconsolidated subsidiaries

(11,652
)
(7,356
)
Allowance for equity funds used during construction

(7,111
)
(8,802
)
Regulatory assets deferrals

(61,846
)
(69,923
)
Regulatory assets amortization

74,686

93,163

Accrued pension and other postretirement benefit costs

(19,792
)
51,587

Deferred costs under gas recovery mechanism

(31,803
)
(2,592
)
Changes in current assets and current liabilities:

Restricted deposits

2,383

(798
)
Accounts and notes receivable

338,099

(357,370
)
Materials, supplies, and fuel

(178
)
(71,535
)
Prepayments

(29,923
)
(40,044
)
Accounts payable

(364,181
)
432,766

Accrued taxes and interest

(15,069
)
(97,625
)
Other assets

5,772

48,362

Other liabilities

58,130

11,322

Net cash provided by (used in) operating activities

596,347

654,879

Financing Activities

Change in short-term debt

(332,404
)
(417,228
)
Issuance of long-term debt

688,166

628,170

Redemption of long-term debt

(187,873
)
(115,672
)
Funds on deposit from issuance of debt securities

—

(131,600
)
Retirement of preferred stock of subsidiaries

(10
)
(3
)
Issuance of common stock

251,271

258,389

Dividends on common stock

(240,402
)
(222,551
)

Net cash provided by (used in) financing activities

178,748

(495
)

Investing Activities

Construction expenditures (less allowance for equity funds used during construction)

(508,671
)
(587,445
)
Proceeds from notes receivable

5,076

—

Acquisitions and other investments

(36,464
)
(56,439
)
Proceeds from sale of subsidiaries and equity investments

51,252

7,305

Net cash provided by (used in) investing activities

(488,807
)
(636,579
)

Net increase (decrease) in cash and cash equivalents from continuing operations

286,288

17,805

Cash and cash equivalents from continuing operations at beginning of period

200,112

87,257

Cash and cash equivalents from continuing operations at end of period

$
486,400

$
105,062

Cash Flows from Discontinued Operations

Operating activities

$
(7,285
)
$
17,992

Financing activities

(13,484
)
(22,551
)
Investing activities

(202
)
(5,046
)

Net increase (decrease) in cash and cash equivalents from discontinued operations

(20,971
)
(9,605
)

Cash and cash equivalents from discontinued operations at beginning of period

20,971

23,810

Cash and cash equivalents from discontinued operations at end of period

$
—

$
14,205

Supplemental Disclosure of Cash Flow Information

Cash paid during the period for:

Interest (net of amount capitalized)

$
182,108

$
207,659

Income taxes

$
90,281

$
30,900

~~The accompanying notes as they relate to Cinergy Corp. are an integral part of these condensed consolidated financial statements.~~

~~THE CINCINNATI GAS & ELECTRIC COMPANY~~

~~AND SUBSIDIARY COMPANIES~~

~~THE CINCINNATI GAS & ELECTRIC COMPANY~~
~~CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME~~

Quarter Ended
September 30

Year to Date
September 30

2003

2002

2003

2002

(dollars in thousands)
(unaudited)

Operating Revenues (Note 1(g)(i))

Electric

$
474,840

$
492,617

$
1,300,859

$
1,301,442

Gas

66,399

41,452

426,986

277,069

Total Operating Revenues

541,239

534,069

1,727,845

1,578,511

Operating Expenses

Fuel and purchased and exchanged power (Note 1(g)(i))

144,794

136,459

381,615

352,292

Gas purchased

32,223

12,594

252,074

145,033

Operation and maintenance

133,474

150,247

394,171

394,443

Depreciation

42,542

49,005

142,119

146,057

Taxes other than income taxes

44,553

50,304

154,810

149,509

Total Operating Expenses

397,586

398,609

1,324,789

1,187,334

Operating Income

143,653

135,460

403,056

391,177

Miscellaneous Income - Net

9,654

4,140

23,137

4,002

Interest Expense

29,506

23,746

84,766

68,375

Income Before Taxes

123,801

115,854

341,427

326,804

Income Taxes

44,938

44,085

125,347

124,780

Income Before Cumulative Effect of Changes in Accounting Principles

78,863

71,769

216,080

202,024

Cumulative effect of changes in accounting principles, net of tax (Note 1(g)(vii))

—

—

30,938

—

Net Income

$
78,863

$
71,769

$
247,018

$
202,024

Preferred Dividend Requirement

211

211

634

634

Net Income Applicable to Common Stock

$
78,652

$
71,558

$
246,384

$
201,390

Net Income

$
78,863

$
71,769

$
247,018

$
202,024

Other Comprehensive Income (Loss), Net of Tax

2,720

(17,588
)
(307
)
(19,673
)

Comprehensive Income

$
81,583

$
54,181

$
246,711

$
182,351

~~The accompanying notes as they relate to The Cincinnati Gas & Electric Company are an integral part of these condensed consolidated financial statements.~~

~~THE CINCINNATI GAS & ELECTRIC COMPANY~~
~~CONDENSED CONSOLIDATED BALANCE SHEETS~~

~~ASSETS~~

September 30
2003

December 31
2002

(dollars in thousands)
(unaudited)

Current Assets

Cash and cash equivalents

$
99,551

$
45,336

Restricted deposits

137

3,071

Notes receivable from affiliated companies

137,144

148,823

Accounts receivable less accumulated provision for doubtful accounts of $4,096 at September 30, 2003, and $5,942 at December 31, 2002

103,345

117,269

Accounts receivable from affiliated companies

9,730

97,584

Materials, supplies, and fuel

135,035

121,881

Energy risk management current assets (Note 1(c)(i))

78,689

57,912

Prepayments and other

35,565

8,560

Total Current Assets

599,196

600,436

Property, Plant, and Equipment - at Cost

Utility plant in service (Note 12)

Electric

2,146,147

2,073,133

Gas

1,043,356

1,003,870

Common

249,382

248,938

Total Utility Plant In Service

3,438,885

3,325,941

Construction work in progress

115,161

84,249

Total Utility Plant

3,554,046

3,410,190

Non-regulated property, plant, and equipment (Note 12)

3,510,124

3,445,056

Accumulated depreciation (Note 1(g)(vi))

2,754,575

2,712,105

Net Property, Plant, and Equipment

4,309,595

4,143,141

Other Assets

Regulatory assets

594,727

604,776

Energy risk management non-current assets (Note 1(c)(i))

61,789

64,762

Other investments

1,084

1,082

Other

178,884

127,550

Total Other Assets

836,484

798,170

Total Assets

$
5,745,275

$
5,541,747

~~The accompanying notes as they relate to The Cincinnati Gas & Electric Company are an integral part of these condensed consolidated financial statements.~~

~~THE CINCINNATI GAS & ELECTRIC COMPANY~~
~~CONDENSED CONSOLIDATED BALANCE SHEETS~~

~~LIABILITIES AND SHAREHOLDER’S EQUITY~~

September 30
2003

December 31
2002

(dollars in thousands)
(unaudited)

Current Liabilities

Accounts payable

$
145,449

$
195,812

Accounts payable to affiliated companies

33,253

146,558

Accrued taxes

193,641

159,199

Accrued interest

32,478

22,872

Notes payable and other short-term obligations (Note 5)

112,100

112,100

Notes payable to affiliated companies (Note 5)

9,042

8,947

Long-term debt due within one year

395,500

120,000

Energy risk management current liabilities (Note 1(c)(i))

73,445

49,288

Other

28,834

37,160

Total Current Liabilities

1,023,742

851,936

Non-Current Liabilities

Long-term debt (Note 3)

1,456,716

1,569,713

Deferred income taxes

942,250

882,628

Unamortized investment tax credits

80,689

85,198

Accrued pension and other postretirement benefit costs

206,003

201,284

Energy risk management non-current liabilities (Note 1(c)(i))

43,204

31,326

Other

82,430

88,843

Total Non-Current Liabilities

2,811,292

2,858,992

Commitments and Contingencies (Note 7)

Total Liabilities

3,835,034

3,710,928

Cumulative Preferred Stock

Not subject to mandatory redemption

20,485

20,485

Common Stock Equity

Common stock - $8.50 par value; authorized shares - 120,000,000; outstanding shares - 89,663,086 at September 30, 2003, and December 31, 2002

762,136

762,136

Paid-in capital

586,292

586,292

Retained earnings

567,381

487,652

Accumulated other comprehensive income (loss)

(26,053
)
(25,746
)
Total Common Stock Equity

1,889,756

1,810,334

Total Liabilities and Shareholder’s Equity

$
5,745,275

$
5,541,747

~~The accompanying notes as they relate to The Cincinnati Gas & Electric Company are an integral part of these condensed consolidated financial statements.~~

~~THE CINCINNATI GAS & ELECTRIC COMPANY~~
~~CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS~~

Year to Date
September 30

2003

2002

(dollars in thousands)
(unaudited)

Operating Activities

Net income

$
247,018

$
202,024

Items providing or (using) cash currently:

Depreciation

142,119

146,057

Deferred income taxes and investment tax credits - net

35,406

95,730

Cumulative effect of changes in accounting principles, net of tax

(30,938
)
—

Change in net position of energy risk management activities

(24,465
)
(19,560
)
Allowance for equity funds used during construction

(2,566
)
261

Regulatory assets deferrals

(17,984
)
(45,007
)
Regulatory assets amortization

31,411

38,024

Accrued pension and other postretirement benefit costs

4,719

5,549

Deferred costs under gas cost recovery mechanism

(31,803
)
(2,592
)
Changes in current assets and current liabilities:

Restricted deposits

2,934

(765
)
Accounts and notes receivable

157,926

(199,985
)
Materials, supplies, and fuel

(13,154
)
6,576

Prepayments

(8,040
)
(14,830
)
Accounts payable

(163,059
)
214,967

Accrued taxes and interest

44,048

(7,301
)
Other assets

(12,307
)
5,856

Other liabilities

(15,350
)
(7,506
)

Net cash provided by (used in) operating activities

345,915

417,498

Financing Activities

Change in short-term debt, including net affiliate notes

(44,374
)
(451,627
)
Issuance of long-term debt

256,198

580,570

Redemption of long-term debt

(100,000
)
(100,000
)
Funds on deposit from issuance of debt securities

—

(84,000
)
Retirement of preferred stock

—

(1
)
Dividends on preferred stock

(634
)
(634
)
Dividends on common stock

(166,655
)
(138,712
)

Net cash provided by (used in) financing activities

(55,465
)
(194,404
)

Investing Activities

Construction expenditures (less allowance for equity funds used during construction)

(236,235
)
(223,740
)
Other investments

—

98

Net cash provided by (used in) investing activities

(236,235
)
(223,642
)

Net increase (decrease) in cash and cash equivalents

54,215

(548
)

Cash and cash equivalents at beginning of period

45,336

9,074

Cash and cash equivalents at end of period

$
99,551

$
8,526

Supplemental Disclosure of Cash Flow Information

Cash paid during the period for:

Interest (net of amount capitalized)

$
69,321

$
68,749

Income taxes

$
38,146

$
16,121

~~The accompanying notes as they relate to The Cincinnati Gas & Electric Company are an integral part of these condensed consolidated financial statements.~~

~~PSI ENERGY~~~~, INC.~~

~~AND SUBSIDIARY COMPANY~~

~~PSI ENERGY, INC.~~
~~CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME~~

Quarter Ended
September 30

Year to Date
September 30

2003

2002

2003

2002

(dollars in thousands)
(unaudited)

Operating Revenues(Note 1(g)(i))

Electric

$
437,084

$
470,772

$
1,210,157

$
1,215,791

Operating Expenses

Fuel and purchased and exchanged power (Note 1(g)(i))

177,786

168,683

466,656

420,278

Operation and maintenance

113,336

128,931

348,668

386,559

Depreciation

47,695

39,826

135,351

115,954

Taxes other than income taxes

10,322

13,446

42,354

46,992

Total Operating Expenses

349,139

350,886

993,029

969,783

Operating Income

87,945

119,886

217,128

246,008

Miscellaneous Income (Expense) - Net

(2,221
)
4,434

5,348

14,155

Interest Expense

21,324

18,782

63,477

55,862

Income Before Taxes

64,400

105,538

158,999

204,301

Income Taxes

26,808

37,895

64,107

68,861

Income Before Cumulative Effect of a Change in Accounting Principle

37,592

67,643

94,892

135,440

Cumulative effect of a change in accounting principle, net of tax (Note 1(g)(vii))

—

—

(494
)
—

Net Income

$
37,592

$
67,643

$
94,398

$
135,440

Preferred Dividend Requirement

647

648

1,940

1,941

Net Income Applicable to Common Stock

$
36,945

$
66,995

$
92,458

$
133,499

Net Income

$
37,592

$
67,643

$
94,398

$
135,440

Other Comprehensive Income (Loss), Net of Tax

(77
)
(2,716
)
2,247

(3,684
)

Comprehensive Income

$
37,515

$
64,927

$
96,645

$
131,756

~~The accompanying notes as they relate to PSI Energy, Inc. are an integral part of these condensed consolidated financial statements.~~

~~PSI ENERGY, INC.~~

~~CONDENSED CONSOLIDATED BALANCE SHEETS~~

~~ASSETS~~

September 30
2003

December 31
2002

(dollars in thousands)
(unaudited)

Current Assets

Cash and cash equivalents

$
11,452

$
2,007

Restricted deposits

571

20

Notes receivable from affiliated companies

21,108

53,755

Accounts receivable less accumulated provision for doubtful accounts of $2,068 at September 30, 2003, and $5,656 at December 31, 2002

48,295

84,819

Accounts receivable from affiliated companies

4,328

437

Materials, supplies, and fuel

122,574

137,292

Energy risk management current assets (Note 1(c)(i))

7,090

8,701

Prepayments and other

33,751

44,725

Total Current Assets

249,169

331,756

Property, Plant, and Equipment - at Cost

Utility plant in service

6,118,651

5,315,410

Construction work in progress

172,908

385,051

Total Utility Plant

6,291,559

5,700,461

Accumulated depreciation

2,436,536

2,334,157

Net Property, Plant, and Equipment (Note 12)

3,855,023

3,366,304

Other Assets

Regulatory assets

417,730

417,920

Energy risk management non-current assets (Note 1(c)(i))

8,988

16,590

Other investments

60,852

54,683

Other

46,278

35,703

Total Other Assets

533,848

524,896

Total Assets

$
4,638,040

$
4,222,956

~~The accompanying notes as they relate to PSI Energy, Inc. are an integral part of these condensed consolidated financial statements.~~

~~PSI ENERGY, INC.~~
~~condensed consolidated balance sheets~~

~~LIABILITIES AND SHAREHOLDER’S EQUITY~~

September 30
2003

December 31
2002

(dollars in thousands)
(unaudited)

Current Liabilities

Accounts payable

$
42,452

$
113,563

Accounts payable to affiliated companies

13,486

107,364

Accrued taxes

117,415

105,960

Accrued interest

26,011

23,078

Notes payable and other short-term obligations (Note 5)

—

35,000

Notes payable to affiliated companies (Note 5)

164,974

138,055

Long-term debt due within one year

1,038

56,000

Energy risk management current liabilities (Note 1(c)(i))

14,648

8,000

Other

27,936

22,335

Total Current Liabilities

407,960

609,355

Non-Current Liabilities

Long-term debt (Note 3)

1,720,330

1,315,984

Deferred income taxes

556,636

538,745

Unamortized investment tax credits

30,497

32,897

Accrued pension and other postretirement benefit costs

176,828

184,299

Energy risk management non-current liabilities (Note 1(c)(i))

3,352

17,157

Other

77,426

80,879

Total Non-Current Liabilities

2,565,069

2,169,961

Commitments and Contingencies (Note 7)

Total Liabilities

2,973,029

2,779,316

Cumulative Preferred Stock

Not subject to mandatory redemption

42,333

42,343

Common Stock Equity

Common stock - without par value; $.01 stated value; authorized shares - 60,000,000; outstanding shares - 53,913,701 at September 30, 2003, and December 31, 2002

539

539

Paid-in capital (Note 2(c))

626,931

426,931

Retained earnings

1,001,080

981,946

Accumulated other comprehensive income (loss)

(5,872
)
(8,119
)
Total Common Stock Equity

1,622,678

1,401,297

Total Liabilities and Shareholder’s Equity

$
4,638,040

$
4,222,956

~~The accompanying notes as they relate to PSI Energy, Inc. are an integral part of these condensed consolidated financial statements.~~

~~PSI ENERGY, INC.~~

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

	Quarter Ended March 31
	2004			2003
	(dollars in thousands) (unaudited)

Cash Flows from Continuing Operations
Operating Activities
Net income	$	103,015		$	166,085
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	104,857			100,605
Loss on discontinued operations, net of tax	—			170
Loss on impairment or disposal of investments	22,766			—
Cumulative effect of changes in accounting principles, net of tax	—			(26,462		)
Change in net position of energy risk management activities	(7,030		)	9,730
Deferred income taxes and investment tax credits - net	11,627			18,013
Equity in earnings of unconsolidated subsidiaries	(2,748		)	(592		)
Allowance for equity funds used during construction	(254		)	(3,579		)
Regulatory assets deferrals	(18,377		)	(17,422		)
Regulatory assets amortization	25,367			27,830
Accrued pension and other postretirement benefit costs	19,082			15,954
Deferred costs under gas cost recovery mechanism	25,728			(38,659		)
Cost of removal	(3,805		)	(3,252		)
Changes in current assets and current liabilities:
Restricted deposits	(1,666		)	35
Accounts and notes receivable	27,156			(57,486		)
Fuel, emission allowances, and supplies	82,044			76,756
Prepayments	(35,336		)	(4,261		)
Accounts payable	123,620			135,435
Accrued taxes and interest	10,047			(22,464		)
Other assets	(7,943		)	(3,111		)
Other liabilities	4,555			3,375

Net cash provided by operating activities	482,705			376,700

Financing Activities
Change in short-term debt	(114,318		)	(341,475		)
Issuance of long-term debt	—			35,000
Redemption of long-term debt	(114,652		)	—
Issuance of common stock	21,095			193,968
Dividends on common stock	(83,987		)	(77,685		)

Net cash used in financing activities	(291,862		)	(190,192		)

Investing Activities
Construction expenditures (less allowance for equity funds used during construction)	(145,748		)	(147,733		)
Proceeds from notes receivable	4,238			—
Acquisitions and other investments	(14,317		)	(7,858		)
Proceeds from disposition of subsidiaries and investments	14,405			—

Net cash used in investing activities	(141,422		)	(155,591		)

Net increase in cash and cash equivalents from continuing operations	49,421			30,917

Cash and cash equivalents from continuing operations at beginning of period	169,120			200,112

Cash and cash equivalents from continuing operations at end of period	$	218,541		$	231,029

Cash Flows from Discontinued Operations
Operating activities	$	158		$	17,513
Financing activities	(158		)	(10,152		)
Investing activities	—			(202		)

Net increase in cash and cash equivalents from discontinued operations	—			7,159
Cash and cash equivalents from discontinued operations at beginning of period	—			20,971
Cash and cash equivalents from discontinued operations at end of period	$	—		$	28,130

Supplemental Disclosure of Cash Flow Information
Cash paid during the period for:
Interest (net of amount capitalized)	$	68,397		$	67,259
Income taxes	$	7,057		$	67,384

The accompanying notes as they relate to Cinergy Corp. are an integral part of these condensed consolidated financial statements.

THE CINCINNATI GAS & ELECTRIC COMPANY

AND SUBSIDIARY COMPANIES

Year to Date
September 30

2003

2002

(dollars in thousands)
(unaudited)

Operating Activities

Net income

$
94,398

$
135,440

Items providing or (using) cash currently:

Depreciation

135,351

115,954

Cumulative effect of a change in accounting principle, net of tax

494

—

Deferred income taxes and investment tax credits - net

14,370

46,376

Change in net position of energy risk management activities

(1,731
)
8,443

Allowance for equity funds used during construction

(4,545
)
(9,063
)
Regulatory assets deferrals

(43,862
)
(24,916
)
Regulatory assets amortization

43,275

55,139

Accrued pension and other postretirement benefit costs

(7,471
)
4,603

Changes in current assets and current liabilities:

Restricted deposits

(551
)
(34
)
Accounts and notes receivable

65,280

222,369

Materials, supplies, and fuel

14,718

(35,243
)
Prepayments

(154
)
(3,857
)
Accounts payable

(164,989
)
(147,681
)
Accrued taxes and interest

14,388

875

Other assets

6,980

4,881

Other liabilities

(909
)
(8,338
)

Net cash provided by (used in) operating activities

165,042

364,948

Financing Activities

Change in short-term debt, including net affiliate notes

(8,081
)
37,287

Issuance of long-term debt

431,968

47,600

Redemption of long-term debt

(459,865
)
(23,000
)
Contribution from parent

200,000

—

Funds on deposit from issuance of debt securities

—

(47,600
)
Retirement of preferred stock

(10
)
(2
)
Dividends on preferred stock

(1,940
)
(1,940
)
Dividends on common stock

(73,324
)
(83,448
)

Net cash provided by (used in) financing activities

88,748

(71,103
)

Investing Activities

Construction expenditures (less allowance for equity funds used during construction)

(241,859
)
(286,610
)
Other investments

(2,486
)
(3,098
)

Net cash provided by (used in) investing activities

(244,345
)
(289,708
)

Net increase (decrease) in cash and cash equivalents

9,445

4,137

Cash and cash equivalents at beginning of period

2,007

1,587

Cash and cash equivalents at end of period

$
11,452

$
5,724

Supplemental Disclosure of Cash Flow Information

Cash paid during the period for:

Interest (net of amount capitalized)

$
72,455

$
75,807

Income taxes

$
50,419

$
13,590

Non-cash financing and investing activities:

Issuance of promissory notes to affiliated company for acquisition of assets

$
375,969

$
—

THE CINCINNATI GAS & ELECTRIC COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

	Quarter Ended March 31
	2004			2003
	(dollars in thousands) (unaudited)

Operating Revenues
Electric	$	437,607		$	428,564
Gas	327,652			275,276
Total Operating Revenues	765,259			703,840

Operating Expenses
Fuel and purchased power	132,792			130,554
Gas purchased	223,517			171,765
Operation and maintenance	156,375			134,758
Depreciation	44,386			49,264
Taxes other than income taxes	64,195			60,518
Total Operating Expenses	621,265			546,859

Operating Income	143,994			156,981

Miscellaneous Income - Net	2,854			6,584
Interest Expense	22,436			25,843

Income Before Taxes	124,412			137,722

Income Taxes	46,957			51,424

Income Before Cumulative Effect of Changes in Accounting Principles	77,455			86,298

Cumulative effect of changes in accounting principles, net of tax (Note 1(e)(ii))	—			30,938

Net Income	$	77,455		$	117,236

Preferred Dividend Requirement	211			211

Net Income Applicable to Common Stock	$	77,244		$	117,025

Net Income	$	77,455		$	117,236

Other Comprehensive Income (Loss), Net of Tax	(324		)	(306		)

Comprehensive Income	$	77,131		$	116,930

The accompanying notes as they relate to The Cincinnati Gas & Electric Company are an integral part of these condensed consolidated financial statements.

THE CINCINNATI GAS & ELECTRIC COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS

	March 31 2004		December 31 2003
	(dollars in thousands) (unaudited)

ASSETS

Current Assets
Cash and cash equivalents	$	22,781	$	15,842
Restricted deposits	137		137
Notes receivable from affiliated companies	35,431		110,149
Accounts receivable less accumulated provision for doubtful accounts of $ 997 at March 31, 2004, and $1,602 at December 31, 2003	97,134		107,733
Accounts receivable from affiliated companies	33,090		58,406
Fuel, emission allowances, and supplies	116,446		135,948
Energy risk management current assets	121,606		72,830
Prepayments and other	17,694		15,049
Total Current Assets	444,319		516,094

Property, Plant, and Equipment - at Cost
Utility plant in service
Electric	2,185,391		2,155,457
Gas	1,127,129		1,104,797
Common	291,081		288,394
Total Utility Plant In Service	3,603,601		3,548,648
Construction work in progress	61,202		71,947
Total Utility Plant	3,664,803		3,620,595
Non-regulated property, plant, and equipment	3,595,575		3,576,187
Accumulated depreciation	2,659,140		2,625,568
Net Property, Plant, and Equipment	4,601,238		4,571,214

Other Assets
Regulatory assets	585,651		594,764
Energy risk management non-current assets	48,955		36,583
Other investments	1,294		1,083
Other	69,329		89,741
Total Other Assets	705,229		722,171

Total Assets	$	5,750,786	$	5,809,479

The accompanying notes as they relate to The Cincinnati Gas & Electric Company are an integral part of these condensed consolidated financial statements.

THE CINCINNATI GAS & ELECTRIC COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS

	March 31 2004			December 31 2003
	(dollars in thousands) (unaudited)

LIABILITIES AND SHAREHOLDER’S EQUITY

Current Liabilities
Accounts payable	$	226,138		$	217,652
Accounts payable to affiliated companies	53,425			136,470
Accrued taxes	177,933			146,216
Accrued interest	21,667			21,572
Notes payable and other short-term obligations (Note 4)	112,100			112,100
Notes payable to affiliated companies (Note 4)	55,013			49,126
Long-term debt due within one year	—			110,000
Energy risk management current liabilities	107,861			77,791
Other	33,799			32,319
Total Current Liabilities	787,936			903,246

Non-Current Liabilities
Long-term debt (Note 3)	1,459,125			1,458,807
Deferred income taxes	992,767			985,481
Unamortized investment tax credits	77,701			79,186
Accrued pension and other postretirement benefit costs	223,717			219,393
Accrued cost of removal	158,141			155,336
Energy risk management non-current liabilities	24,387			11,665
Other	78,341			69,687
Total Non-Current Liabilities	3,014,179			2,979,555

Commitments and Contingencies (Note 6)

Total Liabilities	3,802,115			3,882,801

Cumulative Preferred Stock
Not subject to mandatory redemption	20,485			20,485

Common Stock Equity
Common stock - $8.50 par value; authorized shares - 120,000,000; outstanding shares - 89,663,086 at March 31, 2004 and December 31, 2003	762,136			762,136
Paid-in capital	586,528			586,528
Retained earnings	612,310			589,993
Accumulated other comprehensive income (loss)	(32,788		)	(32,464		)
Total Common Stock Equity	1,928,186			1,906,193

Total Liabilities and Shareholder’s Equity	$	5,750,786		$	5,809,479

The accompanying notes as they relate to The Cincinnati Gas & Electric Company are an integral part of these condensed consolidated financial statements.

THE CINCINNATI GAS & ELECTRIC COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

	Quarter Ended March 31
	2004			2003
	(dollars in thousands) (unaudited)

Operating Activities
Net income	$	77,455		$	117,236
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	44,386			49,264
Deferred income taxes and investment tax credits - net	(2,863		)	13,092
Cumulative effect of changes in accounting principles, net of tax	—			(30,938		)
Change in net position of energy risk management activities	(18,356		)	1,041
Allowance for equity funds used during construction	(245		)	(719		)
Regulatory assets deferrals	(6,446		)	(5,949		)
Regulatory assets amortization	14,636			16,376
Accrued pension and other postretirement benefit costs	4,324			3,803
Deferred costs under gas cost recovery mechanism	25,728			(38,659		)
Cost of removal	(1,736		)	—
Changes in current assets and current liabilities:
Restricted deposits	—			34
Accounts and notes receivable	107,163			103,008
Fuel, emission allowances, and supplies	19,293			21,444
Prepayments	(2,748		)	361
Accounts payable	(74,720		)	(60,051		)
Accrued taxes and interest	31,812			(4,137		)
Other assets	4,579			1,534
Other liabilities	10,156			(6,924		)

Net cash provided by operating activities	232,418			179,816

Financing Activities
Change in short-term debt, including net affiliate notes	9,357			(86,487		)
Redemption of long-term debt	(110,000		)	—
Dividends on preferred stock	(51		)	(211		)
Dividends on common stock	(54,926		)	(47,082		)

Net cash used in financing activities	(155,620		)	(133,780		)

Investing Activities
Construction expenditures (less allowance for equity funds used during construction)	(69,857		)	(64,501		)
Other investments	(2		)	(1		)

Net cash used in investing activities	(69,859		)	(64,502		)

Net increase (decrease) in cash and cash equivalents	6,939			(18,466		)

Cash and cash equivalents at beginning of period	15,842			45,336

Cash and cash equivalents at end of period	$	22,781		$	26,870

Supplemental Disclosure of Cash Flow Information
Cash paid during the period for:
Interest (net of amount capitalized)	$	21,341		$	30,010
Income taxes	$	3,447		$	29,451

The accompanying notes as they relate to The Cincinnati Gas & Electric Company are an integral part of these condensed consolidated financial statements.

PSI ENERGY, INC.
AND SUBSIDIARY COMPANY

PSI ENERGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

	Quarter Ended March 31
	2004		2003
	(dollars in thousands) (unaudited)

Operating Revenues
Electric	$	416,279	$	411,688

Operating Expenses
Fuel and purchased power	136,796		166,872
Operation and maintenance	126,911		115,278
Depreciation	48,831		39,681
Taxes other than income taxes	16,412		15,882
Total Operating Expenses	328,950		337,713

Operating Income	87,329		73,975

Miscellaneous Income - Net	547		2,158
Interest Expense	19,924		20,253

Income Before Taxes	67,952		55,880

Income Taxes	27,146		21,659

Income Before Cumulative Effect of a Change in Accounting Principle	40,806		34,221

Cumulative effect of a change in accounting principle, net of tax (Note 1(e)(ii))	—		(494		)

Net Income	$	40,806	$	33,727

Preferred Dividend Requirement	647		647

Net Income Applicable to Common Stock	$	40,159	$	33,080

Net Income	$	40,806	$	33,727

Other Comprehensive Income (Loss), Net of Tax	484		(630		)

Comprehensive Income	$	41,290	$	33,097

The accompanying notes as they relate to PSI Energy, Inc. are an integral part of these condensed consolidated financial statements.

2016

PSI ENERGY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS

	March 31 2004		December 31 2003
	(dollars in thousands) (unaudited)

ASSETS

Current Assets
Cash and cash equivalents	$	16,796	$	6,565
Restricted deposits	94,341		92,675
Notes receivable from affiliated companies	21,411		65,715
Accounts receivable less accumulated provision for doubtful accounts of $1,185 at March 31, 2004, and $1,110 at December 31, 2003	45,752		37,194
Accounts receivable from affiliated companies	21,161		459
Fuel, emission allowances, and supplies	126,245		149,392
Energy risk management current assets	7,881		7,959
Prepayments and other	3,439		5,303
Total Current Assets	337,026		365,262

Property, Plant, and Equipment - at Cost
Utility plant in service	6,232,060		6,183,475
Construction work in progress	218,580		203,512
Total Utility Plant	6,450,640		6,386,987
Accumulated depreciation	2,175,599		2,133,235
Net Property, Plant, and Equipment	4,275,041		4,253,752

Other Assets
Regulatory assets	421,228		417,387
Energy risk management non-current assets	3,587		7,061
Other investments	68,558		66,803
Other	33,607		29,372
Total Other Assets	526,980		520,623

Total Assets	$	5,139,047	$	5,139,637

The accompanying notes as they relate to PSI Energy, Inc. are an integral part of these condensed consolidated financial statements.

PSI ENERGY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS

	March 31 2004			December 31 2003
	(dollars in thousands) (unaudited)

LIABILITIES AND SHAREHOLDER’S EQUITY

Current Liabilities
Accounts payable	$	53,657		$	58,286
Accounts payable to affiliated companies	21,460			69,746
Accrued taxes	84,376			69,419
Accrued interest	24,228			26,615
Notes payable and other short-term obligations (Note 4)	80,500			80,500
Notes payable to affiliated companies (Note 4)	182,689			188,446
Long-term debt due within one year	1,100			—
Energy risk management current liabilities	15,007			14,744
Other	24,846			25,636
Total Current Liabilities	487,863			533,392

Non-Current Liabilities
Long-term debt (Note 3)	1,719,524			1,720,476
Deferred income taxes	595,712			573,946
Unamortized investment tax credits	28,915			29,698
Accrued pension and other postretirement benefit costs	198,526			193,336
Accrued cost of removal	342,884			335,520
Energy risk management non-current liabilities	2,122			2,796
Other	76,300			74,958
Total Non-Current Liabilities	2,963,983			2,930,730

Commitments and Contingencies (Note 6)

Total Liabilities	3,451,846			3,464,122

Cumulative Preferred Stock
Not subject to mandatory redemption	42,333			42,333

Common Stock Equity
Common stock - without par value; $.01 stated value; authorized shares - 60,000,000; outstanding shares - 53,913,701 at March 31, 2004, and December 31, 2003	539			539
Paid-in capital	627,274			627,274
Retained earnings	1,029,992			1,018,790
Accumulated other comprehensive income (loss)	(12,937		)	(13,421		)
Total Common Stock Equity	1,644,868			1,633,182

Total Liabilities and Shareholder’s Equity	$	5,139,047		$	5,139,637

The accompanying notes as they relate to PSI Energy, Inc. are an integral part of these condensed consolidated financial statements.

PSI ENERGY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

	Quarter Ended March 31
	2004			2003
	(dollars in thousands)
	(unaudited)

Operating Activities
Net income	$	40,806		$	33,727
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	48,831			39,681
Cumulative effect of a change in accounting principle, net of tax	—			494
Deferred income taxes and investment tax credits - net	20,656			(2,654		)
Change in net position of energy risk management activities	3,141			(1,245		)
Allowance for equity funds used during construction	(9		)	(2,860		)
Regulatory assets deferrals	(11,931		)	(11,473		)
Regulatory assets amortization	10,731			11,455
Accrued pension and other postretirement benefit costs	5,190			3,808
Cost of removal	(2,069		)	(3,252		)
Changes in current assets and current liabilities:
Restricted deposits	(1,666		)	—
Accounts and notes receivable	15,044			38,520
Fuel, emission allowances, and supplies	23,147			12,907
Prepayments	1,170			1,345
Accounts payable	(52,915		)	(108,622		)
Accrued taxes and interest	12,570			5,158
Other assets	(3,080		)	(1,219		)
Other liabilities	1,420			1,066

Net cash provided by operating activities	111,036			16,836

Financing Activities
Change in short-term debt, including net affiliate notes	(5,757		)	56,810
Issuance of long-term debt	—			35,000
Dividends on preferred stock	(647		)	(647		)
Dividends on common stock	(28,957		)	(30,503		)

Net cash provided by (used in) financing activities	(35,361		)	60,660

Investing Activities
Construction expenditures (less allowance for equity funds used during construction)	(64,500		)	(74,581		)
Other investments	(944		)	(827		)

Net cash used in investing activities	(65,444		)	(75,408		)

Net increase in cash and cash equivalents	10,231			2,088

Cash and cash equivalents at beginning of period	6,565			2,007

Cash and cash equivalents at end of period	$	16,796		$	4,095

Supplemental Disclosure of Cash Flow Information
Cash paid during the period for:
Interest (net of amount capitalized)	$	24,743		$	20,465
Income taxes	$	3,132		$	36,000

Non-cash financing and investing activities:
Issuance of promissory notes to affiliated company for acquisition of assets	$	—		$	375,969

The accompanying notes as they relate to PSI Energy, Inc. are an integral part of these condensed consolidated financial statements.

THE UNION LIGHT, HEAT

AND POWER COMPANY

THE UNION LIGHT, HEAT AND POWER COMPANY

CONDENSED STATEMENTS OF INCOME

	Quarter Ended March 31
	2004		2003
	(dollars in thousands)
	(unaudited)

Operating Revenues
Electric	$	56,215	$	54,929
Gas	58,139		49,384
Total Operating Revenues	114,354		104,313

Operating Expenses
Electricity purchased from parent company for resale	39,453		39,123
Gas purchased	40,833		31,500
Operation and maintenance	13,760		12,585
Depreciation	4,925		4,445
Taxes other than income taxes	1,438		1,161
Total Operating Expenses	100,409		88,814

Operating Income	13,945		15,499

Miscellaneous Income - Net	499		1,479
Interest Expense	1,227		1,502

Income Before Taxes	13,217		15,476

Income Taxes	5,329		6,070

Net Income	$	7,888	$	9,406

The accompanying notes as they relate to The Union Light, Heat and Power Company are an integral part of these condensed financial statements.

Quarter Ended
September 30

Year to Date
September 30

2003

2002

2003

2002

(dollars in thousands)
(unaudited)

Operating Revenues

Electric

$
64,199

$
68,353

$
170,224

$
175,346

Gas

11,240

7,364

75,007

53,584

Total Operating Revenues

75,439

75,717

245,231

228,930

Operating Expenses

Electricity purchased from parent company for resale

44,546

48,445

120,805

123,091

Gas purchased

5,620

2,732

46,570

30,932

Operation and maintenance

14,689

14,819

41,068

38,199

Depreciation

4,554

4,277

13,582

13,009

Taxes other than income taxes

1,135

1,167

3,417

3,535

Total Operating Expenses

70,544

71,440

225,442

208,766

Operating Income

4,895

4,277

19,789

20,164

Miscellaneous Income (Expense) - Net

886

1,690

3,266

(2,516
)
Interest Expense

1,548

1,431

4,520

4,388

Income Before Taxes

4,233

4,536

18,535

13,260

Income Taxes

1,667

1,302

7,058

4,150

Net Income

$
2,566

$
3,234

$
11,477

$
9,110

THE UNION LIGHT, HEAT AND POWER COMPANY

CONDENSED BALANCE SHEETS

	March 31 2004		December 31 2003
	(dollars in thousands)
	(unaudited)

ASSETS

Current Assets
Cash and cash equivalents	$	8,020	$	1,899
Notes receivable from affiliated companies	5,881		17,906
Accounts receivable less accumulated provision for doubtful accounts of $219 at March 31, 2004, and $192 at December 31, 2003	3,488		2,458
Accounts receivable from affiliated companies	171		4,407
Fuel and supplies	4,884		7,936
Prepayments and other	140		279
Total Current Assets	22,584		34,885

Property, Plant, and Equipment - at Cost
Utility plant in service
Electric	276,724		273,895
Gas	241,892		239,670
Common	53,357		53,297
Total Utility Plant In Service	571,973		566,862
Construction work in progress	8,369		6,165
Total Utility Plant	580,342		573,027
Accumulated depreciation	180,228		176,368
Net Property, Plant, and Equipment	400,114		396,659

Other Assets
Regulatory assets	13,240		13,224
Other	1,010		3,903
Total Other Assets	14,250		17,127

Total Assets	$	436,948	$	448,671

The accompanying notes as they relate to The Union Light, Heat and Power Company are an integral part of these condensed financial statements.

THE UNION LIGHT, HEAT AND POWER COMPANY

CONDENSED BALANCE SHEETS

~~ASSETS~~

September 30
2003

December 31
2002

(dollars in thousands)
(unaudited)

Current Assets

Cash and cash equivalents

$
5,108

$
3,926

Notes receivable from affiliated companies

4,009

13,337

Accounts receivable less accumulated provision for doubtful accounts of $163 at September 30, 2003, and $84 at December 31, 2002

417

703

Accounts receivable from affiliated companies

509

1,671

Materials, supplies, and fuel

9,774

8,182

Prepayments and other

418

316

Total Current Assets

20,235

28,135

Property, Plant, and Equipment - at Cost

Utility plant in service

Electric

271,763

258,094

Gas

228,436

215,505

Common

32,324

31,679

Total Utility Plant In Service

532,523

505,278

Construction work in progress

11,717

14,745

Total Utility Plant

544,240

520,023

Accumulated depreciation

198,059

187,876

Net Property, Plant, and Equipment (Note 12)

346,181

332,147

Other Assets

Regulatory assets

9,441

5,134

Other

19,095

16,811

Total Other Assets

28,536

21,945

Total Assets

$
394,952

$
382,227

	March 31 2004			December 31 2003
	(dollars in thousands)
	(unaudited)

LIABILITIES AND SHAREHOLDER’S EQUITY

Current Liabilities
Accounts payable	$	12,073		$	13,431
Accounts payable to affiliated companies	19,367			21,131
Accrued taxes	8,001			298
Accrued interest	917			1,230
Notes payable to affiliated companies (Note 4)	21,196			45,233
Other	6,673			6,815
Total Current Liabilities	68,227			88,138

Non-Current Liabilities
Long-term debt	54,693			54,685
Deferred income taxes	54,295			55,488
Unamortized investment tax credits	2,815			2,879
Accrued pension and other postretirement benefit costs	17,458			16,953
Accrued cost of removal	27,968			27,443
Other	14,248			13,729
Total Non-Current Liabilities	171,477			171,177

Commitments and Contingencies (Note 6)

Total Liabilities	239,704			259,315

Common Stock Equity
Common stock - $15.00 par value; authorized shares - 1,000,000; outstanding shares - 585,333 at March 31, 2004, and December 31, 2003	8,780			8,780
Paid-in capital	23,541			23,541
Retained earnings	165,412			157,524
Accumulated other comprehensive income (loss)	(489		)	(489		)
Total Common Stock Equity	197,244			189,356

Total Liabilities and Shareholder’s Equity	$	436,948		$	448,671

The accompanying notes as they relate to The Union Light, Heat and Power Company are an integral part of these condensed financial statements.

THE UNION LIGHT, HEAT AND POWER COMPANY

CONDENSED ~~BALANCE SHEETS~~STATEMENTS OF CASH FLOWS

~~LIABILITIES AND SHAREHOLDER’S EQUITY~~

Quarter Ended
March 31

2004

2003

(dollars in thousands)

(unaudited)

Operating Activities

Net income

$
7,888

$
9,406

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation

4,925

4,445

Deferred income taxes and investment tax credits - net

(1,258
)
4,451

Allowance for equity funds used during construction

14

(85
)
Regulatory assets deferrals

(253
)
(33
)
Regulatory assets amortization

192

(22
)
Accrued pension and other postretirement benefit costs

505

271

Deferred costs under gas cost recovery mechanism

3,719

(9,372
)
Cost of removal

(414
)
—

Changes in current assets and current liabilities:

Accounts and notes receivable

15,231

4,417

Fuel and supplies

3,052

4,666

Prepayments

139

158

Accounts payable

(3,122
)
2,783

Accrued taxes and interest

7,390

(480
)
Other assets

18

20

Other liabilities

(408
)
174

Net cash provided by operating activities

37,618

20,799

Financing Activities

Change in short-term debt, including net affiliate notes

(24,037
)
(9,533
)

Net cash used in financing activities

(24,037
)
(9,533
)

Investing Activities

Construction expenditures (less allowance for equity funds used during construction)

(7,460
)
(7,633
)

Net cash used in investing activities

(7,460
)
(7,633
)

Net increase in cash and cash equivalents

6,121

3,633

Cash and cash equivalents at beginning of period

1,899

3,926

Cash and cash equivalents at end of period

$
8,020

$
7,559

Supplemental Disclosure of Cash Flow Information

Cash paid during the period for:

Interest (net of amount capitalized)

$
1,480

$
1,437

Income taxes

$
3

$
3,000

September 30
2003

December 31
2002

(dollars in thousands)
(unaudited)

Current Liabilities

Accounts payable

$
3,775

$
8,816

Accounts payable to affiliated companies

17,291

22,297

Accrued taxes

3,877

1,487

Accrued interest

1,289

1,226

Long-term debt due within one year

20,000

20,000

Notes payable to affiliated companies (Note 5)

23,726

14,076

Other

6,146

6,368

Total Current Liabilities

76,104

74,270

Non-Current Liabilities

Long-term debt

54,676

54,653

Deferred income taxes

47,716

43,360

Unamortized investment tax credits

2,945

3,143

Accrued pension and other postretirement benefit costs

15,958

15,620

Other

15,217

14,017

Total Non-Current Liabilities

136,512

130,793

Commitments and Contingencies (Note 7)

Total Liabilities

212,616

205,063

Common Stock Equity

Common stock - $15.00 par value; authorized shares - 1,000,000; outstanding shares - 585,333 at September 30, 2003, and December 31, 2002

8,780

8,780

Paid-in capital

23,644

23,644

Retained earnings

149,972

144,800

Accumulated other comprehensive income (loss)

(60
)
(60
)
Total Common Stock Equity

182,336

177,164

Total Liabilities and Shareholder’s Equity

$
394,952

$
382,227

The accompanying notes as they relate to The Union Light, Heat and Power Company are an integral part of these condensed financial statements.

~~THE UNION LIGHT, HEAT AND POWER COMPANY~~

~~CONDENSED STATEMENTS OF CASH FLOWS~~

Year to Date
September 30

2003

2002

(dollars in thousands)
(unaudited)

Operating Activities

Net income

$
11,477

$
9,110

Items providing or (using) cash currently:

Depreciation

13,582

13,009

Deferred income taxes and investment tax credits - net

4,157

1,395

Allowance for equity funds used during construction

(224
)
(523
)
Regulatory assets deferrals

(424
)
4,168

Regulatory assets amortization

505

(1,064
)
Accrued pension and other postretirement benefit costs

338

1,417

Deferred costs under gas cost recovery mechanism

(7,279
)
7,246

Changes in current assets and current liabilities:

Accounts and notes receivable

10,776

17,142

Materials, supplies, and fuel

(1,592
)
(1,671
)
Prepayments

(102
)
(174
)
Accounts payable

(10,047
)
(1,619
)
Accrued taxes and interest

2,453

2,194

Other assets

1,071

3,284

Other liabilities

375

(627
)

Net cash provided by (used in) operating activities

25,066

53,287

Financing Activities

Change in short-term debt, including net affiliate notes

9,650

(24,581
)
Dividends on common stock

(6,305
)
(2,675
)

Net cash provided by (used in) financing activities

3,345

(27,256
)

Investing Activities

Construction expenditures (less allowance for equity funds used during construction)

(27,229
)
(26,268
)
Other investments

—

(70
)

Net cash provided by (used in) investing activities

(27,229
)
(26,338
)

Net increase (decrease) in cash and cash equivalents

1,182

(307
)

Cash and cash equivalents at beginning of period

3,926

4,099

Cash and cash equivalents at end of period

$
5,108

$
3,792

Supplemental Disclosure of Cash Flow Information

Cash paid during the period for:

Interest (net of amount capitalized)

$
4,240

$
4,194

Income taxes

$
3,001

$
2,398

~~The accompanying notes as they relate to The Union Light, Heat and Power Company are an integral part of these condensed financial statements.~~

NOTES TO CONDENSED FINANCIAL STATEMENTS

In this report Cinergy (which includes Cinergy Corp. and all of our regulated and non-regulated subsidiaries) is, at times, referred to in the first person as “we”, “our”, or “us”. In addition, when discussing Cinergy’s financial information, it necessarily includes the results of The Cincinnati Gas & Electric Company (CG&E), PSI Energy, Inc. (PSI), The Union Light, Heat and Power Company (ULH&P) and all of Cinergy’s other consolidated subsidiaries. When discussing CG&E’s financial information, it necessarily includes the results of ULH&P and all of CG&E’s other consolidated subsidiaries.

1. Summary of Significant Accounting Policies

(a)Presentation

Our Condensed Financial Statements reflect all adjustments (which include normal, recurring adjustments) necessary in the opinion of the registrants for a fair presentation of the interim results. These results are not necessarily indicative of results for a full year. These statements should be read in conjunction with the Financial Statements and the notes thereto included in the registrants’ combined Form 10-K for the year ended December 31, ~~2002 and Form 8-K filed on June 10,~~ 2003 ~~(together, the 2002~~(2003 10-K). Certain amounts in the ~~2002~~2003 Condensed Financial Statements have been reclassified to conform to the ~~2003~~2004 presentation.

Management makes estimates and assumptions when preparing financial statements under generally accepted accounting principles (GAAP). Actual results could differ, as these estimates and assumptions involve judgment.

(b) Revenue Recognition

~~(i)~~ ~~Operating Revenues~~

~~The Cincinnati Gas & Electric Company (~~(i) Utility Revenues

CG&E), ~~PSI Energy, Inc. (~~PSI), and ~~The Union Light, Heat and Power Company (~~ULH&P) (collectively, our utility operating companies) record Operating Revenues for electric and gas service when delivered to customers. Customers are billed throughout the month as both gas and electric meters are read. We recognize revenues for retail energy sales that have not yet been billed, but where gas or electricity has been consumed. This is termed “unbilled ~~revenue”~~revenues” and is a widely recognized and accepted practice for utilities. In making our estimates of unbilled ~~revenue,~~revenues, we use complex systems that consider various factors, including weather, in our calculation of retail customer consumption at the end of each month. Given the use of these systems and the fact that customers are billed monthly, we believe it is unlikely that materially different results will occur in future periods when revenue is subsequently billed.

The amount of unbilled revenues for Cinergy, CG&E, PSI, and ULH&P as of ~~September 30,~~March 31, 2004 and 2003, ~~and 2002,~~ were as follows:

	2003		2002		2004		2003
	*(in millions)*				(in millions)

Cinergy	$	117	$	124	$	133	$	119
CG&E and subsidiaries	60		63		80		67
PSI	57		61		53		52
ULH&P	11		11		14		12

We market and trade electricity, natural gas, ~~coal,~~ and other energy-related products. Many of the contracts associated with these products qualify as derivatives in accordance with Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities ~~(Statement 133)~~. We designate derivative transactions as either trading or non-trading at the time they are originated in accordance with Emerging Issues Task Force (EITF) Issue 02-3, Issues Involved in Accounting for Derivative Contracts Held for Trading Purposes and Contracts Involved in Energy Trading and Risk Management Activities ~~(EITF 02-3)~~. Generally, trading contracts are reported on a net basis and non-trading contracts are reported on a gross basis.

~~Gross reporting requires presentation of sales contracts in~~ ~~Operating Revenues~~ ~~and purchase contracts in~~ ~~Fuel and purchased and exchanged power~~ ~~expense or~~ ~~Gas purchased~~ ~~expense. Non-trading derivatives typically involve physical delivery of the underlying commodity and are therefore generally presented on a gross basis.~~

Derivatives are classified as non-trading only when (a) the contracts involve the purchase of gas or electricity to serve our native load requirements (end-use customers within our public utility companies’ franchise service territory), or (b) the contracts involve the sale of gas or electricity and we have the intent and projected ability to fulfill substantially all obligations from company-owned assets, which generally is limited to the sale of generation to third parties when it is not required to meet native load requirements.

~~Energy activities that do not principally involve derivatives (e.g., natural gas sales from storage) are presented on a gross basis.~~

Net reporting requires presentation of realized and unrealized gains and losses on trading derivatives on a net basis in Operating Revenues. ~~In 2003, we began reflecting the results~~Gross reporting requires presentation of ~~trading derivatives on a net basis pursuant to the requirements of EITF 02-3, regardless of whether the transactions were settled physically. Prior to 2003, the realized results for trading~~sales contracts ~~that were physical~~ in ~~nature were presented on a gross basis. The presentation for 2002 has been reclassified to conform to the new presentation. See (g)(~~iOperating Revenues~~) below for further discussion.~~

~~Energy derivatives that are not classified as non-trading based on the above requirements are deemed to be trading. Trading typically involves frequent buying~~ and ~~selling with the objective of generating profits from differences~~purchase contracts in ~~price.~~Fuel and purchased power expense or Gas purchased expense.

We account for derivatives pursuant to Statement 133, which requires all derivatives, subject to certain exemptions, to be accounted for at fair value. Changes in the derivative’s fair value must be recognized currently in earnings unless specific hedge accounting criteria are met. Gains and

Entities (Interpretation 46), which significantly changes the consolidation requirements for traditional special purpose entities (SPE) and certain other entities subject to its scope. This interpretation defines a VIE as (a) an entity that does not have sufficient equity to support its activities without additional financial support or (b) anany entity that has equity investors that do not have voting rights, or do not absorb first dollar losses, or receive returns. These entities must be consolidated when certain criteria are met. The interpretation was originally to be effective as of July 1, 2003 for Cinergy; however, the FASB subsequently permitted deferral of the effective date to December 31, 2003 for either some or all potential VIEs. During this deferral period, the FASB plans to clarify and amend several provisions, much of which is intended to assist in the application of Interpretation 46 to operating entities. Clarifications were not needed for most traditional SPEs and ~~we therefore~~to March 31, 2004 for all other entities subject to the scope of Interpretation 46. We elected to implement Interpretation 46 for ~~such entities, as discussed below,~~traditional SPEs in accordance with the original implementation date of July 1, ~~2003. Prior period financial statements were not restated~~2003 and for ~~these changes.~~

Interpretation 46 requires us to consolidate two SPEs that have individual power sale agreements to Central Maine Power Company (CMP) for approximately 45 megawatts (MW) of capacity, ending in 2009, and 35 MW of capacity, ending in 2016. In addition, these SPEs have individual power purchase agreements with Cinergy Capital & Trading, Inc. (Capital & Trading) to supply the power. Capital & Trading also provides various services,all other entities, including certain ~~credit support~~

~~facilities. Upon the initial~~operating joint ventures, as of March 31, 2004. The consolidation of ~~these two SPEs, approximately $239 million~~certain operating joint ventures as of ~~notes receivable, $225 million of non-recourse debt, and miscellaneous other assets and liabilities were included~~March 31, 2004, had an immaterial impact on ~~Cinergy’s~~ Balance Sheets. The debt was incurred by the SPEs to finance the buyout of existing power contracts that CMP held with former suppliers. The cash flows from the notes receivable are designed to repay the debt. Notes 3 and 4 provide additional information regarding the debt and the notes receivable, respectively.

~~In accordance with Interpretation 46, we are no longer permitted to consolidate a trust that was established by~~ ~~Cinergy Corp.~~ ~~in 2001 to~~issue approximately $316 million of combined preferred trust securities and stock purchase contracts. These securities are more fully described in the 2002 10-K. In 2001, the trust loaned the proceeds from the issuance of the securities to ~~Cinergy Corp.~~ in exchange for a note payable to the trust that was eliminated in consolidation. As a result of no longer consolidating the trust beginning July 1, 2003, the preferred trust securities (previously recorded as ~~Company obligated, mandatorily redeemable, preferred trust securities of subsidiary, holding solely debt securities of the company~~~~) are no longer included in~~ ~~Cinergy’s~~ ~~Balance Sheets. In addition, the note payable owed to the trust, which has a current carrying value of approximately $319 million, was included in~~ ~~Long-term debt~~~~. The impact of not consolidating the trust was immaterial to~~ ~~Cinergy’s~~ ~~results of operations.~~our financial position.

Cinergy ~~has concluded that its accounts receivable sale facility, as discussed~~also holds interests in the 2002 10-K, will remain unconsolidated since it involves transfers of financial assets to a qualifying SPE, which is exempted from consolidation by Interpretation 46 and Statement of Financial Accounting Standards No. 140, ~~Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities~~.

(ii) Cumulative Effect of Changes in these entities is approximately $250 million. We also guarantee certain performance obligations of these entities with an estimated maximum potential exposure of approximately $55 million, as disclosed in Note 7(a). As discussed above, we expect additional interpretative guidance to be issued by the FASB during the fourth quarter ofAccounting Principles

In 2003, ~~and~~ Cinergy ~~will adopt those provisions effective December 31, 2003.~~

, CG&E, and PSI recognized ~~(iv)~~Cumulative effect of changes in accounting principles, net of tax ~~Financial Instruments with Characteristics~~gain/(loss) of ~~Both Liabilities~~approximately $26 million, $31 million, and ~~Equity~~

~~In May 2003,~~$(0.5) million, respectively. The cumulative effect of changes in accounting principles was a result of the ~~FASB issued~~adoption of Statement of Financial Accounting Standards No. ~~150,~~143, Accounting for ~~Certain Financial Instruments with Characteristics of Both Liabilities and Equity~~ Asset Retirement Obligations(Statement 150). Statement 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. This statement was effective for financial instruments entered into or modified after May 31, 2003, and was effective on July 1, 2003, for financial instruments held prior to issuance of this statement. Statement 150 would have required ~~Cinergy Corp.’s~~ ~~preferred trust securities to be reported as a liability; however, as described more fully above, the trust holding these securities is no longer permitted to be consolidated~~ and the ~~preferred trust securities are no longer reported on~~

As discussed in the ~~2002~~2003 10-K, Cinergy issues new Cinergy Corp. common stock shares to satisfy obligations under certain of its ~~various~~ employee stock plans and the Cinergy Corp. Direct Stock Purchase and Dividend Reinvestment Plan. During ~~2003,~~the first quarter of 2004, Cinergy has issued approximately ~~3.5~~1.2 million shares under these plans.

In February 2004, CG&E repaid at maturity $110 million of its 6.45% First Mortgage Bonds.

In April 2004, Cinergy Corp. ~~filed a registration statement with the Securities and Exchange Commission (SEC) with respect to the issuance~~repaid at maturity $200 million of ~~common stock, preferred stock, and other securities in an aggregate offering amount of $750 million. On February 5, 2003,~~ ~~Cinergy~~ ~~sold 5.7 million shares of common stock of~~ ~~Cinergy Corp.~~ ~~with net proceeds of approximately $175 million under this registration statement. The net proceeds from the transaction were used to reduce short-term debt of~~ ~~Cinergy Corp.~~ ~~and for other general corporate purposes.~~its 6.125% Debentures.

~~The Compensation Committee of the Board of Directors (Compensation Committee) grants certain performance share awards under the~~ ~~Cinergy Corp.~~ 1996 Long-Term Incentive Compensation Plan (LTIP). Historically, the performance shares have been paid 100 percent in the form of common stock. In order to maintain market-competitiveness with respect to the form of LTIP awards and to ensure continued compliance with internal guidelines on common share dilution, the Compensation Committee approved the future payment of performance share awards 50 percent in common stock and 50 percent in cash. As a result, we have reclassified the expected cash payout portion of the performance shares from ~~Paid-in capital~~ ~~to other current liabilities and other non-current liabilities.~~

~~Cinergy Corp.~~ ~~contributed $200 million in capital to~~ ~~PSI~~ ~~in two separate $100 million capital contributions in the second and third quarters of 2003, respectively. These capital contributions were made to support~~ ~~PSI’s~~ ~~current credit ratings.~~

~~In October 2002,~~ ~~PSI~~ ~~filed a petition with the Indiana Utility Regulatory Commission (IURC) for the purpose of securing authorization and approval to issue two subordinated promissory notes to~~ ~~Cinergy Corp.~~ ~~for the acquisition of the Butler County, Ohio and Henry County, Indiana peaking plants. In January 2003, the IURC granted this request, and in February 2003,~~ ~~PSI~~ issued the notes. One subordinated note was for the principal amount of $200 million with an annual interest rate of 6.30% scheduled to mature on April 15, 2004. The second subordinated note was for $176 million with an annual interest rate of 6.40% scheduled to mature on September 1, 2004.

~~In March 2003,~~ ~~PSI~~ ~~borrowed the proceeds from the issuance by the Indiana Development Finance Authority of $35 million of its Environmental Refunding Revenue Bonds Series 2003,~~

~~due April 1, 2022. Interest was initially set at 1.05% and resets every 35 days by auction. The bonds are not putable by the holders; therefore,~~ ~~PSI’s~~ ~~debt obligation is classified as~~ ~~Long-term debt~~. Later in March 2003, the proceeds from this borrowing plus the interest income earned were used to cause the refunding of the $35 million principal amount outstanding of the City of Princeton, Indiana Pollution Control Revenue Refunding Bonds, 1997 Series.

~~In April 2003,~~ ~~PSI~~ ~~redeemed $26.8 million of the following Series A, Medium-term Notes:~~

~~In June 2003,~~ ~~CG&E~~ issued $200 million principal amount of its 5 3/8% 2003 Series B Debentures due June 15, 2033 (effective interest rate of 5.66%). Proceeds from this issuance were used for general corporate purposes, including the funding of capital expenditures related to construction projects and environmental compliance initiatives, and the repayment of outstanding indebtedness.

~~Also, in June 2003,~~ ~~CG&E~~ ~~modified existing debt resulting in a $200 million principal amount 5.40% 2003 Series A Debenture with a 30 year maturity. The effective interest rate is 6.90%. In June 2003,~~ ~~CG&E~~ ~~redeemed its $100 million 8.28% Junior Subordinated Debentures due July 1, 2025.~~

~~Cinergy~~ ~~adopted Interpretation 46 on July 1, 2003, as discussed in Note 1(g)(~~~~iii~~~~). The adoption of this new accounting principle had the following effects on long-term debt:~~

•~~Cinergy~~ ~~no longer consolidates the trust that held~~ ~~Company obligated, mandatorily redeemable, preferred trust securities of subsidiary, holding solely debt securities of the company~~~~. This resulted in the removal of these securities from our Balance Sheets and the addition to long-term debt of a $319 million note payable that~~ ~~Cinergy~~ ~~owes to the trust.~~

•~~Cinergy~~ ~~consolidated two SPEs effective July 1, 2003. As a result,~~ ~~Cinergy~~ ~~has approximately $221 million of additional non-recourse debt as of September 30, 2003, comprised of two separate notes.~~

The first note, with a September 30, 2003 balance of $114 million bears an interest rate of 7.81% and matures in June 2009. The second note, with a September 30, 2003 balance of $107 million, bears an interest rate of 9.23% and matures in November 2016.

~~The following table reflects the long-term maturities for this non-recourse debt.~~

~~In September 2003,~~ ~~PSI~~ ~~redeemed $56 million of its 5.93% Series B, Medium-term Notes at maturity.~~

~~In September 2003,~~ ~~PSI~~ issued $400 million principal amount of its 5.00% Debentures due September 15, 2013 (effective interest rate of 5.20%). Proceeds from this issuance were used for the early redemption at par of two intercompany promissory notes, as discussed above, totaling $376 million. The remaining proceeds were used to reduce short-term indebtedness associated with general corporate purposes including funding capital expenditures related to construction projects and environmental compliance initiatives.

~~In October 2003,~~ ~~CG&E~~ ~~redeemed its $265.5 million First Mortgage Bonds, 7.20% due October 1, 2023.~~

~~As discussed in Note 1(g)(~~~~iii~~), ~~Cinergy~~ ~~consolidated two previously unconsolidated SPEs effective July 1, 2003. As a result,~~ ~~Cinergy~~ ~~has approximately $235 million of additional notes receivable as of September 30, 2003, comprised of two separate notes.~~

The first note, with a September 30, 2003 balance of $122 million bears an effective interest rate of 7.81% and matures in August 2009. The second note, with a September 30, 2003 balance of $113 million, bears an effective interest rate of 9.23% and matures in December 2016.

At ~~September 30, 2003,~~March 31, 2004, Cinergy Corp. had ~~$776~~$956 million remaining unused and available capacity relating to its $1 billion revolving credit facilities. These revolving credit facilities ~~included~~include the following:

In April ~~2003,~~2004, Cinergy Corp. successfully placed ~~a $600 million, 364-day~~two senior unsecured revolving credit ~~facility. This facility replaced the $600~~facilities with an aggregate borrowing capacity of $1.5 billion, comprised of a $500 million 364-day facility and a $1 billion three-year facility. These facilities replaced the two facilities that ~~expired~~were scheduled to expire in April ~~30, 2003.~~and May of 2004.

In ~~August 2003,~~addition to revolving credit facilities, Cinergy Corp., CG&E ~~caused~~, and PSI also maintain uncommitted lines of credit. These facilities are not guaranteed sources of capital and represent an informal agreement to lend money, subject to availability, with pricing to be determined at the ~~remarketing by the Ohio Air Quality Development Authority~~time of ~~$84~~advance. Cinergy Corp., CG&E, and PSI have established uncommitted lines of $40 million, $15 million, and $60 million, respectively, all of ~~its State~~which remained unused as of ~~Ohio Air Quality Development Revenue Refunding Bonds, due~~March 31, 2004.

September 1, 2030. The issuance consists of a $42 million 1995 Series A and a $42 million 1995 Series B. The remarketing effected the conversion from a daily interest rate reset mode supported by a letter of credit to an unsecured weekly interest rate mode. The interest rate for both series was initially set at 1.30% and will reset every seven days going forward. Because the holders of these notes have the right to have their notes redeemed on a weekly basis, they are reflected in ~~Notes payable and other short-term obligations~~ ~~on the Balance Sheets of~~ ~~Cinergy~~ ~~and~~ ~~CG&E~~.

~~Also in August 2003,~~ ~~CG&E~~ caused the remarketing by the Ohio Air Quality Development Authority of $12.1 million of its State of Ohio Air Quality Development Revenue Bonds 2001 Series A due August 1, 2033. The remarketing effected the conversion from an unsecured one-year interest rate reset mode to a daily interest rate reset mode supported by a letter of credit. The interest rate was initially set at 0.95% and will be reset daily going forward. Because the holders of these notes have the right to have their notes redeemed on a daily basis, they are reflected in ~~Notes payable and other short-term obligations~~ ~~on the Balance Sheets of~~ ~~Cinergy~~ ~~and~~ ~~CG&E~~.

The following table summarizes our Notes payable and other short-term obligations, and Notes payable to affiliated companies.

(1) Outstanding amounts ~~may~~could be greater than established lines as uncommitted lenders are, at times, willing to loan funds in excess of the established lines.

(2) The commercial paper program is limited to $800 million and is supported by Cinergy Corp.’s revolving ~~lines.~~lines of credit.

• a ratio of consolidated indebtedness to consolidated total capitalization not in excess of 65 percent.

A breach of these covenants could result in the termination of the credit facilities and the acceleration of the related indebtedness. In addition to breaches of covenants, certain other events that could result in the termination of available credit and acceleration of the related indebtedness include:

The latter two events, however, are subject to dollar-based materiality thresholds.

~~As discussed in Note 1(g)(~~~~iii~~~~), long-term debt increased in the third quarter of 2003 resulting from the adoption of Interpretation 46. The debt which was recorded as a result of this new accounting pronouncement did not cause~~ ~~Cinergy~~ ~~to be in breach of any covenants.~~

Cinergy’s extension of credit for energy marketing and trading is governed by a Corporate Credit Policy. Written guidelines approved by the Company’s Risk Policy Committee document the management approval levels for credit limits, evaluation of creditworthiness, and credit risk mitigation procedures. Exposures to credit risks are ~~measured and~~ monitored daily by ~~our~~the Corporate Credit Risk function, which is independent of all trading operations. As of ~~September 30, 2003,~~March 31, 2004, approximately 9993 percent of the credit exposure, net of credit collateral, related to energy trading and marketing activity was with counterparties rated ~~Investment Grade~~investment grade or the counterparties’ obligations were guaranteed or secured by an ~~Investment Grade~~investment grade entity. ~~No single non-investment~~The majority of these investment grade counterparties are externally rated. If a counterparty ~~accounts~~has an external rating, the lower of Standard & Poor’s and Moody’s Investors Service is used. An internal rating system is used when a counterparty is not rated externally.

As of March 31, 2004, CG&E has a concentration of trading credit exposure of approximately $79 million with four counterparties, each accounting for ~~more~~greater than ~~one~~10 percent of ~~our~~CG&E’s total trading credit exposure. All four of these counterparties are rated investment grade or are guaranteed or secured by an investment grade entity.

Energy commodity prices can be extremely volatile and the market can, at times, lack liquidity. Because of these issues, credit risk for energy commodities is generally greater than with other commodity trading.

We continually review and monitor our credit exposure to all counterparties and secondary counterparties. If appropriate, we may adjust our credit reserves to attempt to compensate for increased credit risk within the industry. Counterparty credit limits may be adjusted on a daily basis in response to changes in a counterparty’s creditworthiness, financial status, or public debt ratings.

In June 1997, the Ozone Transport Assessment Group, which consisted of 37 states, made a wide range of recommendations to the United States (U.S.) Environmental Protection Agency (EPA) to address the impact of ozone transport on serious non-attainment areas (geographic areas defined by the EPA as non-compliant with ozone standards) in the Northeast, Midwest, and South. Ozone transport refers to wind-blown movement of ozone and ozone-causing materials across city and state boundaries.

In October 1998, the EPA finalized its ozone transport rule, also known as the Nitrogen Oxide (NO_X) State Implementation Plan (SIP) Call, which addresses wind-blown ozone and ozone precursors that impact air quality in downwind states. The EPA’s final rule, which applies to 22 states in the eastern U.S. including the three states in which our electric utilities operate, required states to develop rules to reduce NO_X emissions from utility and industrial sources. In a related matter, in response to petitions filed by several states alleging air quality impacts from upwind sources located in other states, the EPA issued a rule pursuant to Section 126 of the Clean Air Act (CAA) that required reductions similar to those required under the NO_X SIP Call. Various states and industry groups challenged the final rules in the Court of Appeals for the District of Columbia Circuit, but the court upheld the key provisions of the rules.

The EPA has approved the final NO_X SIP Call rules issued by the states of Indiana and Kentucky, but has conditionally approved Ohio’s final rules. Ohio developed final NO_X SIP rules effective in May 2004 to satisfy the EPA’s conditions for approval. Final approval from the EPA is pending. The EPA has proposed withdrawal of the Section 126 rule in states with approved rules under the NO_X SIP Call. All three states have adopted a cap and trade program as the mechanism to achieve the required reductions. In September 2000, Cinergy announced a plan for its subsidiaries, CG&E and PSI, to invest in pollution control and other equipment to reduce NO_X emissions. The company has installed selective catalytic reduction units and other pollution controls and implemented certain combustion improvements at various generating stations to meet the May 2004 compliance deadline under the NO_X SIP Call. The company will also utilize the NO_X allowance market to buy or sell NO_X allowances as appropriate. The company currently estimates that it will incur costs of approximately $84 million in addition to $706 million already incurred to comply with this program.

In March 2004, the state of North Carolina filed a petition under Section 126 of the CAA in which it alleges that sources in 13 upwind states including Ohio, Indiana, and Kentucky, significantly contribute to North Carolina’s non-attainment with certain ambient air quality standards. Depending on the EPA’s final disposition of the pending petition, Cinergy’s generating stations could become subject to requirements for additional sulfur dioxide and NO_X reductions. It is unclear at this time whether any additional reductions would be required beyond those proposed in the Interstate Air Quality Rules, which were proposed by the EPA in December 2003 and expected to become final in December 2004.

In November 1999, and through subsequent amendments, the United States brought a lawsuit in the United States Federal District Court for the Southern District of Indiana (District Court) against Cinergy, CG&E, and PSI alleging various violations of the CAA. Specifically, the lawsuit alleges that we violated the CAA by not obtaining Prevention of Significant Deterioration (PSD), Non-Attainment New Source Review (NSR) and Ohio and Indiana SIP permits for various projects at our owned and co-owned generating stations. Additionally, the suit claims that we violated an Administrative Consent Order entered into in 1998 between the EPA and Cinergy relating to alleged violations of Ohio’s SIP provisions governing particulate matter at Unit 1 at CG&E’s W.C. Beckjord Generating Station (Beckjord Station). The suit

seeks (1) injunctive relief to require installation of pollution control technology on various generating units at CG&E’s Beckjord Station and Miami Fort Generating Station (Miami Fort Station), and PSI’s Cayuga Generating Station, Gallagher Generating Station (Gallagher Station), Wabash River Generating Station, and Gibson Generating Station (Gibson Station), and (2) civil penalties in amounts of up to $27,500 per day for each violation. In addition, three northeast states and two environmental groups have intervened in the case. In May 2004, the City of Louisville, Kentucky filed a motion to intervene in the case with respect to all claims made by the United States against PSI and Cinergy regarding the Gallagher Station. Also in May 2004, plaintiffs filed a motion to amend the most recent complaint pursuant to the Court’s pre-trial procedures scheduling order. This amended complaint added four new projects to the lawsuit, which had been subject to earlier EPA Notices of Violation (NOVs). These new projects are at stations previously named in the lawsuit. Plaintiffs also dropped their claims with respect to a number of projects, the United States dropped ten projects and the three northeast states dropped an additional five projects. The case is currently in discovery, and the District Court has set the case for trial by jury commencing in August 2005.

In March 2000, the United States also filed in the District Court an amended complaint in a separate lawsuit alleging violations of the CAA relating to PSD, NSR, and Ohio SIP requirements regarding various generating stations, including a generating station operated by the Columbus Southern Power Company (CSP) and jointly-owned by CSP, the Dayton Power and Light Company (DP&L), and CG&E. The EPA is seeking injunctive relief and civil penalties of up to $27,500 per day for each violation. This suit is being defended by CSP. In April 2001, the District Court in that case ruled that the Government and the intervening plaintiff environmental groups could seek injunctive relief for alleged violations that occurred more than five years before the filing of the complaint only. Thus, if the plaintiffs prevail in their claims, any calculation for penalties will not start on the date of the alleged violations, unless those alleged violations occurred after November 3, 1994, but CSP would be forced to install the controls required under the CAA. Neither party appealed that decision.

In addition, Cinergy and CG&E have been informed by DP&L that in June 2000, the EPA issued a NOV to DP&L for alleged violations of PSD, NSR, and SIP requirements at a generating station operated by DP&L and jointly-owned by CG&E. The NOV indicated the EPA may (1) issue an order requiring compliance with the requirements of the SIP, or (2) bring a civil action seeking injunctive relief and civil penalties of up to $27,500 per day for each violation.

In December 2000, Cinergy, CG&E, and PSI reached an agreement in principle with the plaintiffs regarding the above matters. The complete resolution of these issues was contingent upon establishing a final agreement with the EPA and other parties, but the plaintiffs insisted on commitments which went beyond those contained in the agreement in principle. At this time we believe it is unlikely that a final settlement agreement will be reached on these terms. It is not possible to predict whether resolution of these matters would have a material effect on our financial position or results of operations. We intend to defend against the allegations, discussed above, vigorously in court.

Prior to the 1950s, gas was produced at MGP sites through a process that involved the heating of coal and/or oil. The gas produced from this process was sold for residential, commercial, and industrial uses.

Coal tar residues, related hydrocarbons, and various metals have been found at former MGP sites in Indiana, including at least 22 sites that PSI or its predecessors previously owned and sold in a series of transactions with Northern Indiana Public Service Company (NIPSCO) and Indiana Gas Company, Inc. (IGC).

In a combination of lawsuits and NOVs, the 22 sites are in the process of being studied and will be remediated, if necessary. In 1998 NIPSCO, IGC, and PSI entered into Site Participation and Cost Sharing Agreements to allocate liability and responsibilities between them. The Indiana Department of Environmental Management (IDEM) oversees investigation and cleanup of all of these sites. Thus far, PSI has primary responsibility for investigating, monitoring and, if necessary, remediating nine of these sites. In December 2003, PSI entered into a voluntary remediation plan with the state of Indiana, providing a formal framework for the investigation and cleanup of the sites for which PSI has primary responsibility.

PSI notified its insurance carriers of the claims related to MGP sites raised by IDEM and costs included in the Site Participation and Cost Sharing Agreements. In April 1998, PSI filed suit in Hendricks County in the state of Indiana against its general liability insurance carriers. PSI sought a declaratory judgment to obligate its insurance carriers to (1) defend MGP claims against PSI and compensate PSI for its costs of investigating, preventing, mitigating, and remediating damage to property and paying claims related to MGP sites or (2) pay PSI’s cost of defense. The trial court issued a variety of rulings with respect to the claims and defenses in the litigation. PSI appealed certain adverse rulings to the Indiana Court of Appeals and the appellate court has remanded the case to the trial court. PSI has filed a petition to transfer the appellate court’s decision to the Indiana Supreme Court for its review. At the present time, PSI cannot predict the outcome of this litigation, including the outcome of the appeals.

PSI has accrued costs related to investigation, remediation, and groundwater monitoring for those sites where such costs are probable and can be reasonably estimated. We will continue to investigate and remediate the sites as outlined in the voluntary remediation plan. As additional facts become known and investigation is completed, we will assess if the likelihood of incurring additional costs becomes probable. Until all investigation and remediation is complete, we are unable to determine the overall impact on our financial position or results of operations.

CG&E has performed site assessments on its sites where we believe MGP activities have occurred at some point in the past and found no imminent risk to the environment. At the present time, CG&E cannot predict whether investigation and/or remediation will be required in the future at any of these sites.

CG&E and PSI have been named as defendants or co-defendants in lawsuits related to asbestos at their electric generating stations. Currently, there are approximately 80 pending lawsuits. In these lawsuits, plaintiffs claim to have been exposed to asbestos-containing products in the course of their work at the CG&E and PSI generating stations. The plaintiffs further claim that as the property owner of the generating stations, CG&E and PSI should be held liable for their injuries and illnesses based on an alleged duty to warn and protect them from any asbestos exposure. A majority of the lawsuits to date have been brought against PSI. The impact on CG&E’s and PSI’s financial position or results of operations of these cases to date has not been material.

Of these lawsuits, one case filed against PSI has been tried to verdict. The jury returned a verdict against PSI in the amount of approximately $500,000 on a negligence claim and for PSI on punitive damages. PSI recently received an adverse ruling in an appeal of that verdict and has filed an appeal of that decision to the Indiana Supreme Court. In addition, PSI has settled a number of other lawsuits for amounts, which neither individually nor in the aggregate are material to PSI’s financial position or results of operations.

At this time, CG&E and PSI are not able to predict the ultimate outcome of these lawsuits or the impact on

In December 2002, PSI filed a petition with the Indiana Utility Regulatory Commission (IURC) seeking approval of a base retail electric rate increase. PSI has filed initial and rebuttal testimony in this case and the final set of hearings took place in November 2003. PSI filed its proposed order in December 2003. Based on updated testimony filed in October 2003 and the proposed order, PSI proposes an increase in annual revenues of approximately $180 million, or an average increase of approximately 14 percent over PSI’s retail electric rates in effect at the end of 2002. An IURC decision is anticipated in the second quarter of 2004.

As discussed in more detail in the 2003 10-K, CG&E made multiple rate filings in 2003 with the Public Utilities Commission of Ohio (PUCO) seeking to recover investments made in the transmission and distribution system. In December 2003, these filings, and CG&E’s proposal for establishing its post market development period market pricing methodology, were consolidated for hearing before the PUCO and the hearing is scheduled for May 2004. In addition, the PUCO requested that CG&E propose a rate stabilization plan in that same proceeding. As part of our proposed rate stabilization plan (which seeks recovery of certain environmental, fuel, and purchased power costs), we seek to end the market development period, which would end the current rate freeze that is currently scheduled to end no later than December 31, 2005 for all customer classes, pursuant to the Ohio electric restructuring law. Our filings also contemplate a distribution rate case in 2004 with revised rates effective January 1, 2005 and mechanisms to recover ongoing transmission costs for Midwest Independent System Operator, Inc. or other applicable Regional Transmission Organizations. In May 2004, CG&E filed a prefiling notice with the PUCO formalizing our intent to file a rate case that will request an increase of approximately $78 million in distribution rates. We cannot predict the outcome of these proceedings.

In the second quarter of 2001, ULH&P filed a retail gas rate case with the Kentucky Public Service Commission (KPSC) seeking to increase base rates for natural gas distribution services and requesting recovery through a tracking mechanism of the costs of an accelerated gas main replacement program with an estimated capital cost of $112 million over 10 years. Through March 31, 2004, ULH&P has recovered approximately $2.5 million under this tracking mechanism. The Kentucky Attorney General has appealed to the Franklin Circuit Court the KPSC’s approval of the tracking mechanism and the KPSC’s orders approving the new tracking mechanism rates. At the present time, ULH&P cannot predict the timing or outcome of this litigation.

In June 2003, the PUCO approved an amended settlement agreement between CG&E and the PUCO Staff in a gas distribution safety case arising out of a gas leak at a service head-adapter (SHA) style riser on CG&E’s distribution system. The amended settlement agreement required CG&E to expend a minimum of $700,000 to replace SHA risers by December 31, 2003, and to file a comprehensive plan addressing all SHA risers on its distribution system. Cinergy has an estimated 190,000 SHA risers on its distribution system, of which 155,000 are in CG&E’s service area and 31,000 are in ULH&P’s service area. Further investigation as to whether any additional SHA risers will need maintenance or replacement is ongoing. If CG&E and ULH&P determine that replacement of all SHA risers is appropriate, we currently estimate that the replacement cost could be up to approximately $70 million for CG&E, which includes $10 million for ULH&P. CG&E and ULH&P would pursue recovery of this cost through rates. At this time, Cinergy, CG&E, and ULH&P cannot predict the outcome of this matter.

In January 2000, Cinergy Investments, Inc. (Investments) sold Cinergy Resources, Inc. (Resources), a former subsidiary, to Licking Rural Electrification, Inc., doing business as The Energy Cooperative (Energy Cooperative). In February 2001, Cinergy, CG&E, and Resources were named as defendants in three class action lawsuits brought by customers relating to Energy Cooperative’s removal from the Ohio Gas Customer Choice program and the failure to deliver gas to customers. Subsequently, these class action suits were amended and consolidated into one suit. CG&E has been dismissed as a defendant in the consolidated suit. The trial court certified a class against Cinergy in November 2003. A trial date has not been set. In October 2001, Cinergy, CG&E, and Investments initiated litigation against the Energy Cooperative requesting indemnification by the Energy Cooperative for the claims asserted by former customers in the class action litigation.

In March 2001, Cinergy, CG&E, and Investments were named as defendants in a lawsuit filed by Energy Cooperative and Resources. This lawsuit concerns any obligations or liabilities Investments may have to Energy Cooperative following its sale of Resources. Trial is anticipated to occur in November 2004.

We intend to vigorously defend these lawsuits and do not believe their outcome will have a material effect on our financial position or results of operations.

In July 2003, Cinergy received a subpoena from the Commodity Futures Trading Commission (CFTC). As has been previously reported by the press, the CFTC has served subpoenas on numerous other energy companies. The CFTC request sought certain information regarding our trading activities, including price reporting to energy industry publications for the period May 2000 through January 2001. Based on an initial review of these matters, we placed one employee on administrative leave and have subsequently terminated his employment. Cinergy is continuing an investigation of these matters, including whether price reporting inconsistencies occurred in our operations. We have been cooperating fully with the CFTC, and hope to resolve the investigation in the near future.

In August 2003, Cinergy, along with 38 other companies, was named as a defendant in civil litigation filed as a purported class action on behalf of all persons who purchased and/or sold New York Mercantile Exchange natural gas futures and options contracts between January 1, 2000 and December 31, 2002. The complaint alleges that improper price reporting caused damages to the class. Two similar lawsuits have subsequently been filed, and these three lawsuits have been consolidated for pretrial purposes. Plaintiffs filed a consolidated class action complaint in January 2004. We believe this action is without merit and intend to defend this lawsuit vigorously; however, we cannot predict the outcome of this matter at this time.

In the second quarter of 2003, Cinergy received initial and follow-up third-party subpoenas from the Securities and Exchange Commission (SEC) requesting information related to particular trading activity with one of its counterparties who was the target of an investigation by the SEC. Cinergy has fully cooperated with the SEC in connection with this matter. In early 2004, Cinergy received two grand jury subpoenas from the Assistant United States Attorney in the Southern District of Texas for information relating to the same trading activities being investigated by the SEC. Specifically, the Assistant United States Attorney has requested information relating to communications between some current and former employees and another energy company. We understand that we are neither a target nor are we under investigation by the Department of Justice in relation to these communications.

At this time, we do not believe the outcome of these investigations and litigation will have a material impact on Cinergy’s financial position or results of operations.

Ronald A. Katz Technology Licensing, L.P. (RAKTL) has offered us a license to a portfolio of patents claiming that the patents may be infringed by certain products and services utilized by us. The patents purportedly relate to various aspects of telephone call processing in Cinergy call centers. As of this date, no legal proceedings have been instituted against us, but if the RAKTL patents are valid, enforceable and apply to our business, we could be required to seek a license from RAKTL or to discontinue certain activities. We are currently considering this matter, but lack sufficient information to assess the potential outcome at this time.

In the ordinary course of business, Cinergy enters into various agreements providing financial or performance assurances to third parties on behalf of certain unconsolidated subsidiaries and joint ventures. These agreements are entered into primarily to support or enhance the creditworthiness otherwise attributed to these entities on a stand-alone basis, thereby facilitating the extension of sufficient credit to accomplish their intended commercial purposes. The guarantees have various termination dates, from short-term (less than one year) to open-ended.

In many cases, the maximum potential amount of an outstanding guarantee is an express term, set forth in the guarantee agreement, representing the maximum potential obligation of Cinergy under that guarantee (excluding, at times, certain legal fees to which a guaranty beneficiary may be entitled). In those cases where there is no maximum potential amount expressly set forth in the guarantee agreement, we calculate the maximum potential amount by considering the terms of the guaranteed transactions, to the extent such amount is estimable.

Cinergy has guaranteed the payment of ~~$32~~$22 million as of ~~September 30, 2003, for unconsolidated subsidiaries’ debt and~~March 31, 2004, for borrowings by individuals under the Director, Officer, and Key Employee Stock Purchase Program. Cinergy may be obligated to pay the debt’s principal and any related interest in the event of an unexcused breach of a guaranteed payment obligation ~~by the unconsolidated subsidiaries or~~ by certain directors, officers, and key employees. Most of the guarantees do not have a set termination date; however, the borrowings associated with the majority of the guarantees are due in the first quarter of 2005.

Cinergy Corp. has also provided performance guarantees on behalf of certain unconsolidated subsidiaries and joint ventures. These guarantees support performance under various agreements and instruments (such as construction contracts, ~~operation~~operations and maintenance agreements, and energy service agreements). Cinergy Corp. may be liable in the event of an unexcused breach of a guaranteed performance obligation by an unconsolidated subsidiary. Cinergy Corp. has estimated its maximum potential amount to be ~~$133~~$86 million under these guarantees as of ~~September 30, 2003.~~March 31, 2004. Cinergy Corp. may also have recourse to third parties for claims required to be paid under certain of these guarantees. The majority of these guarantees expire at the completion of the underlying performance ~~agreements,~~agreement, the majority of which expire from 2016 to 2019.

Cinergy has entered into contracts that include indemnification provisions as a routine part of its business activities. Examples of these contracts include purchase and sale agreements and operating agreements. In general, these provisions indemnify the counterparty for matters such as breaches of representations and warranties and covenants contained in the contract. In some cases, particularly with respect to purchase and sale agreements, the potential liability for certain indemnification obligations is capped, in whole or in part (generally at an aggregate amount not exceeding the sale price), and subject to a deductible amount before any payments would become due. In other cases (such as indemnifications for willful misconduct of employees in a joint venture), the maximum potential amount is not estimable given that the magnitude of any claims under those indemnifications would be a function of the extent of damages actually incurred, which is not practicable to estimate unless and until the event occurs. Cinergy has estimated the maximum potential amount, where estimable, to be ~~$124~~$115 million under these indemnification provisions. The termination period for the majority of matters provided by indemnification provisions in purchase and sale agreements generally ranges from ~~2003~~2004 to 2009.

We believe the likelihood that Cinergy would be required to perform or otherwise incur any significant losses associated with any or all of the guarantees described in the preceding paragraphs is remote.

As discussed in the 2003 10-K, we provide benefits to retirees in the form of pension and other postretirement benefits. Our qualified defined benefit pension plans cover substantially all U.S. employees meeting certain minimum age and service requirements. Funding for the qualified defined benefit pension plans is based on actuarially determined contributions, the maximum of which is generally the amount deductible for income tax purposes and the minimum being that required by the Employee Retirement Income Security Act of 1974, as amended. The pension plans’ assets consist of investments in equity and debt securities. In addition, we sponsor non-qualified pension plans (plans that do not meet the criteria for tax benefits) that cover officers, certain other key employees, and non-employee directors. We provide certain health care and life insurance benefits to retired U.S. employees and their eligible dependents. These benefits are subject to minimum age and service requirements. The health care benefits include medical coverage, dental coverage, and prescription drugs and are subject to certain limitations, such as deductibles and co-payments.

Our benefit plans’ costs for the three months ended March 31 included the following components:

~~In June 1997,~~The net periodic benefit cost by registrant for the Ozone Transport Assessment Group, which consisted of 37 states, made a wide range of recommendations to the Environmental Protection Agency (EPA) to address the impact of ozone transport on serious non-attainment areas (geographic areas defined by the EPAthree months ended March 31 was as ~~non-compliant with ozone standards) in the Northeast, Midwest, and South. Ozone transport refers to wind-blown movement of ozone and ozone-causing materials across city and state boundaries.~~follows:

~~In October 1998, the EPA finalized its ozone transport rule,~~(1) The results of Cinergy also ~~known as the NO~~_X ~~SIP Call. It applied~~include amounts related to ~~22 states in the eastern half of the United States (U.S.), including the three states in which our electric utilities operate, and proposed a model NO~~_X ~~emission allowance trading program. This rule recommended that states reduce NO~~_X ~~emissions primarily from industrial and utility sources to a certain level by May 2003.~~non-registrants.

~~In August 2000,~~On December 8, 2003, President Bush signed into law the ~~U.S. Circuit Court~~Medicare Prescription Drug, Improvement and Modernization Act of ~~Appeals~~2003 (the Act). The Act introduced a prescription drug benefit to retirees as well as a federal subsidy to sponsors of retiree health care benefit plans that provide a prescription drug benefit that is actuarially equivalent to the benefit provided by Medicare. Even though final guidelines for determining actuarial equivalence have not been published, we believe that our coverage for prescription drugs is at least actuarially equivalent to the benefits provided by Medicare for most current retirees because our benefits for that group substantially exceed the benefits provided by Medicare, thereby allowing us to qualify for the ~~District~~subsidy. We have accounted for the subsidy as a reduction of ~~Columbia (Court~~our accumulated postretirement benefit obligation (APBO). The APBO was reduced by approximately $19 million and will be amortized as an actuarial gain over future periods, thus reducing future benefit costs. The impact on 2004 net periodic benefit cost is not expected to be material. Our accounting treatment for the subsidy is consistent with draft guidance proposed by the FASB staff in March 2004; however, definitive guidance has not yet been provided and thus our accounting could change.

Cinergy holds a portfolio of ~~Appeals) extended~~direct and indirect investments in energy technology companies in the ~~deadline for NO~~_X ~~reductions to May 31, 2004. The states of West Virginia~~Power Technology and ~~Illinois, along with various industry groups (some of which we are a member), have challenged portions~~Infrastructure Services Business Unit (discussed in Note 9). One of the ~~final rule that was published on May 1, 2002,~~companies in an action filed in the Court of Appeals. A decision is expected some time after December 2003. It is unclear whether the Court of Appeals’ decision in this matter will result in an increase or decrease in the size of the NO_X ~~reduction requirement, or a deferral of the May 31, 2004 compliance deadline.~~

~~The states of Indiana and Kentucky developed final NO~~_X ~~SIP rules in response to the NO~~_X ~~SIP Call, through cap and trade programs, in June and July of 2001, respectively. The EPA has approved Indiana’s and Kentucky’s SIP rules,~~ which ~~have both become effective, and has conditionally approved Ohio’s SIP rules. Ohio EPA is still promulgating the changes to its rules to satisfy the EPA’s conditions for approval.~~ ~~Cinergy’s~~ ~~current plans for compliance with the EPA’s NO~~_X ~~SIP Call would also satisfy compliance with Indiana’s, Kentucky’s, and Ohio’s SIP rules.~~

~~On September 25, 2000,~~ Cinergy ~~announced~~holds a ~~plan for~~non-controlling interest agreed to sell its ~~subsidiaries,~~ ~~CG&E~~ ~~and~~ ~~PSI~~~~, to invest in pollution control equipment and other methods to reduce NO~~_X ~~emissions.~~major assets. This ~~plan includes the following:~~

• ~~install selective catalytic reduction units at several different generating stations;~~

• ~~install other pollution control technologies, including new computerized combustion controls, at all generating stations;~~

• ~~utilize the NO~~_X ~~allowance market to buy or sell NO~~_X ~~allowances as appropriate.~~

~~The current estimate for additional expenditures for this plan~~company is ~~approximately $167 million and is in addition to the $682 million already incurred to comply with this program.~~

~~In February 1998, several northeast states filed petitions seeking the EPA’s assistance in reducing ozone~~involved in the ~~Eastern U.S. under Section 126~~development and sale of the Clean Air Act (CAA). The EPA believes that Section 126 petitions allow a state to claim that sources in another state are contributing to its air quality problem and request that the EPA require the upwind sources to reduce their emissions.

~~In December 1999, the EPA granted four Section 126 petitions relating to NO~~_X~~emissions. This ruling affected all of our Ohio and Kentucky facilities, as well as some of our Indiana facilities, and required us to reduce our NO~~_X ~~emissions to a certain level by May 2003. The EPA subsequently extended the Section 126 rule compliance deadline to May 31, 2004, thus harmonizing the deadline with that for the NO~~_X ~~SIP Call.~~

~~On April 4, 2003, the EPA issued a proposed rule withdrawing the Section 126 rule in states with approved SIPs under the NO~~_X SIP Call, which include the states of Indiana and Kentucky. The proposed rule states that the EPA will withdraw the Section 126 in Ohio once Ohio has a fully approved SIP. As a result of these actions, we anticipate that the Section 126 rule will not affect any of our facilities.

~~See (e) below for a discussion of the tentative EPA Agreement, which could affect our strategy for compliance with the final NO~~_X ~~SIP Call.~~

The CAA’s NSR provisions require that a company obtain a pre-construction permit if it plans to build a new stationary source of pollution or make a major modification to an existing facility, unless the changes are exempt.

~~On November 3, 1999, the United States sued a number of holding companies and electric utilities, including~~ ~~Cinergy~~, ~~CG&E~~~~, and~~ ~~PSI~~~~, in various U.S. District Courts. The~~ ~~Cinergy~~, ~~CG&E~~~~, and~~ ~~PSI~~ suit alleged violations of the CAA at two of our generating stations relating to NSR and New Source Performance Standards requirements. The suit sought (1) injunctive relief to require installation of pollution control technologyoutage management software. Based on ~~each of the generating units at~~ ~~CG&E’s~~ ~~W.C. Beckjord Generating Station (Beckjord Station) and at~~ ~~PSI’s~~ Cayuga Generating Station, and (2) civil penalties in amounts of up to $27,500 per day for each violation. Since that time, two amendments to the complaint have been filed by the United States, alleging additional violations of the CAA, including allegations involving different generating units. In addition, three northeast states and two environmental groups have intervened in the case.

~~Consistent with a Revised Case Management Plan, the Indiana District Court set the case for trial by jury commencing on June 6, 2005.~~

~~On December 21, 2000,~~ ~~Cinergy~~, ~~CG&E~~~~, and~~ ~~PSI~~ reached an agreement in principle with the parties in the litigation for a negotiated resolution of the CAA claims in the litigation. See (e) below for a discussion of the tentative EPA Agreement, which relates to matters discussed within this note. At this time, we believe it is unlikely that a final agreement will be reached on the

terms currently proposed by the plaintiffs. If the settlement is not completed, we intend to defend against the allegations vigorously in court. At this time, it is not possible to determine the likelihood that the plaintiffs would prevail upon their claims, whether resolution of these matters will be on terms similar to the terms of the ~~tentative agreement, or whether resolution of these matters would have a material effect on our financial position or results of operations.~~

On March 1, 2000, the EPA also filed an amended complaint in a separate lawsuit alleging violations of the CAA relating to NSR, Prevention of Significant Deterioration (PSD), and Ohio SIP requirements regarding various generating stations, including a generating station operated by the Columbus Southern Power Company (CSP) and jointly-owned by CSP, the Dayton Power and Light Company (DP&L), and ~~CG&E~~. The EPA is seeking injunctive relief and civil penalties of up to $27,500 per day for each violation. This suit is being defended by CSP. On April 4, 2001, the District Court in that case ruled that neither the Government nor the intervening plaintiff environmental groups could obtain civil penalties for any alleged violations that occurred more than five years prior to the filing of the complaint, but that both parties could seek injunctive relief for alleged violations that occurred more than five years before the filing of the complaint. Thus, if the plaintiffs prevail in their claims, any calculation for penalties will not start on the date of the alleged violations, unless those alleged violations occurred after November 3, 1994, but CSP would be forced to install the controls required under the CAA. Neither party appealed that decision.

~~In addition,~~transaction, Cinergy concluded that this cost method investment was other-than-temporarily impaired and ~~CG&E~~ ~~have been informed by DP&L, that on June 30, 2000, the EPA issued~~recognized a ~~Notice of Violation (NOV) to DP&L for alleged violations of NSR, PSD, and SIP requirements at a generating station operated by DP&L and jointly-owned by~~ ~~CG&E~~. The NOVs indicated the EPA may (1) issue an order requiring compliance with the requirements of the SIP, or (2) bring a civil action seeking injunctive relief and civil penalties of up to $27,500 per day for each violation.

~~At this time, it is not possible to predict whether resolution of these matters would have a material effect on our financial position or results of operations.~~

~~On November 30, 1999, the EPA filed an NOV against~~ ~~Cinergy~~ ~~and~~ ~~CG&E~~, alleging that emissions of particulate matter at the Beckjord Station exceeded the allowable limit. On June 22, 2000, the EPA issued an NOV and a finding of violation (FOV) alleging additional particulate emission violations at Beckjord Station. The NOV/FOV indicated the EPA may issue an administrative compliance order, issue an administrative penalty order, or bring a civil or criminal action.

~~See (e) below for a discussion of the tentative EPA Agreement, which relates to matters discussed within this note.~~

~~On December 21, 2000,~~ ~~Cinergy~~, ~~CG&E~~~~, and~~ ~~PSI~~ ~~reached an agreement in principle with the United States, three northeast states, and two environmental groups for a negotiated resolution of~~

~~CAA claims and other related matters brought against coal-fired power plants owned and operated by~~ ~~Cinergy’s~~ operating subsidiaries. The complete resolution of these issues is contingent upon establishing a final agreement with the EPA and other parties. If a final agreement is reached with these parties, it would resolve past claims of alleged NSR violations as well as the Beckjord Station NOVs/FOV discussed previously under (c) and (d).

~~In return for resolution of claims regarding past maintenance activities, as well as future operational certainty, we tentatively committed in the agreement in principle to:~~

• ~~shut down or repower with natural gas, nine small coal-fired boilers at three power plants beginning in 2004;~~

• ~~build four additional sulfur dioxide (SO~~₂~~) scrubbers, the first of which must be operational by December 31, 2007;~~

• ~~phase in the operation of NO~~_X ~~reduction technology year-round starting in 2004;~~

• ~~implement $21.5 million in environmental mitigation projects, including retiring 50,000 tons of SO~~₂ ~~allowances by 2005.~~

The estimated cost for these capital expenditures is expected to be approximately $700 million through 2013. These capital expenditures are in addition to our previously announced commitment to install NO_X ~~controls as discussed in (b) above, but does include capital costs that~~ ~~Cinergy~~ ~~would expect to spend regardless of the settlement due to new environmental requirements expected in the second half of this decade.~~

Although we have continued to negotiate with the plaintiffs to achieve a final agreement, the plaintiffs have insisted on commitments from us which go beyond those contained in the agreement in principle. At this time we believe it is unlikely that a final agreement will be reached on the terms currently proposed by the plaintiffs.

If the settlement is not completed, we intend to defend against the allegations, discussed in (c) and (d) above, vigorously in court. At this time, it is not possible to determine the likelihood that the plaintiffs would prevail upon their claims, whether resolution of these matters will be on terms similar to the terms of the tentative agreement, or whether resolution of these matters would have a material effect on our financial position or results of operations.

~~Coal tar residues, related hydrocarbons, and various metals have been found at former MGP sites in Indiana, including at least 22 sites that~~ ~~PSI~~ ~~or its predecessors previously owned and sold in a~~

~~series of transactions with Northern Indiana Public Service Company (NIPSCO) and Indiana Gas Company, Inc. (IGC).~~

~~In a combination of lawsuits and notices of violation, the 22 sites are in the process of being studied and will be remediated, if necessary. In 1998 NIPSCO, IGC, and~~ ~~PSI~~ entered into Site Participation and Cost Sharing Agreements to allocate liability and responsibilities between them. The Indiana Department of Environmental Management (IDEM) oversees investigation and cleanup of all of these sites. Thus far, ~~PSI~~ ~~has primary responsibility for investigating, monitoring and remediating, if necessary, nine of these sites.~~

~~PSI~~ ~~notified its insurance carriers of the claims related to MGP sites raised by IGC, NIPSCO, and IDEM. In April 1998,~~ ~~PSI~~ ~~filed suit in Hendricks County in the State of Indiana against its general liability insurance carriers.~~ ~~PSI~~ ~~sought a declaratory judgment to obligate its insurance carriers to (1) defend MGP claims against~~ ~~PSI~~~~, or (2) pay~~ ~~PSI’s~~ ~~costs of defense and compensate~~ ~~PSI~~ for its costs of investigating, preventing, mitigating, and remediating damage to property and paying claims related to MGP sites. The trial court issued a variety of rulings with respect to the claims and defenses in the litigation. ~~PSI~~ ~~has appealed certain adverse rulings to the Indiana Court of Appeals. Oral argument on the appeal occurred on November 5, 2003. At the present time,~~ ~~PSI~~ ~~cannot predict the outcome of this litigation, including the outcome of the appeals.~~

~~CG&E~~ ~~has performed site assessments on its sites where we believe MGP activities have occurred at some point in the past and found no imminent risk to the environment.~~

~~PSI~~ ~~and~~ ~~CG&E~~, including its utility subsidiaries, have accrued costs related to investigation, remediation, and groundwater monitoring for those sites where such costs are probable and can be reasonably estimated. As we continue to investigate and remediate the sites and additional facts become known, additional costs may be incurred beyond those currently accrued. Until all investigation and remediation is complete, we are unable to determine the overall impact on our financial position or results of operations.

~~CG&E~~ ~~and~~ ~~PSI~~ have been named as defendants or co-defendants in lawsuits related to asbestos at their electric generating stations. Currently, there are approximately 70 pending lawsuits. In these lawsuits, plaintiffs claim to have been exposed to asbestos-containing products in the course of their work at the ~~CG&E~~ ~~and~~ ~~PSI~~ ~~generating stations. The plaintiffs further claim that as the property owner of the generating stations,~~ ~~CG&E~~ ~~and~~ ~~PSI~~ ~~should be held liable for their injuries and illnesses based on an alleged duty to warn and protect them from any asbestos exposure. A majority of the lawsuits to date have been brought against~~ ~~PSI~~~~. The impact on~~ ~~CG&E’s~~ ~~and~~ ~~PSI’s~~ ~~financial position or results of operations of these cases to date has not been material.~~

~~Of these lawsuits, one case filed against~~ ~~PSI~~ ~~has been tried to verdict. The jury returned a verdict against~~ ~~PSI~~ ~~in the amount~~pre-tax impairment charge of approximately ~~$500,000 on a negligence claim and for~~ ~~PSI~~ ~~on punitive damages.~~ ~~PSI~~ ~~is appealing the judgment in this case. In addition, we have settled a number of other lawsuits for substantially less than $500,000.~~

~~At this time,~~ ~~CG&E~~ ~~and~~ ~~PSI~~ ~~are not able to predict the ultimate outcome of these lawsuits or the impact on~~ ~~CG&E’s~~ ~~and~~ ~~PSI’s~~ ~~financial position or results of operations.~~

In January 2000, Cinergy Investments (Investments) sold Cinergy Resources, Inc. (Resources), a former subsidiary, to Licking Rural Electrification, Inc., doing business as The Energy Cooperative (Energy Cooperative). In February 2001, ~~Cinergy~~, ~~CG&E~~, and Resources were named as defendants in three class action lawsuits brought by customers relating to Energy Cooperative’s removal from the Ohio Gas Customer Choice program and the failure to deliver gas to customers. Subsequently, these class action suits were amended and consolidated into one suit. ~~CG&E~~ ~~has been dismissed as a defendant in the consolidated suit. This customer litigation is pending in the Hamilton County Common Pleas Court. A trial date has not been set.~~

~~In March 2001,~~ ~~Cinergy~~, ~~CG&E~~, and Investments were named as defendants in a lawsuit filed by Energy Cooperative and Resources. This lawsuit concerns any obligations or liabilities Investments may have to Energy Cooperative following its sale of Resources. This lawsuit is pending in the Licking County Common Pleas Court. Trial is anticipated to occur in November 2004. In October 2001, ~~Cinergy~~, ~~CG&E~~, and Investments initiated litigation against the Energy Cooperative requesting indemnification by the Energy Cooperative for the claims asserted by former customers in the class action litigation. We intend to vigorously defend these lawsuits. At the present time, we cannot predict the outcome of these suits.

~~In June 2001,~~ ~~PSI~~ ~~filed a petition with the IURC requesting authority to recover $16~~$27 million in under billed deferred fuel costs incurred from March 2001 through May 2001. The IURC approved recovery of these costs subject to refund pending the findings of an investigative sub-docket. The sub-docket was opened to investigate the reasonableness of, and underlying reasons for, the under billed deferred fuel costs. A hearing was held in July 2002, and in March 2003 the IURC issued an order giving final approval to ~~PSI’s~~ ~~recovery of the $16 million.~~

~~In December 2002,~~ ~~PSI~~ ~~filed a petition with the IURC seeking approval of a base retail electric rate increase.~~ ~~PSI~~ ~~has filed initial and rebuttal testimony in this case and the final set of hearings will take place in November 2003. Based on updated testimony filed in October 2003,~~ ~~PSI~~ ~~proposes an increase in annual revenues of approximately $180~~($21 million ~~or an average increase of approximately 14 percent over~~ ~~PSI’s~~ ~~retail electric rates in effect at the end of 2002. An IURC decision is expected in the first quarter of 2004.~~

~~(k)~~ ~~PSI Construction Work in Progress (CWIP) Ratemaking Treatment for NO~~_X ~~Equipment~~

In April 2003, PSI filed an application with the IURC requesting that its CWIP rate adjustment mechanism be updated for expenditures through December 2002 related to NOX equipment currently being installed at certain PSI generation facilities. CWIP ratemaking treatment allows

for the recovery of carrying costs on certain pollution control equipment while and after the equipment is under construction. A final order was issued on September 24, 2003. The order granted substantially all of ~~PSI’s~~ ~~requested relief, leaving only the issue of whether certain equipment qualified for CWIP ratemaking treatment to be decided~~after-tax) in the first quarter of 2004. ~~Amounts approved for recovery are presented below:~~The impairment charge is included in Miscellaneous (Expense) Income-Net in Cinergy’s Condensed Statements of Income.

As discussed in the ~~2002~~2003 10-K, we conduct operations through our subsidiaries, and manage through the following three ~~business units:~~reportable segments:

• Commercial Business Unit (Commercial)~~, formerly named the Energy Merchant Business Unit;~~;

• Power Technology and Infrastructure Services Business Unit (Power ~~Technology)~~Technology and Infrastructure).

The following section describes the activities of our business units as of ~~September 30, 2003.~~March 31, 2004.

Commercial manages wholesale generation and energy marketing and trading of energy commodities. Additionally, Commercial operates and maintains our electric generating plants including some of our jointly-owned plants. Commercial is also responsible for all of our

• ~~proprietary arbitrage activities;~~management activities, trading activities, and

Regulated Businesses consists of PSI’s regulated, integrated utility operations, and Cinergy’s other regulated electric and gas transmission and distribution systems. Regulated Businesses plans, constructs, operates, and maintains Cinergy’s transmission and distribution systems and delivers gas and electric energy to consumers. Regulated Businesses also earns revenues from wholesale customers primarily by transmitting electric power through Cinergy’s transmission system.

Power Technology ~~primarily manages the development, marketing,~~ and ~~sales of our non-regulated retail energy and energy-related businesses. This is accomplished through various subsidiaries and joint ventures. Power Technology also~~Infrastructure primarily manages Cinergy Ventures, LLC (Ventures), Cinergy’s venture capital subsidiary. Ventures identifies, invests in, ~~emerging~~and integrates new energy technologies ~~that can benefit future~~into ~~Cinergy~~Cinergy’s ~~business development activities.~~existing businesses, focused primarily on operational efficiencies and clean energy technologies. In addition, Power Technology and Infrastructure manages our investments in other energy infrastructure and telecommunication service providers.

Following are the financial results by business unit. Certain ~~amounts for the prior year have been restated to reflect implementation of EITF 02-3 and other~~ prior year amounts have been reclassified to conform to the current presentation.

Financial results by business unit for the quarters ended ~~September 30,~~March 31, 2004, and March 31, 2003, ~~and September 30, 2002,~~ are as indicated below.

Business Units

	*Cinergy Business Units*																																Cinergy Business Units
	Commercial					Regulated Businesses				Power Technology						Total						Reconciling Eliminations (1)							Consolidated				Commercial			Regulated Businesses		Power Technology and Infrastructure			Total			Reconciling Eliminations(1)			Consolidated
	*(in thousands)*																																(in thousands)

Quarter Ended September 30, 2003
Quarter Ended March 31, 2004

Operating revenues -
External customers	$		439,059			$		652,946				$	(28		)			$		1,091,977			$		—			$			1,091,977		$	405,707		$	882,949	$	2		$	1,288,658		$	—		$	1,288,658
Intersegment revenues	44,526					—						—						44,526					(44,526			)			—				39,453			—		—			39,453			(39,453		)	—

Cost of sales -
Fuel and purchased and exchanged power
External customers	188,356					141,641						—						329,997											329,997
Intersegment costs	—					44,526						—						44,526					(44,526			)			—
Gas purchased	47,360					32,222						—						79,582											79,582
Gross margins -
Electric																																	181,380			409,834		—			591,214			—			591,214
Gas																																	23,134			104,196		—			127,330			—			127,330

Segment profit (loss)(2)	52,204					62,814			(3)			(3,037			)			111,981					—						111,981				46,092			79,505		(22,582		)	103,015			—			103,015

Quarter Ended September 30, 2002
Quarter Ended March 31, 2003

Operating revenues -
External customers	$	449,571			$		669,605				$			62			$		1,119,238				$	—			$			1,119,238			$	433,642		$	834,315	$	1		$	1,267,958		$	—		$	1,267,958
Intersegment revenues	51,590				—						—						51,590						(51,590			)			—				39,123			—		—			39,123			(39,123		)	—

Cost of sales -
Fuel and purchased and exchanged power
External customers	174,224				128,142						—						302,366												302,366
Intersegment costs	—				51,590						—						51,590						(51,590			)			—
Gas purchased	36,689				12,594						—						49,283												49,283
Gross margins -
Electric																																	174,207			378,986		—			553,193			—			553,193
Gas																																	60,028			102,890		—			162,918			—			162,918

Discontinued operations, net of tax	(1,790			)	—						—						(1,790				)		—						(1,790			)	(170		)	—		—			(170		)	—			(170		)
Cumulative effect of changes in accounting principles, net of tax																																	26,462			—		—			26,462			—			26,462

Segment profit (loss)(2)	57,534				74,939						(1,905				)		130,568						—						130,568				97,105			74,069		(5,089		)	166,085			—			166,085

(1) The Reconciling Eliminations category eliminates the intersegment revenues of Commercial and the intersegment costs of Regulated Businesses.

(2) Management utilizes segment profit (loss), after taxes, to evaluate segment performance.

~~(3)~~ ~~The decrease in 2003 is primarily due to lower megawatt hour (MWh) sales resulting from milder weather and the effects of a continuing sluggish economy.~~

~~Financial results by business unit for year to date September 30, 2003 and September 30, 2002, are as indicated below.~~

~~Business Units~~

Cinergy Business Units

Commercial

Regulated
Businesses

Power
Technology

Total

Reconciling
Eliminations (1)

Consolidated

(in thousands)

Year to Date
September 30, 2003

Operating revenues -

External customers

$
1,222,898
(3)
$
2,070,984
(4)
$
(25
)
$
3,293,857

$
—

$
3,293,857

Intersegment revenues

120,805

—

—

120,805

(120,805
)
—

Cost of sales -

Fuel and purchased and exchanged power

External customers

450,219

390,113

—

840,332

—

840,332

Intersegment costs

—

120,805

—

120,805

(120,805
)
—

Gas purchased

116,823

252,073

—

368,896

—

368,896

Discontinued operations, net of tax

8,875

—

—

8,875

—

8,875

Cumulative effect of changes in accounting principles, net of tax

26,462

—

—

26,462

—

26,462

Segment profit (loss)(2)

213,641
(5)
162,988
(6)
(13,910
)
362,719

—

362,719

Year to Date
September 30, 2002

Operating revenues -

External customers

$
1,052,068

$
1,942,789

$
62

$
2,994,919

$
—

$
2,994,919

Intersegment revenues

127,788

—

—

127,788

(127,788
)
—

Cost of sales -

Fuel and purchased and exchanged power

External customers

417,084

344,774

—

761,858

—

761,858

Intersegment costs

—

127,788

—

127,788

(127,788
)
—

Gas purchased

43,692

145,033

—

188,725

—

188,725

Discontinued operations, net of tax

(561
)
—

—

(561
)
—

(561
)
Cumulative effect of changes in accounting principles, net of tax

(10,899
)
—

—

(10,899
)
—

(10,899
)
Segment profit (loss)(2)

97,677

176,877

(14,174
)
260,380

—

260,380

~~(1)~~ ~~The Reconciling Eliminations category eliminates the intersegment revenues of Commercial and the intersegment costs of Regulated Businesses.~~

~~(2)~~ ~~Management utilizes segment profit (loss) to evaluate segment performance.~~

~~(3)~~ ~~The increase in 2003 is primarily due to the increase in average price realized on wholesale commodity transactions and the sale of synthetic fuel which began in July 2002.~~

~~(4)~~ The increase in 2003 is primarily due to the increase in the average price received per thousand cubic feet (mcf) of gas delivered reflecting a substantial increase in the wholesale gas commodity costs, which is passed directly to the retail customer dollar-for-dollar under the state mandated gas cost recovery mechanism. Also contributing to this increase was higher mcf volumes sold due to colder weather.

~~(5)~~ The increase in 2003 is primarily due to a change in accounting principle, the gain on disposal of discontinued operations and synthetic fuel credits discussed in Note 1(g)(iii), Note 8 and Note 7(s), respectively. This increase also reflects charges associated with employee severance programs and the write-offs of certain equipment and technology investments that were taken in the second quarter of 2002.

~~(6)~~ ~~The decrease in 2003 is primarily due to lower MWh sales resulting from milder than normal weather during the summer and the effects of a continuing sluggish economy.~~

6043

Total segment assets at ~~September 30, 2003,~~March 31, 2004, and December 31, ~~2002,~~2003, were as follows:

Business Units

															Cinergy Business Units
	Cinergy Business Units														Commercial		Regulated Businesses		Power Technology and Infrastructure		Total		All Other (1)		Consolidated
	Commercial			Regulated Businesses			Power Technology		Total		All Other(1)		Consolidated		(in thousands)
	(in thousands)
Segment assets from continuing operations	$	5,339,831	(2)	$	7,866,961	(2)	$	168,117	$	13,374,909	$	101,063	$	13,475,972	$	5,551,997	$	8,415,370	$	152,397	$	14,119,764	$	60,503	$	14,180,267
Segment assets from discontinued operations	7,187			—			—		7,187		—		7,187		4,343		—		—		4,343		—		4,343
Total segment assets at September 30, 2003	$	5,347,018		$	7,866,961		$	168,117	$	13,382,096	$	101,063	$	13,483,159
Total segment assets at March 31, 2004															$	5,556,340	$	8,415,370	$	152,397	$	14,124,107	$	60,503	$	14,184,610

Segment assets from continuing operations	$	5,627,485		$	7,283,812		$	155,252	$	13,066,549	$	93,214	$	13,159,763	$	5,360,886	$	8,515,478	$	175,619	$	14,051,983	$	62,722	$	14,114,705
Segment assets from discontinued operations	147,265			—			—		147,265		—		147,265		4,501		—		—		4,501		—		4,501
Total segment assets at December 31, 2002	$	5,774,750		$	7,283,812		$	155,252	$	13,213,814	$	93,214	$	13,307,028
Total segment assets at December 31, 2003															$	5,365,387	$	8,515,478	$	175,619	$	14,056,484	$	62,722	$	14,119,206

(1)The All Other category represents miscellaneous corporate items which are not allocated to business units for purposes of segment performance measurement.

~~(2)September 30, 2003 balances reflect the transfer of generating assets as discussed in Note 12.~~

6144

10. EPS

A reconciliation of EPS to EPS – assuming dilution is presented below for the quarters ended ~~September 30, 2003~~March 31, 2004 and ~~2002:~~2003:

	Income			Shares	EPS			Income			Shares	EPS
	*(in thousands, except per share amounts)*							(in thousands, except per share amounts)
Quarter Ended September 30, 2003
Quarter Ended March 31, 2004
EPS:
Net Income	$	111,981		177,751	$	0.63		$	103,015		179,261	$	0.57

Effect of dilutive securities:
Common stock options				629							835
Directors’ compensation plans				148							148
Contingently issuable common stock				891							574
Stock purchase contracts				118							1,108

EPS - assuming dilution:
Net income plus assumed conversions	$	111,981		179,537	$	0.62		$	103,015		181,926	$	0.57

Quarter Ended September 30, 2002
Quarter Ended March 31, 2003
EPS:
Income before discontinued operations	$	132,358			$	0.79
Income before discontinued operations and cumulative effect of changes in accounting principles								$	139,793			$	0.81
Discontinued operations, net of tax	(1,790		)		(0.01		)	(170		)		—
Cumulative effect of changes in accounting principles, net of tax								26,462				0.15
Net Income	$	130,568		167,967	$	0.78		$	166,085		173,387	$	0.96

Effect of dilutive securities:
Common stock options				843							724
Directors’ compensation plans				160							134
Contingently issuable common stock				1,118							717

EPS - assuming dilution:
Net income plus assumed conversions	$	130,568		170,088	$	0.77		$	166,085		174,962	$	0.95

Options to purchase shares of common stock are excluded from the calculation of EPS - assuming dilution when the exercise price of these options plus unrecognized compensation expense ~~are~~is greater than the average market price of a common share during the period multiplied by the number of options outstanding at the end of the period because they are anti-dilutive. Approximately ~~2.1~~0.9 million and ~~3.3~~3.5 million shares were excluded from the EPS - assuming dilution calculation for the quarters ended ~~September 30,~~March 31, 2004 and 2003, ~~and 2002,~~ respectively.

Also excluded from the EPS - assuming dilution calculation for the quarters ended ~~September 30,~~March 31, 2004 and 2003, ~~and 2002,~~ are up to ~~10.7~~9.7 million and 10.8 million shares, respectively, issuable pursuant to the stock purchase contracts issued by Cinergy Corp. in December 2001 associated with the preferred trust securities transaction. The number of shares issuable pursuant to the stock purchase contracts is contingent upon the market price of Cinergy Corp. stock in February 2005 and could range between 9.2 and 10.8 million shares.

6245

~~A reconciliation of EPS to EPS - assuming dilution is presented below for the year to date September 30, 2003 and 2002:~~

Income

Shares

EPS

(in thousands, except per share amounts)

Year to Date September 30, 2003

EPS:

Income before discontinued operations and cumulative effect of changes in accounting principles

$
327,382

$
1.86

Discontinued operations, net of tax

8,875

0.05

Cumulative effect of changes in accounting principles, net of tax

26,462

0.15

Net Income

$
362,719

175,944

$
2.06

Effect of dilutive securities:

Common stock options

738

Directors’ compensation plans

147

Contingently issuable common stock

811

Stock purchase contracts

39

EPS - assuming dilution:

Net income plus assumed conversions

$
362,719

177,679

$
2.04

Year to Date September 30, 2002

EPS:

Income before discontinued operations and cumulative effect of changes in accounting principles

$
271,840

$
1.63

Discontinued operations, net of tax

(561
)

—

Cumulative effect of changes in accounting principles, net of tax

(10,899
)

(0.06
)
Net Income

$
260,380

166,544

$
1.57

Effect of dilutive securities:

Common stock options

981

Employee stock purchase and savings plan

5

Directors’ compensation plans

160

Contingently issuable common stock

1,138

EPS - assuming dilution:

Net income plus assumed conversions

$
260,380

168,828

$
1.55

Options to purchase shares of common stock are excluded from the calculation of EPS - assuming dilution when the exercise price of these options plus unrecognized compensation expense are greater than the average market price of a common share during the period multiplied by the number of options outstanding at the end of the period because they are anti-dilutive. For year to date September 30, 2003 and 2002, approximately 2.1 million and 2.7 million shares, respectively, were excluded from the EPS - assuming dilution calculation.

~~Also excluded from the EPS - assuming dilution calculation for year to date September 30, 2003 and 2002, are up to 10.8 million shares issuable pursuant to the stock purchase contracts issued by~~ ~~Cinergy Corp.~~ ~~in December 2001 associated with the preferred trust securities transaction. The number of shares issuable pursuant to the stock purchase contracts is contingent upon the market price of~~ ~~Cinergy Corp.~~ ~~stock in February 2005 and could range between 9.2 and 10.8 million shares.~~

~~11.~~ ~~Ohio Deregulation~~

~~As discussed in the 2002 10-K,~~ ~~CG&E~~ is in a market development period, transitioning to electric deregulation in the state of Ohio. The transition period is governed by Amended Substitute Senate Bill No. 3 (Electric Restructuring Bill) and a stipulated transition plan adopted and approved by the PUCO. Under ~~CG&E’s~~ ~~transition plan, retail customers continue to receive electric distribution services from~~ ~~CG&E~~~~, but may purchase electricity from another supplier. Retail customers that purchase electricity from another supplier receive shopping credits from~~ ~~CG&E~~~~. The shopping credits generally reflect the costs of electric generation included in~~ ~~CG&E’s~~ frozen rates. However, shopping credits for the first 20 percent of electricity usage in each customer class to switch suppliers are higher than shopping credits for subsequent switchers in order to stimulate the development of the competitive retail electric service market, pursuant to ~~CG&E’s~~ ~~stipulated agreement.~~

~~CG&E~~ recovers its generation related regulatory assets and certain other transition costs deferred during the market development period through a Regulatory Transition Charge (RTC) paid by all retail customers. As the RTC is collected from customers, ~~CG&E~~ amortizes the deferred balance of regulatory assets and other transition costs. A portion of the RTC collected from customers is recognized in earnings currently as a return on the deferred balance of regulatory assets and other transition costs and as reimbursement for the difference between the shopping credits provided to customers and the wholesale revenues from switched generation. The ability of ~~CG&E~~ ~~to recover its regulatory assets and other transition costs is dependent on several factors, including, but not limited to, the level of~~ ~~CG&E’s~~ ~~electric sales, prices in the wholesale power markets, and the amount of customers switching to other electric suppliers.~~

~~On January 10, 2003,~~ ~~CG&E~~ filed an application with the PUCO for approval of a methodology to establish how market-based rates for non-residential customers will be determined when the market development period ends. In the filing, ~~CG&E~~ seeks to establish a market-based standard service offer rate for non-residential customers that do not switch suppliers and a process for establishing the competitively bid generation service option required by the Electric Restructuring Bill. As of September 30, 2003, more than 20 percent of the load of ~~CG&E’s~~ ~~commercial and industrial customer classes have switched to other electric suppliers. Under its transition plan,~~ ~~CG&E~~ may end the market development period for those classes of customers once 20 percent switching has been achieved; however, PUCO approval of the standard service offer rate and competitive bidding process is required before the market development period can be ended. ~~CG&E~~ ~~is not requesting to end the market development period for any customers at this time.~~ ~~CG&E~~ ~~is unable to predict the outcome of this proceeding.~~

~~12.~~ ~~Transfer of Generating Assets~~

~~In December 2002, the IURC approved a settlement agreement among~~ ~~PSI~~~~, the Indiana Office of the Utility Consumer Counselor, and the IURC Testimonial Staff authorizing~~ ~~PSI’s~~ purchases of the Henry County, Indiana and Butler County, Ohio, gas-fired peaking plants from two non-regulated affiliates. In February 2003, the Federal Energy Regulatory Commission (FERC) issued an order under Section 203 of the Federal Power Act authorizing ~~PSI’s~~ ~~acquisitions of the plants, which occurred on February 5, 2003. Subsequently, in April 2003, the FERC issued a~~

~~tolling order allowing additional time to consider a request for rehearing filed in response to the February 2003 FERC order. At this time, we cannot predict the outcome of this matter.~~

~~On July 21, 2003,~~ ~~ULH&P~~ ~~filed an application with the KPSC requesting a certificate of public convenience and necessity to acquire~~ ~~CG&E’s~~ ownership interests in the East Bend Generating Station, located in Boone County, Kentucky, the Woodsdale Generating Station, located in Butler County, Ohio, and one generating unit at the four-unit Miami Fort Generating Station located in Hamilton County, Ohio. ~~ULH&P~~ ~~also requested KPSC approval of a back-up power supply agreement under which~~ ~~CG&E~~ ~~would provide replacement power to~~ ~~ULH&P~~ ~~when the transferred generating facilities are out of service, and for approval of another agreement under which the transferred units would be jointly dispatched with~~ ~~CG&E’s~~ ~~remaining fleet of generating units. An order from the KPSC is expected by the end of the year. The transfer, which will be made at net book value, will not affect current electric rates for~~ ~~ULH&P’s~~ ~~customers, as power will be provided under the same terms as under the current wholesale power contract with~~ ~~CG&E~~ ~~through at least December 31, 2006. This transfer is also contingent upon receipt of approval from the FERC and the SEC.~~ ~~ULH&P~~ ~~is unable to predict the outcome of this matter.~~

CAUTIONARY STATEMENTS

CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING INFORMATION

This document includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements are based on management’s beliefs and assumptions. These forward-looking statements are identified by terms and phrases such as “anticipate”, “believe”, “intend”, “estimate”, “expect”, “continue”, “should”, “could”, “may”, “plan”, “project”, “predict”, “will”, and similar expressions.

Forward-looking statements involve risks and uncertainties that may cause actual results to be materially different from the results predicted. Factors that could cause actual results to differ materially from those indicated in any forward-looking statement include, but are not limited to:

• Factors affecting operations, such as:

(1) unanticipated weather conditions;

(2) unscheduled generation outages;

(3) unusual maintenance or repairs;

(4) unanticipated changes in costs;

(5) environmental ~~incidents, including costs of compliance with existing~~incidents; and ~~future environmental requirements; and~~

(6) electric transmission or gas pipeline system constraints.

• Legislative and regulatory initiatives.

• Additional competition in electric or gas markets and continued industry consolidation.

• Financial or regulatory accounting ~~principles.~~principles including costs of compliance with existing and future environmental requirements.

• Political, legal, and economic conditions and developments in the countries in which we have a presence.

• Changing market conditions and other factors related to physical energy and financial trading activities.

• The performance of projects undertaken by our non-regulated businesses and the success of efforts to invest in and develop new opportunities.

• Availability of, or cost of, capital.

• Employee workforce factors.

• Delays and other obstacles associated with mergers, acquisitions, and investments in joint ventures.

• Costs and effects of legal and administrative proceedings, settlements, investigations, and claims. Examples can be found in Note 76 of the “Notes to Condensed Financial Statements” in ~~“Part~~“Item I. Financial ~~Information”~~Statements”.

We undertake no obligation to update the information contained herein.

6746

MD&A - LIQUIDITY AND CAPITAL RESOURCES

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the accompanying ~~condensed~~ financial statements and related notes included elsewhere in this report and the combined Form 10-K for the year ended December 31, ~~2002 and Form 8-K filed on June 10,~~ 2003 ~~(together, the 2002~~(2003 10-K). The results discussed below are not necessarily indicative of the results ~~that may occur~~to be expected in any future periods.

INTRODUCTION

In Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A), we explain our general operating environment, as well as our liquidity, ~~and~~ capital resources, and results of operations. Specifically, we discuss the following:

• factors affecting current and future operations;

• potential sources of cash for future capital expenditures;

• why revenues and expenses changed from period to period; and

• how the above items affect our overall financial condition.

ORGANIZATION

Cinergy Corp., a Delaware corporation ~~created~~organized in ~~October 1994,~~1993, owns all outstanding common stock of ~~The Cincinnati Gas & Electric Company (~~CG&E) and ~~PSI Energy, Inc. (~~PSI), both of which are public ~~utility subsidiaries.~~utilities. As a result of this ownership, we are considered a utility holding company. Because we are a holding company with material utility subsidiaries operating in multiple states, we are registered with and are subject to regulation by the Securities and Exchange Commission (SEC) under the Public Utility Holding Company Act of 1935, as amended (PUHCA). Our other principal subsidiaries ~~are:~~

• ~~Cinergy Wholesale Energy, Inc. (Wholesale Energy);~~

•are Cinergy Services, Inc. (Services); and

• Cinergy Investments, Inc. (Investments).

CG&E, an Ohio corporation organized in 1837, is a combination electric and gas public utility company that provides service in the southwestern portion of Ohio and, through its subsidiaries, in nearby areas of Kentucky and Indiana. CG&E is responsible for the majority of our power marketing and trading activity. CG&E’s principal subsidiary, ~~The Union Light, Heat and Power Company (~~ULH&P), is a Kentucky corporation organized in 1901, that provides electric and gas service in northern Kentucky. CG&E’s other subsidiaries are insignificant to its results of operations.

~~In 2001,~~ ~~CG&E~~ ~~began a transition to electric deregulation and customer choice. Currently, the competitive retail electric market in Ohio is in the development stage.~~ ~~CG&E~~ ~~is recovering its~~

~~Public Utilities Commission of Ohio (PUCO) approved costs and retail electric rates are frozen during this market development period.~~

PSI, an Indiana corporation organized in 1942, is a vertically integrated and regulated electric utility that provides service in north central, central, and southern Indiana.

Services is a service company that provides our subsidiaries with a variety of centralized administrative, management, and support services. Investments holds most of our domestic non-regulated, energy-related businesses and investments, including gas marketing and trading operations.

Wholesale Energy, through a wholly-owned subsidiary, Cinergy Power Generation Services, LLC, provides electric production-related construction, operation, and maintenance services to certain affiliates and non-affiliated third parties.

The majority of our operating revenues are derived from the sale of electricity and the sale and/or transportation of natural gas.

LIQUIDITY AND CAPITAL RESOURCES

Environmental Commitment and Contingency Issues

Ambient Air Standards

In 1997, the United States (U.S.) Environmental Protection Agency (EPA) revised the National Ambient Air Quality Standards ~~(NAAQS)~~ for ozone and fine particulate matter. ~~State~~On April 15, 2004, the EPA made final state ozone non-attainment area ~~designations were due to the EPA on July 15, 2003, and the EPA is under a court-ordered deadline to make final designations by April 15, 2004. The following~~designations. Several counties in which we operate have been ~~tentatively~~ designated ~~(by their respective states)~~ as being in non-attainment with the new ozone ~~standard: Boone County, Kentucky; Hamilton County, Indiana; Floyd County, Indiana; Clermont County, Ohio; and Hamilton County, Ohio. The~~standard. EPA ~~has stated that it will require state~~is also under a court ordered deadline to make final fine particulate ~~non-attainment designations on February 15, 2004, and will make final~~area designations by December 15, 2004. ~~Following identification~~Several counties in which we operate are likely to be designated as non-attainment with the fine particulate standard. Those counties that are designated as being in non-attainment with the new ozone and/or fine particulate standards are required to develop a plan of non-attainment areas, each individual state will identify the sources of emissions and develop emission reduction plans. Under the Clean Air Act (CAA), individual states have up to 12 years from the date of designation to secure emissions reductions from sources contributing to the problem.compliance. Cinergy cannot predict the ~~timing or~~ effect of ~~either~~ the ozone ~~or fine particulate matter~~ non-attainment designations at this time.

In the second quarter of 2003, the EPA announced that it would propose, within the next year or so, a regional or national regulation requiring significant reductions in sulfur dioxide and nitrogen oxide (NO_X~~) emissions from power plants to implement the fine particulate matter NAAQS. This regulation would be expected to impact all of~~ ~~Cinergy’s~~ ~~coal-fired power plants. However,~~ ~~Cinergy~~ ~~cannot predict the exact amount and timing of these reductions at this time. Nonetheless,~~ ~~Cinergy~~ ~~expects that compliance costs with these new standards will be significant.~~

Global Climate Change

~~On September 9, 2003,~~ ~~Cinergy~~ ~~announced an internal voluntary greenhouse gas (GHG) management goal to reduce its GHG emissions by 2010.~~ ~~Cinergy~~ ~~expects to spend $21 million between 2004 and 2010 on projects to reduce or offset its emissions.~~ ~~Cinergy’s~~ ~~goal is to support the President’s voluntary initiative, to address shareholder interest in the issue, and to build internal expertise in GHG management and GHG markets.~~

~~Our plan for managing the potential risk and uncertainty of regulations relating to climate change includes the following:~~

• ~~implementing an internal voluntary goal to reduce~~ ~~Cinergy’s~~ ~~GHG emissions 5 percent below~~ ~~Cinergy’s~~ ~~2000 baseline emission levels by 2010;~~

• ~~measuring and inventorying company related sources of GHG emissions;~~

• ~~identifying and pursuing cost-effective GHG emission reduction and offsetting activities;~~

• ~~funding research of more efficient and alternative electric generating technologies;~~

• ~~funding research to better understand the causes and consequences of climate change;~~

• ~~encouraging a global discussion of the issues and how best to manage them; and~~

• ~~advocating comprehensive legislation for fossil-fired power plants.~~

~~As discussed in~~ ~~Cinergy’s~~ ~~2002 10-K, additional environmental issues that could affect our liquidity include:~~

• ~~Air Toxics Regulation;~~

• ~~Regional Haze; and~~

• ~~Global Climate Change~~

In addition, see Note 7 of the “Notes to Condensed Financial Statements” in “Part I. Financial Information” contained herein, for additional information regarding other environmental items and other matters that could affect our liquidity.

Pensions

~~Cinergy~~ maintains qualified defined benefit pension plans covering substantially all United States (U.S.) employees meeting certain minimum age and service requirements. Plan assets consist of investments in equity and fixed income securities. Due to the decline in market value of the investment portfolio over the last few years, assets held in trust to satisfy plan obligations have decreased. Additionally, recent decreases in long-term interest rates have the effect of increasing the measured liability for funding purposes. As a result of these events, future funding obligations could increase substantially. ~~Cinergy’s~~ minimum required contributions for the calendar year 2003 are $11 million, as compared to $4 million for the calendar year 2002. We made an additional contribution of $63 million in the calendar year 2003.

Long-term debt due within one year

~~Long-term debt due within one year~~ ~~for~~ ~~Cinergy~~ ~~increased approximately $1 billion from December 31, 2002 to September 30, 2003. The primary cause of the increase was the reclassification of~~ ~~Cinergy Corp.’s~~ ~~$200 million 6.125% Debentures due April 15, 2004 and $500 million 6.25% Debentures due September 1, 2004 from~~ ~~Long-term debt~~ to ~~Long-term debt due within one year.~~ ~~An additional $265.5 million was reclassified from~~ ~~Long-term debt~~ to ~~Long-term debt due within one year~~ ~~for~~ ~~CG&E~~ ~~to reflect the early redemption on October 1, 2003 of its 7.20% first mortgage bonds due October 1, 2023.~~

~~As discussed in Note 3 of the “Notes to Condensed Financial Statements” in “Part I. Financial Information”, proceeds from the June 2003 issuance of debt by~~ ~~CG&E~~ ~~were used for the repayment of outstanding indebtedness includingthe early redemption of the 7.20% first mortgage bonds mentioned above. In September 2003,~~ ~~PSI~~ ~~issued $400 million principal amount of its 5.00% Debentures largely using the proceeds from this issuance for the early redemption of two intercompany promissory notes to~~ ~~Cinergy Corp.~~ ~~totaling $376 million.~~ ~~Cinergy Corp.~~ ~~plans to use the proceeds to partially fund the maturity of the 6.125% and 6.25% debentures discussed above. In the interim,~~ ~~Cinergy Corp.~~ ~~has used the proceeds to repay short-term indebtedness.~~

~~Cinergy~~ ~~plans to meet its remaining future debt obligations from the issuance of debt and/or equity securities and internally-generated funds.~~

Other Investing Activities

Our ability to invest in growth initiatives is limited by certain legal and regulatory requirements, including PUHCA. The PUHCA limits the types of non-utility businesses in which Cinergy and other registered holding companies under PUHCA can invest as well as the amount of capital that can be invested in permissible non-utility businesses. Also, the timing and amount of investments in the non-utility businesses is dependent on the development and favorable evaluations of opportunities. Under the PUHCA restrictions, we are allowed to invest or commit to invest in certain non-utility businesses, including:

•�� Exempt Wholesale Generators (EWG) and Foreign Utility Companies (FUCO)

An EWG is an entity, certified by the Federal Energy Regulatory Commission (FERC), devoted exclusively to owning and/or operating, and selling power from one or more electric generating facilities. An EWG whose generating facilities are located in the U.S. is limited to making only wholesale sales of electricity.

A FUCO is a company all of whose utility assets and operations are located outside the U.S. and which are used for the generation, transmission, or distribution of electric energy for sale at retail or wholesale, or the distribution of gas at retail. A FUCO may not derive any income, directly or indirectly, from the generation, transmission, or distribution of electric energy for sale or the distribution of gas at

retail within the U.S. An entity claiming status as a FUCO must provide notification thereof to the SEC under PUHCA.

Cinergy has been granted SEC authority under PUHCA to invest (including by way of guarantees) an aggregate amount in EWGs and FUCOs equal to the sum of (1) our average consolidated retained earnings from time to time plus (2) $2 billion. As of ~~September 30, 2003,~~March 31, 2004, we had invested or committed to invest approximately ~~$775 million~~$0.8 billion in EWGs and FUCOs, leaving available investment capacity under the order of approximately $2.7 billion.

• Qualifying Facilities and Energy-Related Non-utility Entities

SEC regulations under the PUHCA permit Cinergy and other registered holding companies to invest and/or guarantee an amount equal to 15 percent of consolidated capitalization (consolidated capitalization is the sum of Notes payable and other short-term obligations, Long-term debt (including amounts due within one year), ~~Preferred Trust Securities~~, Cumulative Preferred Stock of Subsidiaries, and total Common Stock Equity) in domestic qualifying cogeneration and small power production plants (qualifying facilities) and certain other domestic energy-related non-utility entities. At ~~September 30, 2003,~~March 31, 2004, we had invested and/or guaranteed approximately ~~$735million~~$1.0 billion of the ~~$1.4~~$1.3 billion available.

• Energy-Related Assets

Cinergy has been granted SEC authority under PUHCA to invest up to $1 billion in non-utility Energy-Related Assets within the U.S., Canada, and Mexico. Energy-Related Assets include, natural gas exploration, development, production, gathering, processing, storage and transportation facilities and equipment, liquid oil reserves and storage facilities, and associated assets, facilities and equipment, but would exclude any assets, facilities, or equipment that would cause the owner or operator thereof to be deemed a public utility company. As of ~~September 30, 2003,~~March 31, 2004, we did not have any investments in these Energy-Related Assets.

• Infrastructure Services Companies

Cinergy has been granted SEC authority under PUHCA to invest up to $500 million in companies that derive or will derive substantially all of their operating revenues from the sale of Infrastructure Services including:

• Design, construction, retrofit, and maintenance of utility transmission and distribution systems;

• Installation and maintenance of natural gas pipelines, water and sewer pipelines, and underground and overhead telecommunications networks; and

• Installation and servicing of meter reading devices and related communications networks, including fiber optic cable.

At ~~September 30, 2003,~~March 31, 2004, we had invested approximately ~~$25~~$26 million in these Infrastructure Services companies.

Guarantees

We are subject to an SEC order under the PUHCA, which limits the amounts Cinergy Corp. can have outstanding under guarantees at any one time to $2 billion. As of ~~September 30, 2003,~~March 31, 2004, we had ~~$538~~$737 million outstanding under the guarantees issued, of which approximately 8691 percent represents guarantees of obligations reflected on Cinergy’s Condensed Balance Sheets. The amount outstanding represents Cinergy Corp.’s guarantees of liabilities and commitments of its consolidated subsidiaries, unconsolidated subsidiaries, and joint ventures. See Note ~~7(a)~~6(c)(iv) of the “Notes to Condensed Financial Statements” in ~~“Part~~“Item I. Financial ~~Information”~~Statements” for a discussion of guarantees in accordance with Financial Accounting Standards Board (FASB) Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (Interpretation 45). Interpretation 45 requires disclosure of maximum potential liabilities for guarantees issued on behalf of unconsolidated subsidiaries and joint ventures and under indemnification clauses in various contracts. The Interpretation 45 disclosure differs from the PUHCA restrictions in that it requires a calculation of maximum potential liability, rather than actual amounts outstanding; it excludes guarantees issued on behalf of consolidated subsidiaries; and it includes potential liabilities under indemnification clauses.

Collateral Requirements

Cinergy has certain contracts in place, primarily with trading counterparties, that require the issuance of collateral in the event our debt ratings are downgraded below investment grade. Based upon our ~~September 30, 2003~~March 31, 2004 trading portfolio, if such an event were to occur, Cinergy would be required to issue up to approximately ~~$64~~$86 million in collateral related to its gas and power trading operations, of which ~~$34~~$41 million is related to CG&E.

Capital Resources

Cinergy

, WeCG&E, PSI, and ULH&P meet ~~our~~ current and future capital requirement needs through a combination of internally and externally generated funds, including the issuance of debt and/or equity securities. Cinergy ~~believes~~, CG&E, PSI, and ULH&P believe that ~~it has~~they have adequate financial resources to meet ~~its~~their future needs.

Notes Payable and Other Short-term Obligations

We are required to secure authority to issue short-term debt from the SEC under the PUHCA and from the ~~PUCO.~~Public Utilities Commission of Ohio (PUCO). The SEC under the PUHCA regulates the issuance of short-term debt by Cinergy Corp., PSI, and ULH&P. The PUCO has regulatory jurisdiction over the issuance of short-term debt by CG&E.

Short-term Regulatory Authority
September 30, 2003

(millions)

Authority

Outstanding

Cinergy Corp.

$
5,000
(1)
$
209

CG&E and subsidiaries

671

9

PSI

600

165

ULH&P

65

24

	Short-term Regulatory Authority March 31, 2004
	(in millions)
	Authority			Outstanding

Cinergy Corp.	$	5,000	(1)	$	33
CG&E and subsidiaries	671			55
PSI	600			183
ULH&P	65			21

(1) Cinergy Corp., under the PUHCA, was granted approval to increase total capitalization (excluding retained earnings and accumulated other comprehensive income (loss)), which may be any combination of debt and equity securities, by $5 billion. Outside this requirement, Cinergy Corp. is not subject to specific regulatory debt authorizations.

For the purposes of quantifying regulatory authority, short-term debt includes revolving credit borrowings, uncommitted credit line borrowings, intercompany money pool obligations, and commercial paper.

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Cinergy Corp.’s short-term borrowing consists primarily of unsecured revolving lines of credit and the sale of commercial paper. Cinergy Corp.’s $1 billion revolving credit facilities and $800 million commercial paper program also support the short-term borrowing needs of CG&E, PSI, and ~~PSI~~ULH&P. In addition, Cinergy Corp., CG&E, and PSI maintain uncommitted lines of credit. These facilities are not firm sources of capital but rather informal agreements to lend money, subject to availability, with pricing determined at the time of advance. The following is a summary of outstanding short-term borrowings for Cinergy, CG&E, PSI, and ULH&P, including variable rate pollution control notes:

	Short-term Borrowings September 30, 2003										Short-term Borrowings March 31, 2004
	Established Lines		Outstanding		Unused		Standby Liquidity(3)		Available Revolving Lines of Credit		Established Lines		Outstanding		Unused		Standby Liquidity(3)		Available Revolving Lines of Credit
	*(in millions)*										(in millions)

Cinergy
Cinergy Corp.
Revolving lines	$	1,000	$	—	$	1,000	$	224	$	776	$	1,000	$	—	$	1,000	$	44	$	956
Uncommitted lines(1)	65		—		65						40		—		40
Commercial paper(2)			209		591								33		767

Operating companies
Utility operating companies
Uncommitted lines(1)	75		—		75						75		—		75
Pollution control notes			112										193

Non-regulated subsidiaries
Revolving lines	17		9		8				8		18		9		9				9
Short-term debt			7										2

Cinergy Total			$	337					$	784			$	237					$	965

CG&E and subsidiaries
Uncommitted lines(1)	$	15	$	—	$	15					$	15	$	—	$	15
Pollution control notes			112										112
Money pool			9										55

CG&E Total			$	121									$	167

PSI
Uncommitted lines(1)	$	60	$	—	$	60					$	60	$	—	$	60
Pollution control notes													81
Money pool			165										183

PSI Total			$	165									$	264

ULH&P
Money pool			$	24									$	21

ULH&P Total			$	24									$	21

(1)Outstanding amounts may be greater than established lines as uncommitted lenders are, at times, willing to loan funds in excess of the established lines.

(2)The commercial paper program is limited to $800 million and is supported by Cinergy Corp.’s revolving ~~lines.~~lines of credit.

(3)Standby liquidity is reserved against the revolving lines to support the commercial paper program and outstanding letters of credit (currently ~~$209~~$33 million and ~~$15~~$11 million, respectively).

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Credit Facility	Expiration	Established Lines		Outstanding and Committed		Unused and Available		Expiration	Established Lines		Outstanding and Committed		Unused and Available
				*(in millions)*				(in millions)

364-day senior revolving	April 2004							April 2004
Direct borrowing		$		$	—	$			$		$	—	$
Commercial paper support				209							33

Total 364-day facility		600		209		391			600		33		567

Three-year senior revolving	May 2004							May 2004
Direct borrowing				—							—
Commercial paper support				—							—
Letter of Credit support				15
Letter of credit support											11

Total three-year facility		400		15		385
Total Three-year facility									400		11		389

Total credit facilities		$	1,000	$	224	$	776
Total Credit Facilities									$	1,000	$	44	$	956

In our credit facilities, Cinergy Corp. has covenanted to maintain:

• a consolidated net worth of $2 billion; and

• a ratio of consolidated indebtedness to consolidated total capitalization not in excess of 65 percent.

• bankruptcy;

• defaults in the payment of other indebtedness; and

• judgments against the company that are not paid or insured.

The latter two events, however, are subject to dollar-based materiality thresholds.

~~As discussed in Note 1(g)(~~~~iii~~) of the “Notes to Condensed Financial Statements” in “Part I. Financial Information”, long-term debt increased in the third quarter of 2003 resulting from the adoption of Interpretation No. 46, ~~Consolidation of Variable Interest Entities~~ ~~(Interpretation 46).~~

~~The debt which was recorded as a result of this new accounting pronouncement did not cause~~ ~~Cinergy~~ ~~to be in breach of any covenants.~~

~~Variable Rate Pollution Control Notes~~

~~CG&E~~ has issued certain variable rate pollution control notes (tax-exempt notes obtained to finance equipment or land development for pollution control purposes). Because the holders of these notes have the right to have their notes redeemed on a daily, monthly, or annual basis, they are reflected in ~~Notes payable and other short-term obligations~~ ~~on the Balance Sheets of~~ ~~Cinergy~~ ~~and~~ ~~CG&E~~~~. At September 30, 2003,~~ ~~CG&E~~ ~~had $112 million outstanding in variable rate pollution control notes, classified as short-term debt.~~ ~~PSI~~ ~~and~~ ~~ULH&P~~ ~~had no outstanding short-term pollution control notes. Any short-term pollution control note borrowings outstanding do not reduce the unused and available short-term debt regulatory authority of~~ ~~CG&E~~, ~~PSI~~~~, and~~ ~~ULH&P~~~~. See Note 5 of the “Notes to Condensed Financial Statements” in “Part I. Financial Information” for additional information regarding pollution control notes.~~

~~Money Pool~~

~~Cinergy Corp.~~, Services, and our operating companies participate in a money pool arrangement to better manage cash and working capital requirements. Under this arrangement, those companies with surplus short-term funds provide short-term loans to affiliates (other than ~~Cinergy Corp.~~~~) participating under this arrangement. This surplus cash may be from internal or external sources. The amounts outstanding under this money pool arrangement are shown as a component of~~ ~~Notes receivable from affiliated companies~~ ~~and/or~~ ~~Notes payable to affiliated companies~~ ~~on the Balance Sheets of~~ ~~CG&E~~, ~~PSI~~~~, and~~ ~~ULH&P~~~~. Any money pool borrowings outstanding reduce the unused and available short-term debt regulatory authority of~~ ~~CG&E~~, ~~PSI~~~~, and~~ ~~ULH&P~~.

Long-term Debt

We are required to secure authority to issue long-term debt from the SEC under the PUHCA and the state utility commissions of Ohio, Kentucky, and Indiana. The SEC under the PUHCA

regulates the issuance of long-term debt by Cinergy Corp. The respective state utility commissions regulate the issuance of long-term debt by our utility operating companies.

A summary of our long-term debt authorizations at ~~September 30, 2003,~~March 31, 2004, was as follows:

	Authorized		Used		Available		Authorized		Used		Available
	*(in millions)*						(in millions)

Cinergy Corp.
PUHCA total capitalization(1)	$	5,000	$	1,601	$	3,399	$	5,000	$	1,472	$	3,528

CG&E and subsidiaries(2)
State Public Utility Commissions	575		400		175		$	575	$	—	$	575

PSI
State Public Utility Commission(3)	500		483		17		$	—	$	—	$	—
State Public Utility Commission - Tax-Exempt(3)							—		—		—

ULH&P
State Public Utility Commission	75		—		75		$	75	$	—	$	75

(1) Cinergy Corp., under PUHCA, was granted approval to increase total capitalization (excluding retained earnings and accumulated other comprehensive income (loss)), which may be any combination of debt and equity securities, by $5 billion. Outside this requirement, Cinergy Corp. is not subject to specific regulatory debt authorizations.

(2)Includes amounts for ULH&P.

(3)On April 28, 2004, the Indiana Utility Regulatory Commission (IURC) issued an order granting PSI additional long-term debt issuance authority of up to $500 million and tax-exempt issuance authority of up to $250 million through December 31, 2005.

Cinergy Corp. has an effective shelf registration statement with the SEC relating to the issuance of up to $750 million in any combination of common stock, preferred stock, stock purchase contracts or unsecured debt securities, of which approximately $574 million remains available for issuance. CG&E has an effective shelf registration statement with the SEC relating to the issuance of up to ~~$500~~$800 million in any combination of unsecured debt securities, first mortgage bonds, or preferred stock, of which ~~$100~~$800 million remains available for issuance. PSI has an effective shelf registration statement with the SEC relating to the issuance of up to ~~$700~~$800 million in any combination of unsecured debt securities, first mortgage bonds, or preferred stock, of which ~~$300~~$800 million remains available for issuance. ULH&P has effective shelf registration statements with the SEC relating to the issuance of up to $50 million in unsecured debt securities and up to $40 million in first mortgage bonds, of which $30 million in unsecured debt securities and $20 million in first mortgage bonds remain available for issuance.

Off-Balance Sheet FinancingArrangements

As discussed in the ~~2002~~2003 10-K, Cinergy uses ~~special-purpose entities (SPE)~~off-balance sheet arrangements from time to ~~finance~~time to facilitate financing of various projects. ~~The FASB issued Interpretation 46 in January 2003. This interpretation significantly changes~~Cinergy’s primary off-balance sheet arrangement involves the ~~consolidation requirements for SPEs and certain other entities subject~~sale of accounts receivable to ~~its scope. For further discussions see “Consolidation of Variable Interest Entities” under “Accounting Changes” in MD&A-Future.~~a qualifying special purpose entity.

~~As of September 30, 2003,~~ ~~Cinergy~~ ~~held investments in various unconsolidated subsidiaries which are accounted for under the equity method and had guaranteed approximately $8 million of the debt of these entities. In October 2003,~~ ~~Cinergy Corp.~~ ~~acquired controlling interest in these entities, and as a result, the entities will be consolidated by~~ ~~Cinergy Corp.~~

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Securities Ratings

As of ~~September 30, 2003,~~March 31, 2004, the major credit ~~ratings~~rating agencies rated our securities as follows:

	Fitch(1)	Moody’s(2)	S&P(3)

Cinergy Corp.
Corporate Credit	BBB+	Baa2	BBB+
Senior Unsecured Debt	BBB+	Baa2	BBB
Commercial Paper	F-2	P-2	A-2
Preferred Trust Securities	BBB+	Baa2	BBB

CG&E
Senior Secured Debt	A-	A3	A-
Senior Unsecured Debt	BBB+	Baa1	BBB
Junior Unsecured Debt	BBB	Baa2	BBB-
Preferred Stock	BBB	Baa3	BBB-
Commercial Paper	F-2	P-2	Not Rated

PSI
Senior Secured Debt	A-	A3	A-
Senior Unsecured Debt	BBB+	Baa1	BBB
Junior Unsecured Debt	BBB	Baa2	BBB-
Preferred Stock	BBB	Baa3	BBB-
Commercial Paper	F-2	P-2	Not Rated

ULH&P
Senior Unsecured Debt	Not Rated	Baa1	BBB

(1)Fitch ~~IBCA~~Ratings (Fitch)

(2) Moody’s Investors Service (Moody’s)

(3) Standard & Poor’s ~~Ratings Services~~ (S&P)

The highest investment grade credit rating for Fitch is AAA, Moody’s is Aaal, and S&P is AAA.

The lowest investment grade credit rating for Fitch is BBB-, Moody’s is Baa3, and S&P is BBB-.

A security rating is not a recommendation to buy, sell, or hold securities. These securities ratings may be revised or withdrawn at any time, and each rating should be evaluated independently of any other rating.

Equity

As discussed in the ~~2002~~2003 10-K, ~~the SEC has granted~~Cinergy issues new Cinergy Corp. ~~authority~~common stock shares to ~~increase~~satisfy obligations under certain of its ~~total capitalization by $5 billion. The proceeds from any new issuances will be used for general corporate purposes.~~employee stock plans and the Cinergy Corp. Direct Stock Purchase and Dividend Reinvestment Plan. During the first quarter of 2004, Cinergy has issued approximately 1.2 million shares under these plans.

~~In January 2003,~~ ~~Cinergy Corp.~~
~~filed a registration statement with the SEC with respect to the issuance of common stock, preferred stock, and other securities in an aggregate offering amount of $750 million. In February 2003,~~ ~~Cinergy~~ ~~sold 5.7 million shares of common stock of~~ ~~Cinergy Corp.~~ ~~with net proceeds of approximately $175 million under this registration statement.~~

~~See Note 2(a) of the “Notes to Condensed Financial Statements” in “Part I. Financial Information” for additional information regarding other common stock issuances.~~

~~Cinergy Corp~~~~. contributed $200 million in capital to~~ ~~PSI~~ ~~in two separate $100 million capital contributions in the second and third quarters of 2003, respectively. These capital contributions were made to support~~ ~~PSI’s~~ ~~current credit ratings.~~

79

MD&A – QUARTERLY RESULTS OF OPERATIONS - HISTORICAL

The Results of Operations discussions for 2003 Cinergy, CG&E, and PSI are combined within this section.

2004 QUARTERLY RESULTS OF OPERATIONS - HISTORICAL

Summary of Results

Electric and gas gross margins and net income for Cinergy, CG&E, and PSI for the quarters ended ~~September 30,~~March 31, 2004 and 2003 ~~and 2002~~ were as follows:

	Cinergy (1)				CG&E and subsidiaries				PSI				Cinergy(1)									CG&E and subsidiaries									PSI
	2003		2002		2003		2002		2003		2002		2004		2003		Change			% Change		2004		2003		Change			% Change		2004		2003		Change		% Change
	*(in thousands)*												(in thousands)

Net income													$	103,015	$	166,085	$	(63,070	)	(38	)	$	77,455	$	117,236	$	(39,781	)	(34	)	$	40,806	$	33,727	$	7,079	21

Electric gross margin	$	590,641	$	663,069	$	330,046	$	356,158	$	259,298	$	302,089	591,214		553,193		38,021			7		304,815		298,010		6,805			2		279,483		244,816		34,667		14
Gas gross margin	44,951		54,790		34,176		28,858		—		—		127,330		162,918		(35,588		)	(22	)	104,135		103,511		624			1		—		—		—		—
Net income	111,981		130,568		78,863		71,769		37,592		67,643

(1) The results of Cinergy also include amounts related to non-registrants.

Cinergy’s and CG&E’s net income decreased for the quarter ended March 31, 2004 as compared to the same period last year as a result of a number of factors. Operation and maintenance expense increased primarily as a result of increases in emission allowances expenses, employee incentive compensation costs, and transmission costs. Additionally, the decreases in net income reflect net gains recognized in the first quarter of 2003 resulting from the implementation of certain accounting changes that have been reflected as cumulative effects of changes in accounting principles. Cinergy’s decrease also reflects the decline in gas gross margins as well as an impairment charge on an investment, both discussed below. Cinergy’s and CG&E’s decreases in net income were partially offset by the higher electric gross margins discussed below.

PSI’s net income increased as a result of higher electric gross margins discussed below. This increase was partially offset by higher Operation and maintenance expense primarily related to greater emission allowances expenses and an increase in Depreciation expense primarily due to the addition of depreciable plant.

Electric Margins

Cinergy’s, CG&E’s, and PSI’s electric gross margins increased for the quarter ended March 31, 2004 as compared to the same period last year. Cinergy’s and CG&E’s variances reflect in part, an increase in net revenues on power marketing, trading, and origination contracts. Cinergy’s, CG&E’s,and PSI’s increases also included higher electric retail margins as a result of additional megawatt hour (MWh) sales. Cinergy’s and PSI’s increases included a higher price received per MWh on certain rate tariff adjustments. Milder weather in 2004 as compared to 2003, primarily impacting residential customers, partially offset the increases in margins for Cinergy, CG&E,and PSI.Additionally offsetting Cinergy’s and CG&E’s increases was an increase in the average price of fuel for the quarter.

Electric Operating Revenues

	Cinergy(1)									CG&E and subsidiaries							PSI
	2004		2003		Change			% Change		2004		2003		Change		% Change	2004		2003		Change			% Change
	(in millions)

Retail	$	670	$	684	$	(14	)	(2	)	$	334	$	334	$	—	—	$	336	$	350	$	(14	)	(4	)
Wholesale	169		112		57			51		71		70		1		1	71		56		15			27
Other	39		27		12			44		33		25		8		32	9		6		3			50
Total	$	878	$	823	$	55		7		$	438	$	429	$	9	2	$	416	$	412	$	4		1

(1)The results of Cinergy also include amounts related to non-registrants.

Retail electric operating revenues decreased for ~~Cinergy’s~~Cinergy ~~net income for~~and PSI mainly due to a three percent and five percent decrease in the ~~third~~average retail price per MWh, respectively, in the first quarter of ~~2003 was $112 million ($.62 per share on a diluted basis)~~2004 as compared to ~~$131~~2003. These average decreases resulted in approximately $23 million ~~($.77~~and $19 million lower retail revenues for Cinergy and PSI, respectively. The declines in the retail price per ~~share~~MWh were mainly due to decreases in rate tariff adjustments associated with PSI’s fuel cost recovery program partially offset by approximately $9 million in increases in other rate tariff adjustments related to emission allowances, construction work in progress, and clean coal technologies tracking mechanisms. The cost of fuel for PSI’s retail customers is passed on ~~a diluted basis)~~dollar-for-dollar under the state mandated fuel cost recovery mechanism. Milder weather in the first quarter of 2004 as compared to 2003 also contributed to the decline in retail electric revenues, primarily for residential customers. Heating degree days in PSI’s service territory decreased approximately nine percent in the first quarter of 2004 as compared to 2003. These variances were partially offset by an increase of approximately $12 million and $6 million for Cinergy and PSI, respectively, due to higher amounts of MWh delivered to non-residential customers.

CG&E’s retail revenues were flat for the ~~same period last year. Income before taxes for the period was $148 million~~quarter ended March 31, 2004, as compared to ~~$181~~2003. The average retail price per MWh decreased causing an approximate $4 million decline in retail revenue in 2004 as compared to 2003. This decrease primarily reflects customers switching from full service to transportation only service as a result of deregulation in the state of Ohio. Milder weather in the first quarter of 2004 as compared to 2003 also contributed to the decline in retail electric revenues, primarily for residential customers. Heating degree days decreased approximately seven percent in CG&E’s service territory in the ~~same period a year ago.~~ first quarter of 2004 as compared to 2003. These decreases were offset by an increase in MWh delivered to non-residential customers.

Electric ~~margins at~~wholesale revenues increased for Cinergy and PSI and remained relatively flat for CG&Efor the first quarter of 2004 as compared to 2003. Cinergy’s ~~declined due~~increase includes a number of factors. Net revenues on power marketing, trading, and origination contracts increased approximately $20 million over the first quarter of 2003. The increase in power trading results is attributable to ~~milder weather~~higher earnings on physical and financial trading primarily within the Midwest and the PJM Interconnection (PJM) market. Additionally, approximately $16 million of Cinergy’s variance includes increases in wholesale revenues from non-regulated energy service subsidiaries that started operations, or became fully consolidated, during the second half of 2003.

The majority of the remaining increase was attributable to increases in wholesale sales from excess generation capacity after serving regulated retail customers.

CG&E’s electric wholesale revenues remained relatively flat for the quarter. ~~Gas margins decreased~~Net revenues on power marketing, trading, and origination contracts increased by approximately $24 million over the first quarter of 2003. The increase in power trading results is attributable to higher earnings on physical and financial trading primarily within the Midwest and the PJM market. This increase was offset by a decrease in MWh available for wholesale activity due in part to ~~the results~~a decrease in generation available for these transactions.

The majority of ~~our gas trading operation, Cinergy Marketing & Trading, LP (Marketing & Trading), although this~~PSI’s increase was attributable to increases in wholesale sales from excess generation capacity after serving regulated retail customers. This increase was partially offset by an approximate $5 million decrease in net revenues on power marketing, trading, and origination contracts, due to PSI’s discontinuation of entering into any new transactions beginning in 2002. Revenues continue to be affected by changes in the fair value of existing contracts over the remaining duration of the contracts.

Other Electric operating revenues increased for Cinergy, CG&E, and PSI for the first quarter of 2004, as compared to 2003. Cinergy’s, CG&E’s, and PSI’s increases reflect higher ~~usage by~~transmission revenues primarily resulting from Midwest Independent System Operator, Inc. (Midwest ISO) operations of approximately $6 million, $3 million, and $3 million, respectively. Cinergy’s and CG&E’s ~~retail customers due to cooler weather. During~~other Electric operating revenues also increased by approximately $5 million reflecting an increase in third party coal sales and the ~~quarter, fewer~~introduction of coal trading opportunities were available as a result of market conditions. Also contributing to the decrease in net income were costs associated with the likely resolution of claims with respect to the bankruptcy of Enron Corp. (Enron). Partially offsetting these decreases in net income were reductions in transmission costs and property taxes.activity.

Electric Operating RevenuesFuel and Purchased Power

Cinergy (1)

CG&E and subsidiaries

PSI

2003

2002

% Change

2003

2002

% Change

2003

2002

% Change

(in millions)

Retail

$
744

$
805

(8
)
$
377

$
429

(12
)
$
367

$
377

(3
)
Wholesale

141

109

29

65

27

N/M

61

79

(23
)
Other

36

51

(29
)
33

37

(11
)
9

15

(40
)
Total

$
921

$
965

(5
)
$
475

$
493

(4
)
$
437

$
471

(7
)

	Cinergy(1)							CG&E and subsidiaries									PSI
	2004		2003		Change		% Change	2004		2003		Change			% Change		2004		2003		Change			% Change
	(in millions)

Fuel	$	249	$	240	$	9	4	$	115	$	105	$	10		10		$	114	$	135	$	(21	)	(16	)
Purchased power	38		30		8		27	18		26		(8		)	(31	)	23		32		(9		)	(28	)

(1)The results of Cinergy also include amounts related to non-registrants.

~~N/M Not meaningful to an understanding of the change.~~

~~Electric operating revenues~~ ~~decreased for~~ ~~Cinergy~~, ~~CG&E~~,~~and~~ ~~PSI~~ ~~for the quarter ended September 30, 2003, as compared to 2002. Retail revenues decreased for~~ ~~Cinergy~~, ~~CG&E~~~~, and~~ ~~PSI~~ ~~primarily due to lower megawatt hour (MWh) sales resulting from milder weather. The number of cooling degree days for the third quarter was approximately 35 percent lower than the~~

8058

~~comparable period of 2002, contributing to a reduction in residential MWh sales of approximately 15 percent and 10 percent for~~ ~~CG&E~~Fuel ~~and~~ ~~PSI~~~~, respectively. Also contributing to the decrease were lower commercial and industrial MWh sales reflecting the effects of a continuing sluggish economy. Partially offsetting this decrease for~~ ~~PSI~~ ~~were increased tariff adjustments associated with the fuel cost recovery mechanism and certain construction programs.~~

~~Wholesale revenues increased for~~ ~~Cinergy~~Fuel primarily represents the cost of coal, natural gas, and ~~CG&E~~ ~~for~~oil that is used to generate electricity. The following table details the changes to fuel expense from the quarter ended ~~September 30,~~March 31, 2003, ~~as compared~~ to ~~the same period last year. Due to lower retail demand as a result of mild weather, more~~ ~~Cinergy~~ ~~generation capacity was available for wholesale transactions. In addition~~ ~~CG&E’s~~ ~~increase and~~ ~~PSI’s~~ decrease in wholesale revenues reflects the implementation of the new joint operating agreement as discussed in the 2002 10-K. With this agreement, the majority of new wholesale contracts entered into are originated on behalf of ~~CG&E~~.

~~Other electric operating revenues decreased for~~ ~~Cinergy~~, ~~CG&E~~ ~~and~~ ~~PSI~~ ~~for~~ the quarter ended ~~September 30, 2003, as compared to 2002.~~ ~~Cinergy’s~~ ~~and~~ ~~CG&E’s~~ ~~decrease was primarily the result of decreased third party coal sales and lower transmission revenues.~~ ~~PSI’s~~ ~~decrease was primarily the result of decreased transmission revenues.~~March 31, 2004:

Gas Operating Revenues

Cinergy (1)

CG&E and subsidiaries

2003

2002

% Change

2003

2002

% Change

(in millions)

Retail

$
66

$
41

61

$
66

$
41

61

Wholesale

10

26

(62
)
—

—

—

Storage and transportation

49

36

36

—

—

—

Other

—

1

N/M

—

—

—

Total

$
125

$
104

20

$
66

$
41

61

	Cinergy(1)			CG&E			PSI
	(in millions)

Fuel Expense – March 31, 2003	$	240		$	105		$	135

Increase (Decrease) due to changes in:
Price of fuel	12			11			1
Deferred fuel cost	(36		)	—			(36		)
Fuel consumption	8			(6		)	14
New entities(2)	14			—			—
Other(3)	11			5			—

Fuel Expense – March 31, 2004	$	249		$	115		$	114

(1) The results of Cinergy also include amounts related to non-registrants.

(2) Reflects additional expense due to non-regulated energy service subsidiaries that started operations, or became fully consolidated, during the second half of 2003.

(3) Includes costs of third party coal sales and costs associated with the introduction of coal trading activity.

Deferred fuel cost represents changes in fuel expense associated with PSI’s fuel adjustment charge, which recovers retail fuel costs from customers on a dollar-for-dollar basis. The fuel adjustment charge is calculated based on the estimated cost of fuel in the next three-month period. PSI records any under-recovery or over-recovery resulting from these differences as a deferred asset or liability until it is billed or refunded to its customers, at which point it is adjusted through fuel expense.

~~N/M Not meaningful to an understanding of the change.~~

Purchased Power

~~Gas operating revenues~~Purchased power expense increased for Cinergy and decreased for CG&E and PSI for the quarter ended ~~September 30, 2003,~~March 31, 2004, as compared to ~~2002. Retail gas revenues increased due to both~~2003. CG&E’s and PSI’s decreases in Purchased power expense reflect substantial reductions in the amount of purchases made for wholesale full requirements customers. Both CG&E’s and PSI’s decreases were partially offset by an increase in ~~thousand cubic feet (mcf) delivered and an~~the amount of MWh purchased primarily for non-residential customers, consistent with the increases in load for the customers discussed previously as part of retail electric revenues.

Cinergy’s increase was due to a significantly greater amount of third party purchases by its subsidiaries in ~~price received per mcf.~~ 2004, as opposed to intercompany purchases in 2003 that were eliminated.

Gas Margins

CG&E’s ~~volumes delivered~~gas gross margins remained relatively flat and Cinergy’s decreased for the quarter ended March 31, 2004, as compared to the same period last year. CG&E’s gas margins increased by $8 million primarily due to ~~cooler weather in the third quarter of 2003, as compared to 2002. The higher prices per mcf reflect an increase in~~rate tariff adjustments associated with ~~the gas main replacement~~a low-income

subsidy program, ~~the~~ Ohio excise taxes, and the gas ~~cost recovery mechanism.~~

main replacement program. This was offset by a $7 million decrease reflecting less volume sold due to milder weather during 2004. Heating degree days decreased approximately seven percent in CG&E’s ~~wholesale gas commodity cost is passed directly to the retail customer dollar-for-dollar under the gas cost recovery mechanism mandated by state law. For further information see Note 7(n)~~service territory in the ~~“Notes to Condensed Financial Statements” in “Part I. Financial Information”.~~

~~Cinergy~~ ~~began reporting revenues from energy trading derivative contracts on a net basis in 2003, in accordance with the required adoption~~first quarter of ~~Emerging Issues Task Force (EITF) Issue 02-3,~~ ~~Issues Involved in Accounting for Derivatives Contracts Held for Trading Purposes and~~

~~Contracts Involved in Energy Trading and Risk Management Activities~~ ~~(EITF 02-3). See Note 1(g)(~~~~iii~~~~) in the “Notes to Condensed Financial Statements” in “Part I. Financial Information” for additional information.~~

~~Cinergy’s~~ ~~wholesale gas revenues (which represent net gains and losses on energy trading activity) decreased for the quarter ended September 30, 2003,~~2004 as compared to ~~2002, primarily due to fewer trading opportunities in 2003 as a result of market conditions.~~2003.

Cinergy’s gas margins fell approximately $36 million due to lower margins from our gas marketing and trading business. Our domestic gas marketing and trading business experienced a $28 million decline in physical and financial trading margins. Natural gas prices were extremely volatile in the first quarter of 2003. The reduction in gas marketing and trading margins resulted from fewer trading opportunities caused by lower volatility, lower price levels, and milder weather in 2004. The remaining decline was due to a drop in our storage and transportation ~~revenues increased for the quarter ended September 30, 2003, as compared to 2002 due to an overall increase~~margins. Our volume sold from storage experienced a 35 percent decline in ~~the number of storage contracts that were entered into in the third quarter of 2003.~~2004, reflecting milder weather.

Other Revenues

Other revenuesfor Cinergy ~~decreased~~increased for the quarter ended ~~September 30, 2003,~~March 31, 2004, as compared to ~~2002, primarily due to~~2003. Operating fees received by a ~~decrease in the production of synthetic fuel~~non-regulated subsidiary that provides cogeneration services increased approximately $7 million as a result of ~~a reduction in electric production by~~operational efficiencies. Other revenues also increased approximately $6 million due to non-regulated energy service subsidiaries that started operations, or became fully consolidated, during the ~~third party purchaser~~second half of ~~our synthetic fuel.~~2003.

Operating Expenses

Cinergy (1)

CG&E and subsidiaries

PSI

2003

2002

% Change

2003

2002

% Change

2003

2002

% Change

(in millions)

Fuel

$
287

$
270

6

$
111

$
114

(3
)
$
164

$
140

17

Purchased and exchanged power

43

32

34

34

23

48

14

29

(52
)
Gas purchased

30

13

N/M

32

13

N/M

—

—

—

Gas storage and transportation

50

36

39

—

—

—

—

—

—

Operation and maintenance

317

364

(13
)
133

150

(11
)
113

129

(12
)
Depreciation

105

100

5

43

49

(12
)
48

40

20

Taxes other than income taxes

56

65

(14
)
45

50

(10
)
10

13

(23
)
Total

$
888

$
880

1

$
398

$
399

—

$
349

$
351

(1
)

~~(1)~~ ~~The results of~~ ~~Cinergy~~ ~~also include amounts related to non-registrants.~~

~~N/M Not meaningful to an understanding of the change.~~

Fuel

~~Fuel~~Operation and Maintenance primarily represents the cost of coal, natural gas, and oil that is used to generate electricity. The following table details the changes to fuel expense from the quarter ended September 30, 2002, to the quarter ended September 30, 2003:

Cinergy (1)

CG&E

PSI

(in millions)

Fuel expense – September 30, 2002

$
270

$
114

$
140

Increase (decrease) due to changes in:

Price of fuel

3

2

1

Deferred fuel cost(2)

21

—

21

Fuel consumption

2

—

2

Other(3)

(9
)
(5
)
—

Fuel expense – September 30, 2003

$
287

$
111

$
164

~~(1)~~ ~~The results of~~ ~~Cinergy~~ ~~also include amounts related to non-registrants.~~

~~(2)~~ ~~Deferred fuel cost represents changes in fuel expense associated with~~ ~~PSI's~~ fuel adjustment charge, which recovers retail fuel costs from customers on a dollar-for-dollar basis. Amounts that have been deferred are adjusted through fuel expense as fuel adjustment charge revenue is collected from customers.

~~(3)~~ ~~Includes costs of third party coal sales.~~

Purchased and Exchanged Power

~~Purchased~~Operation and ~~exchanged power~~maintenance expense increased for Cinergy, CG&E, and PSI for the quarter ended ~~September 30, 2003,~~March 31, 2004, as compared to 2003. Cinergy’s, CG&E’s, and PSI’s increases include approximately $18 million, $4 million, and $14 million, respectively, of higher expenses related to emissions allowances. These increases primarily reflect a reduction in the ~~same period last year.~~amount deferred under PSI’s emission allowances tracking mechanism as authorized by the Indiana Utility Regulatory Commission (IURC) and higher expenses due to an increase in the weighted average cost and the number of allowances used during the period. The ~~majority~~expenses also reflect increases of approximately $10 million, $5 million, and $3 million for Cinergy, CG&E, and PSI, respectively, in employee incentive compensation costs. In addition, higher costs of approximately $9 million, $7 million, and $2 million for Cinergy, CG&E, and PSI, respectively, were due to changes in transmission costs largely resulting from changes in the Midwest ISO operations in 2003. Maintenance expenses were higher by approximately $3 million for CG&E. Maintenance expenses decreased for PSI, partially offsetting PSI’s aforementioned increases. Approximately $6 million of Cinergy’s increase relates to non-regulated energy service subsidiaries that started operations, or became fully consolidated, during the second half of 2003.

Depreciation

Depreciation expense increased for Cinergy and PSI, and decreased for CG&E for the quarter ended March 31, 2004, as compared to 2003. Approximately $7 million of Cinergy’s and ~~CG&E’s~~ PSI’s~~increase is a result of an increase in the price paid per MWh and a lower amount of deferred purchased power cost. Offsetting the~~

increase was ~~a decrease in purchased and exchanged power expense at~~ ~~PSI~~~~. More generation is available to serve~~ ~~PSI~~ ~~native load customers~~ due to the ~~repowering~~addition of depreciable plant primarily including pollution control equipment. Partially offsetting Cinergy’s increase and contributing to CG&E’s decrease was an approximate $7.5 million reduction due to higher estimated useful lives of certain of ~~PSI’s~~CG&E’s ~~Noblesville Station~~assets resulting from a new depreciation study completed during the third quarter of 2003. Approximately $3 million of Cinergy’s increase and partially offsetting CG&E’s decrease was the addition of ~~peaking plants as discussed in Note 12 in~~depreciable plant primarily including pollution control equipment and additions related to the ~~“Notes to Condensed Financial Statements” in “Part I. Financial Information”.~~accelerated gas main replacement program.

Gas PurchasedTaxes Other Than Income Taxes

~~Gas purchased~~Taxes other than income taxes expense increased for Cinergy and CG&E for the quarter ended ~~September 30, 2003,~~March 31, 2004, as compared to ~~2002.~~2003. This increase was primarily ~~due~~related to an approximate $3 million increase in Ohio gross receipts taxes, reflecting higher sales for the ~~average cost per mcf of gas purchased. In addition,~~ ~~CG&E’s~~ ~~gas customers usage increased approximately 17 percent in the quarter as compared to the same period last year.~~ ~~CG&E’s~~ ~~wholesale commodity cost is passed directly to the retail customer dollar-for-dollar under the gas cost recovery mechanism mandated by state law.~~comparative period.

Miscellaneous (Expense) Income - Net

~~Gas Storage and Transportation~~Miscellaneous (Expense) Income - Net

~~Gas storage and transportation expense increased~~ decreased for Cinergy for the quarter ended ~~September 30, 2003,~~March 31, 2004, as compared to ~~2002,~~2003. This decrease reflects an approximate $27 million pre-tax impairment charge ($21 million after-tax) on a non-controlling interest in an investment primarily ~~due to an increase~~involved in ~~storage withdrawals which reflects increased storage contract activity. Gas storage expense is recognized on our Statements~~the development and sale of ~~Income as natural gas is sold from inventory.~~

Operation and Maintenance

~~Operation and maintenance~~ ~~expense decreased for~~ ~~Cinergy~~, ~~CG&E~~~~, and~~ ~~PSI~~ ~~for the quarter ended September 30, 2003, as compared to 2002.~~outage management software. The decrease ~~for~~ ~~Cinergy~~was ~~a result~~partially offset by interest income of ~~a decrease in~~approximately $5 million on the ~~costs associated with the production~~notes receivable of ~~synthetic fuel~~two subsidiaries consolidated in the third quarter of 2003, ~~compared to 2002. Partially~~as discussed in the 2003 10-K. Additionally, partially offsetting the decrease ~~for~~ ~~Cinergy~~ ~~were the costs associated with our anticipated resolution of claims with respect to the bankruptcy of Enron.~~ ~~Cinergy’s~~, ~~CG&E’s~~~~, and~~ ~~PSI’s~~ ~~decreases were also affected by a decrease~~was approximately $4 million in ~~the amortization of certain regulatory assets due to lower electric revenues. Also contributing to the decrease for~~ ~~Cinergy~~, ~~CG&E~~~~, and~~ ~~PSI~~ ~~were decreased transmission costs.~~

Depreciation

~~Depreciation~~ ~~expense increased for~~ ~~Cinergy~~ ~~and~~ ~~PSI~~ ~~and decreased for~~ ~~CG&E~~ ~~for the quarter ended September 30, 2003, as compared to 2002.~~ ~~Cinergy’s~~ ~~and~~ ~~PSI’s~~ ~~increase was primarily attributable to the addition of depreciable plant.~~ ~~CG&E’s~~ decrease is primarily attributable to an increase in the estimated useful lives of our generating assets, resulting from a new depreciation study completed during the third quarter of 2003. Also contributing to ~~CG&E’s~~ ~~decrease was the discontinuance of accruing costs of removal for our generating assets (which was previously included as part of~~ ~~Depreciation~~ ~~expense) as a result of the adoption of Statement of Financial Accounting Standards No. 143,~~ ~~Accounting for Asset Retirement Obligations~~ ~~(Statement 143). See Note 1(g)(~~vi~~) of the “Notes to Condensed Financial Statements” in “Part I. Financial Information” for further details. Prior periods were not restated for the adoption of Statement 143.~~

Taxes Other Than Income Taxes

~~Taxes other than income taxes~~ ~~expense decreased for~~ ~~Cinergy~~, ~~CG&E~~~~, and~~ ~~PSI~~ ~~for the quarter ended September 30, 2003, as compared to 2002. This decrease was primarily due to lower property taxes.~~

Miscellaneous Income (Expense) - Net

~~Miscellaneous Income (Expense) - Net~~ ~~increased for~~ ~~Cinergy~~ ~~for the quarter ended September 30, 2003, as compared to 2002.~~ ~~Cinergy’s~~ ~~increase primarily reflects the interest income~~gains on the ~~notes receivable~~disposal of ~~two newly consolidated subsidiaries. See Note 1(g)(~~~~iii~~~~) of the “Notes to Condensed Financial Statements” in “Part I. Financial Information” for further details regarding the consolidation of these entities. In addition,~~ ~~CG&E’s~~ ~~increase and~~ ~~PSI’s~~ ~~decrease was a result of a final reconciliation between the two entities of a previous demutualization of a medical insurance carrier used by both companies.~~other non-regulated investments.

Interest Expense

Interest Expense increased for Cinergy, ~~CG&E~~~~, and~~ ~~PSI~~ for the quarter ended ~~September 30, 2003,~~March 31, 2004, as compared to ~~2002. The impact of a decrease in short-term interest rates was more than offset by an increase in the amount of long-term debt outstanding for~~ ~~Cinergy~~, ~~CG&E~~~~, and~~ ~~PSI~~~~. Interest on long-term debt increased as a result~~2003. Approximately $6 million of the ~~additional debt recorded with the~~

~~consolidation of two new entities and~~increase reflects the recognition of a note payable to a ~~trust~~trust. Also reflected in the increase is approximately $5 million related to additional debt recorded in accordance with the consolidation of two new entities. The note payable and additional debt were both recorded in the third quarter of 2003 resulting from the adoption of Interpretation No. 46, ~~see Note 1(g)(~~~~iii~~Consolidation of Variable Interest Entities) (Interpretation 46), as discussed in the 2003 10-K. Partially offsetting these increases was an increase in interest capitalized in the first quarter of 2004, as compared to 2003, primarily reflecting the ~~“Notes to Condensed Financial Statements” in “Part I. Financial Information”.~~post-in-service carrying costs deferred for recovery as authorized by the IURC.

Preferred Dividend Requirement of Subsidiary Trust

Preferred Dividend Requirement of Subsidiary Trust decreased for Cinergy for the quarter ended ~~September 30,~~March 31, 2004, as compared to 2003, as a result of the implementation of Interpretation 46. Effective July 1, 2003, the preferred trust securities and the related dividends are no longer reported in Cinergy’s financial statements. ~~See Note 1(g)(~~~~iii~~~~) of the “Notes~~However, interest expense is still being incurred on a note payable to ~~Condensed Financial Statements” in “Part I. Financial Information” for further details.~~this trust as discussed above.

Income Taxes

~~Income Taxes~~ ~~expense decreased~~The effective income tax rate for Cinergy ~~and~~ ~~PSI~~ decreased for the quarter ended ~~September 30, 2003,~~March 31, 2004, as compared to ~~2002.~~2003. CG&E’s and PSI’s effective income tax rates remained flat for the comparative period. Cinergy’s decrease was primarily a result of ~~a decrease in taxable book income. Based on its current estimates,~~ ~~Cinergy~~ ~~expects that its effective income tax rate for 2003 will approximate 24 percent.~~ ~~PSI’s~~ ~~decrease was primarily due to a decrease in taxable book income. This decrease was partially offset by an increase~~changes in the ~~Indiana state income tax rate in 2003.~~amount of

8561

~~MD&A - YEAR TO DATE RESULTS OF OPERATIONS - - HISTORICAL~~

2003 YEAR TO DATE RESULTS OF OPERATIONS - HISTORICAL

Summary of Results

~~Electric and gas gross margins and net income for~~ ~~Cinergy~~, ~~CG&E~~~~, and~~ ~~PSI~~ ~~for the nine months ended September 30, 2003 and 2002 were as follows:~~

Cinergy (1)

CG&E and subsidiaries

PSI

2003

2002

2003

2002

2003

2002

(in thousands)

Electric gross margin

$
1,672,622

$
1,769,425

$
919,244

$
949,150

$
743,501

$
795,513

Gas gross margin

269,482

185,620

174,912

132,036

—

—

Net income

362,719

260,380

247,018

202,024

94,398

135,440

~~(1)~~ ~~The results of~~ ~~Cinergy~~ ~~also include amounts related to non-registrants.~~

~~Cinergy’s~~ net income for the nine months ended September 30, 2003, was $363 million ($2.04 per share on a diluted basis) as compared to $260 million ($1.55 per share on a diluted basis) for the same period last year. Income before taxes for the period was $432 million compared to $398 million for the same period a year ago. The increase in 2003 income primarily reflects higher gas margins from wholesale and retail operations in 2003 and $66 million in charges associated with employee severance programs and the write-offs of certain equipment and technology investments that were taken in the second quarter of 2002. The increased gas margins primarily reflect the results of our domestic gas trading operation, Marketing & Trading, as well as increased volume of retail gas sales due to colder weather during the first and third quarters of 2003. Also contributing to the gas margin increase over 2002 was the impact of accounting changes that required certain gas contracts and inventory to be accounted for on the accrual basis beginning in 2003. Offsetting the increase in gas margins was a decrease in electric margins due to milder than normal weather in the second and third quarter of 2003. ~~Cinergy’s~~ increased net income also reflects a net gain resulting from the implementation of certain accounting changes, which have been reflected as a cumulative effect of changes in accounting principles (see Note 1(g)(v) of the “Notes to Condensed Financial Statements” in “Part I. Financial Information”), and gains realized in the second quarter of 2003 from the disposal of discontinued operations and lower income taxes resulting primarily from tax credits associated with the production of synthetic fuel which began in July 2002.

Electric Operating Revenues

Cinergy (1)

CG&E and subsidiaries

PSI

2003

2002

% Change

2003

2002

% Change

2003

2002

% Change

(in millions)

Retail

$
2,063

$
2,129

(3
)
$
1,030

$
1,110

(7
)
$
1,033

$
1,020

1

Wholesale

364

283

29

194

95

N/M

156

168

(7
)
Other

86

119

(28
)
77

96

(20
)
21

28

(25
)
Total

$
2,513

$
2,531

(1
)
$
1,301

$
1,301

—

$
1,210

$
1,216

—

~~(1)~~ ~~The results of~~ ~~Cinergy~~ ~~also include amounts related to non-registrants.~~

~~N/M Not meaningful to an understanding of the change.~~

~~Electric operating revenues~~ ~~decreased for~~ ~~Cinergy~~ ~~and~~ ~~PSI~~ ~~for the nine months ended September 30, 2003, as compared to 2002.~~

~~Electric retail operating revenues decreased for~~ ~~Cinergy~~ ~~for the nine months ended September 30, 2003, compared to the same period last year. Contributing to~~ ~~Cinergy’s~~ ~~decrease was a decrease in MWh sales for~~ ~~PSI~~ ~~and~~ ~~CG&E~~ ~~due to milder than normal weather during the summer and a sluggish economy. For the nine months ended September 30, 2003, cooling degree-days were 39 percent lower for~~ ~~CG&E~~ ~~and 37 percent lower for~~ ~~PSI~~ as compared to 2002. The mild summer weather was offset by a colder heating season during the first half of the year. For the nine months ended September 30, 2003, heating degree-days were approximately 17 percent and 19 percent higher for ~~CG&E~~ ~~and~~ ~~PSI~~~~, respectively. The net effect contributed to a decrease in residential MWh of approximately four percent for~~ ~~CG&E~~ ~~and approximately two percent for~~ ~~PSI~~~~. The sluggish economy caused~~ ~~CG&E’s~~ ~~and~~ ~~PSI’s~~ ~~commercial and industrial MWh sales to decrease by approximately two percent for the nine months ended September 30, 2003, compared to the same period last year. Partially offsetting~~ ~~Cinergy’s~~ ~~decrease in electric retail revenue from lower MWh sales was an increase in the price paid per MWh at~~ ~~PSI~~ ~~during 2003. Increases in tariff adjustments associated with the fuel cost recovery mechanism and certain construction projects caused~~ ~~PSI’s~~ ~~retail operating revenue to increase for 2003.~~

~~Electric wholesale revenues increased for~~ ~~Cinergy~~ ~~and~~ ~~CG&E~~ ~~and decreased for~~ ~~PSI~~ ~~for the nine months ended September 30, 2003, as compared to the same period last year. Due to lower retail demand as a result of milder weather, more~~ ~~Cinergy~~ ~~generation capacity was available for wholesale transactions in the second and third quarters of 2003. In addition,~~ ~~CG&E’s~~ ~~increase and~~ ~~PSI’s~~ decrease in wholesale revenues reflects the implementation of the new joint operating agreement as discussed in the 2002 10-K. With this agreement, the majority of new wholesale contracts entered into are originated on behalf of ~~CG&E~~.

~~Other electric operating revenues decreased for~~ ~~Cinergy~~, ~~CG&E~~~~, and~~ ~~PSI~~ ~~for the nine months ended September 30, 2003, as compared to 2002, primarily reflecting lower transmission revenues. The decrease for~~ ~~Cinergy~~ ~~and~~ ~~CG&E~~ ~~also reflects a reduction in third party coal sales.~~

Gas Operating Revenues

Cinergy (1)

CG&E and subsidiaries

2003

2002

% Change

2003

2002

% Change

(in millions)

Retail

$
424

$
274

55

$
424

$
274

55

Wholesale

73

50

46

—

—

—

Storage and transportation

140

48

N/M

—

—

—

Other

1

2

(50
)
3

3

—

Total

$
638

$
374

71

$
427

$
277

54

~~(1)~~ ~~The results of~~ ~~Cinergy~~ ~~also include amounts related to non-registrants.~~

~~N/M Not meaningful to an understanding of the change.~~

~~Gas operating revenues~~ ~~increased for~~ ~~Cinergy~~ ~~and~~ ~~CG&E~~ ~~for the nine months ended September 30, 2003, as compared to 2002.~~ ~~Cinergy’s~~ ~~and~~ ~~CG&E’s~~ retail gas revenues increased due to an increase in retail sales volumes and higher prices received per mcf. The increase in retail gas sales volumes was primarily the result of the colder weather in the first and third quarters of 2003 as compared to the same period in 2002. The higher price per mcf reflects an increase in ~~CG&E’s~~ base rates, as approved by the PUCO in May 2002, and tariff adjustments associated with the gas main replacement program and gas cost recovery mechanism. For further information see Note 7(n) in the “Notes to Condensed Financial Statements” in “Part I. Financial Information”. ~~CG&E’s~~ ~~wholesale gas commodity cost is passed directly to the retail customer dollar-for-dollar under the gas cost recovery mechanism mandated by state law.~~

~~Cinergy~~ ~~began reporting revenues from energy trading derivative contracts on a net basis in 2003, in accordance with the required adoption of EITF 02-3. See Note 1(g)(~~i~~) in the “Notes to Condensed Financial Statements” in “Part I. Financial Information” for additional information.~~

~~Cinergy’s~~ wholesale gas revenues (which represent net gains and losses on energy trading derivatives) increased for the nine months ended September 30, 2003, as compared to 2002, primarily due to an increase in the volatility of natural gas prices in the first quarter of 2003, as compared to the same period in 2002.

~~Cinergy’s~~ gas storage and transportation revenues increased for the nine months ended September 30, 2003, as compared to 2002. Marketing & Trading began engaging in significant storage activities at the end of the second quarter of 2002.

Operating Expenses

Cinergy (1)

CG&E and subsidiaries

PSI

2003

2002

% Change

2003

2002

% Change

2003

2002

% Change

(in millions)

Fuel

$
746

$
680

10

$
304

$
304

—

$
415

$
349

19

Purchased and exchanged power

94

82

15

78

48

63

52

71

(27
)
Gas purchased

252

145

74

252

145

74

—

—

—

Gas storage and transportation

117

44

N/M

—

—

—

—

—

—

Operation and maintenance

973

962

1

394

394

—

349

387

(10
)
Depreciation

314

294

7

142

146

(3
)
135

116

16

Taxes other than income taxes

201

202

—

155

150

3

42

47

(11
)
Total

$
2,697

$
2,409

12

$
1,325

$
1,187

12

$
993

$
970

2

~~(1)~~ ~~The results of~~ ~~Cinergy~~ ~~also include amounts related to non-registrants.~~

~~N/M Not meaningful to an understanding of the change.~~

Fuel

~~Fuel~~ primarily represents the cost of coal, natural gas, and oil that is used to generate electricity. The following table details the changes to fuel expense from the nine months ended September 30, 2002, to the nine months ended September 30, 2003:

Cinergy (1)

CG&E

PSI

(in millions)

Fuel expense - September 30, 2002

$
680

$
304

$
349

Increase (decrease) due to changes in:

Price of fuel

15

—

15

Deferred fuel cost(2)

44

—

44

Fuel consumption

9

2

7

Other (3)

(2
)
(2
)
—

Fuel expense - September 30, 2003

$
746

$
304

$
415

~~(1)~~ ~~The results of~~ ~~Cinergy~~ ~~also include amounts related to non-registrants.~~

~~(3)~~ ~~Includes costs of third party coal sales.~~

Purchased and Exchanged Power

~~Purchased and exchanged power expense increased for~~ ~~Cinergy~~ ~~and~~ ~~CG&E~~ ~~for the nine months ended September 30, 2003, as compared to the same period last year. The majority of~~ ~~Cinergy’s~~ ~~and~~ ~~CG&E’s~~ ~~increase is a result of an increase in the price paid per MWh and a lower amount of deferred purchased power cost.~~ ~~PSI’s~~ ~~decrease in purchased and exchanged power is a result of more generation being available to serve~~ ~~PSI~~ ~~native load customers due to the repowering of~~

~~PSI’s~~ ~~Noblesville station and the addition of peaking plants as discussed in Note 12 in the “Notes to Condensed Financial Statements” in “Part I. Financial Information”.~~

Gas Purchased

~~Gas purchased~~ ~~expense increased for~~ ~~Cinergy~~ ~~and~~ ~~CG&E~~ ~~for the nine months ended September 30, 2003, as compared to 2002, primarily due to an increased average cost per mcf of gas purchased. In addition,~~ ~~CG&E’s~~ ~~gas customers usage increased approximately 21 percent for the nine months ended September 30, 2003, as compared to the same period last year.~~ ~~CG&E’s~~ ~~wholesale commodity cost is passed directly to the retail customer dollar-for-dollar under the gas cost recovery mechanism mandated by state law.~~

Gas Storage and Transportation

~~Gas storage and transportation expense increased for~~ ~~Cinergy~~ for the nine months ended September 30, 2003, as compared to 2002, primarily due to an increase in storage activity in 2003. Also contributing to this increase was an increase in storage capacity in the third quarter of 2002 that was optimized during the first quarter of 2003. Marketing & Trading began engaging in significant storage activities at the end of the second quarter of 2002. Gas storage expense is recognized on our Statements of Income as natural gas is sold from inventory.

Operation and Maintenance

~~Operation and maintenance~~ ~~expense increased for~~ ~~Cinergy~~ ~~and decreased for~~ ~~PSI~~ ~~for the nine months ended September 30, 2003, as compared to 2002.~~ ~~Cinergy’s~~ ~~increase includes costs associated with the production of synthetic fuel, which began in July 2002, and the costs associated with~~ ~~Cinergy’s~~ ~~anticipated resolution of claims with respect to the bankruptcy of Enron. Partially offsetting~~ ~~Cinergy’s~~ ~~increase and primarily attributing to~~ ~~PSI’s~~ ~~decrease were lower transmission costs and costs associated with employee severance programs in 2002.~~

Depreciation

~~Depreciation~~ ~~expense increased for~~ ~~Cinergy~~ ~~and~~ ~~PSI~~ ~~and decreased for~~ ~~CG&E~~ ~~for the nine months ended September 30, 2003, as compared to 2002.~~ ~~Cinergy’s~~ ~~and~~ ~~PSI’s~~ ~~increase was primarily due to the addition of depreciable plant. Also contributing to~~ ~~Cinergy’s~~ ~~increase was the addition of the depreciable equipment associated with the production of synthetic fuel.~~ ~~CG&E’s~~ ~~decrease was primarily attributable to an increase in the~~ estimated ~~useful lives of certain assets resulting from a new depreciation study completed during the third quarter of 2003. Also contributing to~~ ~~CG&E’s~~ ~~decrease was the discontinuance of accruing costs of removal for our generating assets (which was previously included as part of~~ ~~Depreciation~~ ~~expense) as a result of the adoption of Statement 143. See Note 1(g)(~~~~vii~~~~) of the “Notes to Condensed Financial Statements” in “Part I. Financial Information” for further details. Prior periods were not restated for the adoption of Statement 143.~~

Taxes Other Than Income Taxes

~~Taxes other than income taxes~~ ~~expense increased for~~ ~~CG&E~~ ~~and decreased for~~ ~~PSI~~ ~~for the nine months ended September 30, 2003, as compared to 2002. The increase for~~ ~~CG&E~~ ~~was primarily attributable to an increase in Ohio excise taxes.~~ ~~PSI’s~~ ~~decrease was primarily the result of lower property taxes.~~

Equity in Earnings of Unconsolidated Subsidiaries

~~Equity in Earnings of Unconsolidated Subsidiaries~~ ~~increased for the year ended September 30, 2003, as compared to 2002, primarily due to a change in market valuation of certain investments accounted for at fair value.~~

Miscellaneous Income (Expense) - Net

~~Miscellaneous Income (Expense) - Net~~ ~~increased for~~ ~~Cinergy~~ ~~and~~ ~~CG&E~~ ~~for the nine months ended September 30, 2003, as compared to 2002.~~ ~~Cinergy’s~~ increase primarily reflects the 2002 write-offs of certain equipment and technology investments and the interest income on the notes receivable of two newly consolidated subsidiaries. See Note 4 of the “Notes to Condensed Financial Statements” in “Part I. Financial Information” for further details. ~~Cinergy’s~~ ~~and~~ ~~CG&E’s~~ ~~increase also reflects a gain on the sale of non-utility property and the recognition of expenses in 2002 for previously deferred costs that were denied recovery in the final order of~~ ~~ULH&P’s~~ ~~gas rate case. In addition,~~ ~~CG&E’s~~ ~~increase and~~ ~~PSI’s~~ ~~decrease was a result of a final reconciliation between the two entities of a previous demutualization of a medical insurance carrier used by both companies.~~

Interest Expense

~~Interest~~~~Expense~~ ~~increased for~~ ~~Cinergy~~, ~~CG&E~~~~, and~~ ~~PSI~~ for the nine months ended September 30, 2003, as compared to 2002. The impact of a decrease in short-term interest rates was more than offset by an increase in the amount of long-term debt outstanding for ~~Cinergy~~, ~~CG&E~~~~, and~~ ~~PSI~~. Interest on long-term debt increased as a result of the additional debt recorded with the consolidation of two new entities and the recognition of a note payable to a trust in accordance with the adoption of Interpretation 46, see Note 1(g)(~~iii~~~~) of the “Notes to Condensed Financial Statements” in “Part I. Financial Information”.~~

Income Taxes

~~Income Taxes~~ ~~expense decreased for~~ ~~Cinergy~~ ~~and~~ ~~PSI~~ ~~for the nine months ended September 30, 2003, as compared to 2002.~~ ~~Cinergy’s~~ ~~decrease was primarily a result of the~~ tax credits associated with the production and sale of synthetic fuel, ~~which began~~as discussed further below. Cinergy’s effective tax rate for 2004 is expected to be approximately 24 percent.

In July 2002, Cinergy Capital & Trading, Inc. (Capital & Trading) acquired a coal-based synthetic fuel production facility. The synthetic fuel produced at this facility qualifies for tax credits in ~~July 2002. Based on its current estimates,~~accordance with Section 29 of the Internal Revenue Code. Eligibility for these credits expires after 2007. Cinergy ~~expects that its effective income~~received a private letter ruling from the Internal Revenue Service in connection with the acquisition of the facility. To date, Cinergy has recorded approximately $145 million in tax ~~rate for 2003 will approximate 24 percent.~~ ~~PSI’s~~ ~~decrease was primarily due to a decrease~~credits, including approximately $25 million in ~~taxable book income. This decrease was partially offset by a reversal in 2002 of tax reserves, which were no longer needed, and an increase in the Indiana state income tax rate in 2003.~~2004.

Cumulative Effect of Changes in Accounting Principles Net of Tax

In 2003, Cinergy, CG&E, and PSI recognized a Cumulative effect of changes in accounting principles, net of tax gain/(loss) of approximately $26 million, $31 million, and $(0.5) million, respectively. The cumulative effect of changes in accounting principles was a result of the adoption of Statement of Financial Accounting Standards No. 143,Accounting for Asset Retirement Obligations, and the rescission of ~~EITF~~Emerging Issues Task Force (EITF) Issue 98-10, Accounting for Contracts Involved in Energy Trading and Risk Management Activities ~~(EITF 98-10). See Note 1(g)(~~~~vii~~~~) of~~, as discussed in the ~~“Notes to Condensed Financial Statements” in “Part I. Financial Information” for further information.~~2003 10-K.

~~In 2002,~~ ~~Cinergy~~ ~~recognized a~~ ~~Cumulative effect of changes in accounting principles, net of tax~~ ~~loss of approximately $11 million as a result of implementation of Statement of Financial Accounting Standards No. 142,~~ ~~Goodwill and Other Intangible Assets~~ ~~(Statement 142). See Note 1(g)(~~~~vii~~~~) of the “Notes to Condensed Financial Statements” in “Part I. Financial Information” for further information.~~

Discontinued Operations

~~During the second quarter of 2003,~~ ~~Cinergy~~ completed the disposal of its gas distribution operation in South Africa, sold its remaining wind assets in the U.S., and substantially sold or liquidated the assets of its energy marketing business in the Czech Republic. Pursuant to Statement of Financial Accounting Standards No. 144, ~~Accounting for the Impairment of Long-lived Assets~~, these investments have been classified as discontinued operations in our financial statements. See Note 8 of the “Notes to Condensed Financial Statements” in “Part I. Financial Information” for additional information.

9262

ULH&P

~~The Results of Operations discussion for~~ ~~ULH&P~~ ~~is presented only for the nine months ended September 30, 2003, in accordance with General Instruction H(2)(a) of Form 10-Q.~~

Electric and gas gross margins and net income for ULH&P for the ~~nine months~~quarters ended ~~September 30,~~March 31, 2004 and 2003, ~~and 2002,~~ were as follows:

	ULH&P				ULH&P
	2003		2002		2004		2003		Change		% Change
	*(in thousands)*				(in thousands)

Electric gross margin	$	49,419	$	52,255	$	16,762	$	15,806	956		6
Gas gross margin	28,437		22,652		17,306		17,884		(578	)	(3	)
Net income	11,477		9,110		7,888		9,406		(1,518	)	(16	)

Electric Operating RevenuesSummary of Results

Electric ~~operating revenues~~gross margins increased for ULH&P for the quarter ended March 31, 2004 compared to 2003. This increase was primarily due to increases in MWh delivered to non-residential customers. Gas gross margins decreased for the ~~nine months ended September 30, 2003, as compared to 2002.~~same period. The majority of the decrease ~~was a result of the~~is due to milder weather in the ~~second and third~~first quarter of ~~2003,~~2004 as compared to 2003. Heating degree days decreased approximately seven percent as compared to the same period ~~in 2002, that resulted in residential usage decreasing by approximately four percent.~~last year. The ~~residential usage~~ decrease accounts for approximately 75 percent of the electric operating revenue decrease. The remaining electric operating revenue decrease is associated with decreased usage of commercial and industrial customers reflecting the effects of a continuing sluggish economy.

Electricity Purchased from Parent Company for Resale

~~Electricity purchased from parent company for resale~~ ~~decreased for the nine months ended September 30, 2003, as compared to 2002, primarily~~ due to ~~the mild~~milder weather ~~in the second and third quarters of 2003 and the sluggish economy.~~

Gas Operating Revenues

~~Gas operating revenues~~ ~~increased for the nine months ended September 30, 2003, as compared to 2002. This increase~~ was ~~primarily due to an increase in mcf sold and higher prices received per mcf, as a result of colder weather in the first and third quarters of 2003. New base rates for~~ ~~ULH&P~~~~, which were effective January 31, 2002, and~~partially offset by rate tariff adjustments associated with the gas main replacement ~~program and gas cost recovery mechanism also contributed to this increase.~~ ~~ULH&P’s~~program. wholesale gas commodity cost is passed directly to the retail customer dollar-for-dollar under the gas cost recovery mechanism mandated by state law. For further information see Note 6(o) in the “Notes to Condensed Financial Statements” in “Part I. Financial Information”.

Gas Purchased

~~Gas purchased~~ ~~expense increased~~The decrease in net income for the ~~nine months ended September 30, 2003, as compared to 2002,~~year was primarily due to increased purchases and higher prices paid per mcf, primarily the result of colder weather in the first three months of 2003, which drove up the demand and the price for natural gas. In addition, the third quarter of 2003 was colder than 2002 necessitating a slight increase in gas purchases. The wholesale gas commodity cost is passed directly to the retail customer dollar-for-dollar under the gas cost recovery mechanism mandated under state law.

Operation and Maintenance

Operation and maintenance expense ~~increased~~ for the ~~nine months~~quarter ended ~~September 30, 2003,~~March 31, 2004, as compared to ~~2002, primarily~~2003. The majority of this increase was due to ~~increased amortization of demand side management~~approximately $800,000 in higher employee benefits and incentive compensation program ~~costs and increased maintenance of overhead lines.~~

Miscellaneous Income (Expense) - Netexpenses.

~~Miscellaneous Income (Expense) - Net~~ increased for the nine months ended September 30, 2003, as compared to 2002, primarily due to the recognition of expenses in 2002 for previously deferred costs, that were denied recovery in the final order on ~~ULH&P’s~~ ~~gas rate case.~~

Income Taxes

~~Income Taxes~~ ~~expense increased for the nine months ended September 30, 2003, as compared to 2002.~~ ~~ULH&P’s~~ ~~increase is related to the increase in taxable book income and an increase in the Kentucky state income tax rate.~~

9463

MD&A - RESULTS OF OPERATIONS - FUTURE

FUTURE EXPECTATIONS/TRENDS

In the “Future Expectations/Trends” section, we discuss electric and gas industry developments, market risk sensitive instruments and positions, and accounting matters. Each of these discussions will address the current status and potential future impact on our results of operations and financial ~~position.~~condition.

ELECTRIC INDUSTRY

Wholesale Market Developments

Supply-side ActionsFERC and Midwest ISO

~~In December 2001, the Indiana Utility Regulatory Commission (IURC) approved~~ ~~PSI’s~~ plan for converting its Noblesville generating station from coal to natural gas. The conversion increases the electric generating capacity at the plant from approximately 100 megawatts (MW) to 300 MW. The conversion was completed and the station became operational in June 2003. In addition to increasing capacity, overall emissions to the environment will be reduced.

~~In December 2002, the IURC approved a settlement agreement among~~ ~~PSI~~~~, the Indiana Office of the Utility Consumer Counselor, and the IURC Testimonial Staff authorizing~~ ~~PSI’s~~ purchases of the Henry County, Indiana and Butler County, Ohio, gas-fired peaking plants from two non-regulated affiliates. In February 2003, the FERC issued an order under Section 203 of the Federal Power Act authorizing ~~PSI’s~~ acquisition of the plants, which occurred on February 5, 2003. Subsequently, in April 2003, the FERC issued a tolling order allowing additional time to consider a request for rehearing filed in response to the February 2003 FERC order. At this time, we cannot predict the outcome of this matter.

~~On July 21, 2003,~~ ~~ULH&P~~ ~~filed an application with the Kentucky Public Service Commission (KPSC) requesting a certificate of public convenience and necessity to acquire~~ ~~CG&E’s~~ ownership interests in the East Bend Generating Station, located in Boone County, Kentucky, the Woodsdale Generating Station, located in Butler County, Ohio, and one generating unit at the four-unit Miami Fort Generating Station located in Hamilton County, Ohio. ~~ULH&P~~ ~~also requested KPSC approval of a back-up power supply agreement under which~~ ~~CG&E~~ ~~would provide replacement power to~~ ~~ULH&P~~ ~~when the transferred generating facilities are out of service, and for approval of another agreement under which the transferred units would be jointly dispatched with~~ ~~CG&E’s~~ ~~remaining fleet of generating units. An order from the KPSC is expected by the end of the year. The transfer, which will be made at net book value, will not affect current electric rates for~~ ~~ULH&P’s~~ ~~customers, as power will be provided under the same terms as under the current wholesale power contract with~~ ~~CG&E~~ ~~through at least December 31, 2006. This transfer is also contingent upon receipt of approval from the FERC and the SEC.~~ ~~ULH&P~~ ~~is unable to predict the outcome of this matter.~~

Retail Market Developments

OhioDay-Ahead and Real-Time Energy Markets

Federal Update

~~Energy Bill~~

The U.S. House of Representatives (House) passed the Energy Policy Act in April 2003. The legislation, as it passed the House, includes repeal of the PUHCA, as well as tax incentives for gas and electric distribution lines, and combined heat and power and renewable energy projects.

~~The U.S. Senate (Senate) Energy and Natural Resources Committee passed its version of comprehensive energy legislation in April 2003.~~ On July 31, 2003 the Senate passed comprehensive energy legislation by substituting last year’s energy bill as it passed the Senate for the committee draft. The legislation, as passed by the Senate, among other things, includes PUHCA repeal and creates a renewable energy portfolio standard for utilities. The House and Senate versions of the comprehensive energy legislation are currently the subject of Conference Committee deliberations. At this time, ~~Cinergy~~ ~~is unable to predict whether or not this legislation will pass.~~

~~Clear Skies Legislation~~

President Bush has proposed environmental legislation that would replace a series of CAA requirements for coal-fired power plants with a cap and trade program. The President’s “Clear Skies Initiative” would seek an overall 70 percent reduction in emissions from power plants over a phased-in reduction schedule beginning in 2010 and continuing to 2018. The Senate Environment and Public Works Committee has held several hearings on the “Clear Skies Initiative” proposal and is expected to vote on the legislation in the third quarter of 2003. The House Subcommittee on Energy and Air Quality of the House Energy and Commerce Committee has also held hearings on the “Clear Skies Initiative” but timing for consideration of the bill in subcommittee is less certain. At this time, ~~Cinergy~~ ~~cannot predict whether or not “Clear Skies Initiative” legislation will pass.~~

Midwest Independent Transmission System Operator, Inc. (Midwest ISO)

Historical

~~As part of the effort to create a competitive wholesale power marketplace, the FERC approved the formation of the Midwest ISO during 1998. In that same year,~~ ~~Cinergy~~ agreed to join the Midwest ISO in preparation for meeting anticipated changes in the FERC regulations and future deregulation requirements. The Midwest ISO was established as a non-profit organization to maintain functional control over the combined transmission systems of its members.

FERC Orders

The FERC issued an order in December 2001, in response to protests of the Midwest ISO’s proposed methodology related to the calculation of its administrative adder fees for the services it provides. ~~Cinergy~~ and a number of other parties filed protests to the proposed methodology, suggesting, among other things, that the methodology was inconsistent with the transmission owners’ prior agreement with the Midwest ISO and selectively allowed only independent transmission companies to choose which unbundled administrative adder services they wished to purchase from the Midwest ISO. A partial settlement was reached in the FERC proceeding, resolving the issues addressed by ~~Cinergy’s~~ ~~protest in a manner favorable to~~ ~~Cinergy~~. The settlement agreement was approved by the FERC in a February 24, 2003 order with implementation initiated on March 1, 2003. The settlement results in approximately $25 million of administrative adder credits to be shared among the Midwest ISO transmission owners and customers responsible for Schedule 10 charges. ~~Cinergy’s~~ ~~share was approximately $3 million.~~

As discussed in the 2002 10-K, the FERC issued a Notice of Proposed Rulemaking (NOPR) in 2002 on “Remedying Undue Discrimination through Open Access Transmission Service and Standard Electricity Market Design”. This NOPR would have required all public utilities with open access transmission tariffs to file modifications to their tariffs to implement FERC’s proposed standardization transmission services and standardized wholesale electric market design. The FERC has not taken action on this NOPR and has indicated that they will not require such tariff revisions if the utility has filed similar tariff revisions in their own region, in our case, the Midwest ISO.

In response to prior FERC orders, ~~on July 25, 2003,~~in March 2004, the Midwest ISO filed with the FERC proposed changes to its existing transmission tariff to add terms and conditions to implement a centralized security-constrained economic dispatch platform supported by a Day-Ahead and Real-Time Energy ~~Markets~~Market design, including Locational Marginal Pricing and Financial Transmission Rights (Energy Markets Tariff). ~~In October 2003, the FERC approved a Midwest ISO filing to withdraw this Energy Markets Tariff.~~ ~~Cinergy~~ ~~anticipates that the Midwest ISO will file a new Energy Markets Tariff at sometime in the future; however, at~~At this time, Cinergy cannot predict the effect ~~any such~~the filing will have on its results of operations.

Significant Rate Developments

PSI Retail Electric Rate CaseBlackout Report

In ~~December 2002,~~ ~~PSI~~ ~~filed a petition with~~April 2004, the ~~IURC seeking approval of a base retail electric rate increase.~~ ~~PSI~~ ~~has filed initial and rebuttal testimony in this case and~~U.S.-Canada Power System Outage Task Force issued its Final Report on the ~~final set of hearings will take place in November 2003. Based on updated testimony filed in October~~August 14, 2003 ~~PSI~~ ~~proposes an increase in annual revenues of approximately $180 million, or an average increase of approximately 14 percent over~~ ~~PSI’s~~ ~~retail electric rates in effect at the end of 2002. An IURC decision is expected~~Blackout in the ~~first quarter~~United States and Canada. The report reviewed the causes of ~~2004.~~

PSI Purchased Power Tracker (Tracker)

~~The Tracker was designed~~the Blackout and made 46 recommendations intended to ~~provide~~minimize the likelihood and scope of similar events in the future. One of the recommendations is to make reliability standards mandatory and enforceable with penalties for noncompliance. In the ~~recovery~~past, compliance with North Electric Reliability Council’s reliability standards and guidelines has largely been voluntary. At this time, we do not believe the Final Report will have a material impact on our financial position or results of ~~costs related to purchases of power necessary to meet native load requirements to the extent such costs are not recovered through the existing fuel adjustment clause.~~operations.

~~PSI~~FERC’s Market Screen Orders is authorized to seek recovery of 90 percent of its purchased power expenses through the Tracker (net of the displaced energy portion recovered through the fuel recovery process and net of the mitigation credit portion), with the remaining 10 percent deferred for subsequent recovery in ~~PSI’s~~ ~~general retail electric rate case. In March 2002,~~ ~~PSI~~ filed a petition with the IURC seeking approval to extend the Tracker process beyond the summer of 2002. A hearing was held in January 2003, and in June 2003 the IURC approved the extension for up to an additional two years with the ultimate determination concerning ~~PSI’s~~ ~~continued use of the Tracker process to be made in~~ ~~PSI’s~~ ~~pending retail electric rate case.~~

~~In June 2002,~~ ~~PSI~~ ~~also filed a petition with the IURC seeking approval of the recovery through the Tracker of its actual summer 2002 purchased power costs. In May 2003, the IURC approved~~ ~~PSI’s~~ ~~recovery of $18 million related to its summer 2002 purchased power costs, and also~~

~~authorized $2 million of deferred costs sought for recovery in~~ ~~PSI’s~~ ~~general retail electric rate case.~~

~~In June 2003,~~ ~~PSI~~ ~~filed a petition with the IURC seeking approval of the recovery through the Tracker of its actual summer 2003 purchased power costs. Testimony was filed in support of~~ ~~PSI’s~~ ~~request in August 2003. An evidentiary hearing is scheduled for March 2004.~~

PSI Fuel Adjustment Charge

~~In June 2001,~~ ~~PSI~~ filed a petition with the IURC requesting authority to recover $16 million in under billed deferred fuel costs incurred from March 2001 through May 2001. The IURC approved recovery of these costs subject to refund pending the findings of an investigative sub-docket. The sub-docket was opened to investigate the reasonableness of, and underlying reasons for, the under billed deferred fuel costs. A hearing was held in July 2002, and in March 2003 the IURC issued an order giving final approval to ~~PSI’s~~ ~~recovery of the $16 million.~~

PSI Construction Work in Progress (CWIP) Ratemaking Treatment for NO_X Equipment

In April ~~2003,~~ ~~PSI~~ ~~filed an application with the IURC requesting~~2004, FERC issued various orders and rulemakings that ~~its CWIP~~applied to granting market-based rate ~~adjustment mechanism be updated for expenditures through December 2002 related~~authority and specifically addressed generation market power, transmission market power, barriers to NO_X ~~equipment currently being installed at certain~~ ~~PSI~~ ~~generation facilities. CWIP ratemaking treatment allows for the recovery of carrying costs on certain pollution control equipment while~~entry, and ~~after the equipment is under construction. A final order was issued on September 24, 2003. The order granted substantially all of~~ ~~PSI’s~~ requested relief, leaving only the issue of whether certain equipment qualified for CWIP ratemaking treatment to be decided in the first quarter of 2004. Amounts approved for recovery are presented below:

~~PSI CWIP Ratemaking for NO~~_X ~~Equipment~~

PSI

(in millions)

Total retail CWIP expenditures as of December 31, 2002

$
305

Total amount requested through CWIP mechanism(1)

35

Less: previously approved CWIP mechanism amounts

(28
)
Incremental CWIP mechanism amounts

$
7

~~(1)~~ ~~Amounts include retail customers’ portion only and represent an annual return on qualified NO~~_X ~~equipment expenditures.~~

~~PSI’s~~ ~~initial CWIP rate mechanism adjustment (authorized in July 2002) resulted in an approximately one percent increase in customer rates. Under the IURC’s CWIP rules,~~ ~~PSI~~ ~~may update its CWIP tracker at six-month intervals. The first such update to~~ ~~PSI’s~~ ~~CWIP rate mechanism occurred in the first quarter of 2003. The IURC’s July 2002 order also authorized~~ ~~PSI~~ to defer, for subsequent recovery, post-in-service depreciation and to continue the accrual for allowance for funds used during construction (AFUDC). Pursuant to Statement of Financial Accounting Standards No. 92, ~~Regulated Enterprises-Accounting for Phase-in Plans~~~~, the equity~~

~~component of AFUDC will not be deferred for financial reporting after the related assets are placed in service.~~

Environmental Compliance Cost Recovery

In 2002, the Indiana General Assembly passed legislation that, among other things, encourages the deployment of advanced technologies that reduce regulated air emissions, while allowing the continued use of high sulfur Midwestern coal in existing electric generating plants. The legislation authorizes the IURC to provide financial incentives to utilities that deploy such advanced technologies. ~~PSI~~ ~~is currently seeking IURC approval, under~~affiliated company issues. At this ~~new law, of a cost tracking mechanism for~~ ~~PSI’s~~ NO_X ~~equipment-related depreciation and operation and maintenance costs, authority to use accelerated (18-year) depreciation for its NO~~_X ~~compliance equipment, and approval of a NO~~_X ~~emission allowance purchase and sales tracker. In October,~~ ~~PSI~~ ~~reached a settlement with the other parties to this case that, if approved by the IURC, will provide for the relief described above for most of~~ ~~PSI’s~~ ~~environmental compliance equipment.~~ ~~PSI~~ ~~expects an IURC order addressing approval of the settlement agreement by the end of 2003. The issue of whether the remainder of~~ ~~PSI’s~~ ~~environmental compliance projects qualify for financial incentives is expected to be decided in the second quarter of 2004.~~

CG&E Transmission and Distribution Rate Filings

~~In October 2003,~~ ~~CG&E~~ filed an application with the PUCO seeking deferral of approximately $173 million, of which approximately $37 million has been incurred as of September 30, 2003, in depreciation, property taxes and carrying costs related to net additions to transmission and distribution utility plant in service from January 2001 through December 2005. Rates are frozen in Ohio under the state’s electric restructuring law from 2001 through the end of the market development period. ~~CG&E~~ ~~intends to file a rate case to collect those costs after the market development period ends.~~ ~~CG&E~~ ~~has not deferred any of these costs as of September 30, 2003.~~

~~CG&E~~ is also proposing a mechanism to recover costs related to net additions to transmission and distribution utility plant in service after the end of the market development period. The mechanism would work in a similar manner to the monthly customer charge the PUCO approved for ~~CG&E’s~~ ~~accelerated natural gas main replacement program, discussed below~~in ~~CG&E’s~~ ~~Gas Rate Case, which is adjusted annually based on expenditures in the previous year.~~

GAS INDUSTRY

ULH&P Gas Rate Case

~~As discussed in the 2002 10-K, in the second quarter of 2001,~~ ~~ULH&P~~ filed a retail gas rate case with the KPSC seeking to increase base rates for natural gas distribution services and requesting recovery through a tracking mechanism of the costs of an accelerated gas main replacement program with an estimated capital cost of $112 million over 10 years. ~~ULH&P~~ made its second annual filing for an increase under the tracking mechanism in March 2003. The application sought an increase of $2 million. A hearing was held in July 2003, and the KPSC approved the application in August 2003. The Kentucky Attorney General has appealed to the Franklin Circuit Court the KPSC’s approval of the tracking mechanism and the KPSC’s orders approving

~~100~~

~~the new tracking mechanism rates. At the present~~ time, ~~ULH&P~~we cannot predict the ~~timing~~effect such orders will have on our financial position or ~~outcome~~results of ~~this litigation.~~

CG&E Gas Rate Case

~~In the third quarter of 2001,~~ ~~CG&E~~ filed a retail gas rate case with the PUCO seeking to increase base rates for natural gas distribution service and requesting recovery through a tracking mechanism of the costs of an accelerated gas main replacement program with an estimated capital cost of $716 million over 10 years. ~~CG&E~~ entered into a settlement agreement with most of the parties and a hearing on this matter was held in April 2002. An order was issued in May 2002, in which the PUCO approved the settlement agreement and authorized a base rate increase of approximately $15 million, or 3.3 percent overall, effective May 30, 2002. In addition, the PUCO authorized ~~CG&E~~ to implement the tracking mechanism to recover the costs of the accelerated gas main replacement program, subject to certain rate caps that increase in amount annually through May 2007, through the effective date of new rates in ~~CG&E’s~~ ~~next retail gas rate case. In the fourth quarter of 2002,~~ ~~CG&E~~ ~~filed an application to increase its rates under the tracking mechanism. In April 2003,~~ ~~CG&E~~ ~~entered into a settlement agreement with the parties, providing for an increase of $6.5 million, which the PUCO subsequently approved. This increase was effective in May 2003.~~ ~~CG&E~~ ~~expects to file another application to increase its rates by approximately $6.4 million under the tracking mechanism in the fourth quarter of 2003.~~ ~~CG&E~~ ~~expects the PUCO will rule on this application by May 2004.~~

Gas Distribution Plant

~~In June 2003, the PUCO approved an amended settlement agreement between~~ ~~CG&E~~ ~~and the PUCO Staff in a gas distribution safety case arising out of a gas leak at a service head-adapter (SHA) style riser on~~ ~~CG&E’s~~ ~~distribution system. The amended settlement agreement calls for~~ ~~CG&E~~ ~~to expend a minimum of $700,000 to replace SHA risers by December 31, 2003, and to file a comprehensive plan addressing all SHA risers on its distribution system.~~ ~~Cinergy~~ ~~has an estimated 198,000 SHA risers on its distribution system, of which 155,000 are in~~ ~~CG&E’s~~ ~~service area. The remaining SHA risers are included in~~ ~~ULH&P’s~~ ~~service area. Further investigation as to whether any additional SHA risers will need maintenance or replacement is ongoing. If~~ ~~CG&E~~ ~~and~~ ~~ULH&P~~ ~~determine that replacement of all SHA risers is appropriate, the replacement cost could be up to approximately $50 million.~~ ~~CG&E~~ ~~and~~ ~~ULH&P~~ ~~would pursue recovery of this cost through rates. At this time,~~ ~~Cinergy~~, ~~CG&E~~~~, and~~ ~~ULH&P~~ ~~cannot predict the outcome of this matter.~~

Gas Prices

Natural gas prices escalated dramatically during the fourth quarter of 2002 and peaked midway through the first quarter of 2003. These higher natural gas prices have moderated throughout the spring and summer but are still expected to remain higher than previous years for the remainder of 2003 and into 2004. Currently, neither ~~CG&E~~ ~~nor~~ ~~ULH&P~~ profit from changes in the cost of gas since natural gas purchase costs are passed directly to the customer dollar-for-dollar under the gas cost recovery mechanism that is mandated under state law. These higher natural gas prices could lead to increases in write-offs of our customer receivables, however we believe the overall impact will be immaterial.

~~101~~

~~In July 2003,~~ ~~CG&E~~ filed an application with the PUCO for approval to begin adjusting its gas cost adjustment rates on a monthly basis commencing in September 2003. In August 2003, the PUCO approved the change from quarterly to monthly. ~~ULH&P~~ ~~filed a similar application with the KPSC for monthly gas cost adjustment rates in September 2003 for billing in December 2003.~~

~~In May 2003,~~ ~~ULH&P~~ filed an application with the KPSC requesting approval of a gas procurement-hedging program designed to mitigate the effects of gas price volatility on customers. In June 2003, the KPSC approved the hedging program through March 31, 2005. The program will allow the pre-arranging of between 20-75 percent of winter heating season base load gas requirements and up to 50 percent of summer season base load gas requirements. ~~CG&E~~ ~~similarly hedges its gas procurement costs, however~~ ~~CG&E’s~~ ~~gas procurement-hedging program has not been pre-approved by the PUCO but rather it is subject to PUCO review as part of the normal fuel adjustment process.~~

~~CG&E~~ ~~and~~ ~~ULH&P~~ use primarily fixed price forward contracts and contracts with a ceiling and floor on the price. These contracts employ the normal purchases and sales scope exception, and do not involve hedges under Statement of Financial Accounting Standards No. 133, ~~Accounting for Derivative Instruments and Hedging Activity~~ ~~(Statement 133).~~operations.

MARKET RISK SENSITIVE INSTRUMENTS AND POSITIONS

The transactions associated with the Commercial Business Unit’s (Commercial) ~~(formerly named the Energy Merchant Business Unit)~~ energy marketing and trading activities give rise to various risks, including price risk. Price risk represents the potential risk of loss from adverse changes in the market price of electricity or other energy commodities. As Commercial continues to develop its energy marketing and trading business (and due to its substantial investment in generation assets), its exposure to movements in the price of electricity and other energy commodities may become greater. As a result, we may be subject to increased future earnings volatility.

~~102~~64

As discussed in the 2003 10-K, CG&E and PSI executed a new joint operating agreement in April 2002 whereby new power marketing and trading contracts since April 2002 are originated on behalf of CG&E only. Historically, such contracts were executed on behalf of PSI and CG&E jointly. PSI’s remaining contracts, entered into prior to the new joint operating agreement, are not material. Additionally, we expect that PSI will not enter into new power marketing and trading contracts in the future. Therefore, we have not presented PSI separately in the fair value and credit risk tables below.

Changes in Fair Value

The changes in fair value of the energy risk management assets and liabilities, for the periods ended ~~September 30,~~March 31, 2004 and 2003, ~~and 2002,~~ are presented in the table below:

Change in Fair Value
Year to Date

September 30, 2003

September 30, 2002

Cinergy(1)

CG&E

PSI

Cinergy(1)

CG&E

PSI

(in millions)

Fair value of contracts outstanding at beginning of year

$
75

$
42

$
—

$
18

$
28

$
(7
)

Inception value of new contracts when entered (2)

—

—

—

6

5

2

Changes in fair value attributable to changes in valuation techniques and assumptions (3)

1

1

—

14

6

9

Other changes in fair value (4)

120

40

1

72

26

3

Option premiums paid/(received)

(6
)
3

—

24

—

—

Accounting Changes (5)

Cumulative effect of changes in accounting principle

(20
)
(14
)
(1
)
—

—

—

Consolidation of previously unconsolidated entities

7

—

—

—

—

—

Contract reclassification (6)

—

—

—

14

18

5

Contract acquisitions (7)

—

—

—

(16
)
—

—

Contracts settled

(129
)
(48
)
(2
)
(38
)
(28
)
(11
)

Fair value of contracts outstanding at end of period

$
48

$
24

$
(2
)
$
94

$
55

$
1

	Change in Fair Value
	March 31, 2004						March 31, 2003
	Cinergy(1)			CG&E			Cinergy(1)			CG&E
	(in millions)

Fair value of contracts outstanding at beginning of period	$	41		$	20		$	75		$	42

Changes in fair value attributable to changes in valuation techniques and assumptions(2)	—			—			1			1

Other changes in fair value(3)	49			28			73			4

Option premiums paid/(received)	6			1			(2		)	1

Cumulative effect of changes in accounting principle	—			—			(20		)	(13		)

Contracts settled	(48		)	(10		)	(114		)	(37		)

Fair value of contracts outstanding at end of period	$	48		$	39		$	13		$	(2	)

(1)The results of Cinergy also include amounts related to non-registrants.

(2)Represents fair value, recognized in income, attributable to long-term, structured contracts, primarily in power, which is recorded on the date a deal is signed. These contracts are primarily with end-use customers or municipalities that seek to limit their risk to power price volatility. While caps and floors often exist in such contracts, the amount of power supplied can vary from hour to hour to mirror the customers load volatility. See Note 1(g)(i~~) in the “Notes to Condensed Financial Statements” in “Part I. Financial Information” for additional information regarding inception gains.~~

~~(3)~~Represents changes in fair value recognized in income, caused by changes in assumptions used in calculating fair value or changes in modeling techniques.

~~(4)~~(3)Represents changes in fair value recognized in income, primarily attributable to fluctuations in price. This amount includes both realized and unrealized gains on energy trading contracts.

~~(5)See Note 1(g)(~~i)

The following are the balances at March 31, 2004 and ~~Note 1(g)(~~~~iii~~)2003 of ~~the “Notes to Condensed Financial Statements” in “Part I. Financial Information” for further information.~~

~~(6)~~Represents reclassifications of the settlement value of contracts that have been terminated as a result of counterparty non-performance to non-current other liabilities. These contracts no longer have price risk and are therefore not consideredour energy ~~trading contracts.~~

~~(7)Cinergy Capital & Trading, Inc. (Capital & Trading) acquired a portfolio of gas contracts and inventory in July 2002. This amount represents the fair value of net~~ ~~Energy~~ risk management ~~liabilities~~assets and liabilities:

March 31, 2004

March 31, 2003

Cinergy(1)

CG&E

Cinergy(1)

CG&E

(in millions)

Energy risk management assets - current

$
352

$
122

$
439

$
74

Energy risk management assets - non-current

114

49

93

34

Energy risk management liabilities - current

(330
)
(108
)
(434
)
(90
)
Energy risk management liabilities - non-current

(88
)
(24
)
(85
)
(20
)

$
48

$
39

$
13

$
(2
)

(1) ~~assumed. There was no inception gain or loss recognized at the date~~The results of ~~acquisition.~~Cinergy also include amounts related to non-registrants.

~~103~~65

The following table presents the expected maturity of the energy risk management assets and liabilities as of ~~September 30, 2003:~~March 31, 2004, for Cinergy and CG&E:

	Fair Value of Contracts as of September 30, 2003																Fair Value of Contracts as of March 31, 2004
	Maturing																Maturing
Source of Fair Value(1)	Within 12 months					12-36 months			36-60 months		Thereafter			Total Fair Value			Within 12 months		12-36 months		36-60 months		Thereafter			Total Fair Value
	(in millions)																(in millions)

Cinergy(2)
Prices actively quoted	$	32				$	(2	)	$	—	$	—		$	30		$	3	$	9	$	—	$	—		$	12

Prices based on models and other valuation methods	6					12			5		(5		)	18
Prices based on models and other valuation methods(3)																	19		20		2		(5		)	36

Total	$	38				$	10		$	5	$	(5	)	$	48		$	22	$	29	$	2	$	(5	)	$	48

CG&E
Prices actively quoted	$		(2		)	$	5		$	—	$	—		$	3		$	8	$	12	$	—	$	—		$	20

Prices based on models and other valuation methods(3)	8					9			4		—			21			6		13		—		—			19

Total	$			6		$	14		$	4	$	—		$	24		$	14	$	25	$	—	$	—		$	39

PSI
Prices actively quoted	$			(9	)	$	1		$	—	$	—		$	(8	)

Prices based on models and other valuation methods	2					3			1		—			6

Total	$			(7	)	$	4		$	1	$	—		$	(2	)

(1)While liquidity varies by trading regions, active quotes are generally available for two years for standard electricity transactions and three years for standard gas transactions. Non-standard transactions are classified based on the extent, if any, of modeling used in determining fair value. Long-term transactions can have portions in both categories depending on the tenor.

(2)The results of Cinergy also include amounts related to non-registrants.

(3)A substantial portion of those amounts include option values.

Energy Trading Credit Risk

Cinergy’s extension of credit for energy marketing and trading is governed by a Corporate Credit Policy. Written guidelines approved by the Company’s Risk Policy Committee document the management approval levels for credit limits, evaluation of creditworthiness, and credit risk mitigation procedures. Cinergy analyzes net credit exposure and establishes credit reserves based on the counterparties’ credit rating, payment history, and tenor of the outstanding obligation. Exposures to credit risks are ~~measured and~~ monitored daily by ~~our~~the Corporate Credit Risk function, which is independent of all trading operations. As of September 30, 2003, approximately 99 percent of the credit exposure related to energy trading and marketing activity was with counterparties rated Investment Grade or the counterparties’ obligations were guaranteed or secured by an Investment Grade entity. No single non-investment grade counterparty accounts for more than one percent of our total credit exposure. Energy commodity prices can be extremely volatile and the market can, at times, lack liquidity. Because of these issues, credit risk ~~for energy commodities~~ is generally greater than with other commodity trading.

~~104~~The following tables provide information regarding Cinergy’s and CG&E’s exposure on energy trading contracts as well as the expected maturities of those exposures as of March 31, 2004. The tables include accounts receivable and energy risk management assets, which are net of accounts payable and energy risk management liabilities with the same counterparties when we have the right of offset. The credit collateral shown in the following tables includes cash and letters of credit.

~~We continually review~~Cinergy(1)

Rating	Total Exposure Before Credit Collateral		Credit Collateral		Net Exposure		Percentage of Total Net Exposure		Number of Counterparties Greater than 10%	Net Exposure of Counterparties Greater than 10%(4)
	(in thousands)

Investment Grade(2)	$	498,587	$	20,205	$	478,382	78	%	—	$	—
Internally Rated-Investment Grade(3)	100,077		6,266		93,811		15		—	—
Non-Investment Grade	101,391		69,407		31,984		5		—	—
Internally Rated-Non-Investment Grade	38,881		27,283		11,598		2		—	—

Total	$	738,936	$	123,161	$	615,775	100	%	—	$	—

	Maturity of Credit Risk Exposure
Rating	Less than 2 Years		2-5 Years		Exposure Greater than 5 Years		Total Exposure Before Credit Collateral
	(in thousands)

Investment Grade(2)	$	454,488	$	37,274	$	6,825	$	498,587
Internally Rated-Investment Grade(3)	97,409		2,396		272		100,077
Non-Investment Grade	101,391		—		—		101,391
Internally Rated-Non-Investment Grade	38,774		107		—		38,881

Total	$	692,062	$	39,777	$	7,097	$	738,936

(1)Includes amounts related to non-registrants.

(2)Includes counterparties rated Investment Grade or the counterparties’ obligations are guaranteed or secured by an Investment Grade entity.

(3)Counterparties include a variety of entities, including investor-owned utilities, privately held companies, cities and ~~monitor our~~municipalities. Cinergy assigns internal credit ~~exposure~~ratings to all counterparties ~~and secondary counterparties. If appropriate, we may adjust~~within our credit ~~reserves~~risk portfolio, applying fundamental analytical tools. Included in this analysis is a review of (but not limited to) counterparty financial statements with consideration given to ~~attempt~~off-balance sheet obligations and assets, specific business environment, access to ~~compensate for increased~~capital, and indicators from debt and equity capital markets.

(4) Exposures, positive or negative, with counterparties that are related to one another are not aggregated when no right of offset exists and as a result, credit ~~risk within the industry. Counterparty credit limits may be adjusted~~is extended and evaluated on a ~~daily basis in response~~separate basis.

CG&E

Rating	Total Exposure Before Credit Collateral		Credit Collateral		Net Exposure		Percentage of Total Net Exposure		Number of Counterparties Greater than 10%	Net Exposure of Counterparties Greater than 10%(3)
	(in thousands)

Investment Grade(1)	$	126,312	$	9,253	$	117,059	95	%	4	$	79,054
Internally Rated-Investment Grade(2)	5,037		214		4,823		4		—	—
Non-Investment Grade	15,618		14,313		1,305		1		—	—
Internally Rated-Non-Investment Grade	1,643		1,491		152		—		—	—

Total	$	148,610	$	25,271	$	123,339	100	%	4	$	79,054

	Maturity of Credit Risk Exposure
Rating	Less than 2 Years		2-5 Years			Exposure Greater than 5 Years			Total Exposure Before Credit Collateral
	(in thousands)

Investment Grade(1)	$	115,605	$	13,346		$	(2,639	)	$	126,312
Internally Rated-Investment Grade(2)	5,133		(96		)	—			5,037
Non-Investment Grade	15,618		—			—			15,618
Internally Rated-Non-Investment Grade	1,643		—			—			1,643

Total	$	137,999	$	13,250		$	(2,639	)	$	148,610

(1)Includes counterparties rated Investment Grade or the counterparties’ obligations are guaranteed or secured by an Investment Grade entity.

(2)Counterparties include various cities and municipalities.

(3) Exposures, positive or negative, with counterparties that are related to ~~changes in~~one another are not aggregated when no right of offset exists and as a ~~counterparty’s creditworthiness, financial status, or public debt ratings.~~result, credit is extended and evaluated on a separate basis.

ACCOUNTING MATTERS

Critical Accounting Policies

Preparation of financial statements and related disclosures in compliance with generally accepted accounting principles (GAAP) requires the use of assumptions and estimates. In certain instances, the application of GAAP requires judgments regarding future events, including the likelihood of success of particular initiatives, legal and regulatory challenges, and anticipated recovery of costs. Therefore, the possibility exists for materially different reported amounts under different conditions or assumptions.

Cinergy’s ~~2002~~2003 10-K includes a discussion of accounting policies that are significant to the presentation of Cinergy’s financial position and results of operations. These include:

• Fair Value Accounting for Energy Marketing and Trading;

• Retail Customer Revenue Recognition;

• Regulatory Accounting;

• Pension and Other Postretirement Benefits; ~~and~~

• Income Taxes;

•Legal and Environmental Contingencies; and

•Impairment of Long-lived Assets.

Accounting Changes

Energy Trading

In October 2002, the EITF reached consensus in EITF 02-3, to (a) rescind EITF 98-10, (b) generally preclude the recognition of gains at the inception of derivatives, and (c) require all realized and unrealized gains and losses on energy trading derivatives to be presented net in the Statements of Income, whether or not settled physically. The consensus to rescind EITF 98-10 required most energy trading contracts that do not qualify as derivatives to be accounted for on an accrual basis, rather than at fair value. The consensus was immediately effective for all new contracts executed after October 25, 2002, and required a cumulative effect adjustment to income, net of tax, on January 1, 2003, for all contracts executed on or prior to October 25, 2002. The cumulative effect adjustment, on a net of tax basis, was a loss of $13 million for ~~Cinergy~~ ~~and $8 million for~~ ~~CG&E~~, which includes primarily the impact of certain coal contracts, gas inventory, and certain gas contracts, which were all accounted for at fair value. We expect this rescission to have the largest ongoing impact on our gas trading business, which uses financial contracts, physical contracts, and gas inventory to take advantage of various arbitrage opportunities. Prior to the rescission of EITF 98-10, all of these activities were accounted for at fair value. Under the revised guidance, only certain items are accounted for at fair value, which could increase inter-period volatility in reported results of operations. As a result, we began applying fair value hedge accounting in June 2003 to certain quantities of gas inventory (more fully discussed in Note 1(d) of the “Notes to Condensed

~~105~~

~~Financial Statements” in “Part I. Financial Information”) and are further reviewing additional applications for hedge accounting.~~

Derivatives

~~In May 2003, the FASB issued Statement of Financial Accounting Standards No. 149,~~ ~~Amendment of Statement 133 on Derivative Instruments and Hedging Activities~~ (Statement 149). Statement 149 primarily amends Statement 133 to incorporate implementation conclusions previously cleared by the FASB staff, to clarify the definition of a derivative and to require derivative instruments that include up-front cash payments to be classified as a financing activity in the Statements of Cash Flows. Implementation issues that had been previously cleared by the FASB staff were effective at the time that they were cleared and new guidance was effective in the third quarter of 2003. In connection with our adoption, we reviewed certain power purchase or sale contracts to determine if they met the revised normal purchase and normal sale scope exception criteria in Statement 149. If these criteria were not met, the contract was accounted for at fair value. The impact of adopting Statement 149 was not material to our results of operations or financial position.

In June 2003, the FASB issued final guidance on the use of broad market indices (e.g., consumer price index) in power purchase and sales contracts. This guidance clarifies that the normal purchases and sales scope exception is precluded if a contract contains a broad market index that is not clearly and closely related to the asset being sold or purchased (or a direct factor in the production of the asset sold or purchased). The guidance provides criteria that must be met for the index to be considered clearly and closely related. This guidance, which is effective in the fourth quarter of 2003, is not expected to have a material impact on our results of operations or financial position upon adoption.

Consolidation of Variable Interest Entities (VIE)

In January 2003, the FASB issued Interpretation 46, which significantly changes the consolidation requirements for traditional ~~SPEs~~special purpose entities (SPE) and certain other entities subject to its scope. This interpretation defines a VIE as (a) an entity that does not have sufficient equity to support its activities without additional financial support or (b) anany entity that has equity investors that do not have voting rights, or do not absorb first dollar losses, or receive returns. These entities must be consolidated when certain criteria are met. The interpretation was originally to be effective as of July 1, 2003 for Cinergy; however, the FASB subsequently permitted deferral of the effective date to December 31, 2003 for either some or all potential VIEs. During this deferral period, the FASB plans to clarify and amend several provisions, much of which is intended to assist in the application of Interpretation 46 to operating entities. Clarifications were not needed for most traditional SPEs and ~~we therefore~~to March 31, 2004 for all other entities subject to the scope of Interpretation 46. We elected to implement Interpretation 46 for ~~such entities, as discussed below,~~traditional SPEs in accordance with the original implementation date of July 1, ~~2003. Prior period financial statements were not restated~~2003 and for ~~these changes.~~

Interpretation 46 requires us to consolidate two SPEs that have individual power sale agreements to Central Maine Power Company (CMP) for approximately 45 MW of capacity, ending in 2009, and 35 MW of capacity, ending in 2016. In addition, these SPEs have individual power purchase agreements with Capital & Trading to supply the power. Capital & Trading also provides

~~106~~

~~various services,~~all other entities, including certain ~~credit support facilities. Upon the initial~~operating joint ventures, as of March 31, 2004. The consolidation of ~~these two SPEs, approximately $239 million~~certain operating joint ventures as of ~~notes receivable, $225 million of non-recourse debt, and miscellaneous other assets and liabilities were included~~March 31, 2004, had an immaterial impact on ~~Cinergy’s~~ Balance Sheets. The debt was incurred by the SPEs to finance the buyout of existing power contracts that CMP held with former suppliers. The cash flows from the notes receivable are designed to repay the debt. Notes 3 and 4 in the “Notes to Condensed Financial Statements” in “Part I. Financial Information” provide additional information regarding the debt and the notes receivable, respectively.

~~Cinergy~~ ~~is continuing to evaluate the impact of Interpretation 46 on~~ several operating joint ventures ~~primarily involved in cogeneration and energy efficiency operations, that we currently~~which do not ~~consolidate.~~require consolidation. If all these entities were consolidated, their total assets ~~of approximately $675 million (the majority of which is non-current)~~ and ~~total~~ liabilities ~~of approximately $225 million (which includes long-term debt of approximately $100 million)~~ would be ~~recognized on~~immaterial to our Condensed Balance Sheets.~~Cinergy’s~~ current investment in these entities is approximately $250 million. We also guarantee certain performance obligations of these entities with an estimated maximum potential exposure of approximately $55 million, as disclosed in Note 7(a) of the “Notes to Condensed Financial Statements” in “Part I. Financial Information”. As discussed above, we expect additional interpretative guidance to be issued by the FASB during the fourth quarter of 2003 and ~~Cinergy~~ ~~will adopt those provisions effective December 31, 2003.~~

Financial Instruments with Characteristics of Both Liabilities and Equity

~~In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150,~~ ~~Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity~~ (Statement 150). Statement 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. This statement was effective for financial instruments entered into or modified after May 31, 2003, and was effective on July 1, 2003, for financial instruments held prior to issuance of this statement. Statement 150 would have required ~~Cinergy Corp.’s~~ ~~preferred trust securities to be reported as a~~

~~107~~

~~liability; however, as described more fully above, the trust holding these securities is no longer permitted to be consolidated and the preferred trust securities are no longer reported on~~ ~~Cinergy’s~~ ~~Balance Sheets. However,~~ ~~Cinergy’s~~ ~~note payable to the trust is recorded on the Balance Sheet as~~ ~~Long-term debt~~~~. As a result, the impact of adopting Statement 150 was not material to our results of operations or financial position.~~

~~As discussed in the 2002 10-K,~~ ~~Cinergy~~ ~~issued forward stock sale contracts that require purchase by the holder of a certain number of~~ ~~Cinergy~~ ~~shares in February 2005 (stock contracts). The number of shares to be issued is contingent on the market price of~~ ~~Cinergy Corp.~~ stock, but subject to a predetermined ceiling and floor price. In October 2003, the FASB Staff released an interpretation of Statement 150 that requires an evaluation of these stock contracts to determine whether they constitute a liability, with any changes in accounting required in January 2004. We believe that this interpretation will have no impact on our current accounting.

Intangible Assets

In June 2001, the FASB issued Statement 142. With the adoption of Statement 142, goodwill and other intangibles with indefinite lives are no longer subject to amortization. Statement 142 requires that goodwill be assessed for impairment upon adoption (transition impairment test) and at least annually thereafter by applying a fair-value-based test, as opposed to the undiscounted cash flow test applied under prior accounting standards.

We began applying Statement 142 in the first quarter of 2002. We finalized our transition impairment test in the fourth quarter of 2002 and recognized a non-cash impairment charge of approximately $11 million (net of tax) for goodwill related to certain of our international assets. This amount is reflected in ~~Cinergy’s~~ Statements of Income as a cumulative effect adjustment, net of tax. While Statement 142 did not require the initial transition impairment test to be completed until December 31, 2002, it required the cumulative effect adjustment to be reflected as of January 1, 2002.

Asset Retirement Obligations

In July 2001, the FASB issued Statement 143, which requires fair value recognition beginning January 1, 2003, of legal obligations associated with the retirement or removal of long-lived assets, at the time the obligations are incurred. Our accounting policy for such legal obligations is described in Note 1(f) of the “Notes to Condensed Financial Statements” in “Part I. Financial Information”.

Other Matters

Employee Severance Programs

~~During the second quarter of 2003,~~ ~~Cinergy~~ offered a Voluntary Early Retirement Program (VERP) and other severance benefits (Severance Programs) to certain non-union employees. As a result of the non-union employees electing the Severance Programs, ~~Cinergy~~ ~~recorded expenses of approximately $9 million during the quarter.~~

~~108~~

~~Cinergy~~ ~~recorded $4 million in the third quarter of 2003 as a result of union employees electing Severance Programs that ended in July 2003 under a separate program than mentioned above.~~

~~Additionally, in the third quarter 2003, a VERP was offered to certain non-union employees.~~ ~~Cinergy~~ ~~recorded expenses of approximately $1 million.~~

Synthetic Fuel Production

In July 2002, Capital & Trading acquired a coal-based synthetic fuel production facility. As of September 30, 2003, Capital & Trading’s net book value in this facility was approximately $60 million. The synthetic fuel produced at this facility qualifies for tax credits in accordance with Section 29 of the Internal Revenue Code. Eligibility for these credits expires after 2007. ~~Cinergy~~ ~~received a private letter ruling from the Internal Revenue Service (IRS) in connection with the acquisition of the facility. To date,~~ ~~Cinergy~~ ~~has produced and sold approximately 3.6 million tons of synthetic fuel at this facility, resulting in approximately $100 million in tax credits, including approximately $60 million in 2003.~~

In the second quarter of 2003, the IRS announced, as a result of an audit of another taxpayer, that it had reason to question and was reviewing the scientific validity of test procedures and results that were presented as evidence the fuel underwent a significant chemical change. The IRS recently announced that it has finished its review and has determined that test procedures and results used by taxpayers are scientifically valid if the procedures are applied in a consistent and unbiased manner. The IRS also announced that it plans to impose new testing and record-keeping requirements on synthetic fuel producers and plans to issue guidance extending these requirements to taxpayers already holding private letter rulings on the issue of significant chemical change.

~~Cinergy~~ believes that its testing procedures comply with the standards recently announced by the IRS. We do not anticipate that any new testing or record-keeping requirements imposed by the IRS will have a material effect on our financial position or results of operations.

Energy Market Investigations

~~In July 2003,~~ ~~Cinergy~~ received a subpoena from the Commodity Futures Trading Commission (CFTC). As has been previously reported by the press, the CFTC has served subpoenas on numerous other energy companies. The CFTC request sought certain information regarding our trading activities, including price reporting to energy industry publications. The CFTC sought particular information concerning these matters for the period May 2000 through January 2001 as to one of ~~Cinergy’s~~ ~~employees. Based on an initial review of these matters, we placed that employee on administrative leave and have subsequently terminated his employment.~~ ~~Cinergy~~ ~~is continuing an investigation of these matters and has been cooperating fully with the CFTC.~~

~~In September 2003,~~ ~~Cinergy~~, along with 38 other companies, was named as a defendant in civil litigation filed as a purported class action on behalf of all persons who purchased and/or sold New York Mercantile Exchange natural gas futures and options contracts between January 1, 2000, and December 31, 2002. The complaint alleges that improper price reporting caused damages to the class. Responsive pleadings in the case are due on November 17, 2003. We

~~109~~

~~believe this action against us is without merit. At this time, it is not possible to predict the outcome of this matter.~~

~~In the second quarter of 2003,~~ ~~Cinergy~~ received initial and follow-up third-party subpoenas from the SEC requesting information related to particular trading activity with one of its counterparties who was the target of an investigation by the SEC. ~~Cinergy~~ ~~has and intends to fully cooperate with the SEC in connection with this matter.~~

~~At this time it is not possible to predict the outcome of these investigations and lawsuit or the impact on~~ ~~Cinergy’s~~ ~~financial position or results of operations; although, in the opinion of management, they are not likely to have a material adverse effect on our financial position or results of operations.~~

~~110~~69

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

This information is provided in, and incorporated by reference from, the “Market Risk Sensitive Instruments and Positions” section in “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in “Part I. Financial Information”.

~~111~~70

CONTROLS AND PROCEDURES

ITEM 4. CONTROLS AND PROCEDURES

Disclosure controls and procedures are our controls and other procedures that are designed to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 (Exchange Act) is recorded, processed, summarized, and reported, within the time periods specified in the Securities and Exchange Commission’s (SEC) rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to provide reasonable assurance that information required to be disclosed by us in the reports that we file under the Exchange Act is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.

Under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, we have evaluated the effectiveness of our disclosure controls and procedures as of ~~September 30, 2003,~~March 31, 2004, and, based upon this evaluation, our chief executive officer and chief financial officer have concluded that these controls and procedures are effective in providing reasonable assurance that information requiring disclosure is ~~communicated to management in a timely manner~~recorded, processed, summarized, and reported within the timeframe specified by the SEC’s rules and forms.

Under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, we have evaluated any change in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter ended ~~September 30, 2003~~March 31, 2004 and found no change that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

~~112~~71

PART II. - OTHER INFORMATION

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

CLEAN AIR ACT (CAA) LAWSUIT

~~On August 18, 2003, Cornerstone Propane Partners L.P. filed suit~~In November 1999, and through subsequent amendments, the United States (U.S.) brought a lawsuit in the United States Federal District Court for the Southern District of Indiana (District Court) against Cinergy, The Cincinnati Gas & Electric Company (CG&E), and ~~38 other companies~~PSI Energy, Inc. (PSI) alleging various violations of the CAA. Specifically, the lawsuit alleges that we violated the CAA by not obtaining Prevention of Significant Deterioration (PSD), Non-Attainment New Source Review (NSR), and Ohio and Indiana State Implementation Plan (SIP) permits for various projects at our owned and co-owned generating stations. Additionally, the suit claims that we violated an Administrative Consent Order entered into in 1998 between the U.S. Environmental Protection Agency (EPA) and Cinergy relating to alleged violations of Ohio’s SIP provisions governing particulate matter at Unit 1 at CG&E’s W.C. Beckjord Generating Station (Beckjord Station). The suit seeks (1) injunctive relief to require installation of pollution control technology on various generating units at CG&E’s Beckjord Station and Miami Fort Generating Station (Miami Fort Station), and PSI’s Cayuga Generating Station, Gallagher Generating Station (Gallagher Station), Wabash River Generating Station, and Gibson Generating Station (Gibson Station), and (2) civil penalties in amounts of up to $27,500 per day for each violation. In addition, three northeast states and two environmental groups have intervened in the case. In May 2004, the City of Louisville, Kentucky filed a motion to intervene in the case with respect to all claims made by the United States against PSI and Cinergy regarding the Gallagher Station. Also in May 2004, plaintiffs filed a motion to amend the most recent complaint pursuant to the Court’s pre-trial procedures scheduling order. This amended complaint added four new projects to the lawsuit, which had been subject to earlier EPA Notices of Violation (NOVs). These new projects are at stations previously named in the lawsuit. Plaintiffs also dropped their claims with respect to a number of projects, the United States dropped ten projects and the three northeast states dropped an additional five projects. The case is currently in discovery, and the District Court has set the case for trial by jury commencing in August 2005.

In March 2000, the United States also filed in the District Court an amended complaint in a separate lawsuit alleging violations of the CAA relating to PSD, NSR, and Ohio SIP requirements regarding various generating stations, including a generating station operated by the Columbus Southern ~~District~~Power Company (CSP) and jointly-owned by CSP, the Dayton Power and Light Company (DP&L), and CG&E. The EPA is seeking injunctive relief and civil penalties of ~~New York. The~~up to $27,500 per day for each violation. This suit is being defended by CSP. In April 2001, the District Court in that case ruled that the Government and the intervening plaintiff environmental groups could seek injunctive relief for alleged violations that occurred more than five years before the filing of the complaint only. Thus, if the plaintiffs prevail in their claims, any calculation for penalties will not start on the date of the alleged violations, unless those alleged violations occurred after November 3, 1994, but CSP would be forced to install the controls required under the CAA. Neither party appealed that decision.

In addition, Cinergy and CG&E have been informed by DP&L that in June 2000, the EPA issued a ~~purported class~~NOV to DP&L for alleged violations of PSD, NSR, and SIP requirements at a generating station operated by DP&L and jointly-owned by CG&E. The NOV indicated the EPA may (1) issue an order requiring compliance with the requirements of the SIP, or (2) bring a civil action seeking injunctive relief and civil penalties of up to $27,500 per day for each violation.

In December 2000, Cinergy, CG&E, and PSI reached an agreement in principle with the plaintiffs regarding the above matters. The complete resolution of these issues was contingent upon establishing a final agreement with the EPA and other parties, but the plaintiffs insisted on ~~behalf~~commitments which went beyond those contained in the agreement in principle. At this time we believe it is unlikely that a final settlement agreement will be reached on these terms. It is not possible to predict whether resolution of ~~all persons who purchased and/~~these matters would have a material effect on our financial position or sold New York Mercantile Exchange natural gas futures and options contracts between January 1, 2000 and December 31, 2002. The complaint alleges that improper price reporting caused damages to the class. The plaintiffs are seeking unspecified damages.results of operations. We intend to defend against the allegations, discussed above, vigorously in court.

MANUFACTURED GAS PLANT SITES (MGP)

Prior to the 1950s, gas was produced at MGP sites through a process that involved the heating of coal and/or oil. The gas produced from this ~~lawsuit vigorously; however, we~~process was sold for residential, commercial, and industrial uses.

additional costs becomes probable. Until all investigation and remediation is complete, we are unable to determine the overall impact on our financial position or results of operations.

CG&E has performed site assessments on its sites where we believe MGP activities have occurred at ~~this time.~~some point in the past and found no imminent risk to the environment. At the present time, CG&E cannot predict whether investigation and/or remediation will be required in the future at any of these sites.

We currently, and from time to time, are involved in lawsuits, claims, and complaints incidental to the conduct of our business. In the opinion of management, no such proceeding is likely to have a material adverse effect on us.

See Note 76 of the “Notes to Condensed Financial Statements” in ~~“Part I.~~“Item 1. Financial ~~Information”~~Statements” for further information regarding our commitments and contingencies.

~~113~~ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER
PURCHASES OF EQUITY SECURITIES

The number of shares provided in the table below represent shares exchanged in connection with employee option exercises and shares purchased by the plan trustee on behalf of the 401(k) Excess Plan.

Period	(a) Total Number of Shares (or Units) Purchased	(b) Average Price Paid per Share (or Unit)		(c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs	(d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs
January 1 – January 31	111,447	$	38.71	N/A	N/A
February 1 – February 29	377,757	$	38.63	N/A	N/A
March 1 – March 31	8,769	$	40.07	N/A	N/A

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

The annual meeting of shareholders of Cinergy Corp.

, was held on May 4, 2004, in Covington, Kentucky.

At the meeting, shareholders ratified the selection of Deloitte and Touche, the members of Deloitte Touche Tohmatsu and their respective affiliates, as the Company’s independent auditors and elected three Class I directors to the board of Cinergy Corp. to serve for three-year terms ending in 2007, as set forth below:

Directors	Votes For	Votes Withheld

Class I
Michael G. Browning	155,496,837	3,747,963
George C. Juilfs	156,161,356	3,083,444
Dudley S. Taft	156,170,459	3,074,341

In lieu of ~~a special~~the annual meeting of shareholders of The Cincinnati Gas & Electric Company (CG&E), a resolution was duly adopted via unanimous written consent of Cinergy Corp., CG&E’ssole shareholder, effective ~~July 23, 2003, amending~~May 3, 2004 electing the ~~Regulations~~following members to ~~effectuate changes with respect to certain officer titles at~~ ~~CG&E.~~the Board of Directors for one-year terms expiring in 2005:

~~114~~•James E. Rogers

•R. Foster Duncan

•James L. Turner

The annual meeting of shareholders of PSI Energy, Inc. (PSI) was held on May 4, 2004, in Covington, Kentucky. Proxies were not solicited for the annual meeting. Cinergy Corp. owns all of the 53,913,701 outstanding shares, representing a like number of votes, of the common stock of PSI. By unanimous vote, the following members to the Board of Directors were elected at the annual meeting for one-year terms expiring in 2005:

•Michael G. Browning

•James E. Rogers

•Douglas F. Esamann

None of the 650,989 outstanding shares, representing 423,331 votes, of the preferred stock of PSI, were present or voted at the annual meeting.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) The documents listed below are being furnished or filed on behalf of Cinergy Corp., The Cincinnati Gas & Electric Company (CG&E), PSI Energy, Inc. (PSI), and The Union Light, Heat and Power Company (ULH&P). Exhibits not identified as previously furnished or filed are furnished or filed herewith:

Exhibit Designation	Registrant	Nature of Exhibit	Previously Filed as Exhibit to:

Additional~~Additional~~ Exhibits

10-rr	Cinergy Corp.	Amendment to Cinergy Corp. 401(k) Excess Plan, adopted March 31, 2004, effective January 1, 2004.

Certificates

~~4.2~~31-a	Cinergy Corp. CG&E PSI ULH&P	~~Eighth Supplemental Indenture between~~ ~~PSI~~Certification by James E. Rogers pursuant to Rule 13a-14(a)/15d-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. ~~and Fifth Third Bank, as Trustee, dated as of September 23, 2003 to Indenture dated as of November 15, 1996.~~

~~4.3~~31-b	Cinergy Corp. CG&E PSI ULH&P	~~Fifty-fifth Supplemental Indenture dated~~Certification by R. Foster Duncan pursuant to Rule 13a-14(a)/15d-14(a) of the Exchange Act, as adopted pursuant to Section 302 of ~~February 15, 2003 between~~ ~~PSI~~the Sarbanes-Oxley Act of 2002. ~~and LaSalle Bank National Association, as Trustee, to Indenture dated as of September 1, 1939.~~

~~31.1~~32-a	Cinergy Corp. CG&E PSI ULH&P	Certification ofby James E. Rogers ~~under~~pursuant to 18 U.S.C. Section ~~302~~1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley ~~Act.~~Act of 2002.

~~31.2~~32-b	Cinergy Corp. CG&E PSI ULH&P	Certification ofby R. Foster Duncan ~~under~~pursuant to 18 U.S.C. Section ~~302 of Sarbanes-Oxley Act.~~

~~32.1~~	~~Cinergy Corp.~~ ~~CG&E~~ ~~PSI~~ ~~ULH&P~~	~~Certification of James E. Rogers under~~1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley ~~Act.~~

~~32.2~~	~~Cinergy Corp.~~ ~~CG&E~~ ~~PSI~~ ~~ULH&P~~	~~Certification~~Act of ~~R. Foster Duncan under Section 906 of Sarbanes-Oxley Act.~~2002.

(b) The following reports on Form 8-K were furnished or filed during the quarter ended ~~September 30, 2003.~~March 31, 2004.

Date of Report	Registrant	Item Furnished or Filed

~~July 22, 2003~~	~~CG&E~~ ~~ULH&P~~	~~Item 5. Other Events and Regulation FD Disclosure~~

~~July 25, 2003~~January 23, 2004	Cinergy Corp.	Item 12. Results of Operations and Financial Condition

~~July 25, 2003~~	~~Cinergy Corp.~~ ~~CG&E~~	~~Item 5. Other Events and Regulation FD Disclosure~~

		~~Item 7. Financial Statements and Exhibits~~

~~115~~

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, each of the Registrants has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

~~CINERGY CORP.~~

~~THE CINCINNATI GAS & ELECTRIC COMPANY~~

~~PSI ENERGY, INC.~~

~~THE UNION LIGHT, HEAT AND POWER COMPANY~~

~~Registrants~~

	CINERGY CORP.
	THE CINCINNATI GAS & ELECTRIC COMPANY
	PSI ENERGY, INC.
	THE UNION LIGHT, HEAT AND POWER COMPANY
Registrants



Date: ~~November 13, 2003~~May 7, 2004		/s/	~~David L. Wozny~~ Lynn J. Good
			~~David L. Wozny~~Lynn J. Good
		(duly authorized officer
		and
		principal accounting officer)

~~116~~77

	Quarter Ended September 30				Year to Date September 30					Quarter Ended March 31
	*(in millions, except per share amounts)*									(in millions, except per share amounts)
	2003		2002		2003		2002			2004		2003

Net income, as reported	$	112	$	131	$	363	$	260	Net income, as reported	$	103	$	166

Add: Stock-based employee compensation expense included in reported net income, net of related tax effects.	3		5		12		10
Add:									Stock-based employee compensation expense included in reported net income, net of related tax effects.	4		4

Deduct: Stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects.	4		5		14		11
Deduct:									Stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects.	3		5

Pro-forma net income	$	111	$	131	$	361	$	259	Pro-forma net income	$	104	$	165

EPS - as reported	$	0.63	$	0.78	$	2.06	$	1.57	EPS - as reported	$	0.57	$	0.96
EPS - pro-forma	$	0.63	$	0.78	$	2.05	$	1.56	EPS - pro-forma	$	0.58	$	0.95

EPS assuming dilution - as reported	$	0.62	$	0.77	$	2.04	$	1.55	EPS assuming dilution - as reported	$	0.57	$	0.95
EPS assuming dilution - pro-forma	$	0.62	$	0.77	$	2.03	$	1.54	EPS assuming dilution - pro-forma	$	0.57	$	0.94

	Cinergy(1)			CG&E and subsidiaries			PSI
				*(in thousands)*

Quarter Ended September 30, 2002

Electric Operating Revenues as previously reported	$	2,554,687		$	1,747,379		$	776,837

Adjustment for effect of EITF 02-3 implementation	(1,574,214		)	(1,254,762		)	(306,065		)
Other(2)	(15,038		)	—			—

Electric Operating Revenues as adjusted	$	965,435		$	492,617		$	470,772

Gas Operating Revenues as previously reported	$	1,281,411		$	41,452		$	—

Adjustment for effect of EITF 02-3 implementation	(1,171,709		)	—			—
Other(2)	(5,629		)	—			—

Gas Operating Revenues as adjusted	$	104,073		$	41,452		$	—

Fuel and purchased and exchanged power expense as previously reported	$	1,871,365		$	1,391,221		$	474,748

Adjustment for effect of EITF 02-3 implementation	(1,555,263		)	(1,254,762		)	(306,065		)
Other(2)	(13,736		)	—			—

Fuel and purchased and exchanged power expense as adjusted	$	302,366		$	136,459		$	168,683

Gas purchased expense as previously reported	$	1,243,507		$	12,594		$	—

Adjustment for effect of EITF 02-3 implementation	(1,190,659		)	—			—
Other(2)	(3,565		)	—			—

Gas purchased expense as adjusted	$	49,283		$	12,594		$	—

Year to Date September 30, 2002

Electric Operating Revenues as previously reported	$	5,178,481		$	3,249,715		$	1,874,109

Adjustment for effect of EITF 02-3 implementation	(2,578,261		)	(1,948,273		)	(658,318		)
Other(2)	(68,937		)	—			—

Electric Operating Revenues as adjusted	$	2,531,283		$	1,301,442		$	1,215,791

Gas Operating Revenues as previously reported	$	3,301,625		$	277,069		$	—

Adjustment for effect of EITF 02-3 implementation	(2,921,651		)	—			—
Other(2)	(5,629		)	—			—

Gas Operating Revenues as adjusted	$	374,345		$	277,069		$	—

Fuel and purchased and exchanged power expense as previously reported	$	3,357,585		$	2,300,565		$	1,078,596

Adjustment for effect of EITF 02-3 implementation	(2,549,301		)	(1,948,273		)	(658,318		)
Other(2)	(46,426		)	—			—

Fuel and purchased and exchanged power expense as adjusted	$	761,858		$	352,292		$	420,278

Gas purchased expense as previously reported	$	3,142,899		$	145,033		$	—

Adjustment for effect of EITF 02-3 implementation	(2,950,609		)	—			—
Other(2)	(3,565		)	—			—

Gas purchased expense as adjusted	$	188,725		$	145,033		$	—

Principal Amount		Interest Rate		Maturity Date
*(in millions)*

$	2.0	8.37	%	11/08/2006
5.0		8.81		05/16/2022
3.0		8.80		05/18/2022
16.8		8.67		06/01/2022

	Qualified Pension Benefits				Non-Qualified Pension Benefits				Other Postretirement Benefits
	2004		2003		2004		2003		2004		2003
	(in millions)

Cinergy(1)	$	12.3	$	12.2	$	4.1	$	3.2	$	10.3	$	8.7
CG&E and subsidiaries	3.7		2.4		0.2		0.2		2.6		2.3
PSI	3.2		2.9		0.2		0.2		5.3		4.4
ULH&P	0.4		0.3		—		—		0.2		0.2

	Year to Date September 30, 2002
	Net Income			EPS			EPS- Assuming Dilution
	*(in millions, except for EPS)*

Reported results	$	271		$	1.63		$	1.61
Cumulative effect of a change in accounting principle, net of tax	(11		)	(0.06		)	(0.06		)
Revised results	$	260		$	1.57		$	1.55

	Cinergy
	*(in millions)*

Next 12 months	$	17

13-24 months	19

25-36 months	22

37-48 months	24

49-60 months	27

Thereafter	112

	$	221

	September 30, 2003				December 31, 2002				March 31, 2004				December 31, 2003
	Established Lines		Outstanding		Established Lines		Outstanding		Established Lines		Outstanding		Established Lines		Outstanding
	*(in millions)*								(in millions)
Cinergy
Cinergy Corp.
Revolving lines	$	1,000	$	—	$	1,000	$	25	$	1,000	$	—	$	1,000	$	—
Uncommitted lines (1)	65		—		65		—
Commercial paper (2)			209				473
Uncommitted lines(1)									40		—		40		—
Commercial paper(2)											33				146

Operating companies
Uncommitted lines (1)	75		—		75		—
Utility operating companies
Uncommitted lines(1)									75		—		75		—
Pollution control notes			112				147				193				193

Non-regulated subsidiaries
Revolving lines	17		9		7		1		18		9		19		10
Short-term debt			7				22				2				2

Cinergy Total			$	337			$	668			$	237			$	351

CG&E and subsidiaries
Uncommitted lines (1)	$	15	$	—	$	15	$	—
Uncommitted lines(1)									$	15	$	—	$	15	$	—
Pollution control notes			112				112				112				112
Money pool			9				9				55				49

CG&E Total			$	121			$	121			$	167			$	161

PSI
Uncommitted lines (1)	$	60	$	—	$	60	$	—
Uncommitted lines(1)									$	60	$	—	$	60	$	—
Pollution control notes			—				35				81				81
Money pool			165				138				183				188

PSI Total			$	165			$	173			$	264			$	269

ULH&P
Money pool			$	24			$	14			$	21			$	45

ULH&P Total			$	24			$	14			$	21			$	45

	PSI
	*(in millions)*

Total retail CWIP expenditures as of December 31, 2002	$	305

Total amount requested through CWIP mechanism(1)	35
Less: previously approved CWIP mechanism amounts	(28		)
Incremental CWIP mechanism amounts	$	7

	Short-term Regulatory Authority September 30, 2003
	*(millions)*
	Authority			Outstanding

Cinergy Corp.	$	5,000	(1)	$	209
CG&E and subsidiaries	671			9
PSI	600			165
ULH&P	65			24

	Change in Fair Value Year to Date
	September 30, 2003									September 30, 2002
	Cinergy(1)			CG&E			PSI			Cinergy(1)			CG&E			PSI
	*(in millions)*

Fair value of contracts outstanding at beginning of year	$	75		$	42		$	—		$	18		$	28		$	(7	)

Inception value of new contracts when entered (2)	—			—			—			6			5			2

Changes in fair value attributable to changes in valuation techniques and assumptions (3)	1			1			—			14			6			9

Other changes in fair value (4)	120			40			1			72			26			3

Option premiums paid/(received)	(6		)	3			—			24			—			—

Accounting Changes (5)

Cumulative effect of changes in accounting principle	(20		)	(14		)	(1		)	—			—			—

Consolidation of previously unconsolidated entities	7			—			—			—			—			—

Contract reclassification (6)	—			—			—			14			18			5

Contract acquisitions (7)	—			—			—			(16		)	—			—

Contracts settled	(129		)	(48		)	(2		)	(38		)	(28		)	(11		)

Fair value of contracts outstanding at end of period	$	48		$	24		$	(2	)	$	94		$	55		$	1

NOTES TO CONDENSED FINANCIAL STATEMENTS

CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING INFORMATION

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS

INTRODUCTION

ORGANIZATION

LIQUIDITY AND CAPITAL RESOURCES

Environmental Commitment and Contingency Issues

Global Climate Change

Pensions

Long-term debt due within one year

Other Investing Activities

Guarantees

Collateral Requirements

Capital Resources

Cinergy

Notes Payable and Other Short-term Obligations

Long-term Debt

Off-Balance Sheet FinancingArrangements

Equity

79

The Results of Operations discussions for 2003 Cinergy, CG&E, and PSI are combined within this section.

2004 QUARTERLY RESULTS OF OPERATIONS - HISTORICAL

Summary of Results

Electric Margins

Electric Operating Revenues

Electric Operating RevenuesFuel and Purchased Power

Gas Operating Revenues

Purchased Power

Gas Margins

Other Revenues

Operating Expenses

Fuel

Purchased and Exchanged Power

Depreciation

Gas PurchasedTaxes Other Than Income Taxes

Miscellaneous (Expense) Income - Net

Operation and Maintenance

Depreciation

Taxes Other Than Income Taxes

Miscellaneous Income (Expense) - Net

Interest Expense

Preferred Dividend Requirement of Subsidiary Trust

Income Taxes

2003 YEAR TO DATE RESULTS OF OPERATIONS - HISTORICAL

Summary of Results

Electric Operating Revenues

Gas Operating Revenues

Operating Expenses

Fuel

Purchased and Exchanged Power

Gas Purchased

Gas Storage and Transportation

Operation and Maintenance

Depreciation

Taxes Other Than Income Taxes

Equity in Earnings of Unconsolidated Subsidiaries

Miscellaneous Income (Expense) - Net

Interest Expense

Income Taxes

Cumulative Effect of Changes in Accounting Principles Net of Tax

Discontinued Operations

Electric Operating RevenuesSummary of Results

Electricity Purchased from Parent Company for Resale

Gas Operating Revenues

Gas Purchased

Operation and Maintenance

Miscellaneous Income (Expense) - Netexpenses.

Income Taxes

FUTURE EXPECTATIONS/TRENDS

ELECTRIC INDUSTRY

Wholesale Market Developments

Supply-side ActionsFERC and Midwest ISO

Retail Market Developments

OhioDay-Ahead and Real-Time Energy Markets

Federal Update

Midwest Independent Transmission System Operator, Inc. (Midwest ISO)

Historical

FERC Orders

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS