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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

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FORM 10-Q

|(Mark One)                                        |                                                                                         
|------------------------------------------------- | ----------------------------------------------------------------------------------------
|ý                                                 | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
|For the quarterly period ended September 30, 2002
|or                                               
|o                                                 | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|For the transition period from
 to               

|Commission
File Number |  | Registrant, State of Incorporation,
Address and Telephone Number                                                             |  | I.R.S. Employer
Identification No.
|---------------------- |  | ---------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------------
|1-11377                |  | CINERGY CORP.(A Delaware Corporation)
139 East Fourth Street
Cincinnati, Ohio 45202
(513) 421-9500                           |  | 31-1385023                        
|1-1232                 |  | THE CINCINNATI GAS & ELECTRIC COMPANY(An Ohio Corporation)
139 East Fourth Street
Cincinnati, Ohio 45202
(513) 421-9500      |  | 31-0240030                        
|1-3543                 |  | PSI ENERGY, INC.(An Indiana Corporation)
1000 East Main Street
Plainfield, Indiana 46168
(513) 421-9500                      |  | 35-0594457                        
|2-7793                 |  | THE UNION LIGHT, HEAT AND POWER COMPANY(A Kentucky Corporation)
139 East Fourth Street
Cincinnati, Ohio 45202
(513) 421-9500 |  | 31-0473080                        

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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 registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange
Act). Yes ý    No o

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This
combined Form 10-Q is separately filed byCinergy Corp.,The Cincinnati Gas & Electric
Company,PSI Energy, Inc., andThe 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 Companymeets 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.

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As
of October 31, 2002, shares of common stock outstanding for each registrant were as listed:

|Registrant                              |  | Description                                    |  | Shares     
|--------------------------------------- |  | ---------------------------------------------- |  | -----------
|Cinergy Corp.                           |  | Par value $.01 per share                       |  | 168,326,377
|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    

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TABLE OF CONTENTS

|Item Number                  |  |                                                                                       |  |                                         |  |                                                            |  | Page Number
|---------------------------- |  | ------------------------------------------------------------------------------------- |  | --------------------------------------- |  | ---------------------------------------------------------- |  | -----------
|PART I FINANCIAL INFORMATION
|1                            |  | Financial Statements                                                                  |  |                                        
|                             |  |                                                                                       |  | Cinergy Corp.                           |  | 1                                                         
|                             |  |                                                                                       |  |                                         |  | Consolidated Statements of Income                          |  | 2          
|                             |  |                                                                                       |  |                                         |  | Consolidated Balance Sheets                                |  | 3          
|                             |  |                                                                                       |  |                                         |  | Consolidated Statements of Changes in Common Stock Equity  |  | 5          
|                             |  |                                                                                       |  |                                         |  | Consolidated Statements of Cash Flows                      |  | 7          
|                             |  |                                                                                       |  | The Cincinnati Gas & Electric Company   |  |                                                           
|                             |  |                                                                                       |  |                                         |  | Consolidated Statements of Income and Comprehensive Income |  | 9          
|                             |  |                                                                                       |  |                                         |  | Consolidated Balance Sheets                                |  | 10         
|                             |  |                                                                                       |  |                                         |  | Consolidated Statements of Cash Flows                      |  | 12         
|                             |  |                                                                                       |  | PSI Energy, Inc.                        |  |                                                           
|                             |  |                                                                                       |  |                                         |  | Consolidated Statements of Income and Comprehensive Income |  | 14         
|                             |  |                                                                                       |  |                                         |  | Consolidated Balance Sheets                                |  | 15         
|                             |  |                                                                                       |  |                                         |  | Consolidated Statements of Cash Flows                      |  | 17         
|                             |  |                                                                                       |  | The Union Light, Heat and Power Company |  |                                                           
|                             |  |                                                                                       |  |                                         |  | Statements of Income                                       |  | 19         
|                             |  |                                                                                       |  |                                         |  | Balance Sheets                                             |  | 20         
|                             |  |                                                                                       |  |                                         |  | Statements of Cash Flows                                   |  | 22         
|                             |  | Notes to Financial Statements                                                         |  | 23                                     
|                             |  | Cautionary Statements Regarding Forward-Looking Information                           |  | 48                                     
|2                            |  | Management's Discussion and Analysis of Financial Condition and Results of Operations |  |                                        
|                             |  |                                                                                       |  |                                         |  | Introduction                                               |  | 50         
|                             |  |                                                                                       |  |                                         |  | Organization                                               |  | 50         
|                             |  |                                                                                       |  |                                         |  | Liquidity and Capital Resources                            |  | 51         
|                             |  |                                                                                       |  |                                         |  | 2002 Quarterly Results of OperationsHistorical            |  | 57         
|                             |  |                                                                                       |  |                                         |  | 2002 Year to Date Results of OperationsHistorical         |  | 61         
|                             |  |                                                                                       |  |                                         |  | Results of OperationsFuture                               |  | 66         
|3                            |  | Quantitative and Qualitative Disclosures About Market Risk                            |  | 80                                     
|4                            |  | Controls and Procedures                                                               |  | 80                                     
|PART II OTHER INFORMATION   
|1                            |  | Legal Proceedings                                                                     |  | 80                                     
|6                            |  | Exhibits and Reports on Form 8-K                                                      |  | 81                                     
|                             |  | Signatures                                                                            |  | 82                                     
|                             |  | Certifications                                                                        |  | 83                                     

i

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CINERGY CORP.AND SUBSIDIARY COMPANIES

1

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CINERGY CORP.        CONSOLIDATED STATEMENTS OF INCOME

|                                                           |                                                    | Quarter Ended
September 30 |         | Year to Date
September 30 |          
|---------------------------------------------------------- | -------------------------------------------------- | -------------------------- | ------- | ------------------------- | ---------
|
|
|Operating Revenues(Note 1(d))                              |                                                    |                            |         |                           |          
|                                                           | Electric                                           |                            | $       | 2,554,687                 |          
|                                                           | Gas                                                |                            |         | 1,281,411                 |          
|                                                           | Other                                              |                            |         | 49,890                    |          
|                                                           |                                                    |                            |         |                           |          
|                                                           |                                                    | Total Operating Revenues   |         |                           | 3,885,988
|Operating Expenses                                         |                                                    |                            |         |                           |          
|                                                           | Fuel and purchased and exchanged power (Note 1(d)) |                            |         | 1,871,365                 |          
|                                                           | Gas purchased (Note 1(d))                          |                            |         | 1,243,507                 |          
|                                                           | Operation and maintenance                          |                            |         | 365,373                   |          
|                                                           | Depreciation                                       |                            |         | 103,565                   |          
|                                                           | Taxes other than income taxes                      |                            |         | 64,890                    |          
|                                                           |                                                    |                            |         |                           |          
|                                                           |                                                    | Total Operating Expenses   |         |                           | 3,648,700
|Operating Income                                           |                                                    |                            | 237,288 |                           |          
|Equity in Earnings (Losses) of Unconsolidated Subsidiaries |                                                    |                            | 3,248   |                           |          
|MiscellaneousNet                                          |                                                    |                            | 5,035   |                           |          
|Interest                                                   |                                                    |                            | 63,543  |                           |          
|Preferred Dividend Requirement of Subsidiary Trust         |                                                    |                            | 5,966   |                           |          
|Income Before Taxes                                        |                                                    |                            | 176,062 |                           |          
|Income Taxes                                               |                                                    |                            | 44,635  |                           |          
|Preferred Dividend Requirements of Subsidiaries            |                                                    |                            | 859     |                           |          
|                                                           |                                                    |                            |         |                           |          
|Net Income                                                 |                                                    | $                          | 130,568 |                           | $        
|                                                           |                                                    |                            |         |                           |          
|Average Common Shares Outstanding                          |                                                    |                            | 167,967 |                           |          
|Earnings Per Common Share(Note 10)                         |                                                    |                            |         |                           |          
|                                                           | Net Income                                         |                            | $       | 0.78                      |          
|Earnings Per Common ShareAssuming Dilution(Note 10)       |                                                    |                            |         |                           |          
|                                                           | Net Income                                         |                            | $       | 0.77                      |          
|Dividends Declared Per Common Share                        |                                                    | $                          | 0.45    |                           | $        

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

2

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CINERGY CORP.        CONSOLIDATED BALANCE SHEETS

|                                       |                                                                                                                                                  | September 30
2002   |                                    | December 31
2001
|-------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------- | ---------------------------------- | ----------------
|
|ASSETS                                 |                                                                                                                                                  |                     |                                    |                 
|Current Assets                         |                                                                                                                                                  |                     |                                    |                 
|                                       | Cash and cash equivalents                                                                                                                        |                     | $                                  | 119,267         
|                                       | Restricted deposits                                                                                                                              |                     |                                    | 142,120         
|                                       | Notes receivable (Note 5)                                                                                                                        |                     |                                    | 78,946          
|                                       | Accounts receivable less accumulated provision for doubtful accounts of $17,943 at September 30, 2002, and $35,580 at December 31, 2001 (Note 5) |                     |                                    | 1,459,804       
|                                       | Materials, supplies, and fuelat average cost                                                                                                    |                     |                                    | 308,438         
|                                       | Energy risk management current assets (Note 1(c))                                                                                                |                     |                                    | 363,132         
|                                       | Prepayments and other                                                                                                                            |                     |                                    | 133,505         
|                                       |                                                                                                                                                  |                     |                                    |                 
|                                       |                                                                                                                                                  |                     | Total Current Assets               |                 
|Property, Plant, and Equipmentat Cost |                                                                                                                                                  |                     |                                    |                 
|                                       | Utility plant in service                                                                                                                         |                     |                                    | 8,547,851       
|                                       | Construction work in progress                                                                                                                    |                     |                                    | 366,099         
|                                       |                                                                                                                                                  |                     |                                    |                 
|                                       |                                                                                                                                                  | Total Utility Plant |                                    |                 
|                                       | Non-regulated property, plant, and equipment                                                                                                     |                     |                                    | 4,702,486       
|                                       | Accumulated depreciation                                                                                                                         |                     |                                    | 5,087,644       
|                                       |                                                                                                                                                  |                     |                                    |                 
|                                       |                                                                                                                                                  |                     | Net Property, Plant, and Equipment |                 
|Other Assets                           |                                                                                                                                                  |                     |                                    |                 
|                                       | Regulatory assets                                                                                                                                |                     |                                    | 1,049,266       
|                                       | Investments in unconsolidated subsidiaries                                                                                                       |                     |                                    | 383,942         
|                                       | Energy risk management non-current assets (Note 1(c))                                                                                            |                     |                                    | 161,995         
|                                       | Other investments                                                                                                                                |                     |                                    | 167,615         
|                                       | Goodwill                                                                                                                                         |                     |                                    | 55,163          
|                                       | Other intangible assets                                                                                                                          |                     |                                    | 21,024          
|                                       | Other                                                                                                                                            |                     |                                    | 232,531         
|                                       |                                                                                                                                                  |                     |                                    |                 
|                                       |                                                                                                                                                  |                     | Total Other Assets                 |                 
|Total Assets                           |                                                                                                                                                  | $                   | 13,205,540                         |                 
|                                       |                                                                                                                                                  |                     |                                    |                 

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

3

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CINERGY CORP.        CONSOLIDATED BALANCE SHEETS

|                                           |                                                                                                                                                        | September 30
2002             |            | December 31
2001 |          
|------------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------ | ----------------------------- | ---------- | ---------------- | ---------
|
|LIABILITIES AND SHAREHOLDERS' EQUITY       |                                                                                                                                                        |                               |            |                  |          
|Current Liabilities                        |                                                                                                                                                        |                               |            |                  |          
|                                           | Accounts payable                                                                                                                                       |                               | $          | 1,448,647        |          
|                                           | Accrued taxes                                                                                                                                          |                               |            | 107,000          |          
|                                           | Accrued interest                                                                                                                                       |                               |            | 43,076           |          
|                                           | Notes payable and other short-term obligations (Note 4)                                                                                                |                               |            | 714,125          |          
|                                           | Long-term debt due within one year (Note 4)                                                                                                            |                               |            | 22,387           |          
|                                           | Energy risk management current liabilities (Note 1(c))                                                                                                 |                               |            | 316,179          |          
|                                           | Other                                                                                                                                                  |                               |            | 108,768          |          
|                                           |                                                                                                                                                        |                               |            |                  |          
|                                           |                                                                                                                                                        | Total Current Liabilities     |            |                  | 2,760,182
|Non-Current Liabilities                    |                                                                                                                                                        |                               |            |                  |          
|                                           | Long-term debt (Note 3)                                                                                                                                |                               |            | 4,248,961        |          
|                                           | Deferred income taxes                                                                                                                                  |                               |            | 1,531,030        |          
|                                           | Unamortized investment tax credits                                                                                                                     |                               |            | 120,416          |          
|                                           | Accrued pension and other postretirement benefit costs                                                                                                 |                               |            | 488,276          |          
|                                           | Energy risk management non-current liabilities (Note 1(c))                                                                                             |                               |            | 115,212          |          
|                                           | Other                                                                                                                                                  |                               |            | 315,918          |          
|                                           |                                                                                                                                                        |                               |            |                  |          
|                                           |                                                                                                                                                        | Total Non-Current Liabilities |            |                  | 6,819,813
|Total Liabilities                          |                                                                                                                                                        |                               | 9,579,995  |                  |          
|Preferred Trust Securities                 |                                                                                                                                                        |                               |            |                  |          
|                                           | Company obligated, mandatorily redeemable, preferred trust securities of subsidiary, holding solely debt securities of the company                     |                               |            | 307,752          |          
|Cumulative Preferred Stock of Subsidiaries |                                                                                                                                                        |                               |            |                  |          
|                                           | Not subject to mandatory redemption                                                                                                                    |                               |            | 62,828           |          
|Common Stock Equity(Note 2)                |                                                                                                                                                        |                               |            |                  |          
|                                           | Common stock$.01 par value; authorized shares600,000,000; outstanding shares168,267,726 at September 30, 2002, and 159,402,839 at December 31, 2001 |                               |            | 1,683            |          
|                                           | Paid-in capital                                                                                                                                        |                               |            | 1,889,119        |          
|                                           | Retained earnings                                                                                                                                      |                               |            | 1,385,887        |          
|                                           | Accumulated other comprehensive income (loss)                                                                                                          |                               |            | (21,724          | )        
|                                           |                                                                                                                                                        |                               |            |                  |          
|                                           |                                                                                                                                                        | Total Common Stock Equity     |            |                  | 3,254,965
|Commitments and Contingencies(Note 7)      |                                                                                                                                                        |                               |            |                  |          
|Total Liabilities and Shareholders' Equity |                                                                                                                                                        | $                             | 13,205,540 |                  | $        
|                                           |                                                                                                                                                        |                               |            |                  |          

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

4

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CINERGY CORP.        CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCK EQUITY

|                                               |                                                                 | Common
Stock                                        |       | Paid-in
Capital |   | Retained
Earnings |   | Accumulated
Other
Comprehensive
Income (Loss) |           | Total
Common
Stock
Equity |  
|---------------------------------------------- | --------------------------------------------------------------- | --------------------------------------------------- | ----- | --------------- | - | ----------------- | - | --------------------------------------------- | --------- | ------------------------- | -
|
|Quarter Ended September 30, 2002               |                                                                 |                                                     |       |                 |   |                   |   |                                               |           |                           |  
|Balance at July 1, 2002                        |                                                                 | $                                                   | 1,675 |                 | $ | 1,861,689         |   | $                                             | 1,330,780 |                           | $
|Comprehensive income:                          |                                                                 |                                                     |       |                 |   |                   |   |                                               |           |                           |  
|                                               | Net income                                                      |                                                     |       |                 |   |                   |   |                                               |           | 130,568                   |  
|                                               | Other comprehensive income (loss), net of tax effect of $12,501 |                                                     |       |                 |   |                   |   |                                               |           |                           |  
|                                               |                                                                 | Foreign currency translation adjustment(Note 1(g))  |       |                 |   |                   |   |                                               |           |                           |  
|                                               |                                                                 | Unrealized gain (loss) on investment trusts         |       |                 |   |                   |   |                                               |           |                           |  
|                                               |                                                                 | Cash flow hedges(Note 1(b))                         |       |                 |   |                   |   |                                               |           |                           |  
|                                               |                                                                 |                                                     |       |                 |   |                   |   |                                               |           |                           |  
|                                               | Total comprehensive income                                      |                                                     |       |                 |   |                   |   |                                               |           |                           |  
|Issuance of 781,597 shares of common stocknet |                                                                 |                                                     | 8     |                 |   | 22,888            |   |                                               |           |                           |  
|Dividends on common stock ($.45 per share)     |                                                                 |                                                     |       |                 |   |                   |   |                                               | (75,469   | )                         |  
|Other                                          |                                                                 |                                                     |       |                 |   | 4,542             |   |                                               | 8         |                           |  
|                                               |                                                                 |                                                     |       |                 |   |                   |   |                                               |           |                           |  
|Ending balance at September 30, 2002           |                                                                 | $                                                   | 1,683 |                 | $ | 1,889,119         |   | $                                             | 1,385,887 |                           | $
|                                               |                                                                 |                                                     |       |                 |   |                   |   |                                               |           |                           |  
|Quarter Ended September 30, 2001               |                                                                 |                                                     |       |                 |   |                   |   |                                               |           |                           |  
|Balance at July 1, 2001                        |                                                                 | $                                                   | 1,591 |                 | $ | 1,623,458         |   | $                                             | 1,240,761 |                           | $
|Comprehensive income:                          |                                                                 |                                                     |       |                 |   |                   |   |                                               |           |                           |  
|                                               | Net income                                                      |                                                     |       |                 |   |                   |   |                                               |           | 128,471                   |  
|                                               | Other comprehensive income (loss), net of tax effect of ($854)  |                                                     |       |                 |   |                   |   |                                               |           |                           |  
|                                               |                                                                 | Foreign currency translation adjustment (Note 1(g)) |       |                 |   |                   |   |                                               |           |                           |  
|                                               |                                                                 | Unrealized gain (loss) on investment trusts         |       |                 |   |                   |   |                                               |           |                           |  
|                                               |                                                                 | Minimum pension liability adjustment                |       |                 |   |                   |   |                                               |           |                           |  
|                                               |                                                                 | Cash flow hedges (Note 1(b))                        |       |                 |   |                   |   |                                               |           |                           |  
|                                               |                                                                 |                                                     |       |                 |   |                   |   |                                               |           |                           |  
|                                               | Total comprehensive income                                      |                                                     |       |                 |   |                   |   |                                               |           |                           |  
|Issuance of 11,105 shares of common stocknet  |                                                                 |                                                     |       |                 |   | 587               |   |                                               |           |                           |  
|Treasury shares reissued                       |                                                                 |                                                     |       |                 |   | (190              | ) |                                               |           |                           |  
|Dividends on common stock ($.45 per share)     |                                                                 |                                                     |       |                 |   |                   |   |                                               | (71,593   | )                         |  
|Other                                          |                                                                 |                                                     |       |                 |   | 1,488             |   |                                               | 9         |                           |  
|                                               |                                                                 |                                                     |       |                 |   |                   |   |                                               |           |                           |  
|Ending balance at September 30, 2001           |                                                                 | $                                                   | 1,591 |                 | $ | 1,625,343         |   | $                                             | 1,297,648 |                           | $
|                                               |                                                                 |                                                     |       |                 |   |                   |   |                                               |           |                           |  

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

5

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CINERGY CORP.        CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCK EQUITY        (Continued)

|                                                 |                                                                | Common
Stock                                        |       | Paid-in
Capital |   | Retained
Earnings |   | Accumulated
Other
Comprehensive
Income (Loss) |           | Total
Common
Stock
Equity |  
|------------------------------------------------ | -------------------------------------------------------------- | --------------------------------------------------- | ----- | --------------- | - | ----------------- | - | --------------------------------------------- | --------- | ------------------------- | -
|
|Nine Months Ended September 30, 2002             |                                                                |                                                     |       |                 |   |                   |   |                                               |           |                           |  
|Balance at January 1, 2002                       |                                                                | $                                                   | 1,594 |                 | $ | 1,619,659         |   | $                                             | 1,337,135 |                           | $
|Comprehensive income:                            |                                                                |                                                     |       |                 |   |                   |   |                                               |           |                           |  
|                                                 | Net income                                                     |                                                     |       |                 |   |                   |   |                                               |           | 271,279                   |  
|                                                 | Other comprehensive income (loss), net of tax effect of $7,879 |                                                     |       |                 |   |                   |   |                                               |           |                           |  
|                                                 |                                                                | Foreign currency translation adjustment(Note 1(g))  |       |                 |   |                   |   |                                               |           |                           |  
|                                                 |                                                                | Unrealized gain (loss) on investment trusts         |       |                 |   |                   |   |                                               |           |                           |  
|                                                 |                                                                | Minimum pension liability adjustment                |       |                 |   |                   |   |                                               |           |                           |  
|                                                 |                                                                | Cash flow hedges(Note 1(b))                         |       |                 |   |                   |   |                                               |           |                           |  
|                                                 |                                                                |                                                     |       |                 |   |                   |   |                                               |           |                           |  
|                                                 | Total comprehensive income                                     |                                                     |       |                 |   |                   |   |                                               |           |                           |  
|Issuance of 8,864,887 shares of common stocknet |                                                                |                                                     | 89    |                 |   | 258,300           |   |                                               |           |                           |  
|Dividends on common stock ($1.35 per share)      |                                                                |                                                     |       |                 |   |                   |   |                                               | (222,551  | )                         |  
|Other                                            |                                                                |                                                     |       |                 |   | 11,160            |   |                                               | 24        |                           |  
|                                                 |                                                                |                                                     |       |                 |   |                   |   |                                               |           |                           |  
|Ending balance at September 30, 2002             |                                                                | $                                                   | 1,683 |                 | $ | 1,889,119         |   | $                                             | 1,385,887 |                           | $
|                                                 |                                                                |                                                     |       |                 |   |                   |   |                                               |           |                           |  
|Nine Months Ended September 30, 2001             |                                                                |                                                     |       |                 |   |                   |   |                                               |           |                           |  
|Balance at January 1, 2001                       |                                                                | $                                                   | 1,590 |                 | $ | 1,619,153         |   | $                                             | 1,179,113 |                           | $
|Comprehensive income:                            |                                                                |                                                     |       |                 |   |                   |   |                                               |           |                           |  
|                                                 | Net income                                                     |                                                     |       |                 |   |                   |   |                                               |           | 331,685                   |  
|                                                 | Other comprehensive income (loss), net of tax effect of $490   |                                                     |       |                 |   |                   |   |                                               |           |                           |  
|                                                 |                                                                | Foreign currency translation adjustment (Note 1(g)) |       |                 |   |                   |   |                                               |           |                           |  
|                                                 |                                                                | Unrealized gain (loss) on investment trusts         |       |                 |   |                   |   |                                               |           |                           |  
|                                                 |                                                                | Cumulative effect of change in accounting principle |       |                 |   |                   |   |                                               |           |                           |  
|                                                 |                                                                | Minimum pension liability adjustment                |       |                 |   |                   |   |                                               |           |                           |  
|                                                 |                                                                | Cash flow hedges (Note 1(b))                        |       |                 |   |                   |   |                                               |           |                           |  
|                                                 |                                                                |                                                     |       |                 |   |                   |   |                                               |           |                           |  
|                                                 | Total comprehensive income                                     |                                                     |       |                 |   |                   |   |                                               |           |                           |  
|Issuance of 131,497 shares of common stocknet   |                                                                |                                                     | 1     |                 |   | 4,278             |   |                                               |           |                           |  
|Treasury shares purchased                        |                                                                |                                                     |       |                 |   | (10,015           | ) |                                               |           |                           |  
|Treasury shares reissued                         |                                                                |                                                     |       |                 |   | 5,810             |   |                                               |           |                           |  
|Dividends on common stock ($1.35 per share)      |                                                                |                                                     |       |                 |   |                   |   |                                               | (214,689  | )                         |  
|Other                                            |                                                                |                                                     |       |                 |   | 6,117             |   |                                               | 1,539     |                           |  
|                                                 |                                                                |                                                     |       |                 |   |                   |   |                                               |           |                           |  
|Ending balance at September 30, 2001             |                                                                | $                                                   | 1,591 |                 | $ | 1,625,343         |   | $                                             | 1,297,648 |                           | $
|                                                 |                                                                |                                                     |       |                 |   |                   |   |                                               |           |                           |  

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

6

---

CINERGY CORP.        CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                     |                                                                                      | Year to Date
September 30                                   |                              
|---------------------------------------------------- | ------------------------------------------------------------------------------------ | ----------------------------------------------------------- | -----------------------------
|
|
|Operating Activities                                 |                                                                                      |                                                             |                              
|                                                     | Net income                                                                           |                                                             | $                            
|                                                     | Items providing or (using) cash currently:                                           |                                                             |                              
|                                                     |                                                                                      | Depreciation                                                |                              
|                                                     |                                                                                      | Change in net position of energy risk management activities |                              
|                                                     |                                                                                      | Deferred income taxes and investment tax creditsnet        |                              
|                                                     |                                                                                      | Equity in earnings of unconsolidated subsidiaries           |                              
|                                                     |                                                                                      | Allowance for equity funds used during construction         |                              
|                                                     |                                                                                      | Regulatory assets deferrals                                 |                              
|                                                     |                                                                                      | Regulatory assets amortization                              |                              
|                                                     |                                                                                      | Accrued pension and other postretirement benefit costs      |                              
|                                                     |                                                                                      | Changes in current assets and current liabilities:          |                              
|                                                     |                                                                                      |                                                             | Restricted deposits          
|                                                     |                                                                                      |                                                             | Accounts and notes receivable
|                                                     |                                                                                      |                                                             | Materials, supplies, and fuel
|                                                     |                                                                                      |                                                             | Prepayments                  
|                                                     |                                                                                      |                                                             | Accounts payable             
|                                                     |                                                                                      |                                                             | Accrued taxes and interest   
|                                                     |                                                                                      | Other itemsnet                                             |                              
|                                                     |                                                                                      |                                                             |                              
|                                                     |                                                                                      |                                                             |                              
|Financing Activities                                 |                                                                                      |                                                             |                              
|                                                     | Change in short-term debt                                                            |                                                             |                              
|                                                     | Issuance of long-term debt                                                           |                                                             |                              
|                                                     | Redemption of long-term debt                                                         |                                                             |                              
|                                                     | Funds on deposit from issuance of debt securities                                    |                                                             |                              
|                                                     | Retirement of preferred stock of subsidiaries                                        |                                                             |                              
|                                                     | Issuance of common stock                                                             |                                                             |                              
|                                                     | Dividends on common stock                                                            |                                                             |                              
|                                                     |                                                                                      |                                                             |                              
|                                                     |                                                                                      |                                                             |                              
|Investing Activities                                 |                                                                                      |                                                             |                              
|                                                     | Construction expenditures (less allowance for equity funds used during construction) |                                                             |                              
|                                                     | Acquisitions and other investments                                                   |                                                             |                              
|                                                     |                                                                                      |                                                             |                              
|                                                     |                                                                                      |                                                             |                              
|Net increase (decrease) in cash and cash equivalents |                                                                                      |                                                             | 8,200                        
|Cash and cash equivalents at beginning of period     |                                                                                      |                                                             | 111,067                      
|                                                     |                                                                                      |                                                             |                              
|Cash and cash equivalents at end of period           |                                                                                      | $                                                           | 119,267                      
|Supplemental Disclosure of Cash Flow Information     |                                                                                      |                                                             |                              
|                                                     | Cash paid during the period for:                                                     |                                                             |                              
|                                                     |                                                                                      | Interest (net of amount capitalized)                        |                              
|                                                     |                                                                                      | Income taxes                                                |                              

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

7

---



THE CINCINNATI GAS & ELECTRIC COMPANYAND SUBSIDIARY COMPANIES

8

---



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

|                                                     |                                                    | Quarter Ended
September 30 |         | Year to Date
September 30 |          
|---------------------------------------------------- | -------------------------------------------------- | -------------------------- | ------- | ------------------------- | ---------
|
|
|Operating Revenues(Note 1(d))                        |                                                    |                            |         |                           |          
|                                                     | Electric                                           |                            | $       | 1,747,379                 |          
|                                                     | Gas                                                |                            |         | 41,452                    |          
|                                                     |                                                    |                            |         |                           |          
|                                                     |                                                    | Total Operating Revenues   |         |                           | 1,788,831
|Operating Expenses                                   |                                                    |                            |         |                           |          
|                                                     | Fuel and purchased and exchanged power (Note 1(d)) |                            |         | 1,391,221                 |          
|                                                     | Gas purchased                                      |                            |         | 12,594                    |          
|                                                     | Operation and maintenance                          |                            |         | 150,247                   |          
|                                                     | Depreciation                                       |                            |         | 49,005                    |          
|                                                     | Taxes other than income taxes                      |                            |         | 50,304                    |          
|                                                     |                                                    |                            |         |                           |          
|                                                     |                                                    | Total Operating Expenses   |         |                           | 1,653,371
|Operating Income                                     |                                                    |                            | 135,460 |                           |          
|MiscellaneousNet                                    |                                                    |                            | 4,140   |                           |          
|Interest                                             |                                                    |                            | 23,746  |                           |          
|Income Before Taxes                                  |                                                    |                            | 115,854 |                           |          
|Income Taxes                                         |                                                    |                            | 44,085  |                           |          
|                                                     |                                                    |                            |         |                           |          
|Net Income                                           |                                                    | $                          | 71,769  |                           | $        
|Preferred Dividend Requirement                       |                                                    |                            | 211     |                           |          
|                                                     |                                                    |                            |         |                           |          
|Net Income Applicable to Common Stock                |                                                    | $                          | 71,558  |                           | $        
|                                                     |                                                    |                            |         |                           |          
|Net Income                                           |                                                    | $                          | 71,769  |                           | $        
|Other Comprehensive Income (Loss), Net of Tax Effect |                                                    |                            | (17,588 | )                         |          
|                                                     |                                                    |                            |         |                           |          
|Comprehensive Income                                 |                                                    | $                          | 54,181  |                           | $        
|                                                     |                                                    |                            |         |                           |          

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

9

---

THE CINCINNATI GAS & ELECTRIC COMPANY        CONSOLIDATED BALANCE SHEETS

|                                       |                                                                                                                                                 | September 30
2002 |                                | December 31
2001                  
|-------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------- | ----------------- | ------------------------------ | ----------------------------------
|
|ASSETS                                 |                                                                                                                                                 |                   |                                |                                   
|Current Assets                         |                                                                                                                                                 |                   |                                |                                   
|                                       | Cash and cash equivalents                                                                                                                       |                   | $                              | 8,526                             
|                                       | Restricted deposits                                                                                                                             |                   |                                | 88,305                            
|                                       | Notes receivable from affiliated companies (Note 5)                                                                                             |                   |                                | 51,772                            
|                                       | Accounts receivable less accumulated provision for doubtful accounts of $6,005 at September 30, 2002, and $25,874 at December 31, 2001 (Note 5) |                   |                                | 536,406                           
|                                       | Accounts receivable from affiliated companies                                                                                                   |                   |                                | 2,012                             
|                                       | Materials, supplies, and fuelat average cost                                                                                                   |                   |                                | 131,543                           
|                                       | Energy risk management current assets (Note 1(c))                                                                                               |                   |                                | 35,583                            
|                                       | Prepayments and other                                                                                                                           |                   |                                | 25,140                            
|                                       |                                                                                                                                                 |                   |                                |                                   
|                                       |                                                                                                                                                 |                   |                                | Total Current Assets              
|Property, Plant, and Equipmentat Cost |                                                                                                                                                 |                   |                                |                                   
|                                       | Utility plant in service                                                                                                                        |                   |                                |                                   
|                                       |                                                                                                                                                 | Electric          |                                |                                   
|                                       |                                                                                                                                                 | Gas               |                                |                                   
|                                       |                                                                                                                                                 | Common            |                                |                                   
|                                       |                                                                                                                                                 |                   |                                |                                   
|                                       |                                                                                                                                                 |                   | Total Utility Plant In Service |                                   
|                                       | Construction work in progress                                                                                                                   |                   |                                | 99,475                            
|                                       |                                                                                                                                                 |                   |                                |                                   
|                                       |                                                                                                                                                 |                   | Total Utility Plant            |                                   
|                                       | Non-regulated property, plant, and equipment                                                                                                    |                   |                                | 3,407,761                         
|                                       | Accumulated depreciation                                                                                                                        |                   |                                | 2,678,476                         
|                                       |                                                                                                                                                 |                   |                                |                                   
|                                       |                                                                                                                                                 |                   |                                | Net Property, Plant, and Equipment
|Other Assets                           |                                                                                                                                                 |                   |                                |                                   
|                                       | Regulatory assets                                                                                                                               |                   |                                | 597,001                           
|                                       | Energy risk management non-current assets (Note 1(c))                                                                                           |                   |                                | 61,796                            
|                                       | Other investments                                                                                                                               |                   |                                | 983                               
|                                       | Other                                                                                                                                           |                   |                                | 118,617                           
|                                       |                                                                                                                                                 |                   |                                |                                   
|                                       |                                                                                                                                                 |                   |                                | Total Other Assets                
|Total Assets                           |                                                                                                                                                 | $                 | 5,756,982                      |                                   
|                                       |                                                                                                                                                 |                   |                                |                                   

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

10

---



THE CINCINNATI GAS & ELECTRIC COMPANY        CONSOLIDATED BALANCE SHEETS

|                                           |                                                                                                                                         | September 30
2002             |           | December 31
2001 |          
|------------------------------------------ | --------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------- | --------- | ---------------- | ---------
|
|LIABILITIES AND SHAREHOLDER'S EQUITY       |                                                                                                                                         |                               |           |                  |          
|Current Liabilities                        |                                                                                                                                         |                               |           |                  |          
|                                           | Accounts payable                                                                                                                        |                               | $         | 531,770          |          
|                                           | Accounts payable to affiliated companies                                                                                                |                               |           | 65,802           |          
|                                           | Accrued taxes                                                                                                                           |                               |           | 111,549          |          
|                                           | Accrued interest                                                                                                                        |                               |           | 14,336           |          
|                                           | Notes payable and other short-term obligations (Note 4)                                                                                 |                               |           | 196,100          |          
|                                           | Notes payable to affiliated companies (Note 4)                                                                                          |                               |           | 2,915            |          
|                                           | Long-term debt due within one year (Note 4)                                                                                             |                               |           |                 |          
|                                           | Energy risk management current liabilities (Note 1(c))                                                                                  |                               |           | 19,757           |          
|                                           | Other                                                                                                                                   |                               |           | 37,662           |          
|                                           |                                                                                                                                         |                               |           |                  |          
|                                           |                                                                                                                                         | Total Current Liabilities     |           |                  | 979,891  
|Non-Current Liabilities                    |                                                                                                                                         |                               |           |                  |          
|                                           | Long-term debt (Note 3)                                                                                                                 |                               |           | 1,689,389        |          
|                                           | Deferred income taxes                                                                                                                   |                               |           | 865,925          |          
|                                           | Unamortized investment tax credits                                                                                                      |                               |           | 86,709           |          
|                                           | Accrued pension and other postretirement benefit costs                                                                                  |                               |           | 172,459          |          
|                                           | Energy risk management non-current liabilities (Note 1(c))                                                                              |                               |           | 23,063           |          
|                                           | Other                                                                                                                                   |                               |           | 138,966          |          
|                                           |                                                                                                                                         |                               |           |                  |          
|                                           |                                                                                                                                         | Total Non-Current Liabilities |           |                  | 2,976,511
|Total Liabilities                          |                                                                                                                                         |                               | 3,956,402 |                  |          
|Cumulative Preferred Stock                 |                                                                                                                                         |                               |           |                  |          
|                                           | Not subject to mandatory redemption                                                                                                     |                               |           | 20,485           |          
|Common Stock Equity                        |                                                                                                                                         |                               |           |                  |          
|                                           | Common stock$8.50 par value; authorized shares120,000,000; outstanding shares89,663,086 at September 30, 2002, and December 31, 2001 |                               |           | 762,136          |          
|                                           | Paid-in capital                                                                                                                         |                               |           | 571,926          |          
|                                           | Retained earnings                                                                                                                       |                               |           | 471,384          |          
|                                           | Accumulated other comprehensive income (loss)                                                                                           |                               |           | (25,351          | )        
|                                           |                                                                                                                                         |                               |           |                  |          
|                                           |                                                                                                                                         | Total Common Stock Equity     |           |                  | 1,780,095
|Commitments and Contingencies(Note 7)      |                                                                                                                                         |                               |           |                  |          
|Total Liabilities and Shareholder's Equity |                                                                                                                                         | $                             | 5,756,982 |                  | $        
|                                           |                                                                                                                                         |                               |           |                  |          

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

11

---

THE CINCINNATI GAS & ELECTRIC COMPANY        CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                     |                                                                                      | Year to Date
September 30                                   |                              
|---------------------------------------------------- | ------------------------------------------------------------------------------------ | ----------------------------------------------------------- | -----------------------------
|
|
|Operating Activities                                 |                                                                                      |                                                             |                              
|                                                     | Net income                                                                           |                                                             | $                            
|                                                     | Items providing or (using) cash currently:                                           |                                                             |                              
|                                                     |                                                                                      | Depreciation                                                |                              
|                                                     |                                                                                      | Deferred income taxes and investment tax creditsnet        |                              
|                                                     |                                                                                      | Change in net position of energy risk management activities |                              
|                                                     |                                                                                      | Allowance for equity funds used during construction         |                              
|                                                     |                                                                                      | Regulatory assets deferrals                                 |                              
|                                                     |                                                                                      | Regulatory assets amortization                              |                              
|                                                     |                                                                                      | Accrued pension and other postretirement benefit costs      |                              
|                                                     |                                                                                      | Changes in current assets and current liabilities:          |                              
|                                                     |                                                                                      |                                                             | Restricted deposits          
|                                                     |                                                                                      |                                                             | Accounts and notes receivable
|                                                     |                                                                                      |                                                             | Materials, supplies, and fuel
|                                                     |                                                                                      |                                                             | Prepayments                  
|                                                     |                                                                                      |                                                             | Accounts payable             
|                                                     |                                                                                      |                                                             | Accrued taxes and interest   
|                                                     |                                                                                      | Other itemsnet                                             |                              
|                                                     |                                                                                      |                                                             |                              
|                                                     |                                                                                      |                                                             |                              
|Financing Activities                                 |                                                                                      |                                                             |                              
|                                                     | Change in short-term debt, including net affiliate notes                             |                                                             |                              
|                                                     | Issuance of long-term debt                                                           |                                                             |                              
|                                                     | Redemption of long-term debt                                                         |                                                             |                              
|                                                     | Funds on deposit from issuance of debt securities                                    |                                                             |                              
|                                                     | Retirement of preferred stock                                                        |                                                             |                              
|                                                     | Dividends on preferred stock                                                         |                                                             |                              
|                                                     | Dividends on common stock                                                            |                                                             |                              
|                                                     |                                                                                      |                                                             |                              
|                                                     |                                                                                      |                                                             |                              
|Investing Activities                                 |                                                                                      |                                                             |                              
|                                                     | Construction expenditures (less allowance for equity funds used during construction) |                                                             |                              
|                                                     | Other Investments                                                                    |                                                             |                              
|                                                     |                                                                                      |                                                             |                              
|                                                     |                                                                                      |                                                             |                              
|Net increase (decrease) in cash and cash equivalents |                                                                                      |                                                             | (548                         
|Cash and cash equivalents at beginning of period     |                                                                                      |                                                             | 9,074                        
|                                                     |                                                                                      |                                                             |                              
|Cash and cash equivalents at end of period           |                                                                                      | $                                                           | 8,526                        
|                                                     |                                                                                      |                                                             |                              
|Supplemental Disclosure of Cash Flow Information     |                                                                                      |                                                             |                              
|                                                     | Cash paid during the period for:                                                     |                                                             |                              
|                                                     |                                                                                      | Interest (net of amount capitalized)                        |                              
|                                                     |                                                                                      | Income taxes                                                |                              

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

12

---



PSI ENERGY, INC.AND SUBSIDIARY COMPANY

13

---



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

|                                                     |                                                    | Quarter Ended
September 30 |         | Year to Date
September 30 |        
|---------------------------------------------------- | -------------------------------------------------- | -------------------------- | ------- | ------------------------- | -------
|
|
|Operating Revenues(Note 1(d))                        |                                                    |                            |         |                           |        
|                                                     | Electric                                           |                            | $       | 776,837                   |        
|Operating Expenses                                   |                                                    |                            |         |                           |        
|                                                     | Fuel and purchased and exchanged power (Note 1(d)) |                            |         | 474,748                   |        
|                                                     | Operation and maintenance                          |                            |         | 128,931                   |        
|                                                     | Depreciation                                       |                            |         | 39,826                    |        
|                                                     | Taxes other than income taxes                      |                            |         | 13,446                    |        
|                                                     |                                                    |                            |         |                           |        
|                                                     |                                                    | Total Operating Expenses   |         |                           | 656,951
|Operating Income                                     |                                                    |                            | 119,886 |                           |        
|MiscellaneousNet                                    |                                                    |                            | 4,434   |                           |        
|Interest                                             |                                                    |                            | 18,782  |                           |        
|Income Before Taxes                                  |                                                    |                            | 105,538 |                           |        
|Income Taxes                                         |                                                    |                            | 37,895  |                           |        
|                                                     |                                                    |                            |         |                           |        
|Net Income                                           |                                                    | $                          | 67,643  |                           | $      
|Preferred Dividend Requirement                       |                                                    |                            | 648     |                           |        
|                                                     |                                                    |                            |         |                           |        
|Net Income Applicable to Common Stock                |                                                    | $                          | 66,995  |                           | $      
|Net Income                                           |                                                    | $                          | 67,643  |                           | $      
|Other Comprehensive Income (Loss), Net of Tax Effect |                                                    |                            | (2,716  | )                         |        
|                                                     |                                                    |                            |         |                           |        
|Comprehensive Income                                 |                                                    | $                          | 64,927  |                           | $      
|                                                     |                                                    |                            |         |                           |        

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

14

---

PSI ENERGY, INC.        CONSOLIDATED BALANCE SHEETS

|                                       |                                                                                                                                                | September 30
2002   |                                    | December 31
2001
|-------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------- | ------------------- | ---------------------------------- | ----------------
|
|ASSETS                                 |                                                                                                                                                |                     |                                    |                 
|Current Assets                         |                                                                                                                                                |                     |                                    |                 
|                                       | Cash and cash equivalents                                                                                                                      |                     | $                                  | 5,724           
|                                       | Restricted deposits                                                                                                                            |                     |                                    | 48,153          
|                                       | Notes receivable from affiliated companies (Note 5)                                                                                            |                     |                                    | 33,685          
|                                       | Accounts receivable less accumulated provision for doubtful accounts of $5,788 at September 30, 2002, and $6,773 at December 31, 2001 (Note 5) |                     |                                    | 68,982          
|                                       | Accounts receivable from affiliated companies                                                                                                  |                     |                                    | 47,015          
|                                       | Materials, supplies, and fuelat average cost                                                                                                  |                     |                                    | 122,904         
|                                       | Energy risk management current assets (Note 1(c))                                                                                              |                     |                                    | 13,063          
|                                       | Prepayments and other                                                                                                                          |                     |                                    | 39,932          
|                                       |                                                                                                                                                |                     |                                    |                 
|                                       |                                                                                                                                                |                     | Total Current Assets               |                 
|Property, Plant, and Equipmentat Cost |                                                                                                                                                |                     |                                    |                 
|                                       | Utility plant in service                                                                                                                       |                     |                                    | 5,277,313       
|                                       | Construction work in progress                                                                                                                  |                     |                                    | 266,624         
|                                       |                                                                                                                                                |                     |                                    |                 
|                                       |                                                                                                                                                | Total Utility Plant |                                    |                 
|Accumulated depreciation               |                                                                                                                                                |                     | 2,297,678                          |                 
|                                       |                                                                                                                                                |                     |                                    |                 
|                                       |                                                                                                                                                |                     | Net Property, Plant, and Equipment |                 
|Other Assets                           |                                                                                                                                                |                     |                                    |                 
|                                       | Regulatory assets                                                                                                                              |                     |                                    | 452,265         
|                                       | Energy risk management non-current assets (Note 1(c))                                                                                          |                     |                                    | 17,832          
|                                       | Other investments                                                                                                                              |                     |                                    | 55,573          
|                                       | Other                                                                                                                                          |                     |                                    | 24,919          
|                                       |                                                                                                                                                |                     |                                    |                 
|                                       |                                                                                                                                                |                     | Total Other Assets                 |                 
|Total Assets                           |                                                                                                                                                | $                   | 4,176,306                          |                 
|                                       |                                                                                                                                                |                     |                                    |                 

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

15

---



PSI ENERGY, INC.        CONSOLIDATED BALANCE SHEETS

|                                           |                                                                                                                                                             | September 30
2002             |           | December 31
2001 |          
|------------------------------------------ | ----------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------- | --------- | ---------------- | ---------
|
|LIABILITIES AND SHAREHOLDER'S EQUITY       |                                                                                                                                                             |                               |           |                  |          
|Current Liabilities                        |                                                                                                                                                             |                               |           |                  |          
|                                           | Accounts payable                                                                                                                                            |                               | $         | 161,568          |          
|                                           | Accounts payable to affiliated companies                                                                                                                    |                               |           | 30,710           |          
|                                           | Accrued taxes                                                                                                                                               |                               |           | 110,977          |          
|                                           | Accrued interest                                                                                                                                            |                               |           | 15,975           |          
|                                           | Notes payable and other short-term obligations (Note 4)                                                                                                     |                               |           | 82,600           |          
|                                           | Notes payable to affiliated companies (Note 4)                                                                                                              |                               |           | 80,749           |          
|                                           | Long-term debt due within one year (Note 4)                                                                                                                 |                               |           | 979              |          
|                                           | Energy risk management current liabilities (Note 1(c))                                                                                                      |                               |           | 11,634           |          
|                                           | Other                                                                                                                                                       |                               |           | 37,741           |          
|                                           |                                                                                                                                                             |                               |           |                  |          
|                                           |                                                                                                                                                             | Total Current Liabilities     |           |                  | 532,933  
|Non-Current Liabilities                    |                                                                                                                                                             |                               |           |                  |          
|                                           | Long-term debt (Note 3)                                                                                                                                     |                               |           | 1,371,916        |          
|                                           | Deferred income taxes                                                                                                                                       |                               |           | 595,007          |          
|                                           | Unamortized investment tax credits                                                                                                                          |                               |           | 33,707           |          
|                                           | Accrued pension and other postretirement benefit costs                                                                                                      |                               |           | 159,771          |          
|                                           | Energy risk management non-current liabilities (Note 1(c))                                                                                                  |                               |           | 18,026           |          
|                                           | Other                                                                                                                                                       |                               |           | 80,750           |          
|                                           |                                                                                                                                                             |                               |           |                  |          
|                                           |                                                                                                                                                             | Total Non-Current Liabilities |           |                  | 2,259,177
|Total Liabilities                          |                                                                                                                                                             |                               | 2,792,110 |                  |          
|Cumulative Preferred Stock                 |                                                                                                                                                             |                               |           |                  |          
|                                           | Not subject to mandatory redemption                                                                                                                         |                               |           | 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, 2002, and December 31, 2001 |                               |           | 539              |          
|                                           | Paid-in capital                                                                                                                                             |                               |           | 416,412          |          
|                                           | Retained earnings                                                                                                                                           |                               |           | 930,181          |          
|                                           | Accumulated other comprehensive income (loss)                                                                                                               |                               |           | (5,279           | )        
|                                           |                                                                                                                                                             |                               |           |                  |          
|                                           |                                                                                                                                                             | Total Common Stock Equity     |           |                  | 1,341,853
|Commitments and Contingencies(Note 7)      |                                                                                                                                                             |                               |           |                  |          
|Total Liabilities and Shareholder's Equity |                                                                                                                                                             | $                             | 4,176,306 |                  | $        
|                                           |                                                                                                                                                             |                               |           |                  |          

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

16

---

PSI ENERGY, INC.        CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                     |                                                                                      | Year to Date
September 30                                   |                              
|---------------------------------------------------- | ------------------------------------------------------------------------------------ | ----------------------------------------------------------- | -----------------------------
|
|
|Operating Activities                                 |                                                                                      |                                                             |                              
|                                                     | Net income                                                                           |                                                             | $                            
|                                                     | Items providing or (using) cash currently:                                           |                                                             |                              
|                                                     |                                                                                      | Depreciation                                                |                              
|                                                     |                                                                                      | Deferred income taxes and investment tax creditsnet        |                              
|                                                     |                                                                                      | Change in net position of energy risk management activities |                              
|                                                     |                                                                                      | Allowance for equity funds used during construction         |                              
|                                                     |                                                                                      | Regulatory assets deferrals                                 |                              
|                                                     |                                                                                      | Regulatory assets amortization                              |                              
|                                                     |                                                                                      | Accrued pension and other postretirement benefit costs      |                              
|                                                     |                                                                                      | Changes in current assets and current liabilities:          |                              
|                                                     |                                                                                      |                                                             | Restricted deposits          
|                                                     |                                                                                      |                                                             | Accounts and notes receivable
|                                                     |                                                                                      |                                                             | Materials, supplies, and fuel
|                                                     |                                                                                      |                                                             | Prepayments                  
|                                                     |                                                                                      |                                                             | Accounts payable             
|                                                     |                                                                                      |                                                             | Accrued taxes and interest   
|                                                     |                                                                                      | Other itemsnet                                             |                              
|                                                     |                                                                                      |                                                             |                              
|                                                     |                                                                                      |                                                             |                              
|Financing Activities                                 |                                                                                      |                                                             |                              
|                                                     | Change in short-term debt, including net affiliate notes                             |                                                             |                              
|                                                     | Issuance of long-term debt                                                           |                                                             |                              
|                                                     | Redemption of long-term debt                                                         |                                                             |                              
|                                                     | Funds on deposit from issuance of debt securities                                    |                                                             |                              
|                                                     | Retirement of preferred stock                                                        |                                                             |                              
|                                                     | Dividends on preferred stock                                                         |                                                             |                              
|                                                     | Dividends on common stock                                                            |                                                             |                              
|                                                     |                                                                                      |                                                             |                              
|                                                     |                                                                                      |                                                             |                              
|Investing Activities                                 |                                                                                      |                                                             |                              
|                                                     | Construction expenditures (less allowance for equity funds used during construction) |                                                             |                              
|                                                     | Other investments                                                                    |                                                             |                              
|                                                     |                                                                                      |                                                             |                              
|                                                     |                                                                                      |                                                             |                              
|Net increase (decrease) in cash and cash equivalents |                                                                                      |                                                             | 4,137                        
|Cash and cash equivalents at beginning of period     |                                                                                      |                                                             | 1,587                        
|                                                     |                                                                                      |                                                             |                              
|Cash and cash equivalents at end of period           |                                                                                      | $                                                           | 5,724                        
|                                                     |                                                                                      |                                                             |                              
|Supplemental Disclosure of Cash Flow Information     |                                                                                      |                                                             |                              
|                                                     | Cash paid during the period for:                                                     |                                                             |                              
|                                                     |                                                                                      | Interest (net of amount capitalized)                        |                              
|                                                     |                                                                                      | Income taxes                                                |                              

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

17

---



THE UNION LIGHT, HEAT AND POWER COMPANY

18

---



THE UNION LIGHT, HEAT AND POWER COMPANY        STATEMENTS OF INCOME

|                    |                                                      | Quarter Ended
September 30 |       | Year to Date
September 30 |       
|------------------- | ---------------------------------------------------- | -------------------------- | ----- | ------------------------- | ------
|
|
|Operating Revenues  |                                                      |                            |       |                           |       
|                    | Electric                                             |                            | $     | 68,353                    |       
|                    | Gas                                                  |                            |       | 7,364                     |       
|                    |                                                      |                            |       |                           |       
|                    |                                                      | Total Operating Revenues   |       |                           | 75,717
|Operating Expenses  |                                                      |                            |       |                           |       
|                    | Electricity purchased from parent company for resale |                            |       | 48,445                    |       
|                    | Gas purchased                                        |                            |       | 2,732                     |       
|                    | Operation and maintenance                            |                            |       | 14,819                    |       
|                    | Depreciation                                         |                            |       | 4,277                     |       
|                    | Taxes other than income taxes                        |                            |       | 1,167                     |       
|                    |                                                      |                            |       |                           |       
|                    |                                                      | Total Operating Expenses   |       |                           | 71,440
|Operating Income    |                                                      |                            | 4,277 |                           |       
|MiscellaneousNet   |                                                      |                            | 1,690 |                           |       
|Interest            |                                                      |                            | 1,431 |                           |       
|Income Before Taxes |                                                      |                            | 4,536 |                           |       
|Income Taxes        |                                                      |                            | 1,302 |                           |       
|                    |                                                      |                            |       |                           |       
|Net Income          |                                                      | $                          | 3,234 |                           | $     
|                    |                                                      |                            |       |                           |       

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

19

---

THE UNION LIGHT, HEAT AND POWER COMPANY        BALANCE SHEETS

|                                       |                                                                                                                                             | September 30
2002 |                                | December 31
2001                  
|-------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------- | ----------------- | ------------------------------ | ----------------------------------
|
|ASSETS                                 |                                                                                                                                             |                   |                                |                                   
|Current Assets                         |                                                                                                                                             |                   |                                |                                   
|                                       | Cash and cash equivalents                                                                                                                   |                   | $                              | 3,792                             
|                                       | Notes receivable from affiliate companies (Note 5)                                                                                          |                   |                                | 6,303                             
|                                       | Accounts receivable less accumulated provision for doubtful accounts of $56 at September 30, 2002, and $1,196 at December 31, 2001 (Note 5) |                   |                                | 847                               
|                                       | Accounts receivable from affiliated companies                                                                                               |                   |                                | 416                               
|                                       | Materials, supplies, and fuelat average cost                                                                                               |                   |                                | 12,506                            
|                                       | Prepayments and other                                                                                                                       |                   |                                | 474                               
|                                       |                                                                                                                                             |                   |                                |                                   
|                                       |                                                                                                                                             |                   |                                | Total Current Assets              
|Property, Plant, and Equipmentat Cost |                                                                                                                                             |                   |                                |                                   
|                                       | Utility plant in service                                                                                                                    |                   |                                |                                   
|                                       |                                                                                                                                             | Electric          |                                |                                   
|                                       |                                                                                                                                             | Gas               |                                |                                   
|                                       |                                                                                                                                             | Common            |                                |                                   
|                                       |                                                                                                                                             |                   |                                |                                   
|                                       |                                                                                                                                             |                   | Total Utility Plant In Service |                                   
|                                       | Construction work in progress                                                                                                               |                   |                                | 18,595                            
|                                       |                                                                                                                                             |                   |                                |                                   
|                                       |                                                                                                                                             |                   | Total Utility Plant            |                                   
|                                       | Accumulated depreciation                                                                                                                    |                   |                                | 186,232                           
|                                       |                                                                                                                                             |                   |                                |                                   
|                                       |                                                                                                                                             |                   |                                | Net Property, Plant, and Equipment
|Other Assets                           |                                                                                                                                             |                   |                                |                                   
|                                       | Regulatory assets                                                                                                                           |                   |                                | 4,582                             
|                                       | Other investments                                                                                                                           |                   |                                | 73                                
|                                       | Other                                                                                                                                       |                   |                                | 16,514                            
|                                       |                                                                                                                                             |                   |                                |                                   
|                                       |                                                                                                                                             |                   |                                | Total Other Assets                
|Total Assets                           |                                                                                                                                             | $                 | 368,950                        |                                   
|                                       |                                                                                                                                             |                   |                                |                                   

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

20

---



THE UNION LIGHT, HEAT AND POWER COMPANY        BALANCE SHEETS

|                                           |                                                                                                                                     | September 30
2002             |         | December 31
2001 |        
|------------------------------------------ | ----------------------------------------------------------------------------------------------------------------------------------- | ----------------------------- | ------- | ---------------- | -------
|
|LIABILITIES AND SHAREHOLDER'S EQUITY       |                                                                                                                                     |                               |         |                  |        
|Current Liabilities                        |                                                                                                                                     |                               |         |                  |        
|                                           | Accounts payable                                                                                                                    |                               | $       | 4,547            |        
|                                           | Accounts payable to affiliated companies                                                                                            |                               |         | 17,950           |        
|                                           | Accrued taxes                                                                                                                       |                               |         | 9,267            |        
|                                           | Accrued interest                                                                                                                    |                               |         | 621              |        
|                                           | Notes payable to affiliated companies (Note 4)                                                                                      |                               |         | 1,851            |        
|                                           | Other                                                                                                                               |                               |         | 6,014            |        
|                                           |                                                                                                                                     |                               |         |                  |        
|                                           |                                                                                                                                     | Total Current Liabilities     |         |                  | 40,250 
|Non-Current Liabilities                    |                                                                                                                                     |                               |         |                  |        
|                                           | Long-term debt                                                                                                                      |                               |         | 74,645           |        
|                                           | Deferred income taxes                                                                                                               |                               |         | 29,924           |        
|                                           | Unamortized investment tax credits                                                                                                  |                               |         | 3,205            |        
|                                           | Accrued pension and other postretirement benefit costs                                                                              |                               |         | 14,615           |        
|                                           | Amounts due to customersincome taxes                                                                                               |                               |         | 7,148            |        
|                                           | Other                                                                                                                               |                               |         | 20,525           |        
|                                           |                                                                                                                                     |                               |         |                  |        
|                                           |                                                                                                                                     | Total Non-Current Liabilities |         |                  | 150,062
|Total Liabilities                          |                                                                                                                                     |                               | 190,312 |                  |        
|Common Stock Equity                        |                                                                                                                                     |                               |         |                  |        
|                                           | Common stock$15.00 par value; authorized shares1,000,000; outstanding shares585,333 at September 30, 2002, and December 31, 2001 |                               |         | 8,780            |        
|                                           | Paid-in capital                                                                                                                     |                               |         | 21,111           |        
|                                           | Retained earnings                                                                                                                   |                               |         | 148,755          |        
|                                           | Accumulated other comprehensive income (loss)                                                                                       |                               |         | (8               | )      
|                                           |                                                                                                                                     |                               |         |                  |        
|                                           |                                                                                                                                     | Total Common Stock Equity     |         |                  | 178,638
|Commitments and Contingencies(Note 7)      |                                                                                                                                     |                               |         |                  |        
|Total Liabilities and Shareholder's Equity |                                                                                                                                     | $                             | 368,950 |                  | $      
|                                           |                                                                                                                                     |                               |         |                  |        

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

21

---

THE UNION LIGHT, HEAT AND POWER COMPANY        STATEMENTS OF CASH FLOWS

|                                                     |                                                                                      | Year to Date
September 30                              |                              
|---------------------------------------------------- | ------------------------------------------------------------------------------------ | ------------------------------------------------------ | -----------------------------
|
|
|Operating Activities                                 |                                                                                      |                                                        |                              
|                                                     | Net income                                                                           |                                                        | $                            
|                                                     | Items providing or (using) cash currently:                                           |                                                        |                              
|                                                     |                                                                                      | Depreciation                                           |                              
|                                                     |                                                                                      | Deferred income taxes and investment tax creditsnet   |                              
|                                                     |                                                                                      | Allowance for equity funds used during construction    |                              
|                                                     |                                                                                      | Regulatory assets deferrals                            |                              
|                                                     |                                                                                      | Regulatory assets amortization                         |                              
|                                                     |                                                                                      | Accrued pension and other postretirement benefit costs |                              
|                                                     |                                                                                      | Changes in current assets and current liabilities:     |                              
|                                                     |                                                                                      |                                                        | Accounts and notes receivable
|                                                     |                                                                                      |                                                        | Materials, supplies, and fuel
|                                                     |                                                                                      |                                                        | Prepayment                   
|                                                     |                                                                                      |                                                        | Accounts payable             
|                                                     |                                                                                      |                                                        | Accrued taxes and interest   
|                                                     |                                                                                      | Other itemsnet                                        |                              
|                                                     |                                                                                      |                                                        |                              
|                                                     |                                                                                      |                                                        |                              
|Financing Activities                                 |                                                                                      |                                                        |                              
|                                                     | Change in short-term debt, including net affiliate notes                             |                                                        |                              
|                                                     | Dividends on common stock                                                            |                                                        |                              
|                                                     |                                                                                      |                                                        |                              
|                                                     |                                                                                      |                                                        |                              
|Investing Activities                                 |                                                                                      |                                                        |                              
|                                                     | Construction expenditures (less allowance for equity funds used during construction) |                                                        |                              
|                                                     | Other investments                                                                    |                                                        |                              
|                                                     |                                                                                      |                                                        |                              
|                                                     |                                                                                      |                                                        |                              
|Net increase (decrease) in cash and cash equivalents |                                                                                      |                                                        | (307                         
|Cash and cash equivalents at beginning of period     |                                                                                      |                                                        | 4,099                        
|                                                     |                                                                                      |                                                        |                              
|Cash and cash equivalents at end of period           |                                                                                      | $                                                      | 3,792                        
|                                                     |                                                                                      |                                                        |                              
|Supplemental Disclosure of Cash Flow Information     |                                                                                      |                                                        |                              
|                                                     | Cash paid during the period for:                                                     |                                                        |                              
|                                                     |                                                                                      | Interest (net of amount capitalized)                   |                              
|                                                     |                                                                                      | Income taxes                                           |                              

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

22

---



NOTES TO FINANCIAL STATEMENTS

In
this reportCinergy(which includesCinergy Corp.and all of our regulated and
non-regulated subsidiaries) is, at times, referred to in the first person as "we", "our", or "us".

1.    Summary of Significant Accounting Policies

(a)Presentation

Our
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 statements should be read in conjunction with the Financial Statements and the notes thereto included in the combined 2001 Form 10-K of the registrants. Certain amounts in the
2001 Financial Statements have been reclassified to conform to the 2002 presentation.

(b)Financial Derivatives

We
use derivative financial instruments to manage:



We
account for derivatives under Statement of Financial Accounting Standards No. 133,Accounting for Derivative Instruments and Hedging
Activities(Statement 133), which requires all derivatives that are not exempted 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 losses on derivatives that qualify as hedges can (a) offset related fair value changes on the hedged item in
the income statement for fair value hedges; or (b) be recorded in other comprehensive income for cash flow hedges. To qualify for hedge accounting, financial instruments must be designated as a
hedge (for example, an offset of foreign exchange or interest rate risks) at the inception of the contract and must be effective at reducing the risk associated with the hedged item. Accordingly,
changes in the fair values or cash flows of instruments designated as hedges must be highly correlated with changes in the fair values or cash flows of the related hedged items.

From
time to time, we may use foreign currency contracts (for example, a contract obligating one party to buy, and the other to sell, a specified quantity of a foreign currency for a
fixed price at a future date) and currency swaps (for example, a contract whereby two parties exchange principal and interest cash flows denominated in different currencies) to hedge foreign currency
denominated purchase and sale commitments (cash flow hedges) and certain of our net investments in foreign operations (net investment hedges) against currency exchange rate fluctuations.
Reclassification of unrealized gains or losses on foreign currency cash flow hedges from other comprehensive income occurs when the underlying hedged item is recorded in income.

We
also use interest rate swaps (an agreement by two parties to exchange fixed-interest rate cash flows for floating-interest rate cash flows) and treasury locks (an agreement to
exchange cash flows based on the movement in the underlying treasury benchmark over a specified period of time). Effective with our adoption of Statement 133 in the first quarter of 2001, we began
accounting for all derivatives (including interest rate swaps and treasury locks) using fair value accounting, and we assess the effectiveness of any interest rate swaps and/or treasury locks used in
hedging activities. At September 30, 2002, the ineffectiveness of instruments that we have classified as cash flow hedges of variable-rate debt instruments was not material.
Reclassification of unrealized gains or losses on cash flow hedges of debt instruments fromAccumulated other comprehensive incomeoccurs as interest is
accrued on the debt instrument. We currently estimate that on an after-tax basis, $4 million of

23

---

unrealized losses will be reclassified as a charge toInterestduring the twelve-month period ending September 30, 2003. See
Note 1(d)(iv) below for further discussion of Statement 133.

(c)Energy Marketing and Trading

We
market and trade electricity, natural gas, coal, and other energy-related products. We designate transactions as accrual or trading at the time they are originated. Contracts are
classified as accrual only when we (a) have the intent and projected ability to fulfill substantially all obligations from company-owned assets, and (b) meet the requirements to consider
the contract a normal purchase or sale under Statement 133 (if a derivative), or meet the requirements to consider the contract non-trading under Emerging Issues Task Force (EITF)
98-10,Accounting for Contracts Involved in Energy Trading and Risk Management Activities(EITF 98-10) (if not a derivative
under Statement 133). Such classification is generally limited to the sale of generation to third parties when it is not required to meet native load requirements (end-use customers within
our public utility companies' franchise service territory). All other energy contracts (excluding electric, coal, and gas purchase contracts for use in serving our native load requirements) are
classified as trading. Gas trading is comprised of transactions for which gas is physically delivered to a customer (physical gas trading), as well as transactions that are financial in nature for
which delivery rarely occurs (financial gas trading). SinceCinergyowns no gas production and has limited transmission capabilities, all gas
transactions (other than procurement and sale of gas to The Cincinnati Gas & Electric Company (CG&E) and The Union Light, Heat and Power Company
(ULH&P) retail customers) are considered trading whether physical or financial.

We
account for accrual transactions by recognizing revenues and costs when the underlying commodity is delivered and trading transactions using the fair value method of accounting. Under
the fair value method of accounting, unrealized trading transactions are shown at fair value in our Balance Sheets asEnergy risk management assetsand Energy risk management
liabilities. In October 2002, the EITF reached a consensus in EITF Issue 02-3 Accounting for Contracts Involved in Energy Trading and Risk Management Activities(EITF 02-3)
to rescind EITF 98-10. This
decision will require that non-derivative contracts currently accounted for at fair value be accounted for on an accrual basis in the future. See
Note 1(d)(i) below for further discussion.

We
reflect unrealized gains and losses, resulting from changes in fair value, on a net basis inOperating Revenues. For physical gas
trading and for all power trading, we recognize both revenues and costs on a gross basis inOperating Revenuesand inFuel and
purchased and exchanged powerandGas purchased, respectively, when transactions are settled. For financial gas trading,
realized gains and losses are recorded on a net basis inOperating Revenueswhen transactions are
settled.In June 2002, the EITF reached a consensus requiring realized and unrealized gains and losses on all energy trading contracts to be
presented net inOperating Revenues, beginning with the third quarter of 2002, and reclassification of all periods presented. However, this conclusion
was rescinded in October 2002, and was replaced with a new requirement to present all gains and losses on energy trading derivatives net beginning in 2003. See
Note 1(d)(i) below for further discussion.

Although
we intend to settle accrual contracts with company-owned assets, occasionally we settle these contracts with purchases on the open trading markets. The cost of these purchases
could be in excess of the associated revenues. We recognize the gains or losses on these transactions as delivery occurs. Due to the infrequency of such settlements, both historical and projected, and
the fact that physical settlement to the customer still occurs, we continue to apply the normal purchases and sales exemption to such physical contracts that constitute derivatives. Open market
purchases may occur for the following reasons:



24

---



We
anticipate that some of the electricity obligations, even though considered trading contracts, will ultimately be settled using company-owned generation. The cost of this generation
is usually below the market price at which the trading portfolio has been valued. The potential for earnings volatility from period to period is increased due to the risks associated with marketing
and trading electricity, natural gas, and other energy-related products.

We
value contracts in the trading portfolio using end-of-the-period fair values, utilizing the following factors (as applicable):



(d)Accounting Changes

(i)    Energy Trading

The
EITF has been discussing several issues related to the accounting and disclosure of energy trading activities under EITF 98-10. In June 2002, the EITF reached a
consensus in EITF 02-3 requiring all realized and unrealized gains and losses on energy trading contracts be presented net in the income statement, whether or not settled physically.
However, the EITF rescinded this consensus in October 2002 and replaced it with a requirement to present all gains and losses on energy trading derivatives on a net basis beginning in 2003. In
addition, certain non-derivative contracts used in our trading activities would have been required to be presented net under the June 2002 consensus. Under the new consensus, these
contracts will likely continue to be presented gross. Since most of our energy trading activities involve derivatives, we believe this new consensus will not have a substantially different impact than
the June 2002 consensus, other than deferring the ultimate implementation date. We continue to expect substantial reductions inOperating Revenues, Fuel and purchased
and exchanged powerexpense, andGas purchasedexpense as a result of adopting net reporting. However, Operating IncomeandNet Incomewill not be affected by this change.Operating
RevenuesforCinergy,CG&E, and PSI Energy, Inc.
(PSI), under the EITF's June 2002 consensus regarding net presentation, would have been as follows:

September 30, 2002Quarter Ended

Year to Date(in millions)Cinergy(1)

$
1,098

$
2,986CG&Eand subsidiaries


526


1,566PSI


472


1,222


---

In
October 2002, the EITF reached a consensus to rescind EITF 98-10. All energy trading contracts that do not qualify as a derivative will no longer be accounted for
at fair value. Instead, accrual accounting will be used. The consensus is immediately effective for all new contracts executed after October 25, 2002, and will require a cumulative effect
adjustment to income after tax in the first quarter of 2003 for all contracts executed prior to October 25, 2002. The magnitude of this adjustment will depend on the fair value as of
January 1, 2003, of energy trading contracts meeting the criteria

25

---

outlined above.Cinergyhas begun reviewing the various contracts to determine the effect of this change.

During
the October 2002 meeting, the EITF also rescinded a prior consensus reached in the June 2002 meeting regarding new disclosures for energy trading activities. In
addition, the EITF elected not to provide guidance at this time on the recognition of inception gains on energy trading transactions. However, the decision to rescind EITF 98-10 will
eliminate the recognition of inception gains on contracts that do not meet the definition of a derivative since such contracts will be accounted for on an accrual basis.

(ii)    Business Combinations and Intangible Assets

In
June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 141,Business
Combinations(Statement 141), and No. 142,Goodwill and Other Intangible Assets(Statement 142). Statement 141 requires
all business combinations initiated after June 30, 2001, to be accounted for using the purchase method. With the adoption of Statement 142, goodwill and other intangibles with indefinite lives
will no longer be subject to amortization. Statement 142 requires that goodwill be assessed for impairment upon adoption 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. This test must be applied at the "reporting unit" level, which is not permitted to be broader than the
current business segments discussed in Note 9. Under Statement 142, an acquired intangible asset should be separately recognized if the benefit of the intangible asset is obtained through
contractual or other legal rights, or if the intangible asset can be sold, transferred, licensed, rented, or exchanged, regardless of the acquirer's intent to do so. We began applying Statement 141 in
the third quarter of 2001 and Statement 142 in the first quarter of 2002. The discontinuance of amortization of goodwill, which began in the first quarter of 2002, is not material to our financial
position or results of operations. We have identified the reporting units forCinergyand finalized the initial transition impairment test. Based on the
result of this test, the transition impact of applying Statement 142 is not material to our financial position or results of operations. We will continue to perform goodwill impairment tests annually,
as required by Statement 142, or when circumstances indicate that the fair value of a reporting unit has declined significantly.

(iii)    Asset Retirement Obligations

In
July 2001, the FASB issued Statement of Financial Accounting Standards No. 143,Accounting for Asset Retirement
Obligations(Statement 143). Statement 143 requires fair value recognition of legal obligations to retire long-lived assets at the time the obligations are
incurred. The initial recognition of this liability will be accompanied by a corresponding increase in property, plant, and equipment. Subsequent to the initial recognition, the liability will be
adjusted for any revisions to the expected cash flows of the retirement obligation (with corresponding adjustments to property, plant, and equipment), and for accretion of the liability due to the
passage of time (recognized as an operation expense).
Additional depreciation expense will be recorded prospectively for any property, plant, and equipment increases. We currently accrue costs of removal on many regulated, long-lived assets
through depreciation expense, with a corresponding charge to accumulated depreciation, as allowed by each regulatory jurisdiction. For assets that we conclude have a retirement obligation under
Statement 143, the accounting we currently use will be modified to comply with this standard. We will adopt Statement 143 in the first quarter of 2003. We have formed an implementation team and are
continuing to analyze the impact of this statement. However, at this time, we have not determined whether its implementation will be material to our financial position or results of operations.

(iv)    Derivatives

During
1998, the FASB issued Statement 133. This standard was effective forCinergybeginning in 2001, and requires us to record
derivative instruments, which are not exempt under certain provisions

26

---

of Statement 133, as assets or liabilities, measured at fair value (i.e., mark-to-market). Our financial statements reflect the adoption of Statement 133 in the first quarter
of 2001. Since many of our derivatives were previously required to use fair value accounting, the effects of implementation were not material.

Our
adoption did not reflect the potential impact of applying fair value accounting to selected electricity options and capacity contracts. We had not historically accounted for these
instruments at fair value because they were intended as either hedges of peak period exposure or sales contracts served with physical generation, neither of which were considered trading activities.
At adoption, we classified these contracts as normal purchases or sales based on our interpretation of Statement 133 and in the absence of definitive guidance on such contracts. In June 2001,
the FASB staff issued guidance on the application of the normal purchases and sales exemption to electricity contracts containing characteristics of options. While many of the criteria in this
guidance are consistent with the existing guidance in Statement 133, some criteria were added. We adopted the new guidance in the third quarter of 2001, and the effects of implementation for these
contracts were not material to our financial position or results of operations. We will continue to apply this guidance to any new electricity contracts that meet the definition of a derivative.

In
December 2001, the FASB staff revised the current guidance to make the evaluation of whether electricity contracts qualify as normal purchases and sales more qualitative than
quantitative. This new guidance uses several factors to distinguish between capacity contracts, which qualify for the normal purchases and sales exemption, and options, which do not. These factors
include deal tenor, pricing structure, specification of the source of power, and various other factors. We adopted this guidance in the third quarter of 2002, and its impact was not material to our
financial position or results of operations.

In
October 2001, the FASB staff released final guidance on the applicability of the normal purchases and sales exemption to contracts that contain a minimum quantity (a forward
component) and
flexibility to take additional quantity at a fixed price (an option component). While this guidance was issued primarily to address optionality in fuel supply contracts, it applies to all derivatives
(subject to certain exceptions for capacity contracts in electricity discussed in the previous paragraphs). This guidance concludes that such contracts are not eligible for the normal purchases and
sales exemption due to the existence of optionality in the contract. We adopted this guidance in the second quarter of 2002, consistent with the transition provisions. Cinergyhas certain contracts that
contain fixed-price optionality, primarily coal contracts, which we reviewed to determine the impact of this new
guidance. Due to a lack of liquidity with respect to coal markets in our region, we determined that our coal contracts do not meet the net settlement criteria of Statement 133 and thus do not qualify
as derivatives. Given these conclusions, the results of applying this new guidance were not material to our financial position or results of operations.

In
May 2002, the FASB issued an exposure draft that would amend Statement 133 to incorporate certain implementation conclusions reached by the FASB staff. The proposed effective
date would be the first quarter of 2003. We do not believe the amendment as currently drafted, will have a material effect on our financial position or results of operations.

(v)    Asset Impairment

In
August 2001, the FASB issued Statement of Financial Accounting Standards No. 144,Accounting for the Impairment of Long-Lived
Assets(Statement 144). Statement 144 addresses accounting and reporting for the impairment or disposal of long-lived assets. Statement 144 was effective beginning
with the first quarter of 2002. The impact of implementation on our financial position or results of operations was not material.

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(vi)    Exit Activities

In
August 2002, the FASB issued Statement of Financial Accounting Standards No. 146,Accounting for Costs Associated with Exit or Disposal
Activities(Statement 146). Statement 146 addresses accounting and reporting for the recognition of exit costs, including, but not limited to, one-time employee
benefit terminations, contract cancellations, and facility consolidations. This statement requires that such costs be recognized only when they meet the definition of a liability under generally
accepted accounting principles. Certain of the costs discussed in Note 8 were accrued under previous accounting standards that Statement 146 will supersede when it becomes effective. However,
Statement 146 applies only to exit activities initiated in 2003 and after. All costs recorded through September 30, 2002, are unaffected by this pronouncement. The impact of implementation on
our financial position or results of operations is not expected to be material.

(vii)    Accounting for Stock-Based Compensation

As
discussed in the 2001 Form 10-K, we have historically accounted for our stock-based compensation plans under Accounting Principles Board (APB) Opinion
No. 25,Accounting for Stock Issued to Employees(APB 25). In July 2002,Cinergyannounced
that it will adopt Statement of Financial Accounting Standards No. 123,Accounting for Stock-Based Compensation(Statement 123) effective with
the next grant cycle (January 2003), and will begin measuring the compensation cost of stock-based awards under the fair value method. On October 4, 2002, the FASB issued an Exposure
Draft of a Proposed Statement of Financial Accounting Standards,Accounting for Stock-Based Compensation-Transition and Disclosurethat would amend
Statement 123 and APB Opinion No. 28,Interim Financial Reporting.This proposed statement provides alternative methods of transition to
Statement 123 and more expanded disclosures about the method of accounting for stock-based employee compensation and the effect of the method used on reported results in both annual and interim
financial statements.Cinergyintends to adopt the transition provisions that require expensing options prospectively in the year of adoption consistent
with the original pronouncement. Existing awards will continue to follow the intrinsic value method prescribed by APB 25. The anticipated impact of adoption on our financial position and results of
operations, assuming award levels and fair values similar to past years, is not expected to be material. This change will primarily impact the accounting for stock options related to the Cinergy Corp.
1996 Long-Term Incentive Compensation Plan, Cinergy Corp. Stock Option Plan, and Cinergy Corp. Employee Stock Purchase and Savings Plan.

(e)Operating Revenues

Our
operating companies recordOperating revenuesfor 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" and is a widely recognized and accepted practice for utilities. In making our estimates of unbilled revenue 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 billed. The amount of unbilled revenues forCinergy, CG&E, andPSIwere $124 million, $63 million (including $11 million for ULH&P), and $61 million, respectively, at September 30, 2002.

(f)Related Party Transactions

To
supplement native load requirements for 2002,CG&EandPSIhave agreed to purchase
peaking power from Cinergy Capital & Trading, Inc. (Capital & Trading), an indirect wholly-owned subsidiary ofCinergy Corp.,
pursuant to the terms of a wholesale market-based tariff. For the nine months ended September 30, 2002, payments under these contracts totaled approximately $20 million for CG&Eand
$28 million forPSI.

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(g)Foreign Currency

We
translate the assets and liabilities of foreign subsidiaries, whose functional currency (generally, the local currency of the country in which the subsidiary is located) is not the
United States (U.S.) dollar, using the appropriate exchange rate as of the end of the month. We translate income and expense items using the average exchange rate prevailing during the month the
respective transaction occurs. We record translation gains and losses inAccumulated other comprehensive income (loss), which is a component of common
stock equity.

2.    Common Stock

In February 2002,Cinergy Corp.sold 6.5 million shares of its common stock with net proceeds of
approximately $200 million. The net proceeds from the transaction were used to repay a portion of short-term debt ofCinergy Corp.

As
discussed in the 2001 Form 10-K, it is currentlyCinergy'spolicy to issue newCinergy
Corp.common shares to satisfy obligations under its various employee stock plans and the Cinergy Corp. Direct Stock Purchase and Dividend Reinvestment Plan. Cinergyhas issued
2.4 million shares under these plans in 2002.

3.    Long-term Debt

In January 2002,PSIpaid at maturity $23 million principal amount of Medium-Term Notes,
Series A. The securities were not replaced by new issues of long-term debt.

In
May 2002, an indirect, wholly-owned subsidiary of Cinergy Global Resources, Inc. entered into a senior term loan and a junior term loan, borrowing $13.1 million
and $7 million, respectively. Each of the loans have periodic principal reduction payments, with the senior loan having a final maturity of March 15, 2019, and the junior loan having a
final maturity of March 15, 2012. In July 2002, borrowings under the senior and junior loans were increased to $13.8 and $7.1 million, respectively. At that time, the annual
interest rate on the senior loan was fixed at 6.97% and the junior loan was fixed at 6.35%. Previously, interest on the loans was at a variable rate.

On
September 1, 2002,CG&Epaid at maturity $100 million principal amount of First Mortgage Bonds, 71/4%
Series.

On
September 10, 2002,CG&Eborrowed the proceeds from the issuance by the Ohio Air Quality Development Authority of
$84 million principal amount of its State of Ohio Air Quality Development Revenue Refunding Bonds 2002 Series A, due September 1, 2037. The issuance consists of two
$42 million tranches, with the interest rate on one tranche being reset every 35 days by auction and the interest rate on the other tranche being reset every 7 days by auction.
The initial interest rates for the 35-day and 7-day tranches were 1.40% and 1.35%, respectively. Proceeds from the borrowing were used on October 7, 2002 to redeem, at
par, two $42 million Series 1985 A&B Air Quality Development Authority State of Ohio Customized Purchase Revenue Bonds, due December 1, 2015. The redeemed bonds had been
classified inNotes payable and other short-term obligations.

On
September 12, 2002,PSIborrowed the proceeds from the issuance by the Indiana Development Finance Authority of
$23 million principal amount of its Environmental Refunding Revenue Bonds Series 2002A, due March 1, 2031. The initial interest rate for the bonds was 1.40%. The interest rate
resets every 35 days by auction. Proceeds from the borrowing were used on October 1, 2002 to redeem, at par, the $23 million principal amount of Indiana Development Finance
Authority Environmental Refunding Revenue Bonds Series 1998, due August 1, 2028. The redeemed bonds had been classified inNotes payable and other
short-term obligations.

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On
September 12, 2002,PSIborrowed the proceeds from the issuance by the Indiana Development Finance Authority of
$24.6 million principal amount of its Environmental Refunding Revenue Bonds Series 2002B, due March 1, 2019. The initial interest rate for the bonds was 1.35%. The interest rate
resets every 7 days by auction. Proceeds from the issuance were used on October 1, 2002 to redeem, at par, the $24.6 million principal amount of City of Princeton, Indiana
Pollution Control Revenue Refunding Bonds 1996 Series, due March 1, 2019. The redeemed bonds had been classified inNotes payable and other short-term
obligations.

The
holders of the newly issued Ohio Air Quality Development Authority and Indiana Development Finance Authority bonds mentioned above have the benefit of a financial guaranty insurance
policy that insures the payment of principal of, and interest on, the bonds when due.CG&EandPSIhave
each entered into an insurance agreement with the bond insurer and have pledged first mortgage bonds to secure their respective reimbursement obligations under such agreements.

On
September 23, 2002,CG&Eissued $500 million principal amount senior unsecured debentures due September 15, 2012,
with an interest rate of 5.70%. Proceeds from the offering were used to repay short-term indebtedness incurred in connection with general corporate purposes including capital expenditures
related to environmental compliance construction, and the repayment at maturity of $100 million principal amount ofCG&EFirst Mortgage Bonds,
71/4% Series. In July 2002,CG&Eexecuted
a treasury lock with a notional amount of $250 million, which was designated as a cash flow hedge of 50 percent of the forecasted interest payments on this debt offering. The treasury
lock effectively fixed the benchmark interest rate (i.e., the treasury component of the interest rate, but not the credit spread) for 50 percent of the offering from July 2002 through
the issuance date in order to reduce the exposure associated with treasury rate volatility. With the issuance of the debt, the treasury lock was settled. Given the use of hedge accounting, this
settlement is reflected inAccumulated other comprehensive income (loss)on an after-tax basis in the amount of $13 million, rather
than a charge to net income. This amount will be reclassified toInterestexpense over the 10-year life of the related debt as interest is
accrued.

4.    Notes Payable and Other Short-term Obligations

In February 2002,Cinergy Corp.placed a $600 million, 364-day senior revolving credit
facility. This facility replaces a $400 million, 364-day senior revolving credit facility that expired in February 2002; a $225 million, 364-day senior
revolving credit facility that expired in March 2002; and a $150 million, three-year senior revolving credit facility that expired in June 2002.

In
October 2002,CG&EandPSIcaused the redemption of certain series of variable
rate pollution control notes (tax-exempt notes obtained to finance equipment or land development for pollution control purposes) with a principal amount of $84 million and
$47.6 million, respectively. Holders of the notes had the option of having their notes redeemed at various times ranging from any business day to annually. Because the optional redemption
features were one year or less, the notes are reflected inNotes payable and other short-term obligationsin the Balance Sheets for Cinergy,CG&E, andPSI. The notes were redeemed with
proceeds from the issuance of new series of variable rate pollution control notes that do not have the redemption features mentioned above, and are therefore classified as Long-term debtobligations.
See Note 3 for further discussion of variable rate pollution control notes.

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

|                           |                            | September 30, 2002 |   | December 31, 2001
|-------------------------- | -------------------------- | ------------------ | - | -----------------
|
|
|Cinergy Corp.              |                            |                    |   |                  
|                           | Revolving lines            |                    | $ | 1,000            
|                           | Uncommitted lines(1)       |                    |   | 65               
|                           | Commercial paper(2)        |                    |   | 800              
|Operating companies        |                            |                    |   |                  
|                           | Uncommitted lines(1)       |                    |   | 75               
|                           | Pollution control notes    |                    |   | N/A              
|Non-regulated subsidiaries |                            |                    |   |                  
|                           | Revolving lines            |                    |   | 15               
|                           | Short-term debt            |                    |   | 45               
|                           |                            |                    |   |                  
|Cinergy Total              |                            |                    |   |                  
|CG&Eand subsidiaries       |                            |                    |   |                  
|                           | Uncommitted lines(1)       |                    | $ | 15               
|                           | Pollution control notes(3) |                    |   | N/A              
|                           | Money pool                 |                    |   | N/A              
|                           |                            |                    |   |                  
|CG&E Total                 |                            |                    |   |                  
|PSI                        |                            |                    |   |                  
|                           | Uncommitted lines(1)       |                    | $ | 60               
|                           | Pollution control notes(3) |                    |   | N/A              
|                           | Money pool                 |                    |   | N/A              
|                           |                            |                    |   |                  
|PSI Total                  |                            |                    |   |                  

---

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



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:



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

5.    Sales of Accounts Receivable

In February 2002,CG&E,PSI, and ULH&Preplaced their existing agreement to sell certain of their accounts receivable and related collections.Cinergy
Corp.formed Cinergy Receivables Company, LLC (Cinergy Receivables) to purchase, on a revolving basis, nearly all of the retail accounts receivable and related collections of CG&E,PSI, andULH&P.Cinergy
Corp.does not consolidate Cinergy Receivables since it meets the requirements to be accounted for as a qualifying special-purpose entity. The sales of receivables are
accounted for under Statement of Financial Accounting Standards No. 140,Accounting for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities(Statement 140).

The
proceeds obtained from the sales of receivables are largely cash but do include a subordinated note from Cinergy Receivables for a portion of the purchase price (typically
approximates 25 percent of the total proceeds). The note is subordinate to senior loans that Cinergy Receivables obtains from commercial paper conduits controlled by unrelated financial
institutions. Cinergy Receivables provides credit enhancement related to senior loans in the form of over-collateralization of the purchased receivables. However, the
over-collateralization is calculated monthly and does not extend to the entire pool of receivables held by Cinergy Receivables at any point in time. As such, these senior loans do not have
recourse to all assets of Cinergy Receivables. These loans provide the cash portion of the proceeds paid toCG&E, PSI, andULH&P.

This
subordinated note is a retained interest (right to receive a specified portion of cash flows from the sold assets) under Statement 140 and is classified within Notes receivable from affiliated companiesin the accompanying Balance Sheets ofCG&E, PSI, andULH&Pand is classified withinNotes receivableonCinergy Corp.'sBalance Sheets. In addition,Cinergy Corp.'sinvestment in Cinergy Receivables
constitutes a purchased beneficial interest (purchased right to receive specified cash flows, in our case residual cash flows), which is subordinate to the retained interests held by CG&E,PSI, andULH&P. The carrying values of the
retained interests are determined by allocating the carrying value of the receivables between the assets sold and the interests retained based on relative fair value. The key assumptions in estimating
fair value are credit losses and selection of discount rates. Because (a) the receivables generally turn in less than two months, (b) credit losses are reasonably predictable due to each
company's broad customer base and lack of significant concentration, and (c) the purchased beneficial interest is subordinate to all retained interests and thus would absorb losses first, the
allocated basis of the subordinated notes are not materially different than their face value. Interest accrues toCG&E, PSI, andULH&Pon the retained interests using the accretable yield method, which generally approximates
the stated rate on the notes since the allocated basis and the face value are nearly equivalent.Cinergy Corp.records income from Cinergy Receivables
in a similar manner. We record an impairment charge against the carrying value of both the retained interests and purchased beneficial interest whenever we determine that an
other-than-temporary impairment has occurred (which is unlikely unless credit losses on the receivables far exceed the anticipated level).

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The
key assumptions used in measuring the retained interests for sales since the inception of the new agreement are as follows:

|                                     |  | Cinergy |   | CG&E and
subsidiaries |   | PSI  |   | ULH&P |  
|------------------------------------ |  | ------- | - | --------------------- | - | ---- | - | ----- | -
|Anticipated credit loss rate         |  | 0.6     | % | 0.6                   | % | 0.5  | % | 1.0   | %
|Discount rate on expected cash flows |  | 5.0     | % | 5.0                   | % | 5.0  | % | 5.0   | %
|Receivables turnover rate(1)         |  | 13.2    | % | 13.6                  | % | 12.7 | % | 14.2  | %

---

The
hypothetical effect on the fair value of the retained interests assuming both a 10 percent and 20 percent unfavorable variation in credit losses or discount rates is
not material due to the short turnover of receivables and historically low credit loss history.

CG&Eretains servicing responsibilities for its role as a collection agent on the amounts due on the sold receivables. However, Cinergy
Receivables assumes the risk of collection on the purchased receivables without recourse toCG&E,PSI,
andULH&Pin the event of a loss. While no direct recourse toCG&E, PSI, andULH&Pexists, these entities do risk loss in the event collections are not sufficient to allow
for full recovery of their retained interests. No servicing asset or liability is recorded since the servicing fee paid toCG&Eapproximates a market
rate.

The
following table shows the gross and net receivables sold, retained interest, and purchased beneficial interest as of September 30, 2002.

|                                  |                                       | Cinergy |     | CG&E and
subsidiaries |   | PSI |     | ULH&P
|--------------------------------- | ------------------------------------- | ------- | --- | --------------------- | - | --- | --- | -----
|
|Receivables sold as of period end |                                       | $       | 438 |                       | $ | 252 |     | $    
|Less: Retained Interest           |                                       |         | 76  |                       |   | 42  |     |      
|                                  |                                       |         |     |                       |   |     |     |      
|                                  | Net receivables sold as of period end |         | $   | 362                   |   | $   | 210 |      
|Purchased beneficial interest     |                                       | $       | 9   |                       | $ |    |     | $    

A
decline in the long-term senior unsecured credit ratings ofCG&E,PSI, or ULH&Pbelow investment
grade would result in a termination of the sale program and discontinuance of future sales of receivables, and could prevent
Cinergy Receivables from borrowing additional funds from commercial paper conduits.

6.    Energy Trading Credit Risk

Cinergy'sextension of credit for energy marketing and trading is governed by a Corporate Credit Policy. Written
guidelines document the management approval levels for credit limits, evaluation of creditworthiness, and credit risk mitigation procedures. Exposures to credit risks are monitored daily by the
Corporate Credit Risk function. As of September 30, 2002, approximately 98 percent of the credit exposure related to energy trading and marketing activity was with counterparties rated
Investment Grade. 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.

In
December 2001, Enron Corp. (Enron) filed for protection under Chapter 11 of the U.S. Bankruptcy Code in the Southern District of New York. We decreased our trading activities
with Enron in the months prior to its bankruptcy filing. We intend to resolve any contract differences pursuant to the terms of those contracts, business practices, and the applicable provisions of
the U.S. Bankruptcy Code, as approved by the court. While we cannot predict the court's resolution of these matters, we do not believe that any exposure relating to those contracts would have a
material impact on our financial

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position or results of operations. While most of our contracts with Enron were considered trading and thus recorded at fair value, a few contracts were accounted for utilizing the normal exemption
under Statement 133 (see Note 1(d)(iv)). These contracts were recognized at fair value when the contracts were terminated in the fourth quarter
of 2001.

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 financial status or public debt ratings.

7.    Commitments and Contingencies

(a)Guarantees

Cinergy Corp.has made separate guarantees to certain counterparties regarding performance of commitments by our consolidated
subsidiaries, unconsolidated subsidiaries, and joint ventures. We are subject to a Securities and Exchange Commission order under the Public Utility Holding Company Act
of 1935, as amended, which limits the amount we can have outstanding under guarantees at any one time to $2 billion. As of September 30, 2002, we had $547 million outstanding
under the guarantees issued, of which approximately 75 percent represents guarantees of obligations reflected onCinergy'sConsolidated Balance
Sheets. These outstanding guarantees relate to subsidiary and joint venture indebtedness and performance commitments.

(b)Ozone Transport Rulemakings

In
June 1997, the Ozone Transport Assessment Group, which consisted of 37 states, made a wide range of recommendations to the 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 late 1997, the EPA published a proposed call for revisions to State
Implementation Plans (SIP) for achieving emissions reductions to address air quality concerns. The EPA must approve all SIPs.

(i)    Nitrogen Oxide (NOX ) SIP Call

In
October 1998, the EPA finalized its ozone transport rule, also known as the NOX SIP Call. It applied to 22 states in the Eastern half of the U.S., including the
three states in which our electric utilities operate, and proposed a model NOX emission allowance-trading program. This rule recommended states reduce NOX emissions primarily
from industrial and utility sources to a certain level by May 2003. The EPA gave the affected states until September 30, 1999, to incorporate NOX reductions and, at the
discretion of the state, a NOX trading program into their SIPs. The EPA proposed to implement a federal plan to accomplish the equivalent NOX reductions by May 1, 2003,
if states failed to revise their SIPs.

Ohio,
Indiana, a number of other states, and various industry groups (some of which we are a member), filed legal challenges to the NOX SIP Call with the U.S. Circuit Court
of Appeals for the District of Columbia (Court of Appeals).

Following
a number of rulings and appeals, in August 2000, the Court of Appeals extended the deadline for NOX reductions to May 31, 2004. The states and other
groups sought review of the Court of Appeals ruling by the U.S. Supreme Court (Supreme Court). In March 2001, the Supreme Court decided not to grant that review.

In
June 2001, the Court of Appeals remanded portions of the NOX SIP Call to the EPA for reconsideration of how growth was factored into the state NOX
budgets. On May 1, 2002, the EPA published, in the Federal Register, a final rule reaffirming its growth factors and state NOX budgets,

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with additional explanation. The states of West Virginia and Illinois, along with various industry groups (some of which we are a member), have challenged the growth factors and state NOX
budgets in an action filed in the Court of Appeals. It is unclear when the Court of Appeals will reach a decision in this case, or whether this decision will result in an increase or decrease in the
size of the NOX reduction requirement, or a deferral of the May 31, 2004 compliance deadline.

The
states of Indiana and Kentucky developed final NOX SIP rules in response to the NOX SIP Call, through cap and trade programs, in June and July of 2001,
respectively. On November 8, 2001, the EPA approved Indiana's SIP rules, which became effective December 10, 2001. On April 11, 2002, the EPA proposed direct final approval of
Kentucky's rules and they became effective on June 10, 2002. The state of Ohio completed its NOX SIP rules in response to the NOX SIP Call on July 8, 2002, with
an effective date of July 18, 2002, and the EPA's approval is expected later this year.Cinergy'scurrent plans for compliance with the EPA's
NOX SIP Call would also satisfy compliance with Indiana's and Kentucky's SIP rules and Ohio's proposed rules.

On
September 25, 2000,Cinergyannounced a plan for its subsidiaries,CG&Eand PSI, to invest in
pollution control equipment and other methods to reduce NOX emissions. The current estimate of additional expenditures for
this investment is approximately $350 million (in nominal dollars) and includes the following:



SCRs
are the most proven technology currently available for reducing NOX emissions produced in coal-fired generating stations.

(ii)    Section 126 Petitions

In
February 1998, several northeast states filed petitions seeking the EPA's assistance in reducing ozone in the Eastern U.S. under Section 126 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 NOX emissions. This ruling affected all of our Ohio and Kentucky facilities, as well as
some of our Indiana facilities, and requires us to reduce our NOX emissions to a certain level by May 2003. In May 2001, the Court of Appeals substantially upheld a challenge
to the Section 126 requirements, and remanded portions of the rule to the EPA for reconsideration of how growth was factored into the emission limitations. On August 24, 2001, the Court
of Appeals temporarily suspended the Section 126 compliance deadline, pending the EPA's reconsideration of growth factors. On May 1, 2002, the EPA issued a final rule extending the
Section 126 rule compliance deadline to May 31, 2004, thus harmonizing the deadline with that for the NOX SIP Call.

(iii)    State Ozone Plans

On
November 15, 1999, the states of Indiana and Kentucky (along with Jefferson County, Kentucky) jointly filed an amendment to their attainment demonstration on how they intend to
bring the Greater Louisville Area (including Floyd and Clark Counties in Indiana) into attainment with the one-hour ozone standard. The Greater Louisville Area has since attained the
one-hour ozone standard, and on October 23, 2001, the EPA re-designated the area as being in attainment with that standard. Previous SIP amendments called for, among
other things, statewide NOX reductions from utilities in

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Indiana, Kentucky, and surrounding states which are less stringent than the EPA's NOX SIP Call. Indiana and Kentucky committed to adopt utility NOX control rules by
December 2000 that would require controls be installed by May 2003. However, Indiana halted the rulemaking for NOX controls at this level, but completed NOX SIP
Call level reduction regulations. Kentucky has completed its rulemaking, and issued a final rule that changed the compliance deadline to mirror the NOX SIP Call of May 31, 2004.
However, on March 18, 2002, Kentucky completed the withdrawal of this regulation in favor of its completed and more restrictive regulations in response to the NOX SIP Call.

See
(e) below for a discussion of the tentative EPA Agreement, the implementation of which could affect our strategy for compliance with the final NOX SIP Call.

(c)New Source Review (NSR)

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
September 15, 1999, November 3, 1999, and February 2, 2001, the Attorneys General of New York, Connecticut, and New Jersey, respectively, issued letters notifying CinergyandCG&Eof their intent to sue under the citizens' suit provisions of the CAA. These states
alleged violations of the CAA by constructing and continuing to operate a major modification ofCG&E'sW.C. Beckjord Generating Station (Beckjord
Station) without obtaining the required NSR pre-construction permits.

On
November 3, 1999, the EPA sued a number of holding companies and electric utilities, includingCinergy, CG&E, andPSI, in various U.S. District Courts (District Court). The Cinergy,CG&E, andPSIsuit 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
technology on each of the generating units at Beckjord Station and atPSI'sCayuga Generating Station (Cayuga Station), and (2) civil penalties
in amounts of up to $27,500 per day for each violation.

On
March 1, 2000, the EPA filed an amended complaint againstCinergy,CG&E, and PSI. The amended
complaint added alleged violations of the NSR requirements of the CAA at two of our generating stations contained in a notice of
violation (NOV) filed by the EPA on November 3, 1999. It also added claims for relief of alleged violations of nonattainment NSR, Indiana and Ohio SIPs, and particulate matter emission limits
(as discussed below in (d)).

The
amended complaint sought (1) injunctive relief to require installation of pollution control technology on each of the generating units at Beckjord Station and PSI'sCayuga Station, Wabash River
Generating Station, and Gallagher Generating Station, and such other measures as necessary, and (2) civil
penalties in amounts of up to $27,500 per day for each violation.

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), andCG&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.

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On
June 28, 2000, the EPA issued an NOV toCinergy,CG&E, and PSIfor alleged violations of NSR, PSD,
and SIP requirements atCG&E'sMiami Fort Generating Station and PSI'sGibson Generating Station. In addition,CinergyandCG&Ehave been informed by DP&L, the operator of J.M. Stuart Generating Station (Stuart Station), that on June 30, 2000, the EPA issued an NOV to
DP&L for alleged violations of NSR, PSD, and SIP requirements at this station.CG&Eowns 39 percent of the Stuart Station. 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.

On
August 2, 2001, the states of New York, New Jersey, and Connecticut filed an assented to motion to intervene in this litigation. Their motion was granted by the District Court
on August 3, 2001. The states' proposed complaint is an exhibit to the motion to intervene.Cinergy, CG&E, andPSIare in the process of evaluating the states' complaint, and their answer is due to be
filed by November 30, 2002. At this time,Cinergy,CG&E, and PSIare unable to determine the effect,
 if any, this filing will have on the issues affecting us regarding NSR, as framed in the EPA's amended
complaint.

On
January 17, 2002, the Hoosier Environmental Council and the Ohio Environmental Council (Environmental Groups) filed an unopposed motion to intervene as plaintiffs in this
litigation. The motion was granted by the District Court on March 19, 2002, and the complaint of the Environmental Groups' was filed on May 1, 2002. Cinergy,CG&E, andPSIare in the process of evaluating
the Environmental Groups' complaint, and their answer is due to be filed by November 30, 2002. At this time,Cinergy, CG&E, andPSIare unable to determine the effect, if any, this filing will have upon the issues
affecting us regarding NSR, as framed in the EPA's amended complaint.

On
July 18, 2002, the U.S. District Court for the Southern District of Indiana (Indiana District Court), issued an order on a motion for partial summary judgment in a similar case
involving the Southern Indiana Gas and Electric Company (SIGECO). The narrow issue presented by SIGECO's motion was at what point does an owner or operator of facilities have to determine whether a
pre-construction permit is required under the CAA. The Indiana District Court, relying in part upon a decision issued by the Environmental Appeals Board in a similar case involving the
Tennessee Valley Authority, ruled that the owner or operator must review evidence of the projected post-project emissions increases to determine if the pre-construction permit
is required, and may not rely upon evidence of actual post-project emissions. The Indiana District Court is the same court in which Cinergy'scase is pending, so it could be expected that this order
would influence a decision upon any similar motion filed by Cinergy. No such motion is pending at this date. At this timeCinergycannot predict the impact
any such
ruling might have on its financial position or results of operations.

On
July 26, 2002, the Indiana District Court also issued an order on a motion for partial summary judgment in the SIGECO case. The issue presented by SIGECO's motion was whether
the general federal five-year statute of limitations bars an action for civil penalties for allegedly unlawful construction projects that were completed more than five years prior to the
filing of suit. The Indiana District Court held that an NSR preconstruction violation accrues on the first day of construction without a permit, and continues only through the end of construction.
Accordingly, the government may not collect civil penalties for allegedly unlawful projects for which construction ended more than five years before the filing of an enforcement action. Cinergyis not
aware that any notice of appeal has
been filed regarding that order.Cinergywill file a similar motion if the parties fail to enter into a consent decree to settle all issues. At
this timeCinergycannot predict the impact on our financial position or results of operations, although the amount of penalties, if any, that could
potentially be awarded by the Indiana District Court if the ruling is not reversed, would be significantly smaller than the amount claimed by the EPA in its amended complaint against Cinergy.

37

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On
October 25, 2002, the Indiana District Court also issued an order on a motion for summary judgment in the SIGECO case. The issue presented by SIGECO's motion was whether or not
the Government violated the Congressional Review of Agency Rule Making Act, 5 U.S.C. Section 801,et seq.(CRA) by establishing a new agency rule
without submitting a report to Congress about the rule as required by the CRA. SIGECO had argued that, at least since the filing of the NSR lawsuit against it in November 1999, the EPA was
interpreting more strictly the NSR routine maintenance exemption that had been validated by the Seventh Circuit Court of Appeals inWisconsin Electric Power Co. v.
Reilly, 893 F.2d 901 (7th Cir. 1990), and that this new, stricter interpretation in effect established a new agency rule. In denying SIGECO's motion, the Indiana
District Court held that SIGECO had failed to demonstrate that the EPA had changed its longstanding interpretation of the NSR routine maintenance exemption. As the Indiana District Court is the same
court in whichCinergy'scase is pending, it could be expected that this order would influence a decision upon any similar motion filed by Cinergy. However,
 no such motion is pending at this date.Cinergycannot predict the impact any such
ruling might have on its financial position or results of operations.

On
October 4, 2002, the Indiana District Court issued a Revised Case Management Plan inCinergy'scase that sets forth the dates by
which various events in the litigation, such as discovery and the filing of dispositive motions, must be completed. Consistent with the plan, on October 9, 2002, the Indiana District Court set
the case for trial by jury commencing on October 4, 2004.

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

(d)Beckjord Station NOV

On
November 30, 1999, the EPA filed an NOV againstCinergyandCG&E, alleging that
emissions of particulate matter at the Beckjord Station exceeded the allowable limit. The NOV indicated the EPA may (1) issue an administrative penalty order, or (2) file a civil
action seeking injunctive relief and civil penalties of up to $27,500 per day for each violation. The allegations contained in this NOV were incorporated within the March 1, 2000 amended
complaint, as discussed in (c) above. On June 22, 2000, the EPA issued an NOV and a finding of violation (FOV) alleging additional particulate emission violations at Beckjord Station and
offered us an opportunity to meet and discuss the allegations and corrective measures. 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.

(e)EPA Agreement

On
December 21, 2000,Cinergy,CG&E, and PSIreached an agreement in principle with the EPA, the U.S.
Department of Justice (Justice Department), three northeast states, and two environmental
groups that could serve as the basis for a negotiated resolution of CAA claims and other related matters brought against coal-fired power plants owned and operated by Cinergy'soperating 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
addition, the intent of the tentative agreement is that we would be allowed to continue on-going activities to maintain reliability and availability without subjecting the
plants to future litigation regarding federal NSR permitting requirements.

38

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In
return for resolution of claims regarding past maintenance activities, as well as future operational certainty, we have tentatively agreed to:



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 NOX controls as discussed in (b) above, but includes capital costs thatCinergywould otherwise expect to spend
due to new environmental requirements expected in the second half of this decade.

Cinergy,CG&E, andPSIhave accrued costs
related to certain aspects of the tentative agreement. In reaching the tentative agreement, we did not admit any wrongdoing and remain free to continue our current maintenance practices, as well as
implement future projects for improved reliability.

In
January 2002, the Justice Department completed its review of NSR, after considering dismissal of the lawsuits, and decided to pursue the pending lawsuits, including the suit
againstCinergy,CG&E, andPSI. We will continue to
pursue a negotiated settlement of these lawsuits if that continues to be in the best interests of the company. At this time, it is not possible to predict whether a final agreement implementing the
agreement in principle can be reached. If the settlement is not completed, we intend to defend against the allegations, discussed in (c) and (d) above, vigorously in court. In such an
event, it is not possible to determine the likelihood that the plaintiffs would prevail on their claims or whether resolution of these matters would have a material effect on our financial position or
results of operations.

(f)Manufactured Gas Plant (MGP) Sites

(i)    General

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.

(ii)    PSI

Coal
tar residues, related hydrocarbons, and various metals associated with MGP sites have been found at former MGP sites in Indiana, including at least 21 sites which PSIor its predecessors previously
owned.PSIacquired four of the sites from Northern Indiana Public
Service Company (NIPSCO) in 1931. At the same time,PSIsold NIPSCO the sites located in Goshen and Warsaw, Indiana. In 1945, PSIsold 19 of these sites
(including the four sites it acquired from NIPSCO) to the predecessor of the Indiana Gas Company, Inc. (IGC). IGC
later sold the site located in Rochester, Indiana to NIPSCO.

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IGC (in 1994) and NIPSCO (in 1995) both made claims againstPSI. The basis of these claims was that PSIis
a Potentially Responsible Party with respect to the 21 MGP sites under the Comprehensive Environmental Response, Compensation and Liability Act
(CERCLA). The claims further asserted thatPSIwas legally responsible for the costs of investigating and remediating the sites. In August 1997,
NIPSCO filed suit againstPSIin federal court, claiming recovery (pursuant to CERCLA) of NIPSCO's past and future costs of investigating and
remediating MGP-related contamination at the Goshen, Indiana MGP site.

In
November 1998, NIPSCO, IGC, andPSIentered into a Site Participation and Cost Sharing Agreement (Agreement). This Agreement
allocated CERCLA liability for past and future costs at seven MGP sites in Indiana among the three companies. As a result of the Agreement, NIPSCO's lawsuit against PSIwas dismissed. The parties have
assigned lead responsibility for managing further investigation and remediation activities at each of the sites to
one of the parties. Similar agreements were reached between IGC andPSIthat allocate CERCLA liability at 14 MGP sites with which NIPSCO was not
involved. These agreements concluded all CERCLA and similar claims between the three companies related to MGP sites. The parties continue to investigate and remediate the sites, as appropriate, under
the agreements and applicable laws. The Indiana Department of Environmental Management (IDEM) oversees investigation and cleanup of some of the sites.

PSInotified its insurance carriers of the claims related to MGP sites raised by IGC, NIPSCO, and IDEM. In April 1998, PSIfiled suit in Hendricks County Circuit
Court in the State of Indiana against its general liability insurance carriers. PSIsought a declaratory judgment to obligate its insurance carriers to (1) defend MGP claims againstPSI, or (2) payPSI'scosts of defense and compensate PSIfor its costs of investigating, preventing,
mitigating, and remediating damage to property and paying claims related to MGP sites. The lawsuit was
moved to the Hendricks County Superior Court (Superior Court) in July 1998.PSIand its insurance carriers filed briefs on various issues for
decision by the Superior Court in hearings held in November 2001. On February 1, 2002, the Superior Court issued rulings on motions for summary judgment. The Superior Court granted the
motions of several insurance carriers that claimed there was insufficient evidence concerning the terms of their insurance policies. The insurance policies in question were between
1950-1958 and 1961-1964. The Superior Court entered a final judgment with respect to these "lost policies" on March 25, 2002. With respect to the remaining policies
(between 1958-1961 and 1964-1984), the Superior Court denied all of the insurance carriers' motions. This included motions on the issues of Trigger of Coverage, Expected or
Intended Damage, Late Notice, and Voluntary Payments. The Superior Court found triable issues of fact for the jury to decide as to the former two issues, and ruled in PSI'sfavor, as a matter of law, on
the latter two issues. On February 15, 2002,PSIrequested
rulings on certain remaining summary judgment issues and a clarification of certain of the Superior Court's summary judgment rulings. That request was denied on April 1, 2002. On
March 15, 2002, one of the insurance carriers filed a motion for partial summary judgment asserting a Lack of Justiciability. That motion was heard on April 26, 2002, and denied by the
Superior Court on April 30, 2002.

On
April 23, 2002,PSIfiled a notice of appeal with the Indiana Court of Appeals with respect to the Superior Court's
March 25, 2002 order granting final judgment with respect to certain "lost policies." On June 21, 2002, the Superior Court granted the motions of PSIand the insurance carriers and certified
four orders for interlocutory review by the Indiana Court of Appeals. Unlike the "lost policies" appeal
that is an appeal of right, the appeal of these four certified orders is discretionary and the Indiana Court of Appeals can accept or reject any or all of the issues certified. At the present time, PSIcannot predict the outcome of this litigation, including the outcome of the appeals to the Indiana Court of Appeals.

40

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(iii)CG&E

CG&Eand its utility subsidiaries are aware of potential sites where MGP activities have occurred at some time in the past. None of these
sites is known to present a risk to the environment.CG&Eand its utility subsidiaries have begun preliminary site assessments to obtain information
about some of these MGP sites.

PSIandCG&E, including its utility subsidiaries, have accrued costs for the sites related
to investigation, remediation, and groundwater monitoring to the extent such costs are probable and can be reasonably estimated.PSIand CG&E,
including its utility subsidiaries, do not believe they can provide an estimate of the reasonably possible total remediation costs for any site
before a remedial investigation/feasibility study has been completed. To the extent remediation is necessary, the timing of the remediation activities impacts the cost of remediation. Therefore, PSIandCG&E, including its utility subsidiaries, currently cannot determine the total costs that may be
incurred in connection with remediation of all sites, to the extent that remediation is required. Until investigation and remediation activities have been completed on these sites, we are unable to
reasonably estimate the total costs and impact on our financial position or results of operations.

(g)Asbestos Claims Litigation

CG&EandPSIhave been named in lawsuits related to Asbestos at their electric generating
stations. In these lawsuits, plaintiffs claim to have been exposed to Asbestos containing products in the course of their work at theCG&Eand PSIgenerating stations. The plaintiffs further claim that as the property owner of the generating stations, CG&EandPSIshould be held liable for their
injuries and illnesses based on an alleged duty to warn and
protect them from any Asbestos exposure. The impact onCG&E'sandPSI'sfinancial position or results of
operations of these cases to date has not been material.

One
specific case filed againstPSIhas been tried to verdict. Following a ten week trial of the case entitled William Lee Roberts, Jr. and Beverly Roberts v. AC&S, Inc., et
al., PSI Energy, Inc., Marion Superior Court 2, on May 24, 2002, the
jury returned a verdict againstPSIin the amount of $494,000 on a negligence claim and forPSIon
punitive damages.PSIis appealing the judgment in this case. The total damages were immaterial toPSI'sfinancial position and results of operations. However, future verdicts in any of the pending lawsuits could be material. At this timeCG&Eand PSIare
not able to predict the ultimate outcome of these lawsuits or the impacts onCG&E'sand PSI'sfinancial position or results of operations.

(h)Gas Customer Choice

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&Ehas been dismissed as a defendant in
the consolidated suit. In March 2001,Cinergy, CG&E, and Investments were named as defendants in a lawsuit filed by both Energy Cooperative and
Resources. This lawsuit concerns any obligations or
liabilities Investments may have to Energy Cooperative following its sale of Resources.Cinergy,CG&Eand Investments initiated litigation in October 2001 against the Energy Cooperative requesting indemnification by the Energy Cooperative for the claims asserted by former customers in the class
action litigation. Trial is scheduled to occur in mid-2003. We intend to vigorously defend these lawsuits. At the present time,Cinergycannot predict the outcome of these suits.

41

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(i)PSI Fuel Adjustment Charge

As
discussed in the 2001 Form 10-K,PSIdefers fuel costs that are recoverable in future periods subject to Indiana
Utility Regulatory Commission (IURC) approval under a fuel recovery mechanism. In June 2001, the IURC issued an order in aPSIfuel recovery
proceeding, disallowing approximately $14 million of deferred costs. In June 2001,PSIformally requested that the IURC reconsider its
disallowance decision. In August 2001, the IURC indicated that it would reconsider its decision andPSIcontinued the deferral of these costs. In
August 2002, the IURC issued its final ruling allowingPSIto fully recover the $14 million.

In
June 2001,PSIfiled 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 on July 30, 2002. We anticipate a decision in the fourth
quarter of 2002.

(j)Contract Disputes

Cinergy, through a subsidiary of Investments, is currently involved in negotiations to resolve a customer-billing dispute. The primary
issue of contention between the parties relates to the determinants used in calculating the monthly charge for steam and electricity billed.Cinergyhas
reserved for a portion of the amount billed based on our current estimate of net realizable value.

Cinergy, through a subsidiary of Capital & Trading, is involved in a billing dispute with respect to billings for the supply of
wholesale natural gas to a customer. This dispute, if not satisfactorily resolved by the parties, is subject to arbitration.Cinergyhas reserved for a
portion of the amount billed based on the current estimate of net realizable value.

Although
we cannot predict the outcome of these matters, we believe the ultimate impact onCinergy'sfinancial position and results of
operations, beyond amounts reserved, will not be material.

8.    Employee Severance Programs

In March 2002, a Voluntary Early Retirement Program (VERP) offering was made to approximately 280 non-union employees. As a result of the 213
employees electing the VERP in the second quarter of 2002,Cinergy,CG&E, and PSIrecorded expenses of
approximately $35 million, $16 million (including $2 million related toULH&P), and $18 million, respectively, relating to benefits provided to the VERP participants. In the second quarter of 2002, Cinergy,CG&E, andPSIincurred approximately
$13 million, $2 million, and $4 million, respectively, in additional expenses related to other employee severance programs.

In
June 2002, a VERP was also offered to approximately 70 Utility Workers of America / Independent Utilities Union # 600 (IUU) employees. As a result of the 41 employees electing
the VERP in the third quarter of 2002,Cinergy,CG&E, and PSIrecorded expenses of approximately
$4 million, $2 million (including $1 million related to ULH&P), and $1 million, respectively, in the third quarter of 2002 relating to benefits provided to IUU VERP participants.

9.    Financial Information by Business Segment

As discussed in the 2001 Form 10-K, we conduct operations through our subsidiaries, and manage through the following three business units:



42

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The
following section describes the activities of our business units as of September 30, 2002.

Energy
Merchant manages wholesale generation and energy marketing and trading of energy commodities. Energy Merchant operates and maintains our regulated and non-regulated
electric generating plants including some of our jointly-owned plants. Energy Merchant is also responsible for all of our international operations. In addition, Energy Merchant also conducts the
following activities:



Regulated
Businesses consists ofPSI'sregulated, integrated utility operations, and Cinergy'sother regulated electric and gas transmission and distribution
systems. Regulated Businesses plans, constructs,
operates, and maintainsCinergy'stransmission and distribution systems and delivers gas and electric energy to consumers. Regulated Businesses also
earns revenues from wholesale customers primarily by transmitting electric power throughCinergy'stransmission 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 manages Cinergy Ventures, LLC (Ventures),Cinergy'sventure capital subsidiary. Ventures
invests in emerging energy technologies that can benefit futureCinergybusiness development activities.

Financial
results by business unit are as indicated below. Certain amounts for the prior year have been restated to reflect segment restructuring which includes the consolidation of all
of our international operations into Energy Merchant. This restructuring became effective January 1, 2002.

Financial
results by business unit for the quarters ended September 30, 2002 and September 30, 2001 are as indicated below.

|Business Units                  
|--------------------------------
|
|
|
|Quarter ended September 30, 2002
|Operating revenues             
|                                
|                                
|Segment profit (loss)(2)        
|Quarter ended September 30, 2001
|Operating revenues             
|                                
|                                
|Segment profit (loss)(2)        

---

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Financial results by business unit for the nine months ended September 30, 2002 and September 30, 2001 are as indicated below.

|Business Units                      
|------------------------------------
|
|
|
|Nine months ended September 30, 2002
|Operating revenues                 
|                                    
|                                    
|Segment profit (loss)(2)            
|Nine months ended September 30, 2001
|Operating revenues                 
|                                    
|                                    
|Segment profit (loss)(2)            

---

Total segment assets at September 30, 2002 and December 31, 2001, were as follows:

|                                           |  | Cinergy Business Units |           |  |   |          
|------------------------------------------ |  | ---------------------- | --------- |  | - | ---------
|
|
|Total segment assets at September 30, 2002 |  | $                      | 5,483,625 |  | $ | 7,432,558
|Total segment assets at December 31, 2001  |  |                        | 4,956,109 |  |   | 7,084,104

---

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10.  Earnings Per Common Share (EPS)

A reconciliation of EPS to EPSassuming dilution is presented below for the quarters ended September 30, 2002 and September 30, 2001:

|                                 |                                     | Income |   | Shares  |  | EPS    
|-------------------------------- | ----------------------------------- | ------ | - | ------- |  | -------
|
|Quarter ended September 30, 2002 |                                     |        |   |         |  |        
|EPS:                             |                                     |        |   |         |  |        
|                                 | Net Income                          |        | $ | 130,568 |  | 167,967
|Effect of dilutive securities:   |                                     |        |   |         |  |        
|                                 | Common stock options                |        |   |         |  | 843    
|                                 | Directors' compensation plans       |        |   |         |  | 160    
|                                 | Contingently issuable common stock  |        |   |         |  | 1,118  
|                                 |                                     |        |   |         |  |        
|EPSassuming dilution:           |                                     |        |   |         |  |        
|                                 | Net income plus assumed conversions |        | $ | 130,568 |  | 170,088
|Quarter ended September 30, 2001 |                                     |        |   |         |  |        
|EPS:                             |                                     |        |   |         |  |        
|                                 | Net Income                          |        | $ | 128,471 |  | 159,097
|Effect of dilutive securities:   |                                     |        |   |         |  |        
|                                 | Common stock options                |        |   |         |  | 948    
|                                 | Directors' compensation plans       |        |   |         |  | 144    
|                                 | Contingently issuable common stock  |        |   |         |  | 491    
|                                 |                                     |        |   |         |  |        
|EPSassuming dilution:           |                                     |        |   |         |  |        
|                                 | Net income plus assumed conversions |        | $ | 128,471 |  | 160,680

Options to purchase shares of common stock are excluded from the calculation of EPSassuming dilution when the exercise prices of
these options are greater than the average market price of the
common shares during the period. For the quarters ended September 30, 2002 and 2001, approximately 3.3 million and 2.1 million shares, respectively, were excluded from the
EPSassuming dilution calculation.

Also
excluded from the EPSassuming dilution calculation for the quarter ended September 30, 2002, are up to 10.8 million shares issuable pursuant to the stock
purchase contracts associated with the preferred trust securities issued byCinergy Corp.in December 2001. These stock purchase contracts would
impact EPSassuming dilution only to the extent thatCinergy'saverage stock price were to exceed $34.40 per share, which is the maximum
price payable by the holders of the stock purchase contracts, during any period for which earnings per share are presented. As discussed in the 2001 Form 10-K, the number of shares
issued pursuant to the stock purchase contracts is contingent upon the market price ofCinergy Corp.stock in February 2005 and could range
between 9.2 and 10.8 million shares.

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A
reconciliation of EPS to EPSassuming dilution is presented below for the nine months ended September 30, 2002 and September 30, 2001:

|                                     |                                          | Income |   | Shares  |  | EPS    
|------------------------------------ | ---------------------------------------- | ------ | - | ------- |  | -------
|
|Nine months ended September 30, 2002 |                                          |        |   |         |  |        
|EPS:                                 |                                          |        |   |         |  |        
|                                     | Net Income                               |        | $ | 271,279 |  | 166,544
|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      |        | $ | 271,279 |  | 168,828
|Nine months ended September 30, 2001 |                                          |        |   |         |  |        
|EPS:                                 |                                          |        |   |         |  |        
|                                     | Net Income                               |        | $ | 331,685 |  | 159,049
|Effect of dilutive securities:       |                                          |        |   |         |  |        
|                                     | Common stock options                     |        |   |         |  | 1,023  
|                                     | Directors' compensation plans            |        |   |         |  | 144    
|                                     | Contingently issuable common stock       |        |   |         |  | 498    
|                                     |                                          |        |   |         |  |        
|EPSassuming dilution:               |                                          |        |   |         |  |        
|                                     | Net income plus assumed conversions      |        | $ | 331,685 |  | 160,714

Options
to purchase shares of common stock are excluded from the calculation of EPSassuming dilution when the exercise prices of these options are greater than the average
market price of the common shares during the period. For the nine months ended September 30, 2002 and 2001, approximately 2.7 million and 2.1 million shares, respectively, were
excluded from the EPSassuming dilution calculation.

Also
excluded from the EPSassuming dilution calculation for the nine months ended September 30, 2002, are up to 10.8 million shares issuable pursuant to the
stock purchase contracts associated with the preferred trust securities issued byCinergy Corp.in December 2001. These stock purchase contracts
would impact EPSassuming dilution only to the extent thatCinergy'saverage stock price were to exceed $34.40 per share, which is the
maximum price payable by the holders of the stock purchase contracts, during any period for which earnings per share are presented. As discussed in the 2001 Form 10-K, the number of
shares to be issued pursuant to the stock purchase contracts is contingent upon the market price ofCinergy Corp.stock in February 2005 and
could range between 9.2 and 10.8 million shares.

11.  Ohio Deregulation

As discussed in the 2001 Form 10-K, in July 1999, Ohio Governor Robert Taft signed Amended Substitute Senate Bill No. 3 (Electric
Restructuring Bill), beginning the transition to electric deregulation and customer choice for the State of Ohio. The Electric Restructuring Bill created a competitive electric retail service market
effective January 1, 2001. The legislation provides for a market development period that began January 1, 2001, and ends no later than December 31, 2005. During the market
development period, electric rates toCG&Ecustomers are frozen.

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In
May 2000,CG&Ereached a stipulated agreement with the Public Utilities Commission of Ohio (PUCO) staff and various other
interested parties with respect to its proposal to implement electric customer choice in Ohio effective January 1, 2001. In August 2000, the PUCO approved CG&E'sstipulation agreement.
Subsequently, two parties filed applications for rehearing with the PUCO. In October 2000, the PUCO denied these
applications. One of the parties appealed to the Ohio Supreme Court in the fourth quarter of 2000 andCG&Esubsequently intervened in that case. In
April 2002, the Ohio Supreme Court affirmed the PUCO's stipulated agreement withCG&Ewith respect to implementing electric customer choice. The
Ohio Supreme Court ruling leavesCG&E'stransition plan entirely intact.

UnderCG&E'stransition plan, retail customers continue to receive transportation 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 inCG&E'sfrozen
rates. However, shopping credits for the first 20 percent of electricity usage in each customer class to switch suppliers are higher thanCG&E'selectric generation costs in order to stimulate the development of the competitive electric retail service market.

A
Federal Energy Regulatory Commission order, that was effective April 2002, allowedCinergyto jointly dispatch the regulated
generating assets ofPSIin conjunction with the deregulated generating assets ofCG&E. The order also
authorizes the transfer of theCG&Egenerating assets to a non-regulated affiliate. However, Cinergyhas determined that it can realize the benefits of
the new joint dispatch agreement without transferring CG&E'sgeneration assets. Therefore, whileCG&Ewill continue to pursue any remaining
regulatory and
other approvals already in process that are necessary for the transfer ofCG&E'sgeneration assets, Cinergydoes not plan to transferCG&E'sgenerating assets to a non-regulated affiliate in
the foreseeable future.

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CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING INFORMATION

In this report we discuss various matters that may make management's corporate vision of the future clearer for you. This report outlines management's goals and
projections for the future. These goals and projections are considered forward-looking statements and 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 are often presented with forward-looking statements. In addition, other factors could cause actual results to differ materially from those indicated in any forward-looking statement. These
include:



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Unless
we otherwise have a duty to do so, the Securities and Exchange Commission's (SEC) rules do not require forward-looking statements to be revised or updated (whether as a result of
changes in actual results, changes in assumptions, or other factors affecting the statements). Our forward-looking statements reflect our best beliefs as of the time they are made and may not be
updated for subsequent developments.

49

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

In this reportCinergy(which includesCinergy Corp.and all of
our regulated and non-regulated subsidiaries) is, at times, referred to in the first person as "we", "our", or "us".

The
following discussion should be read in conjunction with the accompanying financial statements and related notes included elsewhere in this report and the 2001
Form 10-K. The results discussed below are not necessarily indicative of the results that may occur 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:



Organization

Cinergy Corp., a Delaware corporation created in October 1994, 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. 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 SEC under the Public Utility Holding Company Act of 1935, as amended (PUHCA). Our other principal subsidiaries are:



CG&E, an Ohio corporation, 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'sprincipal subsidiary, The Union Light, Heat and Power Company
(ULH&P), is a Kentucky corporation that provides electric and gas service in northern Kentucky.CG&E'sother subsidiaries are insignificant to its results of operations.

In
2001,CG&Ebegan a transition to electric deregulation and customer choice. Currently, the competitive retail electric market in Ohio
is in the development stage.CG&Eis 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, is a vertically integrated and regulated electric utility that provides service in north central, central,
and southern Indiana.

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

50

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LIQUIDITY AND CAPITAL RESOURCES

Environmental Issues

Ambient Air Standards

In 1997, the Environmental Protection Agency (EPA) revised the National Ambient Air Quality Standards (NAAQS) for ozone and fine particulate matter. Fine
particulate matter refers to very small solid or liquid particles in the air. The EPA has estimated that it will take up to five years to collect sufficient ambient air monitoring data to determine
fine particulate matter non-attainment areas. A fine particulate monitoring network was put in place during 1999 and 2000. Following identification of non-attainment areas, the
states will identify the sources of particulate emissions and develop emission reduction plans. These plans may be state-specific or regional in scope. We currently cannot predict the exact amount and
timing of required reductions.

On
May 14, 1999, the U.S. Circuit Court of Appeals for the District of Columbia (Court of Appeals) ruled that the EPA's final rule establishing the new eight-hour
ozone standard and the fine particulate matter standard constituted an invalid delegation of legislative authority, and also that the EPA had improperly failed to consider the beneficial health
effects of ozone (shielding from Ultraviolet-B radiation) when it established the NAAQS ozone standards. In June 1999, the EPA appealed the conclusion that its standards constituted
an invalid delegation of legislative authority, but did not appeal the decision that it is required to consider the beneficial health effects of ozone when setting the NAAQS. On February 27,
2001, the U.S. Supreme Court (Supreme Court) reversed the Court of Appeals' ruling. However, the Supreme Court invalidated the EPA's implementation procedure for the portion of the case dealing with
the eight-hour ozone standard.

Following
the Supreme Court's ruling, the Court of Appeals reconsidered the validity of the eight-hour ozone standard and the fine particulate matter standard, as a number of
issues that were raised by the parties were not addressed in its original opinion invalidating those standards. On March 26, 2002, the
Court of Appeals ruled in the EPA's favor on all remaining issues. Nonetheless, before the standards can be implemented, the EPA must conduct rulemaking to: (1) assess the beneficial health
effects of ozone in connection with the NAAQS ozone standards; and (2) develop an approach for implementing the ozone standard in accordance with the Supreme Court's opinion. At this time, the
EPA predicts that emissions reductions will be required in the 2007-2019 timeframe, but we currently cannot predict the exact amount and timing of required reductions.

See
Note 7 of the "Notes to Financial Statements" in "Part I. Financial Information" for additional Environmental Issues and other matters that could effect our liquidity.

Capital Resources

We 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.

Notes Payable and Other Short-term Obligations

Short-term Borrowings

At September 30, 2002,Cinergy Corp.had $630 million remaining unused and available capacity
relating to its $1 billion revolving credit facilities. The revolving credit facilities are comprised of a $400 million, three-year senior revolving credit facility expiring
in May 2004 and a $600 million, 364-day senior revolving credit facility expiring in February 2003. At September 30, 2002, certain of our
non-regulated subsidiaries had $6 million of unused and available revolving credit lines.

51

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



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
of September 30, 2002, our operating companies had regulatory authority to borrow up to a total of $1.27 billion in short-term debt ($671 million for CG&Eand its subsidiaries,
including $65 million forULH&P, and $600 million forPSI). As of September 30, 2002,CG&Eand its subsidiaries had $667 million (including
$63 million forULH&P) unused and available andPSIhad $520 million unused and available
under their respective regulatory authority.

Uncommitted Lines

In addition to revolving credit facilities,Cinergy,CG&E, and PSIalso maintain uncommitted lines of credit represented by written, enforceable agreements. However, the lenders under such agreements are not
obligated to make advances and, therefore, we pay no fees for these lines of credit. The purpose of these agreements is to provide the framework (including conditions to lending and events of default)
for making borrowings at an interest rate and for a term that would be determined at the time that the borrower requests an advance. At September 30, 2002,Cinergy
Corp.had uncommitted lines of $65 million, of which $45 million remained unused.CG&Eand PSIhave established
uncommitted lines of $15 million and $60 million, respectively, all of which remained unused at September 30,
2002.

Commercial Paper

Cinergy Corp.has a commercial paper program with a maximum outstanding principal amount of $800 million. This program is supported
byCinergy Corp.'s$1 billion revolving credit facilities. The commercial paper program at theCinergy
Corp.level, in part, supports the short-term borrowing needs ofCG&Eand PSI. At September 30, 2002,Cinergy Corp.had $311 million in commercial paper
outstanding.

Variable Rate Pollution Control Notes

CG&EandPSIhave 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 redeem their notes on a
daily, monthly, or annual basis, they are reflected inNotes payable and other short-term obligationsin the Balance Sheets for Cinergy,CG&E, andPSI. At September 30, 2002, CG&EandPSIhad
$196 million and $83 million outstanding in short-term
variable rate pollution control notes, respectively. In October 2002,CG&EandPSIredeemed
$84 million and $47.6 million, respectively, of variable rate pollution control notes (see Notes 3 and 4 of the "Notes to Financial Statements" in "Part I. Financial Information"
for additional information).

52

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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 asNotes receivable from affiliated companiesorNotes payable to affiliated
companieson the Balance Sheets ofCG&E,PSI, and ULH&P. Any money pool
borrowings outstanding reduce the unused and available short-term debt regulatory authority ofCG&E,PSI, andULH&P.

Capital Leases

Our operating companies are able to enter into capital leases subject to the authorization limitations of the applicable state utility commissions. New financing
authority is subject to the approval of the respective commissions. On May 22, 2002,ULH&Preceived approval from the Kentucky Public Service
Commission (KPSC) to enter into up to an additional $25 million of capital lease obligations for the period ending December 31, 2004. On June 26, 2002, PSIreceived approval from the
Indiana Utility Regulatory Commission (IURC) to enter into an additional $100 million of capital lease obligations
for the period ending December 31, 2003.

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 byCinergy Corp.The respective state utility commissions regulate
the issuance of long-term debt by our operating companies. In June 2000, the SEC issued an order under the PUHCA authorizingCinergy
Corp., over a five-year period expiring in June 2005, to increase its total capitalization based on a balance at December 31, 1999 (excluding retained
earnings and accumulated other comprehensive income (loss)) by an additional $5 billion, through the issuance of any combination of equity and debt securities. This increased authorization is
subject to certain conditions, including, among others, that common equity comprises at least 30 percent ofCinergy Corp.'sconsolidated capital
structure and thatCinergy Corp., under certain circumstances, maintains an investment grade rating on its senior debt obligations.

In
July 2002,CG&Efiled a shelf registration statement with the SEC for the issuance of up to $700 million in any
combination of unsecured debt securities, first mortgage bonds, or preferred stock. This shelf registration statement became effective in September 2002, and on September 23, 2002, CG&Esold $500 million of senior unsecured debentures thereby reducing the standby capacity of its shelf registration statement to
$200 million.PSImaintains shelf registration statements with the SEC with authority remaining to issue $400 million in unsecured
debentures, $205 million in first mortgage bonds, and $40 million in preferred stock.ULH&Pmay issue up to $30 million in secured
or unsecured debt securities and up to $20 million in first mortgage bonds.

CG&E,PSI, andULH&Pare also subject to
the various state public utility commissions for authority to issue securities. At September 30, 2002,PSIhad authority to issue up to
$452 million in any combination of unsecured debt securities or first mortgage bonds, andULH&Phad authority to issue up to $75 million
in secured or unsecured bonds. As a result of the issuance of $500 million of unsecured debentures,CG&Ehad no remaining authority for the
issuance of securities.CG&Eintends to file for additional authority from the PUCO in the fourth quarter of 2002.

On
October 18, 2002,PSIfiled a petition with the IURC for the purpose of securing authorization and approval to issue promissory
notes toCinergyfor the acquisition of the Butler County, Ohio and Henry County, Indiana peaking plants. These peaking plants are currently owned by
indirect wholly-

53

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owned subsidiaries ofCinergy. In the petition,PSIseeks the approval to issue two promissory notes to Cinergy. One promissory note will be for the principal amount of $200 million with an annual interest rate of 6.302% and will mature on
April 15, 2004. The second promissory note will be for the remainder of the purchase price, which will be determined by the IURC, with an annual interest rate of 6.403% and will mature on
September 1, 2004. Each promissory note will be pre-payable at the option ofPSI, in whole or in part, at any time before its
scheduled maturity, without penalty or premium. The promissory notes will be subordinated and subject in right of payment to the full prior payment of all
senior debt ofPSI. At this time,PSIcannot predict the outcome of this matter. For further discussion
of the acquisition, see "Transfer of Generating Assets toPSI" in "Results of OperationsFuture."

Off-Balance Sheet Financing

As discussed in the 2001 Form 10-K,Cinergyuses special-purpose entities (SPE) to finance
various projects. The Financial Accounting Standards Board (FASB) issued an exposure draft in July 2002 on a proposed interpretation of consolidation accounting standards that would
significantly change the consolidation requirements for SPEs. We have reviewed the impact of this proposal and, if adopted in its current form, we believe that it would require consolidation of all
the SPEs discussed in the 2001 Form 10-K, except the accounts receivable sale facility discussed in Note 5 of the "Notes to Financial Statements" in "Part I. Financial
Information." The accounts receivable sale facility involves transfers of financial assets to a qualifying SPE, which is exempted from consolidation by Statement of Financial Accounting Standards
No. 140,Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilitiesand this proposal. This exposure draft
proposes that SPEs not meeting the required criteria be consolidated at fair value, effective in the second quarter of 2003 forCinergy.

As
discussed in the 2001 Form 10-K,Cinergyhas an arrangement with an SPE that has contracted to buy five combustion
turbines (turbines). In the second quarter of 2002,Cinergyexercised its option to purchase the contractual rights to two of the turbines and
subsequently sold those rights to third parties.Cinergyrecognized a loss of $6.9 million on these sales. The rights to the remaining turbines
remain with the SPE.

54

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Securities Ratings

As of September 30, 2002, the major credit ratings 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

BBBCommercial Paper

F-2

P-2

A-2Preferred Trust Securities

BBB+

Baa2

BBBCG&ESenior Secured Debt

A-

A3

A-Senior Unsecured Debt

BBB+

Baa1

BBBJunior Unsecured Debt

BBB

Baa2

BBB-Preferred Stock

BBB

Baa3

BBB-Commercial Paper

F-2

P-2

Not RatedPSISenior Secured Debt

A-

A3

A-Senior Unsecured Debt

BBB+

Baa1

BBBJunior Unsecured Debt

BBB

Baa2

BBB-Preferred Stock

BBB

Baa3

BBB-Commercial Paper

F-2

P-2

Not RatedULH&PSenior Unsecured Debt

Not Rated

Baa1

BBB


---

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

In
April 2002, Moody's affirmed the credit ratings ofCinergy Corp.and its operating subsidiaries, CG&EandPSI. Moody's also removedCinergy Corp.from
review for possible downgrade, and assigned stable outlooks to the debt and preferred stock ofCinergy Corp.and all of its operating subsidiaries.

In
June 2002, S&P affirmedCinergy Corp.'scorporate credit rating, the rating of the company's commercial paper program, and the
secured debt ratings ofCG&EandPSI, while lowering the credit ratings on other issuances. S&P removed
all of theCinergy Corp.,CG&E, andPSIratings from
CreditWatch with negative implications and assigned a stable outlook.

Also
in June 2002, Fitch affirmed the credit ratings ofCinergy Corp.Fitch also changed the rating outlook on these securities
from negative to stable and affirmed the ratings ofCG&EandPSI.

These
securities ratings may be revised or withdrawn at any time, and each rating should be evaluated independently of any other rating.

Equity Securities

In February 2002,Cinergyissued 6.5 million shares of common stock with net proceeds of
approximately $200 million. As discussed in the 2001 Form 10-K, in November 2001,Cinergychose to

55

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reinstitute the practice of issuing newCinergy Corp.common shares to satisfy obligations under its various employee stock plans and the Cinergy Corp.
Direct Stock Purchase and Dividend Reinvestment Plan. See Note 2 of the "Notes to Financial Statements" in "Part I. Financial Information" for additional information on issued shares.

In
July 2002,Cinergyannounced that it is implementing a policy that will generally prohibit executive officers and directors from
selling stock acquired by exercising options until 90 days after they leave the company or board.

Guarantees

Cinergy Corp.has made separate guarantees to certain counterparties regarding performance of commitments by our consolidated
subsidiaries, unconsolidated subsidiaries, and joint ventures. We are subject to a SEC order under the PUHCA, which limits the amount we can have outstanding under guarantees at any one time to
$2 billion. As of September 30, 2002, we had $547 million outstanding under the guarantees issued, of which approximately 75 percent represents guarantees of obligations
reflected onCinergy'sConsolidated Balance Sheets. These outstanding guarantees relate to subsidiary and joint venture indebtedness and performance
commitments.

Collateral Requirements

Cinergyhas 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, 2002 trading portfolio, if such an event were to occur, Cinergywould be required to
issue up to approximately $48 million in collateral related to its gas and power trading operations in connection
with a downgrade to anything below an investment grade rating.

56

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2002 QUARTERLY RESULTS OF OPERATIONSHISTORICAL

Summary of Results

Electric and gas gross margins and net income forCinergy,CG&E,
andPSIfor the quarters ended September 30, 2002 and 2001 were as follows:

Cinergy(1)

CG&E and subsidiaries

PSI2002

2001

2002

2001

2002

2001(in thousands)Electric gross margin

$
683,322

$
650,671

$
356,158

$
345,546

$
302,089

$
268,122Gas gross margin


37,904


25,020


28,858


28,488





Net income


130,568


128,471


71,769


89,390


67,643


56,454


---

Net
income for the third quarter of 2002 was $131 million ($.77 per share on a diluted basis) as compared to $128 million ($.80 per share on a diluted basis) for the same
period last year. Income before taxes for the period was $176 million compared to $208 million for the same period a year ago. Increased gross margins were offset by higher operating
costs.Cinergy'sincome also reflects a reduction in income taxes primarily related to tax credits associated with the production of synthetic fuel,
beginning in July 2002.

Electric Operating Revenues

|               |       | Cinergy(1) |       | CG&E and subsidiaries |   | PSI   |      
|-------------- | ----- | ---------- | ----- | --------------------- | - | ----- | -----
|
|
|Retail         |       | $          | 803   |                       | $ | 772   |      
|Wholesale      |       |            | 1,694 |                       |   | 1,747 |      
|Transportation |       |            | 4     |                       |   | 1     |      
|Other          |       |            | 53    |                       |   | 19    |      
|               |       |            |       |                       |   |       |      
|               | Total |            | $     | 2,554                 |   | $     | 2,539

---

Electric operating revenuesincreased forCinergyand CG&Eand decreased forPSIfor the quarter ended September 30, 2002, as compared to 2001. Retail
revenues increased forCinergyandPSIprimarily due to increased megawatt hour (MWh) sales as a result
of warmer than normal weather for the quarter. The revenue increase also reflects higher realizations and changes in rate tariff adjustments associated with demand-side management programs
and certain construction programs (see "Construction Work in Progress" in "Results of Operations-Future").CG&E'sretail revenues were relatively flat
for the quarter ended September 30, 2002, as compared to 2001. Increased residential sales, attributable to warmer than normal weather, were offset by decreases in revenue from commercial and
industrial customers. This decrease reflects a sluggish economy and the migration of such customers to a transportation-only tariff in connection with the Ohio electric customer choice
program.

Wholesale
revenues decreased slightly forCinergyfor the quarter ended September 30, 2002, as compared to 2001. A reduction in the
average price received per MWh was partially offset by increases in MWh sold. In addition,PSI'sand CG&E'swholesale revenues reflect the
implementation of the new joint operating agreement effective April 2002 (see "Termination of Operating
Agreement" in "Results of Operations-Future"). In connection with implementation of the new operating agreement, the

57

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majority of new wholesale sales transactions entered into since April 2002 were originated on behalf ofCG&E.

OtherElectric operating revenuesincreased forCinergyand CG&Efor the quarter ended September 30, 2002,
 as compared to 2001, due primarily to third party coal sales.

Gas Operating Revenues

|               |       | Cinergy(1) |       | CG&E and subsidiaries |  
|-------------- | ----- | ---------- | ----- | --------------------- | -
|
|
|Retail         |       | $          | 34    |                       | $
|Wholesale      |       |            | 1,241 |                       |  
|Transportation |       |            | 7     |                       |  
|Other          |       |            |      |                       |  
|               |       |            |       |                       |  
|               | Total |            | $     | 1,282                 |  

---

Gas operating revenuesincreased forCinergyand decreased for CG&Efor the quarter ended September 30, 2002, as
compared to 2001. Wholesale gas revenues for Cinergyincreased for the quarter ended September 30, 2002, as compared to 2001, mainly due to a higher price received per thousand cubic feet
(mcf) sold by Cinergy Marketing & Trading, LP (Marketing & Trading). Wholesale natural gas commodity spot prices were approximately 15 percent higher on average than in the third
quarter of 2001. Also contributing toCinergy'swholesale revenues was an increase in the amount of mcf delivered.

Cinergy'sandCG&E'sretail gas revenues decreased primarily due to a reduction in retail
mcf sales and lower prices received per mcf delivered. The lower price reflects a decrease in the wholesale gas commodity cost, which is passed directly to the retail customer
dollar-for-dollar under the gas cost recovery mechanism mandated by state law. Partially offsetting the decrease in wholesale gas commodity costs was an increase in CG&E'sbase rates, as approved by
the PUCO in May 2002 (See "CG&EGas Rate Case" in "Results of
OperationsFuture").

Other Revenues

Other revenues increased for the quarter ended September 30, 2002, as compared to 2001. This increase is primarily due to the sale of synthetic fuel,
beginning in July 2002 (see "New Business Initiative" in "Results of OperationsFuture").

58

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Operating Expenses

|                              |       | Cinergy(1) |       | CG&E and subsidiaries |   | PSI   |      
|----------------------------- | ----- | ---------- | ----- | --------------------- | - | ----- | -----
|
|
|Fuel                          |       | $          | 250   |                       | $ | 210   |      
|Purchased and exchanged power |       |            | 1,621 |                       |   | 1,679 |      
|Gas purchased                 |       |            | 1,244 |                       |   | 762   |      
|Operation and maintenance     |       |            | 365   |                       |   | 265   |      
|Depreciation                  |       |            | 103   |                       |   | 97    |      
|Taxes other than income taxes |       |            | 65    |                       |   | 59    |      
|                              |       |            |       |                       |   |       |      
|                              | Total |            | $     | 3,648                 |   | $     | 3,072

---

Fuel

Fuelprimarily 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, 2001, to the quarter ended September 30, 2002:

Cinergy(1)

CG&E

PSI(in millions)Fuel expenseSeptember 30, 2001

$
210

$
88

$
124Increase (decrease) due to changes in:Price of fuel


6


(5
)

11Deferred fuel cost


3





3MWh generation


7


9


(2
)Other(2)


24


22


Fuel expenseSeptember 30, 2002

$
250

$
114

$
136


---

Purchased and Exchanged Power

Purchased and exchanged powerexpense decreased slightly for Cinergyfor the quarter ended
September 30, 2002, as compared to 2001. A reduction in the average price paid per MWh was partially offset by
increases in MWh volumes purchased. Wholesale electric on-peak commodity prices were nine percent lower on average than the quarter ended last year. As discussed above, CG&E'sandPSI'spurchased and exchanged power expense also reflects the effects of the implementation of the new joint operating agreement beginning in April 2002.

Gas Purchased

Gas purchasedexpense increased forCinergyand decreased for CG&Efor the quarter ended September 30, 2002, as compared to 2001.Cinergy'sgas purchased
expense increased primarily due to an increase in the average cost per mcf of gas purchased by Marketing & Trading. Wholesale natural gas commodity spot prices were approximately
15 percent higher on average for the quarter ended September 30, 2002, as compared to 2001. Also, contributing toCinergy'sincrease was
increased volumes purchased by Marketing & Trading.CG&E'sgas purchased expense decrease reflects a

59

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reduction in volumes purchased and a decrease in the average cost purchased per mcf.CG&E'swholesale commodity cost is passed directly to the retail
customer dollar-for-dollar under the gas cost recovery mechanism mandated by state law.

Operation and Maintenance

Operation and maintenanceexpense increased forCinergy, CG&E, andPSIfor the quarter ended September 30, 2002, as compared to 2001. Approximately
40 percent ofCinergy'sincrease reflects costs associated with the production of synthetic fuel, beginning in July 2002. Additionally, Cinergy's,CG&E's, andPSI'sincrease reflects the
recognition of the remaining costs associated with employee severance programs, which began in the second quarter of 2002, increased costs of employee compensation and benefit programs, and higher
transmission expenses.Cinergy'sandPSI'sincrease also reflects increased amortization of
demand-side management expenditures.

Depreciation

Depreciationexpense increased forCinergy, CG&E, andPSIfor the quarter ended September 30, 2002, as compared to 2001, primarily
attributable to the addition of depreciable plant, includingCinergy'sacquisitions of non-regulated peaking generation in 2001.

Taxes Other Than Income Taxes

Taxes other than income taxesincreased forCinergyand CG&Efor the quarter ended September 30, 2002, as compared to 2001. This increase is primarily attributable to increased property taxes.

Equity in Earnings (Losses) of Unconsolidated Subsidiaries

Equity in earnings (losses) of unconsolidated subsidiariesincreased for the quarter ended September 30,
2002, as compared to 2001, primarily due to changes in the market valuation of certain technology investments.

Interest

Interestexpense decreased forCinergyfor the quarter ended
September 30, 2002, as compared to 2001. This decrease was primarily the result of lower interest rates.

Preferred Dividend Requirement of Subsidiary Trust

Preferred dividend requirement of subsidiary trustexpense relates to quarterly payments to be made to holders of Cinergy'spreferred trust securities, which were issued in December 2001.

Income Taxes

Income taxexpense decreased forCinergyfor the quarter ended
September 30, 2002, as compared to 2001, primarily due to tax credits associated with the production of synthetic fuel, beginning in July 2002. CG&E'sincome tax expense decreased for the
quarter ended September 30, 2002, as compared to 2001, primarily due to a decrease in taxable income.

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2002 YEAR TO DATE RESULTS OF OPERATIONSHISTORICAL

Summary of Results

Electric and gas gross margins and net income forCinergy,CG&E,
andPSIfor the nine months ended September 30, 2002 and 2001 were as follows:

|                      |  | Cinergy(1) |           | CG&E and subsidiaries |   | PSI      
|--------------------- |  | ---------- | --------- | --------------------- | - | ---------
|
|
|Electric gross margin |  | $          | 1,820,896 |                       | $ | 1,707,077
|Gas gross margin      |  |            | 158,726   |                       |   | 169,343  
|Net income            |  |            | 271,279   |                       |   | 331,685  

---

Net
income for the nine months ended September 30, 2002 was $271 million ($1.61 per share on a diluted basis) as compared to $332 million ($2.06 per share on a
diluted basis) for the same period last year. Income before taxes for the period was $395 million compared to $512 million for the same period a year ago. Increased total gross margins
were offset by the recognition of approximately $71 million of costs associated with employee severance programs and charges related to the write-off of certain equipment and
technology investments, and higher operating costs.

Electric Operating Revenues

|               |       | Cinergy(1) |       | CG&E and subsidiaries |   | PSI   |      
|-------------- | ----- | ---------- | ----- | --------------------- | - | ----- | -----
|
|
|Retail         |       | $          | 2,121 |                       | $ | 2,052 |      
|Wholesale      |       |            | 2,930 |                       |   | 4,738 |      
|Transportation |       |            | 9     |                       |   | 2     |      
|Other          |       |            | 118   |                       |   | 46    |      
|               |       |            |       |                       |   |       |      
|               | Total |            | $     | 5,178                 |   | $     | 6,838

---

Electric operating revenuesforCinergy, CG&E, andPSIdecreased for the nine months ended September 30, 2002, as compared to 2001. Cinergy'sandCG&E'sdecrease in wholesale revenues primarily reflects a reduction in the average price
received per MWh. Additionally, the decrease inPSI'swholesale revenues primarily reflect the implementation of the new joint operating agreement
effective April 2002 (see "Termination of the Operating Agreement" in "Results of Operations-Future"). In connection with implementation of the new operating agreement, the majority of new
wholesale sales transactions entered into since April 2002 were originated on behalf ofCG&E.

Retail
revenues increased forCinergyandPSIdue to increased MWh sales, as a result of
warmer than normal weather. Also contributing to the increase were higher realizations and changes in rate tariff adjustments associated with demand-side management, Purchase Power Tracker
(Tracker), and fuel cost recovery programs. The cost of fuel forPSI'sretail customers is passed on dollar-for-dollar under the
state mandated fuel cost recovery mechanism.CG&E'sretail revenues were relatively flat for the nine months ended September 30, 2002, as
compared to 2001. Increased residential sales, attributable to warmer than normal weather, were offset by decreases in revenue from commercial and industrial customers. This decrease reflects a
sluggish economy and the migration of such customers to a transportation-only tariff, in connection with the Ohio electric customer choice program.

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OtherElectric operating revenuesincreased forCinergyand CG&Efor the nine months ended September 30,
2002, as compared to 2001, due primarily to third party coal sales.

Gas Operating Revenues

|               |       | Cinergy(1) |       | CG&E and subsidiaries |  
|-------------- | ----- | ---------- | ----- | --------------------- | -
|
|
|Retail         |       | $          | 242   |                       | $
|Wholesale      |       |            | 3,026 |                       |  
|Transportation |       |            | 32    |                       |  
|Other          |       |            | 2     |                       |  
|               |       |            |       |                       |  
|               | Total |            | $     | 3,302                 |  

---

Gas operating revenuesforCinergyand CG&Edecreased for the nine months ended September 30, 2002, as compared
to 2001. Decreases in retail gas revenues were primarily due to a lower
price received per mcf delivered. The lower price reflects a substantial decrease in the wholesale gas commodity cost, which is passed directly to the retail customer
dollar-for-dollar under the state mandated gas cost recovery mechanism.

Cinergy'sdecrease in wholesale gas revenues was mainly due to a lower price received per mcf sold by Marketing & Trading.
Wholesale natural gas commodity spot prices were 33 percent lower on average than in the nine months ended 2001. This decrease was partially offset by an increase in the amount of mcf
delivered.

Other Revenues

Other revenues increased for the nine months ended September 30, 2002, as compared to 2001. This increase is primarily due to the sale of synthetic fuel,
beginning in July 2002.

Operating Expenses

|                              |       | Cinergy(1) |       | CG&E and subsidiaries |   | PSI   |       
|----------------------------- | ----- | ---------- | ----- | --------------------- | - | ----- | ------
|
|
|Fuel                          |       | $          | 672   |                       | $ | 606   |       
|Purchased and exchanged power |       |            | 2,685 |                       |   | 4,525 |       
|Gas purchased                 |       |            | 3,143 |                       |   | 3,668 |       
|Operation and maintenance     |       |            | 973   |                       |   | 782   |       
|Depreciation                  |       |            | 304   |                       |   | 278   |       
|Taxes other than income taxes |       |            | 202   |                       |   | 176   |       
|                              |       |            |       |                       |   |       |       
|                              | Total |            | $     | 7,979                 |   | $     | 10,035

---

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Fuel

Fuelprimarily 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, 2001, to the nine months ended September 30, 2002:

Cinergy(1)

CG&E

PSI(in millions)Fuel expenseSeptember 30, 2001

$
606

$
268

$
332Increase (decrease) due to changes in:Price of fuel


1


(17
)

18Deferred fuel cost


13





13MWh generation


4


10


(6
)Other(2)


48


42


Fuel expenseSeptember 30, 2002

$
672

$
303

$
357


---

Purchased and Exchanged Power

Purchased and exchanged powerexpense decreased forCinergy, CG&E, andPSIfor the nine months ended September 30, 2002, as compared to 2001.Cinergy'sandCG&E'sdecrease is due primarily to a reduction in the purchase price. Partially
offsetting this decrease in purchase price was an increase in volumes purchased. As discussed above,CG&E'sand PSI'spurchased and exchanged power
expense
also reflects the effects of the implementation of the new joint operating agreement beginning in April 2002.

Gas Purchased

Gas purchasedexpense decreased forCinergyand CG&Efor the nine months ended September 30, 2002, as compared to 2001.Cinergy'sdecrease is
primarily due to a decrease in the average cost per mcf of gas purchased by Marketing & Trading. Wholesale natural gas commodity spot prices were 33 percent lower on average than the
nine months ended last year.CG&E'sgas purchased expense decreased primarily due to a decrease in the average cost purchased per mcf. CG&E'swholesale commodity cost is passed directly to the retail customer dollar-for-dollar under the gas cost recovery
mechanism mandated by state law.

Operation and Maintenance

Operation and maintenanceexpense increased forCinergy, CG&E, andPSIfor the nine months ended September 30, 2002, as compared to 2001.Cinergy's,CG&E's, andPSI'sincrease reflects the
recognition of costs associated with employee severance programs, which began in the second quarter of 2002, increased costs of employee compensation and benefit programs, and higher transmission
expenses.Cinergy'sandPSI'sincrease also reflects increased amortization of demand-side
management expenditures. Additionally,Cinergy'sincrease includes costs associated with the production of synthetic fuel, beginning in
July 2002.

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Depreciation

Depreciationexpense increased forCinergy, CG&E, andPSIfor the nine months ended September 30, 2002, as compared to 2001, primarily
attributable to the addition of depreciable plant, includingCinergy'sacquisitions of non-regulated peaking generation in 2001.

Taxes Other Than Income Taxes

Taxes other than income taxesincreased forCinergy, CG&E, andPSIfor the nine months ended September 30, 2002, as compared to 2001. This increase is
primarily attributable to increased property taxes.

Equity in Earnings (Losses) of Unconsolidated Subsidiaries

Equity in earnings (losses) of unconsolidated subsidiariesincreased for the nine months ended
September 30, 2002, as compared to 2001, primarily due to changes in the market valuation of certain technology investments recognized in 2001, and the dissolution of a subsidiary.

MiscellaneousNet

Miscellaneousnetexpense increased forCinergyfor
the nine months ended September 30, 2002, as compared to 2001, primarily reflecting the write-off of certain equipment and technology investments.

Interest

Interestexpense decreased forCinergy, CG&E, andPSIfor the nine months ended September 30, 2002, as compared to 2001, primarily as a
result of lower interest rates.

Preferred Dividend Requirement of Subsidiary Trust

Preferred dividend requirement of subsidiary trustrelates to quarterly payments to be made to holders of Cinergy'spreferred trust securities, which were issued in December 2001.

Income Taxes

Income taxexpense decreased forCinergyand PSIfor the nine months ended September 30, 2002, as compared to 2001. This decrease was primarily due to the decrease in taxable income. Also
contributing toCinergy'sdecrease were tax credits associated with the production of synthetic fuel beginning July 2002. CG&E'sincome tax
expense increased for the nine months ended September 30, 2002, as compared to 2001, primarily reflecting tax changes,
including state rate changes, due to deregulation.

ULH&P

The Results of Operations discussion forULH&Pis presented only for the nine months ended September 30,
2002, in accordance with General Instruction H(2)(a) of Form 10-Q.

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Electric
and gas margins and net income forULH&Pfor the nine months ended September 30, 2002 and 2001, were as follows:

ULH&P2002

2001(in thousands)Electric gross margin

$
52,255

$
61,164Gas gross margin


22,652


26,740Net income


9,110


26,854


Electric Gross Margin

Electric operating revenuesdecreased $5.4 million for the nine months ended September 30, 2002, as
compared to 2001, primarily due to recognition of revenues in 2001 which were previously deferred subject to refund in connection with a 2000 retail rate filing with the KPSC. A settlement was reached
in May 2001, allowingULH&Pto retain these revenues. Warmer than normal weather partially offset the decrease in revenues. Electricity purchased from parent company for
resaleincreased $3.5 million for the nine months ended September 30, 2002, as compared to
2001, due to a new wholesale power contract withCG&Ethat became effective in January 2002. This five-year agreement is a negotiated
fixed-rate contract that replaced the previous cost of service based contract that expired on December 31, 2001.

Gas Gross Margin

Gas operating revenuesdecreased $29.2 million for the nine months ended September 30, 2002, as
compared to 2001. This decrease is primarily due to lower price received per mcf. The lower price reflects a substantial decrease in the wholesale gas commodity cost. Partially offsetting the decrease
in gas revenues was an increase inULH&P'sbase rates approved by the KPSC in January 2002 (see
"ULH&PGas Rate Case" in "Results of OperationsFuture").Gas purchasedexpenses decreased
$25.1 million for the nine months ended September 30, 2002, as compared to 2001, due to lower prices paid per mcf. The wholesale gas commodity cost is passed directly to the retail
customer dollar-for-dollar under the gas cost recovery mechanism that is mandated under state law.

Operation and Maintenance

Operation and maintenanceexpense increased $9.2 million for the nine months ended September 30,
2002, as compared to 2001, due primarily to higher transmission costs associated with the new wholesale power contract withCG&Ethat became effective
in January 2002.

Miscellaneousnet

Miscellaneousnetexpense increased for the nine months ended September 30, 2002, as compared
to 2001, primarily due to the expensing of previously deferred costs, that were denied recovery in the final order onULH&P'sgas rate case.

Income Taxes

Income taxexpense decreased for the nine months ended September 30, 2002, as compared to 2001, primarily
due to a reduction in taxable income.

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RESULTS OF OPERATIONSFUTURE

Electric Industry

Wholesale Market Developments

Federal Energy Regulatory Commission (FERC) Notice of Proposed Rulemaking (NOPR)

In July 2002, the FERC issued a NOPR on "Remedying Undue Discrimination through Open Access Transmission Service and Standard Electricity Market Design",
that proposed significant changes designed to create genuine wholesale competition, efficient transmission systems, the right pricing signals for investment in transmission, generation facilities and
demand reduction, and more customer options. Market monitoring and market power mitigation proposals are also critical parts of the proposals for standardized power market rules. Among other things,
the FERC also proposes to amend its regulations under the Federal Power Act to modify the proforma open access transmission tariff established under the FERC's Order No. 888 to remedy remaining
undue discrimination in the provision of interstate transmission services and in other industry practices, and to assure just and reasonable rates within and among regional power markets. FERC
proposes to require all public utilities with open access transmission tariffs to file modifications to their tariffs to reflect non-discriminatory, standardized transmission services and
standardized wholesale electric market design. FERC proposes a phased compliance process. By July 31, 2003, all public utilities that own, operate, or control interstate transmission facilities
must file revised open access transmission tariffs to become effective September 30, 2003, that place transmission service for bundled retail customers under the same terms and conditions of
service as wholesale transmission. By December 1, 2003, all public utilities that own, control, or operate interstate transmission facilities must file revised open access transmission tariffs,
to become effective no later than September 30, 2004, or such other time as directed by the FERC, that reflect all of the remaining revisions and requirements of the Final Rule in
the proceeding.Cinergyis currently evaluating this ruling and at this time cannot determine the impact to either our financial position or results of
operations.

Retail Market Developments

Ohio

As discussed in the 2001 Form 10-K, in July 1999, Ohio Governor Robert Taft signed Amended Substitute Senate Bill No. 3 (Electric
Restructuring Bill), beginning the transition to electric deregulation and customer choice for the State of Ohio. The Electric Restructuring Bill created a competitive electric retail service market
effective January 1, 2001. The legislation provides for a market development period that began January 1, 2001, and ends no later than December 31, 2005. During the market
development period, electric rates toCG&Ecustomers are frozen.

In
May 2000,CG&Ereached a stipulated agreement with the PUCO staff and various other interested parties with respect to its
proposal to implement electric customer choice in Ohio effective January 1, 2001. In August 2000, the PUCO approvedCG&E'sstipulation
agreement. Subsequently, two parties filed applications for rehearing with the PUCO. In October 2000, the PUCO denied these applications. One of the parties appealed to the Ohio Supreme Court
in the fourth quarter of 2000 andCG&Esubsequently intervened in that case. In April 2002, the Ohio Supreme Court affirmed the PUCO's stipulated
agreement withCG&Ewith respect to implementing electric customer choice. The Ohio Supreme Court ruling leaves CG&E'stransition plan entirely
intact.

UnderCG&E'stransition plan, retail customers continue to receive transportation 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 inCG&E'sfrozen
rates. However, shopping credits for the first 20 percent of electricity usage in each customer class to switch suppliers are higher thanCG&E's

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electric generation costs in order to stimulate the development of the competitive electric retail service market.

A
FERC order, that was effective April 2002, allowedCinergyto jointly dispatch the regulated generating assets of PSIin conjunction with the
deregulated generating assets ofCG&E. The order also authorizes the
transfer of theCG&Egenerating assets to a non-regulated affiliate. However,Cinergyhas
determined that it can realize the benefits of the new joint dispatch agreement without transferringCG&E'sgeneration assets. Therefore, while CG&Ewill continue to pursue any remaining regulatory
and other approvals already in process that are necessary for the transfer ofCG&E'sgeneration assets, Cinergydoes not plan to transferCG&E'sgenerating assets to a non-regulated affiliate in
the foreseeable future. For further discussion of the joint dispatch agreement, see "Termination of Operating Agreement."

Supply-side Actions

In December 2001,PSIfiled a petition with the IURC to acquire the Butler County, Ohio and Henry County,
Indiana peaking plants from subsidiaries of Cinergy Capital & Trading, Inc. (Capital & Trading). This transfer, if approved, will increase PSI'sgenerating portfolio by
approximately 800 megawatts (MW). See "Transfer of Generating Assets to PSI" for additional information.

Demand-side Actions

In July 2002, we experienced record peak loads of 11,133 MW, 5,265 MW, and 6,088 MW forCinergy, CG&E, andPSI, respectively.Cinergyand CG&Esubsequently set new
record peak loads of 11,305 MW and 5,311 MW, respectively, in August 2002. We met customer demands with our own supply
and planned purchases from other regional electric suppliers.

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

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, Cinergyagreed 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.

On
December 15, 2001, the Midwest ISO initiated startup of its operations with the provision of a variety of support or stand-alone services to its transmission owning members.
The Midwest ISO achieved full startup, including implementation of tariff administration, on February 1, 2002. Although the Midwest ISO continues to develop, modify, and enhance its various
operating practices, it has assumed functional control of the transmission systems of its member companies, including theCinergyutilities. The impact
of this transfer was not material to our financial position or results of operations.

In
July 2002, the FERC issued a NOPR that proposed significant changes to the electricity wholesale market. At this time we are unable to determine the impact of the NOPR upon the
Midwest ISO andCinergy. See "Federal Energy Regulatory Commission Notice of Proposed Rulemaking" for further discussion.

Finally,
in its July 17, 2002 open meeting and subsequent orders, FERC reaffirmed its expectation that the Midwest ISO and the PJM Interconnection, LLC (PJM) implement a common
wholesale market between them by October 1, 2004. FERC also imposed more immediate deadlines upon the Midwest ISO, PJM, and various other parties to establish certain protocols, including the
elimination of pancaked transmission rates between the Midwest ISO and PJM, necessary to establish a "virtual" single regional transmission organization among the Midwest ISO and PJM companies. As
part of the FERC orders, the FERC has opened an investigation under Section 206 of the Federal Power Act into the justness and reasonableness of the "through and out" transmission rates of the
Midwest ISO and

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PJM.Cinergyis participating in the Section 206 hearing, along with the other transmission owners who are members or potential members of the
Midwest ISO or PJM. Pursuant to an order issued in July 2002, the FERC indicated that it plans to issue a decision by July 31, 2003. As part of this proceeding, Cinergyis advocating the
removal of pancaked transmission rates between the Midwest ISO and PJM including all of the former Alliance Regional
Transmission Organization companies, as well as lost revenue recovery for transmission owners who are affected by the removal of the pancaked transmission rates. At this time, Cinergycannot determine
the impact of either the FERC orders or the related Section 206 investigation upon either our financial position or
results of operations.

Federal Update

Energy Bill

President George W. Bush (President Bush), in conjunction with the work of an inter-agency energy task force headed by Vice President Richard Cheney, developed a
number of recommendations to address the energy security needs of America. The U.S. House of Representatives (House) passed its version of energy security legislation, H.R. 4 in 2001 and the U.S.
Senate (Senate) passed its version, S. 517, on April 25, 2002. The bill remains in a joint House/Senate Conference Committee. Many issues are yet to be resolved and may not result in a final
bill that will be acceptable to both Houses of Congress before this congressional session ends.

Both
House and Senate versions of the energy bill include tax provisions for favorable gas distribution line depreciation changes, tax incentives for combined heat and power facilities
and for other non-traditional fuel sources such as biomass.

The
Senate bill includes an electricity provision that calls for repeal of the PUHCA with consumer protection provisions and increased oversight by the FERC over mergers. The Senate bill
also includes
a Renewable Portfolio Standard, mandating that utilities purchase an increasing percent of power from renewable sources.

At
this time, it is not possible to predict whether energy legislation will pass by the end of this session of Congress or what provisions affecting Cinergywill be included. Because of this, it is not
possible at this time to determine the impact of the pending legislation on our financial position
or results of operations.

Significant Rate Developments

Purchased Power Tracker

As discussed in the 2001 Form 10-K, in May 1999,PSIfiled a petition with the IURC
seeking approval of a Tracker. This request was designed to provide for the recovery of costs related to purchases of power necessary to meet native load requirements to the extent such costs are not
sought through the existing fuel adjustment clause.

A
hearing was held before the IURC in February 2001, to determine whether it was appropriate forPSIto continue the Tracker for
future periods. In April 2001, a favorable order was received extending the Tracker process for two years, through the summer of 2002.PSIis
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 portions), with the remaining 10 percent deferred for subsequent recovery inPSI'snext general rate case.

In
June 2001,PSIfiled a petition with the IURC seeking approval of the recovery of its summer 2001 purchased power costs through
the Tracker. In October 2001,PSIfiled an amended petition with the IURC, seeking approval of the costs associated with additional power
purchases made during July and August 2001. In February 2002, the IURC issued an order approving the recovery of $15.3 million of PSI'ssummer 2001 purchase power costs via the Tracker.
The remaining $1.7 million was deferred

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for subsequent recovery inPSI'snext general rate case. In March 2002,PSIfiled a petition
with the IURC seeking approval to extend the Tracker process beyond the summer of 2002 and seek recovery of power purchases made year-round (rather than just in the summer months) as
needed to maintain adequate reserves. A hearing is scheduled for the first quarter of 2003.

In
June 2002,PSIfiled a petition with the IURC seeking approval of the recovery through the Tracker of its actual summer 2002
purchased power costs. A hearing is scheduled for the first quarter of 2003.

Termination of Operating Agreement

As discussed in the 2001 Form 10-K,CG&E,PSI,
and Services filed a notice of termination of the operating agreement with the FERC in October 2000. In December 2000, the FERC ruled that the companies have the contractual right to
terminate the agreement and established a termination effective date in May 2001 and also set a hearing date in May 2001 on the issue of the reasonableness of termination.

Certain
parties appealed the FERC's decision to establish a termination date. In March 2001, the IURC initiated an investigation proceeding into the termination of the operating
agreement. In May 2001, the parties to the FERC proceeding reached a settlement agreement resolving the termination issues and certain compensation and damage issues. The settlement agreement
was approved by the FERC in June 2001 and delayed the termination of the existing operating agreement until a new successor agreement was approved by the FERC.

In
August 2001, the parties to both the IURC proceeding and the previous FERC proceeding entered into two complementary settlement agreements. Both the IURC and FERC agreements
were conditioned upon FERC acceptance of the proposed successor agreements. The IURC settlement agreement was approved by the IURC in September 2001. Cinergyfiled the successor agreements with the
FERC in October 2001 and in March 2002, the FERC approved the successor agreements. The
successor agreements allowCinergyto jointly dispatch the regulated generating assets ofPSIin
conjunction with the deregulated generating assets ofCG&Eat market based pricing. The successor agreements were implemented effective in
April 2002.

PSI Fuel Adjustment Charge

As discussed in the 2001 Form 10-K,PSIdefers fuel costs that are recoverable in future
periods subject to IURC approval under a fuel recovery mechanism. In June 2001, the IURC issued an order in aPSIfuel recovery proceeding,
disallowing approximately $14 million of deferred costs. In June 2001,PSIformally requested that the IURC reconsider its disallowance
decision. In August 2001, the IURC indicated that it would reconsider its decision andPSIcontinued the deferral of these costs. In
August 2002, the IURC issued its final ruling allowingPSIto fully recover the $14 million.

In
June 2001,PSIfiled 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 on July 30, 2002. We anticipate a decision in the fourth
quarter of 2002.

Construction Work in Progress (CWIP) Ratemaking Treatment for Nitrogen Oxide (NOX ) Equipment

During the third quarter of 2001,PSIfiled an application with the IURC requesting CWIP ratemaking treatment for
costs related to NOX equipment currently being installed at certainPSIgeneration facilities. CWIP ratemaking treatment allows for the
recovery of carrying costs on the equipment during the construction period.PSIfiled its case-in-chief testimony in
January 2002. In

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July 2002, the IURC approved the application allowingPSIto commence CWIP ratemaking treatment for its NOX equipment investments
made through December 31, 2001. Initially this rate adjustment will result in approximately a one percent increase in customer rates. Under the IURC's CWIP rules, PSImay update its CWIP Tracker at
six-month intervals. The IURC's July order also authorized PSIto defer, for subsequent recovery, post-in-service depreciation and to continue the accrual for allowance for funds used
during construction. Pursuant to FASB Statement No. 92,Regulated EnterprisesAccounting for Phase-in Plans, the equity
component of allowance for funds used during construction will not be deferred for financial reporting.

On
September 4, 2002,PSIfiled its first six-month CWIP Tracker update with the IURC, covering investments made in
NOX emission reduction equipment from January 1, 2002 through June 30, 2002. An IURC order allowing for the recovery of these incremental expenditures is expected during the
first quarter of 2003.

Transfer of Generating Assets toPSI

In December 2001,PSIfiled a petition with the IURC requesting approval, under Indiana's Power Plant
Construction Act, to acquire the Butler County, Ohio and Henry County, Indiana peaking plants from their current owners, subsidiaries of Capital & Trading, to address its need for increased
generating capacity.PSI, the IURC Staff, and the Indiana Utility Consumer Counselor reached a settlement agreement in September 2002, which if
approved by the IURC, would authorizePSIto purchase the two peaking plants. Other parties are still opposing PSI'sproposed purchase of these plants. A
hearing before the IURC was held in October 2002.PSIanticipates receiving an IURC order in this case during the fourth quarter of 2002.

In
September 2002,PSIand the applicable Capital & Trading subsidiaries filed applications with the SEC under PUHCA and the
FERC under the Federal Power Act requesting authorization for the transfer. However, in October 2002, the SEC notifiedPSIthat the transaction
is exempt from the SEC's jurisdiction under PUHCA and accordinglyPSIand the Capital & Trading subsidiaries withdrew the SEC application. In
October 2002, several parties intervened and filed protests in the proceeding before
the FERC, opposing the transfer.Cinergytimely filed an answer to these protests.Cinergyexpects the
FERC to issue an order in this case during the fourth quarter of 2002.

2002 Purchased Power Costs

In May 2002, the IURC approved a settlement agreement betweenPSI, the IURC staff, and the Indiana Office
of Utility Consumer Counselor pertaining toPSI's2002 purchased power arrangements. This agreement allows PSIto purchase the output of the Henry County,
Indiana and Butler County, Ohio peaking plants through December 31, 2002. The parties also agreed
to not challenge the recovery of costs for the purchase of power from these plants, as well as the costs of additional purchases needed for reliability purposes, through PSI'sTracker. The order also
provides for cost recovery of energy charges associated withPSI's2002
reliability purchases through the fuel cost recovery mechanism.

Gas Industry

ULH&P Gas Rate Case

On May 4, 2001,ULH&Pfiled a retail gas rate case with the KPSC seeking to increase base rates for natural
gas distribution services by $7.3 million annually, or 8.4 percent overall. In addition to an increase in base rates,ULH&Prequested
recovery through a tracking mechanism of the costs of an accelerated gas main replacement program with a capital cost of approximately $112 million over the next ten years. A hearing on this
matter was held in November 2001 and an order was issued on January 31, 2002. In the order, the KPSC authorized a base rate increase of $2.7 million, or 2.8 percent
overall, to be effective on January 31, 2002. In addition, the KPSC authorizedULH&Pto implement

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the tracking mechanism to recover the costs of the accelerated gas main replacement program for an initial period of three years, with the possibility of renewal for the full ten years. Per the terms
of the order, the tracker will be set annually. The first filing was made on March 27, 2002 and was approved by the KPSC in an order issued on August 30, 2002. The Kentucky Attorney
General (Attorney General) has appealed the KPSC's approval of the tracking mechanism to the Franklin Circuit Court (Court). The KPSC's August 30, 2002 order requires ULH&Pto maintain records
of the revenues collected under the tracking mechanism to enableULH&Pto
refund such revenues, in case the Attorney General's appeal is upheld and the KPSC orders a refund.ULH&Pfiled an application for rehearing with the
KPSC on September 20, 2002, in whichULH&Prequested that the KPSC eliminate this requirement. On October 7, 2002, the KPSC issued an
order grantingULH&P'sapplication for rehearing in part. The KPSC's order clarified thatULH&Pmust
maintain its records of the revenues collected under the tracking mechanism in case a refund is ordered at a later date; however, the KPSC's order stated that it will not address the issue of whether
to order a refund unless the Court rules that the KPSC lacked the requisite authority to approve the tracking mechanism. As a result, ULH&Pwill not record these revenues as subject to refund unless
the Court so rules. At the present time, ULH&Pcannot predict the outcome of this litigation.

CG&E Gas Rate Case

On July 31, 2001,CG&Efiled a retail gas rate case with the PUCO seeking to increase base rates for
natural gas distribution services by approximately $26 million, or 5 percent overall. Simultaneously,CG&Erequested recovery through a
tracking mechanism of the costs of an accelerated gas main replacement program with a capital cost of approximately $716 million over the next ten years. CG&Eentered into a settlement
agreement with most of the parties to the case, resolving most of the issues, and CG&Efiled the settlement agreement with the PUCO on April 17, 2002. The settlement agreement provides for a
base rate increase of
$15.1 million or 3.3 percent and also provides for implementation of the tracking mechanism, subject to rate caps, through the date of CG&E'snext base rate case.CG&Eagreed, as part of the settlement agreement, not to file a new
gas base rate case prior to January 1, 2004, absent certain exceptional circumstances. On May 30, 2002, the PUCO issued an order approving the settlement.

CG&E Gas Hedging Program

As discussed in the 2001 Form 10-K, in July 2001,CG&Efiled an application with the
PUCO requesting pre-approval of its gas procurement-hedging program. This request was subsequently denied. However, in denyingCG&E'srequest for pre-approval of a hedging program, the PUCO order provided clarification that prudently incurred hedging costs are a valid component of CG&E'sgas purchasing strategy. As a result,CG&Ehedged approximately 50 percent of its winter
2001/2002 base load requirements, using primarily fixed price forward contracts and contracts with a ceiling and floor on the price. These contracts employ the normal purchases and sales exemption,
and do not involve Statement of Financial Accounting Standards No. 133,Accounting for Derivative Instruments and Hedging Activity, (Statement
133) hedges.CG&Ewas authorized to recover the hedging program costs through its gas cost recovery mechanism.

Market Risk Sensitive Instruments and Positions

The transactions associated with the Energy Merchant Business Unit (Energy Merchant) 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 market price of electricity or other energy commodities. As Energy Merchant 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.

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The changes in fair value of the energy risk management assets and liabilities for the period ended September 30, 2002, are presented in the table below:

Change in Fair Value
September 30, 2002
(in millions)

|                                                                                         |  | Year to Date
September 30 |    
|---------------------------------------------------------------------------------------- |  | ------------------------- | ---
|Fair value of contracts outstanding at beginning of period:                              |  | $                         | 18 
|Inception value of new contracts when entered(1)                                         |  |                           | 6  
|Changes in fair value attributable to changes in valuation techniques and assumptions(2) |  |                           | 14 
|Other changes in fair value(3)                                                           |  |                           | 72 
|Option premiums paid/(received)                                                          |  |                           | 24 
|Contract reclassifications(4)                                                            |  |                           | 14 
|Contract acquisition(5)                                                                  |  |                           | (16
|Contracts settled                                                                        |  |                           | (38
|                                                                                         |  |                           |    
|Fair value of contracts outstanding at end of period                                     |  | $                         | 94 
|                                                                                         |  |                           |    

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The
following table presents the expected maturity of theEnergy risk management assetsandEnergy risk management
liabilitiesas of September 30, 2002:

|                                                   |  | Fair Value of Contracts at September 30, 2002
|-------------------------------------------------- |  | ---------------------------------------------
|
|
|Prices actively quoted                             |  | $                                            
|Prices based on models and other valuation methods |  |                                              
|                                                   |  |                                              
|Total                                              |  | $                                            
|                                                   |  |                                              

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Concentrations of Credit Risk

Credit risk is the exposure to economic loss that would occur as a result of nonperformance by counterparties, pursuant to the terms of their contractual
obligations. Specific components of credit risk include counterparty default risk, collateral risk, concentration risk, and settlement risk.

Energy Trading Credit Risk

Cinergy'sextension of credit for energy marketing and trading is governed by a Corporate Credit Policy. Written
guidelines document the management approval levels for credit limits, evaluation of creditworthiness, and credit risk mitigation procedures. Exposures to credit risks are monitored daily by the
Corporate Credit Risk function. As of September 30, 2002, approximately 98 percent of the credit exposure related to energy trading and marketing activity was with counterparties rated
Investment Grade. 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.

In
December 2001, Enron Corp. (Enron) filed for protection under Chapter 11 of the U.S. Bankruptcy Code in the Southern District of New York. We decreased our trading activities
with Enron in the months prior to its bankruptcy filing. We intend to resolve any contract differences pursuant to the terms of those contracts, business practices, and the applicable provisions of
the U.S. Bankruptcy Code, as approved by the court. While we cannot predict the court's resolution of these matters, we do not believe that any exposure relating to those contracts would have a
material impact on our financial position or results of operations. While most of our contracts with Enron were considered trading and thus recorded at fair value, a few contracts were accounted for
utilizing the normal exemption under Statement 133 (see Note 1(d)(iv) of the "Notes to Financial Statements" in "Item 1. Financial Information").
These contracts were recognized at fair value when the contracts were terminated in the fourth quarter of 2001.

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 financial status or public debt ratings.

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Accounting Changes

Energy Trading

The Emerging Issues Task Force (EITF) has been discussing several issues related to the accounting and disclosure of energy trading activities under EITF
98-10,Accounting for Contracts Involved in Energy Trading and Risk Management Activities(EITF 98-10). In June 2002, the
EITF reached a consensus in
EITF Issue 02-3,Accounting for Contracts Involved in Energy Trading and Risk Management Activitiesrequiring all realized and unrealized
gains and losses on energy trading contracts be presented net in the income statement, whether or not settled physically. However, the EITF rescinded this consensus in October 2002 and replaced
it with a requirement to present all gains and losses on energy trading derivatives on a net basis beginning in 2003. In addition, certain non-derivative contracts used in our trading
activities would have been required to be presented net under the June 2002 consensus. Under the new consensus, these contracts will likely continue to be presented gross. Since most of our
energy trading activities involve derivatives, we believe this new consensus will not have a substantially different impact than the June 2002 consensus, other than deferring the ultimate
implementation date. We continue to expect substantial reductions inOperating Revenues, Fuel and purchased and exchanged powerexpense, and Gas purchasedexpense as a result of adopting net reporting. However,Operating IncomeandNet Incomewill not be affected by this change.Operating Revenuesfor Cinergy,CG&E, andPSI,under the EITF's
June 2002 consensus regarding net presentation, would have been as follows:

September 30, 2002Quarter Ended

Year to Date(in millions)Cinergy(1)

$
1,098

$
2,986CG&Eand subsidiaries


526


1,566PSI


472


1,222


---

In
October 2002, the EITF reached a consensus to rescind EITF 98-10. All energy trading contracts that do not qualify as a derivative will no longer be accounted for
at fair value. Instead, accrual accounting will be used. The consensus is immediately effective for all new contracts executed after October 25, 2002, and will require a cumulative effect
adjustment to income after tax in the first quarter of 2003 for all contracts executed prior to October 25, 2002. The magnitude of this adjustment will depend on the fair value as of
January 1, 2003, of energy trading contracts meeting the criteria outlined above.Cinergyhas begun reviewing the various contracts to determine
the effect of this change.

During
the October 2002 meeting, the EITF also rescinded a prior consensus reached in the June 2002 meeting regarding new disclosures for energy trading activities. In
addition, the EITF elected not to provide guidance at this time on the recognition of inception gains on energy trading transactions. However, the decision to rescind EITF 98-10 will
eliminate the recognition of inception gains on contracts that do not meet the definition of a derivative since such contracts will be accounted for on an accrual basis.

Business Combinations and Intangible Assets

In June 2001, the FASB issued Statement of Financial Accounting Standards No. 141,Business
Combinations(Statement 141), and No. 142,Goodwill and Other Intangible Assets(Statement 142). Statement 141 requires
all business combinations initiated after June 30, 2001, to be accounted for using the purchase method. With the adoption of Statement 142, goodwill and other intangibles with indefinite lives
will no longer be subject to amortization. Statement 142 requires that goodwill be

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assessed for impairment upon adoption 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. This test must be applied at the "reporting unit" level, which is not permitted to be broader than the current business segments discussed in Note 9 of the "Notes to Financial
Statements" in "Item 1. Financial Information". Under Statement 142, an acquired intangible asset should be separately recognized if the benefit of the intangible asset is obtained through contractual
or other legal rights, or if the intangible asset can be sold, transferred, licensed, rented, or exchanged, regardless of the acquirer's intent to do so. We began applying Statement 141 in the third
quarter of 2001 and Statement 142 in the first quarter of 2002. The discontinuance of amortization of goodwill, which began in the first quarter of 2002, is not material to our financial position or
results of operations. We have identified the reporting units forCinergyand finalized the initial transition impairment test. Based on the result of
this test, the transition impact of applying Statement 142 is not material to our financial position or results of operations. We will continue to perform goodwill impairment tests annually, as
required by Statement 142, or when circumstances indicate that the fair value of a reporting unit has declined significantly.

Asset Retirement Obligations

In July 2001, the FASB issued Statement of Financial Accounting Standards No. 143,Accounting for Asset Retirement
Obligations(Statement 143). Statement 143 requires fair value recognition of legal obligations to retire long-lived assets at the time the obligations are
incurred. The initial recognition of this liability will be accompanied by a corresponding increase in property, plant, and equipment. Subsequent to the initial recognition, the liability will be
adjusted for any revisions to the expected cash flows of the retirement obligation (with corresponding adjustments to property, plant, and equipment), and for accretion of the liability due to the
passage of time (recognized as an operation expense). Additional depreciation expense will be recorded prospectively for any property, plant, and equipment increases. We currently accrue costs of
removal on many regulated, long-lived assets through depreciation expense, with a corresponding charge to accumulated depreciation, as allowed by each regulatory jurisdiction. For assets
that we conclude have a retirement obligation under Statement 143,
the accounting we currently use will be modified to comply with this standard. We will adopt Statement 143 in the first quarter of 2003. We have formed an implementation team and are continuing to
analyze the impact of this statement. However, at this time, we have not determined whether its implementation will be material to our financial position or results of operations.

Derivatives

During 1998, the FASB issued Statement 133. This standard was effective forCinergybeginning in 2001, and
requires us to record derivative instruments, which are not exempt under certain provisions of Statement 133, as assets or liabilities, measured at fair value (i.e.,
mark-to-market). Our financial statements reflect the adoption of Statement 133 in the first quarter of 2001. Since many of our derivatives were previously required to use fair
value accounting, the effects of implementation were not material.

Our
adoption did not reflect the potential impact of applying fair value accounting to selected electricity options and capacity contracts. We had not historically accounted for these
instruments at fair value because they were intended as either hedges of peak period exposure or sales contracts served with physical generation, neither of which were considered trading activities.
At adoption, we classified these contracts as normal purchases or sales based on our interpretation of Statement 133 and in the absence of definitive guidance on such contracts. In June 2001,
the FASB staff issued guidance on the application of the normal purchases and sales exemption to electricity contracts containing characteristics of options. While many of the criteria in this
guidance are consistent with the existing guidance in Statement 133, some criteria were added. We adopted the new guidance in the third quarter of 2001, and the effects of implementation for
these contracts were not material to our

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financial position or results of operations. We will continue to apply this guidance to any new electricity contracts that meet the definition of a derivative.

In
December 2001, the FASB staff revised the current guidance to make the evaluation of whether electricity contracts qualify as normal purchases and sales more qualitative than
quantitative. This new guidance uses several factors to distinguish between capacity contracts, which qualify for the normal purchases and sales exemption, and options, which do not. These factors
include deal tenor, pricing structure, specification of the source of power, and various other factors. We adopted this guidance in the third quarter of 2002, and its impact was not material to our
financial position or results of operations.

In
October 2001, the FASB staff released final guidance on the applicability of the normal purchases and sales exemption to contracts that contain a minimum quantity (a forward
component) and flexibility to take additional quantity at a fixed price (an option component). While this guidance was issued primarily to address optionality in fuel supply contracts, it applies to
all derivatives (subject to certain exceptions for capacity contracts in electricity discussed in the previous paragraphs). This guidance concludes that such contracts are not eligible for the normal
purchases and sales exemption
due to the existence of optionality in the contract. We adopted this guidance in the second quarter of 2002, consistent with the transition provisions. Cinergyhas certain contracts that contain
fixed-price optionality, primarily coal contracts, which we reviewed to determine the impact of this new
guidance. Due to a lack of liquidity with respect to coal markets in our region, we determined that our coal contracts do not meet the net settlement criteria of Statement 133 and thus do not qualify
as derivatives. Given these conclusions, the results of applying this new guidance were not material to our financial position or results of operations.

In
May 2002, the FASB issued an exposure draft that would amend Statement 133 to incorporate certain implementation conclusions reached by the FASB staff. The proposed effective
date would be the first quarter of 2003. We do not believe the amendment as currently drafted, will have a material effect on our financial position or results of operations.

Asset Impairment

In August 2001, the FASB issued Statement of Financial Accounting Standards No. 144,Accounting for the Impairment of
Long-Lived Assets(Statement 144). Statement 144 addresses accounting and reporting for the impairment or disposal of long-lived assets.
Statement 144 was effective beginning with the first quarter of 2002. The impact of implementation on our financial position or results of operations was not material.

Exit Activities

In August 2002, the FASB issued Statement of Financial Accounting Standards No. 146,Accounting for Costs Associated with
Exit or Disposal Activities(Statement 146). Statement 146 addresses accounting and reporting for the recognition of exit costs, including, but not limited to,
one-time employee benefit terminations, contract cancellations, and facility consolidations. This statement requires that such costs be recognized only when they meet the definition of a
liability under generally accepted accounting principles. Certain of the costs discussed in Note 8 of the "Notes to Financial Statements" in "Item 1. Financial Information" were accrued under
previous accounting standards that Statement 146 will supersede when it becomes effective. However, Statement 146 applies only to exit activities initiated in 2003 and after. All costs recorded
through September 30, 2002, are unaffected by this pronouncement. The impact of implementation on our financial position or results of operations is not expected to be material.

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Accounting for Stock-Based Compensation

As discussed in the 2001 Form 10-K, we have historically accounted for our stock-based compensation plans under Accounting Principles Board
(APB) Opinion No. 25,Accounting for Stock Issued to Employees(APB 25).In July 2002, Cinergyannounced that it will adopt Statement of Financial Accounting Standards No. 123,Accounting for Stock-Based
Compensation(Statement 123) effective with the next grant cycle (January 2003), and will begin measuring the compensation cost of stock-based awards under the fair
value method. On October 4, 2002, the FASB issued an Exposure Draft of a Proposed Statement of Financial Accounting Standards,Accounting for Stock-Based Compensation-
Transition and Disclosurethat would amend Statement 123 and APB Opinion No. 28,Interim Financial Reporting.This
proposed statement provides alternative methods of transition to Statement 123 and more expanded disclosures about the method of accounting for stock-based employee compensation and the effect of the
method used on reported results in both annual and interim financial statements.Cinergyintends to adopt the transition provisions that require
expensing options prospectively in the year of adoption consistent with the original pronouncement. Existing awards will continue to follow the intrinsic value method prescribed by APB 25. The
anticipated impact of adoption on our financial position and results of operations, assuming award levels and fair values similar to past years, is not expected to be material. This change will
primarily impact the accounting for stock options related to the Cinergy Corp. 1996 Long-Term Incentive Compensation Plan, Cinergy Corp. Stock Option Plan, and Cinergy Corp. Employee Stock
Purchase and Savings Plan.

Other

On October 24, 2002,Cinergy, through a press release, reported its third quarter 2002 results consistent
with the EITF's June 2002 consensus in EITF 02-3 (see Energy Trading above). This consensus required all realized and unrealized gains and losses on energy trading contracts be presented
net in the income statement whether or not settled physically. Subsequent to the release, on October 25, 2002, the EITF reached a consensus which effectively supersedes the original
June 2002 consensus. As a result, the adoption of EITF 02-3 is to become effective beginning in 2003.Cinergy, CG&E,PSI, andULH&Phave filed their third quarter 2002
financial statements herein consistent with their previous policy, and will adopt the revised consensus effective January 1, 2003.

Other Matters

Employee Severance Programs

In March 2002, a Voluntary Early Retirement Program (VERP) offering was made to approximately 280 non-union employees. As a result of the 213
employees electing the VERP in the second quarter of 2002,Cinergy,CG&E, and PSIrecorded expenses of
approximately $35 million, $16 million (including
$2 million related toULH&P), and $18 million, respectively, relating to benefits provided to the VERP participants. In the second quarter
of 2002,Cinergy,CG&E, andPSIincurred approximately
$13 million, $2 million, and $4 million, respectively, in additional expenses related to other employee severance programs.

In
June 2002, a VERP was also offered to approximately 70 Utility Workers of America / Independent Utilities Union # 600 (IUU) employees. As a result of the 41 employees electing
the VERP in the third quarter of 2002,Cinergy,CG&E, and PSIrecorded expenses of approximately
$4 million, $2 million (including $1 million related to ULH&P), and $1 million, respectively, in the third quarter of 2002 relating to benefits provided to IUU VERP participants.

Pension Plans

Cinergymaintains defined benefit pension plans covering substantially all U.S. employees meeting certain minimum
age and service requirements. Plan assets consist of investments in equity and fixed

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income securities. The company is required to meet certain minimum funding standards under the Employee Retirement Income Security Act of 1974. 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. Although the funding valuation will not be completed until 2003,
preliminary estimates indicate a funding requirement of approximately $11 million for the calendar year 2003, which includes approximately $4.4 million related to the 2002 plan year.
Additional contributions applicable to the 2003 plan year, to be made in 2004, are estimated at $24 million. Contributions for the calendar year 2002 were $4 million.

The
decline in market value of fund assets coupled with anticipated assumption changes regarding discount rate and long-term rate of return will also affect recognized
pension expense under Statement of Financial Accounting Standards No. 87Employers' Accounting for Pensions. Preliminary estimates of the effects
of the above factors indicate an increase in expense of approximately $20 million in 2003.

New Business Initiatives

In the third quarter of 2002, Capital & Trading completed an acquisition of a coal-based synthetic fuel production facility which converts coal
feedstock into synthetic fuel for sale to a third party. The cost of this acquisition 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 tax credits expires in 2007. We anticipate the operation of the facility, together with the tax credits, will
benefit our net income.

Collective Bargaining Agreements

As discussed in the 2001 Form 10-K, the collective bargaining agreements of the IUU and the International Brotherhood of Electrical Workers #
1393 (IBEW) expired on April 1, 2002 and April 30, 2002, respectively. With regards to the contracts, the parties have negotiated new three-year agreements that will run
through March 31, 2005 and April 30, 2005 for the IUU and IBEW, respectively.

Federal Tax Law Changes

In March 2002, President Bush signed into law the Job Creation and Worker Assistance Act of 2002, also known as the Economic Stimulus Package. The primary
benefit toCinergyis the allowance of additional first-year depreciation deductions for tax purposes, equal to 30 percent of the
adjusted tax basis of qualified property. This provision applies to qualifying additions after September 11, 2001. The provisions of this bill will not have a material impact on our financial
position or results of operations.

Indiana Tax Law Changes

In June 2002, the Indiana Legislature passed a bill, which was signed by the Governor, containing new tax law provisions in Indiana that apply to both
utility and non-utility companies with operations in the state. After review of the new provisions, we do not believe that the total impact of these changes will materially impact CinergyorPSI.

PUCO Review of Financial Condition of Ohio Regulated Utilities

In October 2002, as the result of recent financial problems experienced by certain public utility companies and the current state of the economy, the PUCO
issued an order initiating a review of the financial condition of the nineteen large public utilities (gas, electric, and telecommunication) serving Ohio customers, including CG&E. The PUCO intends
to identify available measures to ensure that the

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regulated operations of the Ohio public utilities are not adversely impacted by the parent or affiliate companies' unregulated operations. The PUCO has requested comments, to be filed by
November 12, 2002, regarding how the review should be conducted and on the potential measures the PUCO could take to protect the financial condition of the regulated utilities. CG&Efiled
comments; however, at this time we cannot predict the outcome of this review.

Shareholder Rights Plan

In July 2000,Cinergy Corp.'sboard of directors approved a Shareholder Rights Plan. Under the plan, each
shareholder of record on October 30, 2000, received, as a dividend, a right to purchase fromCinergy Corp.one share of common stock at a price
of $100. The rights were scheduled to expire in October 2010.

As
part of its dedication to ensure a leadership position in adopting corporate governance practices that are considered best in class, on August 28, 2002, Cinergy Corp.'sboard of directors approved
a resolution to accelerate the termination date of the company's Shareholder Rights Plan. Under the
resolution, the company terminated the plan, effective September 16, 2002. The company also amended the contract with the plan's agent and notified the SEC and the New York Stock Exchange of
the change.

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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".

ITEM 4. CONTROLS AND PROCEDURES

Disclosure controls and procedures are our controls and other procedures that are designed to ensure 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 SEC's rules and
forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure 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 the design
and operation of our disclosure controls and procedures within 90 days of the filing date of this quarterly report, and, based upon this evaluation, our chief executive officer and chief
financial officer have concluded that these controls and procedures are adequate to ensure that information requiring disclosure is communicated to management in a timely manner and reported within
the timeframe specified by the SEC's rules and forms.

There
were no significant changes in our internal controls or in other factors that could significantly affect our internal controls subsequent to the date of our most recent evaluation.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

CITY OF NEWPORT, KENTUCKY

On
January 29, 2002,ULH&Pinstituted litigation proceedings in the Campbell County Circuit Court in the Commonwealth of Kentucky
against the City of Newport, Kentucky, City of Newport doing business as (d/b/a/) the Newport Water Works and also known as (a/k/a) City of Newport Water Department and the Kentucky Risk Management
Association. The complaint states that on or about October 5, 2000, a water main owned and under the control of the City of Newport and/or the City of Newport d/b/a/ Newport Water Works and
a/k/a/ City of Newport Water Department located in and underground at the Newport Shopping Center on Monmouth Street, Newport, Campbell County, Kentucky ruptured. The abrasive action of the
pressurized stream of water combined with the sand, gravel, and dirt flowing directly on the surface of the natural gas main, caused a hole that breached the adjacent natural gas main of ULH&P.ULH&Phas incurred total damages in excess of $3.5 million.

In
February 2002, a third party complaint was filed by the City of Newport against the owners of the shopping center, Newport Company, Newport Associates, American Diversified
Developments, Inc., and Newport Associates Limited Partnership. Subsequently,ULH&Pfiled a Second Amended Complaint naming the additional
parties.

In
October 2002, all parties reached a settlement on this issue effectively ending this dispute.

See
Note 7 of the "Notes to Financial Statements" in "Item 1. Financial Information" for additional information regarding certain legal proceedings.

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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

|Exhibit Designation |  | Registrant         |  | Nature of Exhibit                                                                                                                                        |  | Previously Filed
as Exhibit to:                                   
|------------------- |  | ------------------ |  | -------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------
|4-qqq               |  | Cinergy Corp. CG&E |  | Thirty-ninth Supplemental Indenture dated as of September 1, 2002, betweenCG&Eand The Bank of New York, as Trustee.                                      |  |                                                                   
|4-rrr               |  | Cinergy Corp. PSI  |  | Fifty-fourth Supplemental Indenture dated as of September 1, 2002, betweenPSIand LaSalle Bank National Association, as Trustee.                          |  |                                                                   
|4-sss               |  | Cinergy Corp. CG&E |  | Sixth Supplemental Indenture betweenCG&Eand Fifth Third Bank dated as of September 15, 2002.                                                             |  |                                                                   
|4-ttt               |  | Cinergy Corp. PSI  |  | Loan Agreement betweenPSIand the Indiana Development Finance Authority dated as of September 1, 2002.                                                    |  |                                                                   
|4-uuu               |  | Cinergy Corp. PSI  |  | Loan Agreement betweenPSIand the Indiana Development Finance Authority dated as of September 1, 2002.                                                    |  |                                                                   
|4-vvv               |  | Cinergy Corp. CG&E |  | Loan Agreement betweenCG&Eand the Ohio Air Quality Development Authority dated as of September 1, 2002.                                                  |  |                                                                   
|4-www               |  | Cinergy Corp.      |  | First Amendment to Rights Agreement, dated August 28, 2002, effective September 16, 2002, betweenCinergy Corp.and The Fifth Third Bank, as Rights Agent. |  | Cinergy Corp.Form 8-A/A, Amendment No. 1, filed September 16, 2002

Date of Report

Registrant

Item FiledAugust 13, 2002

Cinergy Corp., CG&E, PSI,andULH&P

Item 9. Regulation FD Disclosure


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SIGNATURES

Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have
been condensed or omitted pursuant to such rules and regulations, although Cinergy Corp., The Cincinnati Gas & Electric Company (CG&E), PSI Energy, Inc. (PSI), and The Union Light, Heat
and Power Company (ULH&P) believe that the disclosures are adequate to make the information presented not misleading. In the opinion of Cinergy Corp., CG&E, PSI, and ULH&P, these statements reflect
all adjustments (which include normal, recurring adjustments) necessary to reflect the results of operations for the respective periods. The unaudited statements are subject to such adjustments as the
annual audit by independent public accountants may disclose to be necessary.

Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrants have duly caused this report to be signed by an officer and the chief
accounting officer on their 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

Date:

November 13, 2002

/s/BERNARD F. ROBERTSBernard F. Roberts Duly Authorized Officer
and
Chief Accounting Officer


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I, James E. Rogers, certify that:





Date:
November 13, 2002

|/s/JAMES E. ROGERSChief Executive Officer | 
|----------------------------------------- | 

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I, R. Foster Duncan, certify that:





Date:
November 13, 2002

|/s/R. FOSTER DUNCANChief Financial Officer | 
|------------------------------------------ | 

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