** **

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C.20549**

** **

**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, 2003**                                                                                                                                        |
|                                                                                                                                                                                              |
| **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.**                                                                              |   | **31-1385023**                          |
|                        |   | **(A Delaware Corporation)  139 East Fourth Street  Cincinnati, Ohio 45202  (513) 421-9500**   |   |                                    |
|                        |   |                                                                                           |   |                                    |
| **1-1232**                  |   | **THE CINCINNATI GAS & ELECTRIC COMPANY**                                                  |   | **31-0240030**                          |
|                        |   | **(An Ohio Corporation)  139 East Fourth Street  Cincinnati, Ohio 45202  (513) 421-9500**      |   |                                    |
|                        |   |                                                                                           |   |                                    |
| **1-3543**                  |   | **PSI ENERGY, INC.**                                                                           |   | **35-0594457**                          |
|                        |   | **(An Indiana Corporation)  1000 East Main Street  Plainfield, Indiana 46168  (513) 421-9500** |   |                                    |
|                        |   |                                                                                           |   |                                    |
| **2-7793**                  |   | **THE UNION LIGHT, HEAT AND POWER COMPANY**                                                    |   | **31-0473080**                          |
|                        |   | **(A Kentucky Corporation)  139 East Fourth Street  Cincinnati, Ohio 45202  (513) 421-9500**   |   |                                    |

 

----

 

Indicate bycheck mark whether the registrants (1) have filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the registrants wererequired to file such reports), and (2) have been subject to such filingrequirements for the past 90 days.

Yes ý  No o

 

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Indicate bycheck mark whether the registrant is an accelerated filer (as defined in Rule12b-2 of the Exchange Act).

Yes ý  No o

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This combinedForm 10-Q is separately filed by **CinergyCorp.**, **The Cincinnati Gas &Electric Company**, **PSI Energy, Inc.**,and **The Union Light, Heat and Power Company**.  Information contained herein relating to anyindividual registrant is filed by such registrant on its own behalf.  Each registrant makes no representation asto information relating to the other registrants.

 

**TheUnion Light, Heat and Power Company** meets the conditionsset forth in General Instruction H(1)(a) and (b) of Form 10-Q and is thereforefiling its company specific information with the reduced disclosure formatspecified in General Instruction H(2) of Form 10-Q.

 

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As ofOctober 31, 2003, shares of common stock outstanding for each registrantwere as listed:

 
| **Registrant**                                 |   | **Description**                                |   | **Shares**  |   |
|------------------------------------------------|--------|------------------------------------------------|--------|-------------|--------|
|                                           |   |                                           |   |        |   |
| **Cinergy Corp.**                              |   | Par value $.01 per share                       |   | 178,070,206 |   |
|                                           |   |                                           |   |        |   |
| **The Cincinnati Gas  & Electric Company** |   | Par value $8.50 per share                      |   | 89,663,086  |   |
|                                           |   |                                           |   |        |   |
| **PSI Energy, Inc.**                           |   | Without par value, stated value $.01 per share |   | 53,913,701  |   |
|                                           |   |                                           |   |        |   |
| **The Union Light,  Heat and Power Company**   |   | Par value $15.00 per share                     |   | 585,333     |   |

 

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2

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**TABLE OF CONTENTS**

 
| **Item  Number**                        |   |                                                                                            |
|-----------------------------------------|--------|-------------------------------------------------------------------------------------------------|
| **PART I   FINANCIAL INFORMATION** |
|                                    |   |                                                                                            |
| 1                                       |   | **Financial Statements**                                                                        |
|                                    |   | ***Cinergy Corp.***                                                                             |
|                                    |   | Condensed Consolidated Statements of Income                                                     |
|                                    |   | Condensed Consolidated Balance Sheets                                                           |
|                                    |   | Condensed Consolidated Statements of Changes in Common  Stock Equity                            |
|                                    |   | Condensed Consolidated Statements of Cash Flows                                                 |
|                                    |   |                                                                                            |
|                                    |   | ***The Cincinnati Gas & Electric Company***                                                 |
|                                    |   | Condensed Consolidated Statements of Income and  Comprehensive Income                           |
|                                    |   | Condensed Consolidated Balance Sheets                                                           |
|                                    |   | Condensed Consolidated Statements of Cash Flows                                                 |
|                                    |   |                                                                                            |
|                                    |   | ***PSI Energy, Inc.***                                                                          |
|                                    |   | Condensed Consolidated Statements of Income and  Comprehensive Income                           |
|                                    |   | Condensed Consolidated Balance Sheets                                                           |
|                                    |   | Condensed Consolidated Statements of Cash Flows                                                 |
|                                    |   |                                                                                            |
|                                    |   | ***The Union Light, Heat and Power Company***                                                   |
|                                    |   | Condensed Statements of Income                                                                  |
|                                    |   | Condensed  Balance Sheets                                                                       |
|                                    |   | Condensed Statements of Cash Flows                                                              |
|                                    |   |                                                                                            |
|                                    |   | **Notes to Condensed Financial Statements**                                                     |
|                                    |   |                                                                                            |
|                                    |   | **Cautionary Statements Regarding Forward-Looking  Information**                                |
|                                    |   |                                                                                            |
| 2                                       |   | **Management’s  Discussion and Analysis of Financial Condition and Results of Operations** |
|                                    |   | Introduction                                                                                    |
|                                    |   | Organization                                                                                    |
|                                    |   | Liquidity and Capital Resources                                                                 |
|                                    |   | 2003 Quarterly Results of Operations - Historical                                               |
|                                    |   | 2003 Year to Date Results of Operations - Historical                                            |
|                                    |   | Results of Operations - Future                                                                  |
|                                    |   |                                                                                            |
| 3                                       |   | **Quantitative and Qualitative Disclosures About Market Risk**                                  |
|                                    |   |                                                                                            |
| 4                                       |   | **Controls and  Procedures**                                                                    |
|                                    |   |                                                                                            |
| **PART II  OTHER INFORMATION**     |
|                                    |   |                                                                                            |
| 1                                       |   | **Legal Proceedings**                                                                           |
|                                    |   |                                                                                            |
| 4                                       |   | **Submission of Matters to a Vote of Security Holders**                                         |
|                                    |   |                                                                                            |
| 6                                       |   | **Exhibits and Reports on Form 8-K**                                                            |
|                                    |   |                                                                                            |
|                                    |   | **Signatures**                                                                                  |
|                                         |        |                                                                                                 |  |

 

3

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**CINERGY CORP.**

**AND SUBSIDIARYCOMPANIES**

** **

**4**

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** **

**CINERGY CORP.**

**CONDENSED CONSOLIDATED STATEMENTS OF INCOME**

** **
|                                                                                                      |   | **Quarter Ended  September 30**                                 |        | **Year to Date  September 30** |   |
|-----------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------|-------------|-------------------------------------|--------|
|                                                                                                      |   | **2003**                                                             |        | **2002**                            |   | **2003** |   | **2002** |   |
|                                                                                                      |   | ***(dollars in  thousands, except per share amounts)  (unaudited)*** |        |
| **Operating Revenues** (Note 1(g)(*i*))                                                                   |   |                                                                 |        |                                |   |   |   |   |   |
| Electric                                                                                                  |   | **$**                                                                | **920,638** | ** **                          | $      | 965,435 |   | **$** | **2,512,954** | ** ** | $ | 2,531,283 |   |
| Gas                                                                                                       |   | **124,533**                                                          | ** **  | 104,073                             |   | **638,378** | ** ** | 374,345 |   |
| Other                                                                                                     |   | **46,806**                                                           | ** **  | 49,730                              |   | **142,525** | ** ** | 89,291 |   |
| **Total Operating  Revenues**                                                                             |   | **1,091,977**                                                        | ** **  | 1,119,238                           |   | **3,293,857** | ** ** | 2,994,919 |   |
|                                                                                                      |   |                                                                 | ** **  |                                |   |   | ** ** |   |   |
| **Operating Expenses**                                                                                    |   |                                                                 | ** **  |                                |   |   | ** ** |   |   |
| Fuel  and purchased and exchanged power (Note 1(g)(*i*))                                                  |   | **329,997**                                                          | ** **  | 302,366                             |   | **840,332** | ** ** | 761,858 |   |
| Gas  purchased (Note 1(g)(*i*))                                                                           |   | **79,582**                                                           | ** **  | 49,283                              |   | **368,896** | ** ** | 188,725 |   |
| Operation  and maintenance                                                                                |   | **317,897**                                                          | ** **  | 363,362                             |   | **973,065** | ** ** | 962,280 |   |
| Depreciation                                                                                              |   | **104,856**                                                          | ** **  | 100,050                             |   | **313,719** | ** ** | 294,345 |   |
| Taxes  other than income taxes                                                                            |   | **55,828**                                                           | ** **  | 64,890                              |   | **200,535** | ** ** | 201,559 |   |
| **Total Operating  Expenses**                                                                             |   | **888,160**                                                          | ** **  | 879,951                             |   | **2,696,547** | ** ** | 2,408,767 |   |
|                                                                                                      |   |                                                                 | ** **  |                                |   |   | ** ** |   |   |
| **Operating Income**                                                                                      |   | **203,817**                                                          | ** **  | 239,287                             |   | **597,310** | ** ** | 586,152 |   |
|                                                                                                      |   |                                                                 | ** **  |                                |   |   | ** ** |   |   |
| **Equity in Earnings  of Unconsolidated Subsidiaries**                                                    |   | **4,956**                                                            | ** **  | 3,248                               |   | **11,652** | ** ** | 7,356 |   |
| **Miscellaneous  Income – Net**                                                                      |   | **12,296**                                                           | ** **  | 6,965                               |   | **27,678** | ** ** | 2,517 |   |
| **Interest Expense**                                                                                      |   | **73,075**                                                           | ** **  | 62,518                              |   | **192,623** | ** ** | 180,122 |   |
| **Preferred Dividend  Requirement of Subsidiary Trust**(Note 1(g)(*iii*))                                 |   | **—**                                                           | ** **  | 5,966                               |   | **11,940** | ** ** | 17,847 |   |
|                                                                                                      |   |                                                                 | ** **  |                                |   |   | ** ** |   |   |
| **Income Before Taxes**                                                                                   |   | **147,994**                                                          | ** **  | 181,016                             |   | **432,077** | ** ** | 398,056 |   |
|                                                                                                      |   |                                                                 | ** **  |                                |   |   | ** ** |   |   |
| **Income Taxes**                                                                                          |   | **35,155**                                                           | ** **  | 47,799                              |   | **102,121** | ** ** | 123,641 |   |
| **Preferred Dividend Requirements of Subsidiaries**                                                       |   | **858**                                                              | ** **  | 859                                 |   | **2,574** | ** ** | 2,575 |   |
|                                                                                                      |   |                                                                 | ** **  |                                |   |   | ** ** |   |   |
| **In****come  Before Discontinued Operations and Cumulative Effect of Changes in Accounting  Principles** |   | **111,981**                                                          | ** **  | 132,358                             |   | **327,382** | ** ** | 271,840 |   |
|                                                                                                      |   |                                                                 | ** **  |                                |   |   | ** ** |   |   |
| Discontinued  operations, net of tax (Note 8)                                                             |   | **—**                                                           | ** **  | (1,790                              | )      | **8,875** | ** ** | (561 | ) |
| Cumulative  effect of changes in accounting principles, net of tax (Note 1(g)(*vii*))                     |   | **—**                                                           | ** **  | —                              |   | **26,462** | ** ** | (10,899 | ) |
| **Net Income**                                                                                            |   | **$**                                                                | **111,981** | ** **                          | $      | 130,568 |   | **$** | **362,719** | ** ** | $ | 260,380 |   |
|                                                                                                      |   |                                                                 | ** **  |                                |   |   | ** ** |   |   |
| **Average Common  Shares Outstanding**                                                                    |   | **177,751**                                                          | ** **  | 167,967                             |   | **175,944** | ** ** | 166,544 |   |
|                                                                                                      |   |                                                                 | ** **  |                                |   |   | ** ** |   |   |
| **Earnings Per Common Share**  (Note 10)                                                                  |   |                                                                 | ** **  |                                |   |   | ** ** |   |   |
| Income Before Discontinued Operations and  Cumulative Effect of Changes in Accounting Principles          |   | **$**                                                                | **0.63**    | ** **                          | $      | 0.79 |   | **$** | **1.86** | ** ** | $ | 1.63 |   |
| Discontinued operations, net of tax                                                                       |   | **—**                                                           | ** **  | (0.01                               | )      | **0.05** | ** ** | — |   |
| Cumulative effect of changes in accounting  principles, net of tax                                        |   | **—**                                                           | ** **  | —                              |   | **0.15** | ** ** | (0.06 | ) |
| Net Income                                                                                                |   | **$**                                                                | **0.63**    | ** **                          | $      | 0.78 |   | **$** | **2.06** | ** ** | $ | 1.57 |   |
|                                                                                                      |   |                                                                 | ** **  |                                |   |   | ** ** |   |   |
| **Earnings Per Common Share -  Assuming Dilution** (Note 10)                                              |   |                                                                 | ** **  |                                |   |   | ** ** |   |   |
| Income Before Discontinued Operations and  Cumulative Effect of Changes in Accounting Principles          |   | **$**                                                                | **0.62**    | ** **                          | $      | 0.78 |   | **$** | **1.84** | ** ** | $ | 1.61 |   |
| Discontinued operations, net of tax                                                                       |   | **—**                                                           | ** **  | (0.01                               | )      | **0.05** | ** ** | — |   |
| Cumulative effect of changes in accounting principles,  net of tax                                        |   | **—**                                                           | ** **  | —                              |   | **0.15** | ** ** | (0.06 | ) |
| Net Income                                                                                                |   | **$**                                                                | **0.62**    | ** **                          | $      | 0.77 |   | **$** | **2.04** | ** ** | $ | 1.55 |   |
|                                                                                                      |   |                                                                 | ** **  |                                |   |   | ** ** |   |   |
| **Dividends Declared Per Common Share**                                                                   |   | **$**                                                                | **0.46**    | ** **                          | $      | 0.45 |   | **$** | **1.38** | ** ** | $ | 1.35 |   |

 

**The accompanying notes as they relate toCinergy Corp. are an integral part of these condensed consolidated financialstatements.**

 

5

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**CINERGY CORP.CONDENSED CONSOLIDATED BALANCESHEETS**

** **

**ASSETS**

** **
|                                                                                                                                                |   | **September 302003**                  |           | **December 31  2002** |     |
|-----------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------|----------------|----------------------------|----------|
|                                                                                                                                                |   | ***(dollars in  thousands)  (unaudited)*** |           |
|                                                                                                                                                |   |                                       | * *       |                       | * * |
| **Current Assets**                                                                                                                                  |   |                                       |           |                       |     |
| Cash  and cash equivalents                                                                                                                          |   | **$**                                      | **486,400**    | ** **                 | $        | 200,112 |   |
| Restricted  deposits                                                                                                                                |   | **709**                                    | ** **     | 3,092                      |     |
| Notes  receivable, current                                                                                                                          |   | **63,594**                                 | ** **     | 135,873                    |     |
| Accounts  receivable less accumulated provision for doubtful accounts of $10,873 at  September 30, 2003, and $16,368 at December 31, 2002 |   | **1,029,127**                              | ** **     | 1,280,810                  |     |
| Materials,  supplies, and fuel (Note 1(d))                                                                                                          |   | **319,632**                                | ** **     | 319,454                    |     |
| Energy  risk management current assets (Note 1(c)(*i*))                                                                                             |   | **224,299**                                | ** **     | 464,028                    |     |
| Prepayments  and other                                                                                                                              |   | **138,236**                                | ** **     | 107,086                    |     |
| **Total Current  Assets**                                                                                                                           |   | **2,261,997**                              | ** **     | 2,510,455                  |     |
|                                                                                                                                                |   |                                       | ** **     |                       |     |
| **Property, Plant,  and Equipment - at Cost**                                                                                                       |   |                                       | ** **     |                       |     |
| Utility  plant in service (Note 12)                                                                                                                 |   | **9,557,536**                              | ** **     | 8,641,351                  |     |
| Construction  work in progress                                                                                                                      |   | **288,069**                                | ** **     | 469,300                    |     |
| **Total Utility  Plant**                                                                                                                            |   | **9,845,605**                              | ** **     | 9,110,651                  |     |
| Non-regulated  property, plant, and equipment (Note 12)                                                                                             |   | **4,326,626**                              | ** **     | 4,616,754                  |     |
| Accumulated  depreciation (Note 1(g)(*vi*))                                                                                                         |   | **5,319,500**                              | ** **     | 5,157,040                  |     |
| **Net Property,  Plant, and Equipment**                                                                                                             |   | **8,852,731**                              | ** **     | 8,570,365                  |     |
|                                                                                                                                                |   |                                       | ** **     |                       |     |
| **Other Assets**                                                                                                                                    |   |                                       | ** **     |                       |     |
| Regulatory  assets                                                                                                                                  |   | **1,012,457**                              | ** **     | 1,022,696                  |     |
| Investments  in unconsolidated subsidiaries                                                                                                         |   | **482,978**                                | ** **     | 417,188                    |     |
| Energy  risk management non-current assets (Note 1(c)(*i*))                                                                                         |   | **127,407**                                | ** **     | 162,773                    |     |
| Notes  receivable, non-current (Note 4)                                                                                                             |   | **218,347**                                | ** **     | —                     |     |
| Other  investments                                                                                                                                  |   | **173,790**                                | ** **     | 163,851                    |     |
| Goodwill  (Note 1 (g)(*v*))                                                                                                                         |   | **43,717**                                 | ** **     | 43,717                     |     |
| Other  intangible assets                                                                                                                            |   | **1,723**                                  | ** **     | 2,059                      |     |
| Other                                                                                                                                               |   | **300,825**                                | ** **     | 266,659                    |     |
| **Total Other Assets**                                                                                                                              |   | **2,361,244**                              | ** **     | 2,078,943                  |     |
|                                                                                                                                                |   |                                       | ** **     |                       |     |
| **Assets of  Discontinued Operations** (Note 8)                                                                                                     |   | **7,187**                                  | ** **     | 147,265                    |     |
|                                                                                                                                                |   |                                       | ** **     |                       |     |
| **Total Assets**                                                                                                                                    |   | **$**                                      | **13,483,159** | ** **                 | $        | 13,307,028 |   |

 

**The accompanying notes as they relate toCinergy Corp. are an integral part of these condensed consolidated financialstatements.**

 

6

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**CINERGY CORP.CONDENSED CONSOLIDATED BALANCE SHEETS**

 

**LIABILITIES ANDSHAREHOLDERS’ EQUITY**

** **
|                                                                                                                                                                      |   | **September 30  2003**                |           | **December 31  2002** |     |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------|----------------|----------------------------|----------|
|                                                                                                                                                                      |   | ***(dollars in  thousands)  (unaudited)*** |           |
|                                                                                                                                                                      |   |                                       | * *       |                       | * * |
| **Current Liabilities**                                                                                                                                                   |   |                                       |           |                       |     |
| Accounts  payable                                                                                                                                                         |   | **$**                                      | **947,882**    | ** **                 | $        | 1,318,379 |   |
| Accrued  taxes                                                                                                                                                            |   | **228,225**                                | ** **     | 258,613                    |     |
| Accrued  interest                                                                                                                                                         |   | **79,161**                                 | ** **     | 62,244                     |     |
| Notes  payable and other short-term obligations (Note 5)                                                                                                                  |   | **336,687**                                | ** **     | 667,973                    |     |
| Long-term  debt due within one year                                                                                                                                       |   | **1,113,319**                              | ** **     | 176,000                    |     |
| Energy  risk management current liabilities (Note 1(c)(*i*))                                                                                                              |   | **186,146**                                | ** **     | 407,710                    |     |
| Other                                                                                                                                                                     |   | **133,677**                                | ** **     | 105,026                    |     |
| **Total Current  Liabilities**                                                                                                                                            |   | **3,025,097**                              | ** **     | 2,995,945                  |     |
|                                                                                                                                                                      |   |                                       | ** **     |                       |     |
| **Non-Current  Liabilities**                                                                                                                                              |   |                                       | ** **     |                       |     |
| Long-term  debt (Note 3)                                                                                                                                                  |   | **4,129,946**                              | ** **     | 4,011,568                  |     |
| Deferred  income taxes                                                                                                                                                    |   | **1,519,097**                              | ** **     | 1,458,171                  |     |
| Unamortized  investment tax credits                                                                                                                                       |   | **111,186**                                | ** **     | 118,095                    |     |
| Accrued  pension and other postretirement benefit costs                                                                                                                   |   | **606,375**                                | ** **     | 626,167                    |     |
| Energy  risk management non-current liabilities (Note 1(c)(*i*))                                                                                                          |   | **117,777**                                | ** **     | 143,991                    |     |
| Other                                                                                                                                                                     |   | **233,768**                                | ** **     | 179,767                    |     |
| **Total Non-Current  Liabilities**                                                                                                                                        |   | **6,718,149**                              | ** **     | 6,537,759                  |     |
|                                                                                                                                                                      |   |                                       | ** **     |                       |     |
| **Liabilities of  Discontinued Operations** (Note 8)                                                                                                                      |   | **8,877**                                  | ** **     | 108,833                    |     |
|                                                                                                                                                                      |   |                                       | ** **     |                       |     |
| **Commitments and  Contingencies**(Note 7)                                                                                                                                |   |                                       | ** **     |                       |     |
|                                                                                                                                                                      |   |                                       | ** **     |                       |     |
| **Total Liabilities**                                                                                                                                                     |   | **9,752,123**                              | ** **     | 9,642,537                  |     |
|                                                                                                                                                                      |   |                                       | ** **     |                       |     |
| **Preferred Trust  Securities** (Note  1(g)(*iii*))                                                                                                                       |   |                                       | ** **     |                       |     |
| Company  obligated, mandatorily redeemable, preferred trust securities of subsidiary,  holding solely debt securities of the company                                      |   | **—**                                 | ** **     | 308,187                    |     |
|                                                                                                                                                                      |   |                                       | ** **     |                       |     |
| **Cumulative  Preferred Stock of Subsidiaries**                                                                                                                           |   |                                       | ** **     |                       |     |
| Not  subject to mandatory redemption                                                                                                                                      |   | **62,818**                                 | ** **     | 62,828                     |     |
|                                                                                                                                                                      |   |                                       | ** **     |                       |     |
| **Common Stock  Equity**(Note 2)                                                                                                                                          |   |                                       | ** **     |                       |     |
| Common  stock - $.01 par value; authorized shares - 600,000,000; outstanding shares -  177,899,822 at September 30, 2003, and 168,663,115 at December 31,  2002 |   | **1,779**                                  | ** **     | 1,687                      |     |
| Paid-in  capital                                                                                                                                                          |   | **2,170,392**                              | ** **     | 1,918,136                  |     |
| Retained  earnings                                                                                                                                                        |   | **1,525,727**                              | ** **     | 1,403,453                  |     |
| Accumulated  other comprehensive income (loss)                                                                                                                            |   | **(29,680**                                | **)**          | (29,800                    | )        |
| **Total Common Stock  Equity**                                                                                                                                            |   | **3,668,218**                              | ** **     | 3,293,476                  |     |
|                                                                                                                                                                      |   |                                       | ** **     |                       |     |
| **Total Liabilities  and Shareholders’ Equity**                                                                                                                      |   | **$**                                      | **13,483,159** | ** **                 | $        | 13,307,028 |   |

 

**The accompanyingnotes as they relate to Cinergy Corp. are an integral part of these condensedconsolidated financial statements.**

 

7

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**CINERGY CORP.**

**CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCK EQUITY**

** **
|                                                                |   | **Common  Stock**                          |         | **Paid-in  Capital** |         | **Retained  Earnings** |         | **Accumulated  Other  Comprehensive  Income/(Loss)** |          | **Total  Common  Stock  Equity** |         |
|---------------------------------------------------------------------|--------|--------------------------------------------|--------------|----------------------|--------------|------------------------|--------------|------------------------------------------------------|---------------|----------------------------------|--------------|
|                                                                |   | ***(dollars in  thousands)  (unaudited)*** |         |
|                                                                |   |                                       | *** *** |                 | *** *** |                   | *** *** |                                                 | *** ***  |                             | *** *** |
| **Quarter Ended September 30, 2003**                           |   |                                       | ** **   |                 | ** **   |                   | ** **   |                                                 | ** **    |                             | ** **   |
|                                                                |   |                                       | ** **   |                 | ** **   |                   | ** **   |                                                 | ** **    |                             | ** **   |
| **Balance at July 1, 2003 (176,947,118 shares)**               |   | **$**                                      | **1,769**    | ** **           | **$**        | **2,135,968**          | ** **   | **$**                                                | **1,495,502** | ** **                       | **$**        | **(24,423** | **)** | **$** | **3,608,816** | ** ** |
| **Comprehensive income:**                                           |   |                                       | ** **   |                 | ** **   |                   | ** **   |                                                 | ** **    |                             | ** **   |
| **Net income**                                                      |   |                                       | ** **   |                 | ** **   | **111,981**            | ** **   |                                                 | ** **    | **111,981**                      | ** **   |
| **Other comprehensive income (loss), net of tax effect  of $2,532** |   |                                       | ** **   |                 | ** **   |                   | ** **   |                                                 | ** **    |                             | ** **   |
| **Foreign currency translation adjustment**                         |   |                                       |         |                 |         |                   | ** **   | **(8,365**                                           | **)**         | **(8,365**                       | **)**        |
| **Minimum pension liability adjustment**                            |   |                                       |         |                 |         |                   | ** **   | **26**                                               | ** **    | **26**                           | ** **   |
| **Unrealized gain (loss) on investment trusts**                     |   |                                       |         |                 |         |                   | ** **   | **32**                                               | ** **    | **32**                           | ** **   |
| **Cash flow hedges**(Note 1(c))                                     |   |                                       |         |                 |         |                   | ** **   | **3,050**                                            | ** **    | **3,050**                        | ** **   |
| **Total comprehensive income**                                      |   |                                       | ** **   |                 | ** **   |                   | ** **   |                                                 | ** **    | **106,724**                      | ** **   |
|                                                                |   |                                       | ** **   |                 | ** **   |                   | ** **   |                                                 | ** **    |                             | ** **   |
| **Issuance of common stock - net**(952,704 shares)                  |   | **10**                                     | ** **   | **31,824**           | ** **   |                   | ** **   |                                                 | ** **    | **31,834**                       | ** **   |
| **Dividends on common stock ($.46 per share)**                      |   |                                       |         |                 |         | **(81,725**            | **)**        |                                                 | ** **    | **(81,725**                      | **)**        |
| **Other**(Note 2(b))                                                |   |                                       | ** **   | **2,600**            |         | **(31**                | **)**        |                                                 | ** **    | **2,569**                        | ** **   |
|                                                                |   |                                       | ** **   |                 | ** **   |                   | ** **   |                                                 | ** **    |                             | ** **   |
| **Ending balance at September 30, 2003**(177,899,822  shares)  |   | **$**                                      | **1,779**    | ** **           | **$**        | **2,170,392**          | ** **   | **$**                                                | **1,525,727** | ** **                       | **$**        | **(29,680** | **)** | **$** | **3,668,218** | ** ** |
|                                                                |   |                                       | ** **   |                 | ** **   |                   | ** **   |                                                 | ** **    |                             | ** **   |
| Quarter Ended September 30, 2002                               |   |                                       |         |                 |         |                   |         |                                                 |          |                             |         |
|                                                                |   |                                       |         |                 |         |                   |         |                                                 |          |                             |         |
| Balance  at July 1, 2002 (167,486,129 shares)                  |   | $                                          | 1,675        |                 | $            | 1,861,689              |         | $                                                    | 1,319,881     |                             | $            | (4,787 | ) | $ | 3,178,458 |   |
| Comprehensive  income:                                              |   |                                       |         |                 |         |                   |         |                                                 |          |                             |         |
| Net  income                                                         |   |                                       |         |                 |         | 130,568                |         |                                                 |          | 130,568                          |         |
| Other  comprehensive income (loss), net of tax effect of $12,501    |   |                                       |         |                 |         |                   |         |                                                 |          |                             |         |
| Foreign  currency translation adjustment                            |   |                                       |         |                 |         |                   |         | 4,810                                                |          | 4,810                            |         |
| Unrealized  gain (loss) on investment trusts                        |   |                                       |         |                 |         |                   |         | (3,003                                               | )             | (3,003                           | )            |
| Cash  flow hedges (Note 1(c))                                       |   |                                       |         |                 |         |                   |         | (18,744                                              | )             | (18,744                          | )            |
| Total  comprehensive income                                         |   |                                       |         |                 |         |                   |         |                                                 |          | 113,631                          |         |
|                                                                |   |                                       |         |                 |         |                   |         |                                                 |          |                             |         |
| Issuance  of common stock - net (781,597 shares)                    |   | 8                                          |         | 22,888               |         |                   |         |                                                 |          | 22,896                           |         |
| Dividends  on common stock ($.45 per share)                         |   |                                       |         |                 |         | (75,469                | )            |                                                 |          | (75,469                          | )            |
| Other                                                               |   |                                       |         | 4,542                |         | 8                      |         |                                                 |          | 4,550                            |         |
|                                                                |   |                                       |         |                 |         |                   |         |                                                 |          |                             |         |
| Ending  balance at September 30, 2002 (168,267,726 shares)     |   | $                                          | 1,683        |                 | $            | 1,889,119              |         | $                                                    | 1,374,988     |                             | $            | (21,724 | ) | $ | 3,244,066 |   |

 

**Theaccompanying notes as they relate to Cinergy Corp. are an integral part ofthese condensed consolidated financial statements.**

 

8

----

**CINERGY CORP.CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCK EQUITY**
|                                                                                                             |   | **Common  Stock**                          |         | **Paid-in  Capital** |         | **Retained  Earnings** |         | **Accumulated  Other  Comprehensive  Income/(Loss)** |          | **Total  Common  Stock  Equity** |         |
|------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------|--------------|----------------------|--------------|------------------------|--------------|------------------------------------------------------|---------------|----------------------------------|--------------|
|                                                                                                             |   | ***(dollars in  thousands)  (unaudited)*** |         |
|                                                                                                             |   |                                       | *** *** |                 | *** *** |                   | *** *** |                                                 | *** ***  |                             | *** *** |
| **Year to Date September 30, 2003**                                                                         |   |                                       | ** **   |                 | ** **   |                   | ** **   |                                                 | ** **    |                             | ** **   |
|                                                                                                             |   |                                       | ** **   |                 | ** **   |                   | ** **   |                                                 | ** **    |                             | ** **   |
| **Balance at January 1, 2003 (168,663,115 shares)**                                                         |   | **$**                                      | **1,687**    | ** **           | **$**        | **1,918,136**          | ** **   | **$**                                                | **1,403,453** | ** **                       | **$**        | **(29,800** | **)** | **$** | **3,293,476** | ** ** |
| **Comprehensive income:**                                                                                        |   |                                       | ** **   |                 | ** **   |                   | ** **   |                                                 | ** **    |                             | ** **   |
| **Net income**                                                                                                   |   |                                       | ** **   |                 | ** **   | **362,719**            | ** **   |                                                 | ** **    | **362,719**                      | ** **   |
| **Other comprehensive income (loss), net of tax effect  of $(26)**                                               |   |                                       | ** **   |                 | ** **   |                   | ** **   |                                                 | ** **    |                             | ** **   |
| **Foreign currency translation adjustment, net of  reclassification adjustments of $6,134 (net of tax)**(Note 8) |   |                                       |         |                 |         |                   | ** **   | **(2,312**                                           | **)**         | **(2,312**                       | **)**        |
| **Minimum pension liability adjustment**                                                                         |   |                                       |         |                 |         |                   | ** **   | **26**                                               | ** **    | **26**                           | ** **   |
| **Unrealized gain (loss) on investment trusts**                                                                  |   |                                       |         |                 |         |                   | ** **   | **2,551**                                            | ** **    | **2,551**                        | ** **   |
| **Cash flow hedges**(Note 1(c))                                                                                  |   |                                       |         |                 |         |                   | ** **   | **(145**                                             | **)**         | **(145**                         | **)**        |
| **Total comprehensive income**                                                                                   |   |                                       | ** **   |                 | ** **   |                   | ** **   |                                                 | ** **    | **362,839**                      | ** **   |
|                                                                                                             |   |                                       | ** **   |                 | ** **   |                   | ** **   |                                                 | ** **    |                             | ** **   |
| **Issuance of common stock - net**(9,236,707 shares)                                                             |   | **92**                                     | ** **   | **251,179**          | ** **   |                   |         |                                                 | ** **    | **251,271**                      | ** **   |
| **Dividends on common stock ($1.38 per share)**                                                                  |   |                                       |         |                 |         | **(240,402**           | **)**        |                                                 | ** **    | **(240,402**                     | **)**        |
| **Other**(Note 2(b))                                                                                             |   |                                       | ** **   | **1,077**            |         | **(43**                | **)**        |                                                 | ** **    | **1,034**                        | ** **   |
|                                                                                                             |   |                                       | ** **   |                 | ** **   |                   | ** **   |                                                 | ** **    |                             | ** **   |
| **Ending balance at September 30, 2003**(177,899,822  shares)                                               |   | **$**                                      | **1,779**    | ** **           | **$**        | **2,170,392**          | ** **   | **$**                                                | **1,525,727** | ** **                       | **$**        | **(29,680** | **)** | **$** | **3,668,218** | ** ** |
|                                                                                                             |   |                                       | ** **   |                 | ** **   |                   | ** **   |                                                 | ** **    |                             | ** **   |
| Year to Date September 30, 2002                                                                             |   |                                       |         |                 |         |                   |         |                                                 |          |                             |         |
|                                                                                                             |   |                                       |         |                 |         |                   |         |                                                 |          |                             |         |
| Balance  at January 1, 2002 (159,402,839 shares)                                                            |   | $                                          | 1,594        |                 | $            | 1,619,659              |         | $                                                    | 1,337,135     |                             | $            | (16,929 | ) | $ | 2,941,459 |   |
| Comprehensive  income:                                                                                           |   |                                       |         |                 |         |                   |         |                                                 |          |                             |         |
| Net  income                                                                                                      |   |                                       |         |                 |         | 260,380                |         |                                                 |          | 260,380                          |         |
| Other  comprehensive income (loss), net of tax effect of $7,879                                                  |   |                                       |         |                 |         |                   |         |                                                 |          |                             |         |
| Foreign  currency translation adjustment                                                                         |   |                                       |         |                 |         |                   |         | 20,123                                               |          | 20,123                           |         |
| Minimum  pension liability adjustment                                                                            |   |                                       |         |                 |         |                   |         | 136                                                  |          | 136                              |         |
| Unrealized  gain (loss) on investment trusts                                                                     |   |                                       |         |                 |         |                   |         | (4,637                                               | )             | (4,637                           | )            |
| Cash  flow hedges (Note 1(c))                                                                                    |   |                                       |         |                 |         |                   |         | (20,417                                              | )             | (20,417                          | )            |
| Total  comprehensive income                                                                                      |   |                                       |         |                 |         |                   |         |                                                 |          | 255,585                          |         |
|                                                                                                             |   |                                       |         |                 |         |                   |         |                                                 |          |                             |         |
| Issuance  of common stock - net (8,864,887 shares)                                                               |   | 89                                         |         | 258,300              |         |                   |         |                                                 |          | 258,389                          |         |
| Dividends  on common stock ($1.35 per share)                                                                     |   |                                       |         |                 |         | (222,551               | )            |                                                 |          | (222,551                         | )            |
| Other                                                                                                            |   |                                       |         | 11,160               |         | 24                     |         |                                                 |          | 11,184                           |         |
|                                                                                                             |   |                                       |         |                 |         |                   |         |                                                 |          |                             |         |
| Ending  balance at September 30, 2002 (168,267,726 shares)                                                  |   | $                                          | 1,683        |                 | $            | 1,889,119              |         | $                                                    | 1,374,988     |                             | $            | (21,724 | ) | $ | 3,244,066 |   |

 

**The accompanying notes as they relate toCinergy Corp. are an integral part of these condensed consolidated financialstatements.**

 

9

----

 

**CINERGY CORP.CONDENSED CONSOLIDATED STATEMENTSOF CASH FLOWS**

** **
|                                                                                   |   | **Year to Date  September 30**        |        |
|----------------------------------------------------------------------------------------|--------|--------------------------------------------|-------------|
|                                                                                   |   | **2003**                                   |        | **2002** |   |
|                                                                                   |   | ***(dollars in  thousands)  (unaudited)*** |        |
|                                                                                   |   |                                       | * *    |   | * * |
| **Cash Flows  from Continuing Operations**                                             |   |                                       | ** **  |   |   |
| **Operating  Activities**                                                              |   |                                       | ** **  |   |   |
| Net income                                                                             |   | **$**                                      | **362,719** | ** ** | $ | 260,380 |   |
| Items providing or (using) cash currently:                                             |   |                                       | ** **  |   |   |
| Depreciation                                                                           |   | **313,719**                                | ** **  | 294,345 |   |
| (Income) Loss of discontinued operations, net of  tax                                  |   | **(8,875**                                 | **)**       | 561 |   |
| Cumulative effect of changes in accounting  principles, net of tax                     |   | **(26,462**                                | **)**       | 10,899 |   |
| Change in net position of energy risk management  activities                           |   | **(18,097**                                | **)**       | (61,838 | ) |
| Deferred income taxes and investment tax credits –  net                           |   | **35,828**                                 | ** **  | 169,377 |   |
| Equity in (earnings) losses of unconsolidated  subsidiaries                            |   | **(11,652**                                | **)**       | (7,356 | ) |
| Allowance for equity funds used during  construction                                   |   | **(7,111**                                 | **)**       | (8,802 | ) |
| Regulatory assets deferrals                                                            |   | **(61,846**                                | **)**       | (69,923 | ) |
| Regulatory assets amortization                                                         |   | **74,686**                                 | ** **  | 93,163 |   |
| Accrued pension and other postretirement benefit  costs                                |   | **(19,792**                                | **)**       | 51,587 |   |
| Deferred costs under gas recovery mechanism                                            |   | **(31,803**                                | **)**       | (2,592 | ) |
| Changes in current assets and current liabilities:                                     |   |                                       | ** **  |   |   |
| Restricted deposits                                                                    |   | **2,383**                                  | ** **  | (798 | ) |
| Accounts and notes receivable                                                          |   | **338,099**                                | ** **  | (357,370 | ) |
| Materials, supplies, and fuel                                                          |   | **(178**                                   | **)**       | (71,535 | ) |
| Prepayments                                                                            |   | **(29,923**                                | **)**       | (40,044 | ) |
| Accounts payable                                                                       |   | **(364,181**                               | **)**       | 432,766 |   |
| Accrued taxes and interest                                                             |   | **(15,069**                                | **)**       | (97,625 | ) |
| Other assets                                                                           |   | **5,772**                                  | ** **  | 48,362 |   |
| Other liabilities                                                                      |   | **58,130**                                 | ** **  | 11,322 |   |
|                                                                                   |   |                                       | ** **  |   |   |
| **Net cash provided by (used in) operating activities**                                |   | **596,347**                                | ** **  | 654,879 |   |
|                                                                                   |   |                                       | ** **  |   |   |
| **Financing Activities**                                                               |   |                                       | ** **  |   |   |
| Change in short-term debt                                                              |   | **(332,404**                               | **)**       | (417,228 | ) |
| Issuance of long-term debt                                                             |   | **688,166**                                | ** **  | 628,170 |   |
| Redemption of long-term debt                                                           |   | **(187,873**                               | **)**       | (115,672 | ) |
| Funds on deposit from issuance of debt securities                                      |   | **—**                                 | ** **  | (131,600 | ) |
| Retirement of preferred stock of subsidiaries                                          |   | **(10**                                    | **)**       | (3 | ) |
| Issuance of common stock                                                               |   | **251,271**                                | ** **  | 258,389 |   |
| Dividends on common stock                                                              |   | **(240,402**                               | **)**       | (222,551 | ) |
|                                                                                   |   |                                       | ** **  |   |   |
| **Net cash provided by (used in) financing activities**                                |   | **178,748**                                | ** **  | (495 | ) |
|                                                                                   |   |                                       | ** **  |   |   |
| **Investing Activities**                                                               |   |                                       | ** **  |   |   |
| Construction expenditures (less allowance for  equity funds used during construction)  |   | **(508,671**                               | **)**       | (587,445 | ) |
| Proceeds from notes receivable                                                         |   | **5,076**                                  | ** **  | — |   |
| Acquisitions and other investments                                                     |   | **(36,464**                                | **)**       | (56,439 | ) |
| Proceeds from sale of subsidiaries and equity  investments                             |   | **51,252**                                 | ** **  | 7,305 |   |
|                                                                                   |   |                                       | ** **  |   |   |
| **Net cash provided by (used in) investing activities**                                |   | **(488,807**                               | **)**       | (636,579 | ) |
|                                                                                   |   |                                       | ** **  |   |   |
| **Net increase (decrease) in cash and cash equivalents from continuing  operations**   |   | **286,288**                                | ** **  | 17,805 |   |
|                                                                                   |   |                                       | ** **  |   |   |
| **Cash and cash equivalents from continuing operations at beginning of  period**       |   | **200,112**                                | ** **  | 87,257 |   |
|                                                                                   |   |                                       | ** **  |   |   |
| **Cash and cash equivalents from continuing operations at end of period**              |   | **$**                                      | **486,400** | ** ** | $ | 105,062 |   |
|                                                                                   |   |                                       | ** **  |   |   |
| **Cash Flows from Discontinued Operations**                                            |   |                                       | ** **  |   |   |
| Operating activities                                                                   |   | **$**                                      | **(7,285**  | **)** | $ | 17,992 |   |
| Financing activities                                                                   |   | **(13,484**                                | **)**       | (22,551 | ) |
| Investing activities                                                                   |   | **(202**                                   | **)**       | (5,046 | ) |
|                                                                                   |   |                                       | ** **  |   |   |
| **Net increase (decrease) in cash and cash equivalents from discontinued  operations** |   | **(20,971**                                | **)**       | (9,605 | ) |
|                                                                                   |   |                                       | ** **  |   |   |
| **Cash and cash equivalents from discontinued operations at beginning of  period**     |   | **20,971**                                 | ** **  | 23,810 |   |
|                                                                                   |   |                                       | ** **  |   |   |
| **Cash and cash equivalents from discontinued operations at end of period**            |   | **$**                                      | **—**  | ** ** | $ | 14,205 |   |
|                                                                                   |   |                                       | ** **  |   |   |
| **Supplemental Disclosure of Cash Flow Information**                                   |   |                                       | ** **  |   |   |
| Cash paid during the period for:                                                       |   |                                       | ** **  |   |   |
| Interest (net of amount capitalized)                                                   |   | **$**                                      | **182,108** | ** ** | $ | 207,659 |   |
| Income taxes                                                                           |   | **$**                                      | **90,281**  | ** ** | $ | 30,900 |   |

** **

**The accompanying notes as they relate toCinergy Corp. are an integral part of these condensed consolidated financialstatements.**

 

10

----

 

**THE CINCINNATI GAS& ELECTRIC COMPANY**

**AND SUBSIDIARYCOMPANIES**

** **

**11**

----

** **

**THE CINCINNATI GAS & ELECTRICCOMPANYCONDENSED CONSOLIDATED STATEMENTSOF INCOME AND COMPREHENSIVE INCOME**

** **
|                                                                                  |   | **Quarter Ended  September 30**       |        | **Year to Date  September 30** |     |
|---------------------------------------------------------------------------------------|--------|--------------------------------------------|-------------|-------------------------------------|----------|
|                                                                                  |   | **2003**                                   |        | **2002**                            |     | **2003** |   | **2002** |   |
|                                                                                  |   | ***(dollars in  thousands)  (unaudited)*** |        |
|                                                                                  |   |                                       | * *    |                                | * * |   | * * |   | * * |
| **Operating Revenues**(Note 1(g)(*i*))                                                |   |                                       | ** **  |                                |     |   |   |   |   |
| Electric                                                                              |   | **$**                                      | **474,840** | ** **                          | $        | 492,617 |   | **$** | **1,300,859** | ** ** | $ | 1,301,442 |   |
| Gas                                                                                   |   | **66,399**                                 | ** **  | 41,452                              |     | **426,986** | ** ** | 277,069 |   |
| **Total Operating  Revenues**                                                         |   | **541,239**                                | ** **  | 534,069                             |     | **1,727,845** | ** ** | 1,578,511 |   |
|                                                                                  |   |                                       | ** **  |                                |     |   | ** ** |   |   |
| **Operating Expenses**                                                                |   |                                       | ** **  |                                |     |   | ** ** |   |   |
| Fuel  and purchased and exchanged power (Note 1(g)(*i*))                              |   | **144,794**                                | ** **  | 136,459                             |     | **381,615** | ** ** | 352,292 |   |
| Gas  purchased                                                                        |   | **32,223**                                 | ** **  | 12,594                              |     | **252,074** | ** ** | 145,033 |   |
| Operation  and maintenance                                                            |   | **133,474**                                | ** **  | 150,247                             |     | **394,171** | ** ** | 394,443 |   |
| Depreciation                                                                          |   | **42,542**                                 | ** **  | 49,005                              |     | **142,119** | ** ** | 146,057 |   |
| Taxes  other than income taxes                                                        |   | **44,553**                                 | ** **  | 50,304                              |     | **154,810** | ** ** | 149,509 |   |
| **Total Operating  Expenses**                                                         |   | **397,586**                                | ** **  | 398,609                             |     | **1,324,789** | ** ** | 1,187,334 |   |
|                                                                                  |   |                                       | ** **  |                                |     |   | ** ** |   |   |
| **Operating Income**                                                                  |   | **143,653**                                | ** **  | 135,460                             |     | **403,056** | ** ** | 391,177 |   |
|                                                                                  |   |                                       | ** **  |                                |     |   | ** ** |   |   |
| **Miscellaneous  Income - Net**                                                       |   | **9,654**                                  | ** **  | 4,140                               |     | **23,137** | ** ** | 4,002 |   |
| **Interest Expense**                                                                  |   | **29,506**                                 | ** **  | 23,746                              |     | **84,766** | ** ** | 68,375 |   |
|                                                                                  |   |                                       | ** **  |                                |     |   | ** ** |   |   |
| **Income Before  Taxes**                                                              |   | **123,801**                                | ** **  | 115,854                             |     | **341,427** | ** ** | 326,804 |   |
|                                                                                  |   |                                       | ** **  |                                |     |   | ** ** |   |   |
| **Income Taxes**                                                                      |   | **44,938**                                 | ** **  | 44,085                              |     | **125,347** | ** ** | 124,780 |   |
|                                                                                  |   |                                       | ** **  |                                |     |   | ** ** |   |   |
| **Income Before  Cumulative Effect of Changes in Accounting Principles**              |   | **78,863**                                 | ** **  | 71,769                              |     | **216,080** | ** ** | 202,024 |   |
|                                                                                  |   |                                       | ** **  |                                |     |   | ** ** |   |   |
| Cumulative  effect of changes in accounting principles, net of tax (Note 1(g)(*vii*)) |   | **—**                                 | ** **  | —                              |     | **30,938** | ** ** | — |   |
|                                                                                  |   |                                       | ** **  |                                |     |   | ** ** |   |   |
| **Net Income**                                                                        |   | **$**                                      | **78,863**  | ** **                          | $        | 71,769 |   | **$** | **247,018** | ** ** | $ | 202,024 |   |
|                                                                                  |   |                                       | ** **  |                                |     |   | ** ** |   |   |
| **Preferred Dividend  Requirement**                                                   |   | **211**                                    | ** **  | 211                                 |     | **634** | ** ** | 634 |   |
|                                                                                  |   |                                       | ** **  |                                |     |   | ** ** |   |   |
| **Net Income  Applicable to Common Stock**                                            |   | **$**                                      | **78,652**  | ** **                          | $        | 71,558 |   | **$** | **246,384** | ** ** | $ | 201,390 |   |
|                                                                                  |   |                                       | ** **  |                                |     |   | ** ** |   |   |
| **Net Income**                                                                        |   | **$**                                      | **78,863**  | ** **                          | $        | 71,769 |   | **$** | **247,018** | ** ** | $ | 202,024 |   |
|                                                                                  |   |                                       | ** **  |                                |     |   | ** ** |   |   |
| **Other  Comprehensive Income (Loss), Net of Tax**                                    |   | **2,720**                                  | ** **  | (17,588                             | )        | **(307** | **)** | (19,673 | ) |
|                                                                                  |   |                                       | ** **  |                                |     |   | ** ** |   |   |
| **Comprehensive  Income**                                                             |   | **$**                                      | **81,583**  | ** **                          | $        | 54,181 |   | **$** | **246,711** | ** ** | $ | 182,351 |   |

 

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

 

12

----

 

**THE CINCINNATI GAS & ELECTRICCOMPANYCONDENSED CONSOLIDATED BALANCESHEETS**

** **

**ASSETS**

** **
|                                                                                                                                              |   | **September 30  2003**                |          | **December 31  2002** |     |
|---------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------|---------------|----------------------------|----------|
|                                                                                                                                              |   | ***(dollars in  thousands)  (unaudited)*** |          |
|                                                                                                                                              |   |                                       | *** ***  |                       | * * |
| **Current Assets**                                                                                                                                |   |                                       | ** **    |                       |     |
| Cash  and cash equivalents                                                                                                                        |   | **$**                                      | **99,551**    | ** **                 | $        | 45,336 |   |
| Restricted  deposits                                                                                                                              |   | **137**                                    | ** **    | 3,071                      |     |
| Notes  receivable from affiliated companies                                                                                                       |   | **137,144**                                | ** **    | 148,823                    |     |
| Accounts  receivable less accumulated provision for doubtful accounts of $4,096 at  September 30, 2003, and $5,942 at December 31, 2002 |   | **103,345**                                | ** **    | 117,269                    |     |
| Accounts  receivable from affiliated companies                                                                                                    |   | **9,730**                                  | ** **    | 97,584                     |     |
| Materials,  supplies, and fuel                                                                                                                    |   | **135,035**                                | ** **    | 121,881                    |     |
| Energy  risk management current assets (Note 1(c)(*i*))                                                                                           |   | **78,689**                                 | ** **    | 57,912                     |     |
| Prepayments  and other                                                                                                                            |   | **35,565**                                 | ** **    | 8,560                      |     |
| **Total Current  Assets**                                                                                                                         |   | **599,196**                                | ** **    | 600,436                    |     |
|                                                                                                                                              |   |                                       | ** **    |                       |     |
| **Property, Plant,  and Equipment - at Cost**                                                                                                     |   |                                       | ** **    |                       |     |
| Utility  plant in service (Note 12)                                                                                                               |   |                                       | ** **    |                       |     |
| Electric                                                                                                                                          |   | **2,146,147**                              | ** **    | 2,073,133                  |     |
| Gas                                                                                                                                               |   | **1,043,356**                              | ** **    | 1,003,870                  |     |
| Common                                                                                                                                            |   | **249,382**                                | ** **    | 248,938                    |     |
| **Total Utility  Plant In Service**                                                                                                               |   | **3,438,885**                              | ** **    | 3,325,941                  |     |
| Construction  work in progress                                                                                                                    |   | **115,161**                                | ** **    | 84,249                     |     |
| **Total Utility  Plant**                                                                                                                          |   | **3,554,046**                              | ** **    | 3,410,190                  |     |
| Non-regulated  property, plant, and equipment (Note 12)                                                                                           |   | **3,510,124**                              | ** **    | 3,445,056                  |     |
| Accumulated  depreciation (Note 1(g)(*vi*))                                                                                                       |   | **2,754,575**                              | ** **    | 2,712,105                  |     |
| **Net Property,  Plant, and Equipment**                                                                                                           |   | **4,309,595**                              | ** **    | 4,143,141                  |     |
|                                                                                                                                              |   |                                       | ** **    |                       |     |
| **Other Assets**                                                                                                                                  |   |                                       | ** **    |                       |     |
| Regulatory  assets                                                                                                                                |   | **594,727**                                | ** **    | 604,776                    |     |
| Energy  risk management non-current assets (Note 1(c)(*i*))                                                                                       |   | **61,789**                                 | ** **    | 64,762                     |     |
| Other  investments                                                                                                                                |   | **1,084**                                  | ** **    | 1,082                      |     |
| Other                                                                                                                                             |   | **178,884**                                | ** **    | 127,550                    |     |
| **Total Other Assets**                                                                                                                            |   | **836,484**                                | ** **    | 798,170                    |     |
|                                                                                                                                              |   |                                       | ** **    |                       |     |
| **Total Assets**                                                                                                                                  |   | **$**                                      | **5,745,275** | ** **                 | $        | 5,541,747 |   |

 

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

 

13

----

**THE CINCINNATI GAS & ELECTRICCOMPANYCONDENSED CONSOLIDATED BALANCE SHEETS**

 

**LIABILITIESAND SHAREHOLDER’S EQUITY**

 
|                                                                                                                                                      |   | **September 30  2003**                |          | **December 31  2002** |     |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------|---------------|----------------------------|----------|
|                                                                                                                                                      |   | ***(dollars in  thousands)  (unaudited)*** |          |
|                                                                                                                                                      |   |                                       | * *      |                       | * * |
| **Current Liabilities**                                                                                                                                   |   |                                       |          |                       |     |
| Accounts  payable                                                                                                                                         |   | **$**                                      | **145,449**   | ** **                 | $        | 195,812 |   |
| Accounts  payable to affiliated companies                                                                                                                 |   | **33,253**                                 | ** **    | 146,558                    |     |
| Accrued  taxes                                                                                                                                            |   | **193,641**                                | ** **    | 159,199                    |     |
| Accrued  interest                                                                                                                                         |   | **32,478**                                 | ** **    | 22,872                     |     |
| Notes  payable and other short-term obligations (Note 5)                                                                                                  |   | **112,100**                                | ** **    | 112,100                    |     |
| Notes  payable to affiliated companies (Note 5)                                                                                                           |   | **9,042**                                  | ** **    | 8,947                      |     |
| Long-term  debt due within one year                                                                                                                       |   | **395,500**                                | ** **    | 120,000                    |     |
| Energy  risk management current liabilities (Note 1(c)(*i*))                                                                                              |   | **73,445**                                 | ** **    | 49,288                     |     |
| Other                                                                                                                                                     |   | **28,834**                                 | ** **    | 37,160                     |     |
| **Total Current  Liabilities**                                                                                                                            |   | **1,023,742**                              | ** **    | 851,936                    |     |
|                                                                                                                                                      |   |                                       | ** **    |                       |     |
| **Non-Current  Liabilities**                                                                                                                              |   |                                       | ** **    |                       |     |
| Long-term  debt (Note 3)                                                                                                                                  |   | **1,456,716**                              | ** **    | 1,569,713                  |     |
| Deferred  income taxes                                                                                                                                    |   | **942,250**                                | ** **    | 882,628                    |     |
| Unamortized  investment tax credits                                                                                                                       |   | **80,689**                                 | ** **    | 85,198                     |     |
| Accrued  pension and other postretirement benefit costs                                                                                                   |   | **206,003**                                | ** **    | 201,284                    |     |
| Energy  risk management non-current liabilities (Note 1(c)(*i*))                                                                                          |   | **43,204**                                 | ** **    | 31,326                     |     |
| Other                                                                                                                                                     |   | **82,430**                                 | ** **    | 88,843                     |     |
| **Total Non-Current  Liabilities**                                                                                                                        |   | **2,811,292**                              | ** **    | 2,858,992                  |     |
|                                                                                                                                                      |   |                                       | ** **    |                       |     |
| **Commitments and  Contingencies**(Note 7)                                                                                                                |   |                                       | ** **    |                       |     |
|                                                                                                                                                      |   |                                       | ** **    |                       |     |
| **Total Liabilities**                                                                                                                                     |   | **3,835,034**                              | ** **    | 3,710,928                  |     |
|                                                                                                                                                      |   |                                       | ** **    |                       |     |
| **Cumulative  Preferred Stock**                                                                                                                           |   |                                       | ** **    |                       |     |
| Not  subject to mandatory redemption                                                                                                                      |   | **20,485**                                 | ** **    | 20,485                     |     |
|                                                                                                                                                      |   |                                       | ** **    |                       |     |
| **Common Stock  Equity**                                                                                                                                  |   |                                       | ** **    |                       |     |
| Common  stock - $8.50 par value; authorized shares - 120,000,000; outstanding shares  - 89,663,086 at September 30, 2003, and December 31, 2002 |   | **762,136**                                | ** **    | 762,136                    |     |
| Paid-in  capital                                                                                                                                          |   | **586,292**                                | ** **    | 586,292                    |     |
| Retained  earnings                                                                                                                                        |   | **567,381**                                | ** **    | 487,652                    |     |
| Accumulated  other comprehensive income (loss)                                                                                                            |   | **(26,053**                                | **)**         | (25,746                    | )        |
| **Total Common Stock  Equity**                                                                                                                            |   | **1,889,756**                              | ** **    | 1,810,334                  |     |
|                                                                                                                                                      |   |                                       | ** **    |                       |     |
| **Total Liabilities  and Shareholder’s Equity**                                                                                                      |   | **$**                                      | **5,745,275** | ** **                 | $        | 5,541,747 |   |

 

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

 

14

----

 

**THE CINCINNATI GAS & ELECTRICCOMPANYCONDENSED CONSOLIDATED STATEMENTSOF CASH FLOWS**

** **
|                                                                                  |   | **Year to Date  September 30**        |        |
|---------------------------------------------------------------------------------------|--------|--------------------------------------------|-------------|
|                                                                                  |   | **2003**                                   |        | **2002** |   |
|                                                                                  |   | ***(dollars in  thousands)  (unaudited)*** |        |
|                                                                                  |   |                                       | * *    |   | * * |
| **Operating Activities**                                                              |   |                                       |        |   |   |
| Net  income                                                                           |   | **$**                                      | **247,018** | ** ** | $ | 202,024 |   |
| Items  providing or (using) cash currently:                                           |   |                                       | ** **  |   |   |
| Depreciation                                                                          |   | **142,119**                                | ** **  | 146,057 |   |
| Deferred  income taxes and investment tax credits - net                               |   | **35,406**                                 | ** **  | 95,730 |   |
| Cumulative  effect of changes in accounting principles, net of tax                    |   | **(30,938**                                | **)**       | — |   |
| Change  in net position of energy risk management activities                          |   | **(24,465**                                | **)**       | (19,560 | ) |
| Allowance  for equity funds used during construction                                  |   | **(2,566**                                 | **)**       | 261 |   |
| Regulatory  assets deferrals                                                          |   | **(17,984**                                | **)**       | (45,007 | ) |
| Regulatory  assets amortization                                                       |   | **31,411**                                 | ** **  | 38,024 |   |
| Accrued  pension and other postretirement benefit costs                               |   | **4,719**                                  | ** **  | 5,549 |   |
| Deferred  costs under gas cost recovery mechanism                                     |   | **(31,803**                                | **)**       | (2,592 | ) |
| Changes  in current assets and current liabilities:                                   |   |                                       | ** **  |   |   |
| Restricted  deposits                                                                  |   | **2,934**                                  | ** **  | (765 | ) |
| Accounts  and notes receivable                                                        |   | **157,926**                                | ** **  | (199,985 | ) |
| Materials,  supplies, and fuel                                                        |   | **(13,154**                                | **)**       | 6,576 |   |
| Prepayments                                                                           |   | **(8,040**                                 | **)**       | (14,830 | ) |
| Accounts  payable                                                                     |   | **(163,059**                               | **)**       | 214,967 |   |
| Accrued  taxes and interest                                                           |   | **44,048**                                 | ** **  | (7,301 | ) |
| Other  assets                                                                         |   | **(12,307**                                | **)**       | 5,856 |   |
| Other  liabilities                                                                    |   | **(15,350**                                | **)**       | (7,506 | ) |
|                                                                                  |   |                                       | ** **  |   |   |
| **Net cash provided  by (used in) operating activities**                              |   | **345,915**                                | ** **  | 417,498 |   |
|                                                                                  |   |                                       | ** **  |   |   |
| **Financing  Activities**                                                             |   |                                       | ** **  |   |   |
| Change  in short-term debt, including net affiliate notes                             |   | **(44,374**                                | **)**       | (451,627 | ) |
| Issuance  of long-term debt                                                           |   | **256,198**                                | ** **  | 580,570 |   |
| Redemption  of long-term debt                                                         |   | **(100,000**                               | **)**       | (100,000 | ) |
| Funds  on deposit from issuance of debt securities                                    |   | **—**                                 | ** **  | (84,000 | ) |
| Retirement  of preferred stock                                                        |   | **—**                                 | ** **  | (1 | ) |
| Dividends  on preferred stock                                                         |   | **(634**                                   | **)**       | (634 | ) |
| Dividends  on common stock                                                            |   | **(166,655**                               | **)**       | (138,712 | ) |
|                                                                                  |   |                                       | ** **  |   |   |
| **Net cash provided  by (used in) financing activities**                              |   | **(55,465**                                | **)**       | (194,404 | ) |
|                                                                                  |   |                                       | ** **  |   |   |
| **Investing  Activities**                                                             |   |                                       | ** **  |   |   |
| Construction  expenditures (less allowance for equity funds used during construction) |   | **(236,235**                               | **)**       | (223,740 | ) |
| Other  investments                                                                    |   | **—**                                 | ** **  | 98 |   |
|                                                                                  |   |                                       | ** **  |   |   |
| **Net cash provided  by (used in) investing activities**                              |   | **(236,235**                               | **)**       | (223,642 | ) |
|                                                                                  |   |                                       | ** **  |   |   |
| **Net increase  (decrease) in cash and cash equivalents**                             |   | **54,215**                                 | ** **  | (548 | ) |
|                                                                                  |   |                                       | ** **  |   |   |
| **Cash and cash  equivalents at beginning of period**                                 |   | **45,336**                                 | ** **  | 9,074 |   |
|                                                                                  |   |                                       | ** **  |   |   |
| **Cash and cash  equivalents at end of period**                                       |   | **$**                                      | **99,551**  | ** ** | $ | 8,526 |   |
|                                                                                  |   |                                       | ** **  |   |   |
| **Supplemental  Disclosure of Cash Flow Information**                                 |   |                                       | ** **  |   |   |
| Cash  paid during the period for:                                                     |   |                                       | ** **  |   |   |
| Interest  (net of amount capitalized)                                                 |   | **$**                                      | **69,321**  | ** ** | $ | 68,749 |   |
| Income  taxes                                                                         |   | **$**                                      | **38,146**  | ** ** | $ | 16,121 |   |

** **

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

 

15

----

 

**PSI ENERGY**, INC.

**AND SUBSIDIARYCOMPANY**

 

16

----

 

**PSI ENERGY, INC.CONDENSED CONSOLIDATED STATEMENTSOF INCOME AND COMPREHENSIVE INCOME**

** **
|                                                                                  |   | **Quarter Ended  September 30**       |        | **Year to Date  September 30** |     |
|---------------------------------------------------------------------------------------|--------|--------------------------------------------|-------------|-------------------------------------|----------|
|                                                                                  |   | **2003**                                   |        | **2002**                            |     | **2003** |   | **2002** |   |
|                                                                                  |   | ***(dollars in  thousands)  (unaudited)*** |        |
|                                                                                  |   |                                       | * *    |                                | * * |   | * * |   | * * |
| **Operating Revenues**(Note 1(g)(*i*))                                                |   |                                       |        |                                |     |   |   |   |   |
| Electric                                                                              |   | **$**                                      | **437,084** | ** **                          | $        | 470,772 |   | **$** | **1,210,157** | ** ** | $ | 1,215,791 |   |
|                                                                                  |   |                                       | ** **  |                                |     |   | ** ** |   |   |
| **Operating Expenses**                                                                |   |                                       | ** **  |                                |     |   | ** ** |   |   |
| Fuel  and purchased and exchanged power (Note 1(g)(*i*))                              |   | **177,786**                                | ** **  | 168,683                             |     | **466,656** | ** ** | 420,278 |   |
| Operation  and maintenance                                                            |   | **113,336**                                | ** **  | 128,931                             |     | **348,668** | ** ** | 386,559 |   |
| Depreciation                                                                          |   | **47,695**                                 | ** **  | 39,826                              |     | **135,351** | ** ** | 115,954 |   |
| Taxes  other than income taxes                                                        |   | **10,322**                                 | ** **  | 13,446                              |     | **42,354** | ** ** | 46,992 |   |
| **Total Operating  Expenses**                                                         |   | **349,139**                                | ** **  | 350,886                             |     | **993,029** | ** ** | 969,783 |   |
|                                                                                  |   |                                       | ** **  |                                |     |   | ** ** |   |   |
| **Operating Income**                                                                  |   | **87,945**                                 | ** **  | 119,886                             |     | **217,128** | ** ** | 246,008 |   |
|                                                                                  |   |                                       | ** **  |                                |     |   | ** ** |   |   |
| **Miscellaneous  Income (Expense) - Net**                                             |   | **(2,221**                                 | **)**       | 4,434                               |     | **5,348** | ** ** | 14,155 |   |
| **Interest Expense**                                                                  |   | **21,324**                                 | ** **  | 18,782                              |     | **63,477** | ** ** | 55,862 |   |
|                                                                                  |   |                                       | ** **  |                                |     |   | ** ** |   |   |
| **Income Before  Taxes**                                                              |   | **64,400**                                 | ** **  | 105,538                             |     | **158,999** | ** ** | 204,301 |   |
|                                                                                  |   |                                       | ** **  |                                |     |   | ** ** |   |   |
| **Income Taxes**                                                                      |   | **26,808**                                 | ** **  | 37,895                              |     | **64,107** | ** ** | 68,861 |   |
|                                                                                  |   |                                       | ** **  |                                |     |   | ** ** |   |   |
| **Income Before  Cumulative Effect of a Change in Accounting Principle**              |   | **37,592**                                 | ** **  | 67,643                              |     | **94,892** | ** ** | 135,440 |   |
|                                                                                  |   |                                       | ** **  |                                |     |   | ** ** |   |   |
| Cumulative  effect of a change in accounting principle, net of tax (Note 1(g)(*vii*)) |   | **—**                                 | ** **  | —                              |     | **(494** | **)** | — |   |
|                                                                                  |   |                                       | ** **  |                                |     |   | ** ** |   |   |
| **Net Income**                                                                        |   | **$**                                      | **37,592**  | ** **                          | $        | 67,643 |   | **$** | **94,398** | ** ** | $ | 135,440 |   |
|                                                                                  |   |                                       | ** **  |                                |     |   | ** ** |   |   |
| **Preferred Dividend  Requirement**                                                   |   | **647**                                    | ** **  | 648                                 |     | **1,940** | ** ** | 1,941 |   |
|                                                                                  |   |                                       | ** **  |                                |     |   | ** ** |   |   |
| **Net Income  Applicable to Common Stock**                                            |   | **$**                                      | **36,945**  | ** **                          | $        | 66,995 |   | **$** | **92,458** | ** ** | $ | 133,499 |   |
|                                                                                  |   |                                       | ** **  |                                |     |   | ** ** |   |   |
| **Net Income**                                                                        |   | **$**                                      | **37,592**  | ** **                          | $        | 67,643 |   | **$** | **94,398** | ** ** | $ | 135,440 |   |
|                                                                                  |   |                                       | ** **  |                                |     |   | ** ** |   |   |
| **Other  Comprehensive Income (Loss), Net of Tax**                                    |   | **(77**                                    | **)**       | (2,716                              | )        | **2,247** | ** ** | (3,684 | ) |
|                                                                                  |   |                                       | ** **  |                                |     |   | ** ** |   |   |
| **Comprehensive  Income**                                                             |   | **$**                                      | **37,515**  | ** **                          | $        | 64,927 |   | **$** | **96,645** | ** ** | $ | 131,756 |   |

 

**The accompanying notes as they relate to PSIEnergy, Inc. are an integral part of these condensed consolidated financialstatements.**

 

17

----

 

**PSI ENERGY, INC.**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

** **

**ASSETS**

** **
|                                                                                                                                              |   | **September 30  2003**                |          | **December 31  2002** |     |
|---------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------|---------------|----------------------------|----------|
|                                                                                                                                              |   | ***(dollars in  thousands)  (unaudited)*** |          |
|                                                                                                                                              |   |                                       | * *      |                       | * * |
| **Current Assets**                                                                                                                                |   |                                       |          |                       |     |
| Cash  and cash equivalents                                                                                                                        |   | **$**                                      | **11,452**    | ** **                 | $        | 2,007 |   |
| Restricted  deposits                                                                                                                              |   | **571**                                    | ** **    | 20                         |     |
| Notes  receivable from affiliated companies                                                                                                       |   | **21,108**                                 | ** **    | 53,755                     |     |
| Accounts  receivable less accumulated provision for doubtful accounts of $2,068 at  September 30, 2003, and $5,656 at December 31, 2002 |   | **48,295**                                 | ** **    | 84,819                     |     |
| Accounts  receivable from affiliated companies                                                                                                    |   | **4,328**                                  | ** **    | 437                        |     |
| Materials,  supplies, and fuel                                                                                                                    |   | **122,574**                                | ** **    | 137,292                    |     |
| Energy  risk management current assets (Note 1(c)(*i*))                                                                                           |   | **7,090**                                  | ** **    | 8,701                      |     |
| Prepayments  and other                                                                                                                            |   | **33,751**                                 | ** **    | 44,725                     |     |
| **Total Current  Assets**                                                                                                                         |   | **249,169**                                | ** **    | 331,756                    |     |
|                                                                                                                                              |   |                                       | ** **    |                       |     |
| **Property, Plant,  and Equipment - at Cost**                                                                                                     |   |                                       | ** **    |                       |     |
| Utility  plant in service                                                                                                                         |   | **6,118,651**                              | ** **    | 5,315,410                  |     |
| Construction  work in progress                                                                                                                    |   | **172,908**                                | ** **    | 385,051                    |     |
| **Total Utility  Plant**                                                                                                                          |   | **6,291,559**                              | ** **    | 5,700,461                  |     |
| Accumulated  depreciation                                                                                                                         |   | **2,436,536**                              | ** **    | 2,334,157                  |     |
| **Net Property,  Plant, and Equipment**(Note 12)                                                                                                  |   | **3,855,023**                              | ** **    | 3,366,304                  |     |
|                                                                                                                                              |   |                                       | ** **    |                       |     |
| **Other Assets**                                                                                                                                  |   |                                       | ** **    |                       |     |
| Regulatory  assets                                                                                                                                |   | **417,730**                                | ** **    | 417,920                    |     |
| Energy  risk management non-current assets (Note 1(c)(*i*))                                                                                       |   | **8,988**                                  | ** **    | 16,590                     |     |
| Other  investments                                                                                                                                |   | **60,852**                                 | ** **    | 54,683                     |     |
| Other                                                                                                                                             |   | **46,278**                                 | ** **    | 35,703                     |     |
| **Total Other Assets**                                                                                                                            |   | **533,848**                                | ** **    | 524,896                    |     |
|                                                                                                                                              |   |                                       | ** **    |                       |     |
| **Total Assets**                                                                                                                                  |   | **$**                                      | **4,638,040** | ** **                 | $        | 4,222,956 |   |

 

**The accompanying notes as they relate to PSIEnergy, Inc. are an integral part of these condensed consolidated financialstatements.**

 

18

----

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

** **

**LIABILITIES AND SHAREHOLDER’S EQUITY**

** **
|                                                                                                                                                                           |   | **September 30  2003**                |          | **December 31  2002** |     |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------|---------------|----------------------------|----------|
|                                                                                                                                                                           |   | ***(dollars in  thousands)  (unaudited)*** |          |
|                                                                                                                                                                           |   |                                       | * *      |                       | * * |
| **Current Liabilities**                                                                                                                                                        |   |                                       |          |                       |     |
| Accounts  payable                                                                                                                                                              |   | **$**                                      | **42,452**    | ** **                 | $        | 113,563 |   |
| Accounts  payable to affiliated companies                                                                                                                                      |   | **13,486**                                 | ** **    | 107,364                    |     |
| Accrued  taxes                                                                                                                                                                 |   | **117,415**                                | ** **    | 105,960                    |     |
| Accrued  interest                                                                                                                                                              |   | **26,011**                                 | ** **    | 23,078                     |     |
| Notes  payable and other short-term obligations (Note 5)                                                                                                                       |   | **—**                                 | ** **    | 35,000                     |     |
| Notes  payable to affiliated companies (Note 5)                                                                                                                                |   | **164,974**                                | ** **    | 138,055                    |     |
| Long-term  debt due within one year                                                                                                                                            |   | **1,038**                                  | ** **    | 56,000                     |     |
| Energy  risk management current liabilities (Note 1(c)(*i*))                                                                                                                   |   | **14,648**                                 | ** **    | 8,000                      |     |
| Other                                                                                                                                                                          |   | **27,936**                                 | ** **    | 22,335                     |     |
| **Total Current  Liabilities**                                                                                                                                                 |   | **407,960**                                | ** **    | 609,355                    |     |
|                                                                                                                                                                           |   |                                       | ** **    |                       |     |
| **Non-Current  Liabilities**                                                                                                                                                   |   |                                       | ** **    |                       |     |
| Long-term  debt (Note 3)                                                                                                                                                       |   | **1,720,330**                              | ** **    | 1,315,984                  |     |
| Deferred  income taxes                                                                                                                                                         |   | **556,636**                                | ** **    | 538,745                    |     |
| Unamortized  investment tax credits                                                                                                                                            |   | **30,497**                                 | ** **    | 32,897                     |     |
| Accrued  pension and other postretirement benefit costs                                                                                                                        |   | **176,828**                                | ** **    | 184,299                    |     |
| Energy  risk management non-current liabilities (Note 1(c)(*i*))                                                                                                               |   | **3,352**                                  | ** **    | 17,157                     |     |
| Other                                                                                                                                                                          |   | **77,426**                                 | ** **    | 80,879                     |     |
| **Total Non-Current  Liabilities**                                                                                                                                             |   | **2,565,069**                              | ** **    | 2,169,961                  |     |
|                                                                                                                                                                           |   |                                       | ** **    |                       |     |
| **Commitments and  Contingencies** (Note  7)                                                                                                                                   |   |                                       | ** **    |                       |     |
|                                                                                                                                                                           |   |                                       | ** **    |                       |     |
| **Total Liabilities**                                                                                                                                                          |   | **2,973,029**                              | ** **    | 2,779,316                  |     |
|                                                                                                                                                                           |   |                                       | ** **    |                       |     |
| **Cumulative  Preferred Stock**                                                                                                                                                |   |                                       | ** **    |                       |     |
| Not  subject to mandatory redemption                                                                                                                                           |   | **42,333**                                 | ** **    | 42,343                     |     |
|                                                                                                                                                                           |   |                                       | ** **    |                       |     |
| **Common Stock  Equity**                                                                                                                                                       |   |                                       | ** **    |                       |     |
| Common  stock - without par value; $.01 stated value; authorized shares - 60,000,000;  outstanding shares - 53,913,701 at September 30, 2003, and  December 31, 2002 |   | **539**                                    | ** **    | 539                        |     |
| Paid-in  capital (Note 2(c))                                                                                                                                                   |   | **626,931**                                | ** **    | 426,931                    |     |
| Retained  earnings                                                                                                                                                             |   | **1,001,080**                              | ** **    | 981,946                    |     |
| Accumulated  other comprehensive income (loss)                                                                                                                                 |   | **(5,872**                                 | **)**         | (8,119                     | )        |
| **Total Common Stock  Equity**                                                                                                                                                 |   | **1,622,678**                              | ** **    | 1,401,297                  |     |
|                                                                                                                                                                           |   |                                       | ** **    |                       |     |
| **Total Liabilities  and Shareholder’s Equity**                                                                                                                           |   | **$**                                      | **4,638,040** | ** **                 | $        | 4,222,956 |   |

 

**The accompanying notes as they relate to PSIEnergy, Inc. are an integral part of these condensed consolidated financialstatements.**

 

19

----

 

**PSI ENERGY, INC.**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

** **
|                                                                                  |   | **Year to Date  September 30**        |        |
|---------------------------------------------------------------------------------------|--------|--------------------------------------------|-------------|
|                                                                                  |   | **2003**                                   |        | **2002** |   |
|                                                                                  |   | ***(dollars in  thousands)  (unaudited)*** |        |
|                                                                                  |   |                                       | * *    |   | * * |
| **Operating Activities**                                                              |   |                                       |        |   |   |
| Net  income                                                                           |   | **$**                                      | **94,398**  | ** ** | $ | 135,440 |   |
| Items  providing or (using) cash currently:                                           |   |                                       | ** **  |   |   |
| Depreciation                                                                          |   | **135,351**                                | ** **  | 115,954 |   |
| Cumulative  effect of a change in accounting principle, net of tax                    |   | **494**                                    | ** **  | — |   |
| Deferred  income taxes and investment tax credits - net                               |   | **14,370**                                 | ** **  | 46,376 |   |
| Change  in net position of energy risk management activities                          |   | **(1,731**                                 | **)**       | 8,443 |   |
| Allowance  for equity funds used during construction                                  |   | **(4,545**                                 | **)**       | (9,063 | ) |
| Regulatory  assets deferrals                                                          |   | **(43,862**                                | **)**       | (24,916 | ) |
| Regulatory  assets amortization                                                       |   | **43,275**                                 | ** **  | 55,139 |   |
| Accrued  pension and other postretirement benefit costs                               |   | **(7,471**                                 | **)**       | 4,603 |   |
| Changes  in current assets and current liabilities:                                   |   |                                       | ** **  |   |   |
| Restricted  deposits                                                                  |   | **(551**                                   | **)**       | (34 | ) |
| Accounts  and notes receivable                                                        |   | **65,280**                                 | ** **  | 222,369 |   |
| Materials,  supplies, and fuel                                                        |   | **14,718**                                 | ** **  | (35,243 | ) |
| Prepayments                                                                           |   | **(154**                                   | **)**       | (3,857 | ) |
| Accounts  payable                                                                     |   | **(164,989**                               | **)**       | (147,681 | ) |
| Accrued  taxes and interest                                                           |   | **14,388**                                 | ** **  | 875 |   |
| Other  assets                                                                         |   | **6,980**                                  | ** **  | 4,881 |   |
| Other  liabilities                                                                    |   | **(909**                                   | **)**       | (8,338 | ) |
|                                                                                  |   |                                       | ** **  |   |   |
| **Net cash provided  by (used in) operating activities**                              |   | **165,042**                                | ** **  | 364,948 |   |
|                                                                                  |   |                                       | ** **  |   |   |
| **Financing  Activities**                                                             |   |                                       | ** **  |   |   |
| Change  in short-term debt, including net affiliate notes                             |   | **(8,081**                                 | **)**       | 37,287 |   |
| Issuance  of long-term debt                                                           |   | **431,968**                                | ** **  | 47,600 |   |
| Redemption  of long-term debt                                                         |   | **(459,865**                               | **)**       | (23,000 | ) |
| Contribution  from parent                                                             |   | **200,000**                                | ** **  | — |   |
| Funds  on deposit from issuance of debt securities                                    |   | **—**                                 | ** **  | (47,600 | ) |
| Retirement  of preferred stock                                                        |   | **(10**                                    | **)**       | (2 | ) |
| Dividends  on preferred stock                                                         |   | **(1,940**                                 | **)**       | (1,940 | ) |
| Dividends  on common stock                                                            |   | **(73,324**                                | **)**       | (83,448 | ) |
|                                                                                  |   |                                       | ** **  |   |   |
| **Net cash provided  by (used in) financing activities**                              |   | **88,748**                                 | ** **  | (71,103 | ) |
|                                                                                  |   |                                       | ** **  |   |   |
| **Investing  Activities**                                                             |   |                                       | ** **  |   |   |
| Construction  expenditures (less allowance for equity funds used during construction) |   | **(241,859**                               | **)**       | (286,610 | ) |
| Other  investments                                                                    |   | **(2,486**                                 | **)**       | (3,098 | ) |
|                                                                                  |   |                                       | ** **  |   |   |
| **Net cash provided  by (used in) investing activities**                              |   | **(244,345**                               | **)**       | (289,708 | ) |
|                                                                                  |   |                                       | ** **  |   |   |
| **Net increase  (decrease) in cash and cash equivalents**                             |   | **9,445**                                  | ** **  | 4,137 |   |
|                                                                                  |   |                                       | ** **  |   |   |
| **Cash and cash  equivalents at beginning of period**                                 |   | **2,007**                                  | ** **  | 1,587 |   |
|                                                                                  |   |                                       | ** **  |   |   |
| **Cash and cash  equivalents at end of period**                                       |   | **$**                                      | **11,452**  | ** ** | $ | 5,724 |   |
|                                                                                  |   |                                       | ** **  |   |   |
| **Supplemental  Disclosure of Cash Flow Information**                                 |   |                                       | ** **  |   |   |
| Cash  paid during the period for:                                                     |   |                                       | ** **  |   |   |
| Interest  (net of amount capitalized)                                                 |   | **$**                                      | **72,455**  | ** ** | $ | 75,807 |   |
| Income  taxes                                                                         |   | **$**                                      | **50,419**  | ** ** | $ | 13,590 |   |
|                                                                                  |   |                                       | ** **  |   |   |
| Non-cash  financing and investing activities:                                         |   |                                       | ** **  |   |   |
| Issuance  of promissory notes to affiliated company for acquisition of assets         |   | **$**                                      | **375,969** | ** ** | $ | — |   |

 

**The accompanying notes as they relate to PSIEnergy, Inc. are an integral part of these condensed consolidated financialstatements.**

 

20

----

 

**THE UNION LIGHT**, HEAT

**AND POWER COMPANY**

 

21

----

 

**THE UNION LIGHT, HEAT AND POWERCOMPANY**

**CONDENSEDSTATEMENTS OF INCOME**

** **
|                                                  |   | **Quarter Ended  September 30**       |       | **Year to Date  September 30** |     |
|-------------------------------------------------------|--------|--------------------------------------------|------------|-------------------------------------|----------|
|                                                  |   | **2003**                                   |       | **2002**                            |     | **2003** |   | **2002** |   |
|                                                  |   | ***(dollars  in thousands)  (unaudited)*** |       |
|                                                  |   |                                       | * *   |                                | * * |   | * * |   | * * |
| **Operating Revenues**                                |   |                                       |       |                                |     |   |   |   |   |
| Electric                                              |   | **$**                                      | **64,199** | ** **                          | $        | 68,353 |   | **$** | **170,224** | ** ** | $ | 175,346 |   |
| Gas                                                   |   | **11,240**                                 | ** ** | 7,364                               |     | **75,007** | ** ** | 53,584 |   |
| **Total Operating  Revenues**                         |   | **75,439**                                 | ** ** | 75,717                              |     | **245,231** | ** ** | 228,930 |   |
|                                                  |   |                                       | ** ** |                                |     |   | ** ** |   |   |
| **Operating Expenses**                                |   |                                       | ** ** |                                |     |   | ** ** |   |   |
| Electricity  purchased from parent company for resale |   | **44,546**                                 | ** ** | 48,445                              |     | **120,805** | ** ** | 123,091 |   |
| Gas  purchased                                        |   | **5,620**                                  | ** ** | 2,732                               |     | **46,570** | ** ** | 30,932 |   |
| Operation  and maintenance                            |   | **14,689**                                 | ** ** | 14,819                              |     | **41,068** | ** ** | 38,199 |   |
| Depreciation                                          |   | **4,554**                                  | ** ** | 4,277                               |     | **13,582** | ** ** | 13,009 |   |
| Taxes  other than income taxes                        |   | **1,135**                                  | ** ** | 1,167                               |     | **3,417** | ** ** | 3,535 |   |
| **Total Operating  Expenses**                         |   | **70,544**                                 | ** ** | 71,440                              |     | **225,442** | ** ** | 208,766 |   |
|                                                  |   |                                       | ** ** |                                |     |   | ** ** |   |   |
| **Operating Income**                                  |   | **4,895**                                  | ** ** | 4,277                               |     | **19,789** | ** ** | 20,164 |   |
|                                                  |   |                                       | ** ** |                                |     |   | ** ** |   |   |
| **Miscellaneous  Income (Expense) - Net**             |   | **886**                                    | ** ** | 1,690                               |     | **3,266** | ** ** | (2,516 | ) |
| **Interest Expense**                                  |   | **1,548**                                  | ** ** | 1,431                               |     | **4,520** | ** ** | 4,388 |   |
|                                                  |   |                                       | ** ** |                                |     |   | ** ** |   |   |
| **Income Before  Taxes**                              |   | **4,233**                                  | ** ** | 4,536                               |     | **18,535** | ** ** | 13,260 |   |
|                                                  |   |                                       | ** ** |                                |     |   | ** ** |   |   |
| **Income Taxes**                                      |   | **1,667**                                  | ** ** | 1,302                               |     | **7,058** | ** ** | 4,150 |   |
|                                                  |   |                                       | ** ** |                                |     |   | ** ** |   |   |
| **Net Income**                                        |   | **$**                                      | **2,566**  | ** **                          | $        | 3,234 |   | **$** | **11,477** | ** ** | $ | 9,110 |   |

 

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

 

22

----

 

**THE UNION LIGHT, HEAT AND POWERCOMPANY**

**CONDENSEDBALANCE SHEETS**

** **

**ASSETS**

** **
|                                                                                                                                         |   | **September 30  2003**                |        | **December 31  2002** |     |
|----------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------|-------------|----------------------------|----------|
|                                                                                                                                         |   | ***(dollars in  thousands)  (unaudited)*** |        |
|                                                                                                                                         |   |                                       | * *    |                       | * * |
| **Current Assets**                                                                                                                           |   |                                       |        |                       |     |
| Cash  and cash equivalents                                                                                                                   |   | **$**                                      | **5,108**   | ** **                 | $        | 3,926 |   |
| Notes  receivable from affiliated companies                                                                                                  |   | **4,009**                                  | ** **  | 13,337                     |     |
| Accounts  receivable less accumulated provision for doubtful accounts of $163 at  September 30, 2003, and $84 at December 31, 2002 |   | **417**                                    | ** **  | 703                        |     |
| Accounts  receivable from affiliated companies                                                                                               |   | **509**                                    | ** **  | 1,671                      |     |
| Materials,  supplies, and fuel                                                                                                               |   | **9,774**                                  | ** **  | 8,182                      |     |
| Prepayments  and other                                                                                                                       |   | **418**                                    | ** **  | 316                        |     |
| **Total Current  Assets**                                                                                                                    |   | **20,235**                                 | ** **  | 28,135                     |     |
|                                                                                                                                         |   |                                       | ** **  |                       |     |
| **Property, Plant,  and Equipment - at Cost**                                                                                                |   |                                       | ** **  |                       |     |
| Utility  plant in service                                                                                                                    |   |                                       | ** **  |                       |     |
| Electric                                                                                                                                     |   | **271,763**                                | ** **  | 258,094                    |     |
| Gas                                                                                                                                          |   | **228,436**                                | ** **  | 215,505                    |     |
| Common                                                                                                                                       |   | **32,324**                                 | ** **  | 31,679                     |     |
| **Total Utility  Plant In Service**                                                                                                          |   | **532,523**                                | ** **  | 505,278                    |     |
| Construction  work in progress                                                                                                               |   | **11,717**                                 | ** **  | 14,745                     |     |
| **Total Utility  Plant**                                                                                                                     |   | **544,240**                                | ** **  | 520,023                    |     |
| Accumulated  depreciation                                                                                                                    |   | **198,059**                                | ** **  | 187,876                    |     |
| **Net Property,  Plant, and Equipment**(Note 12)                                                                                             |   | **346,181**                                | ** **  | 332,147                    |     |
|                                                                                                                                         |   |                                       | ** **  |                       |     |
| **Other Assets**                                                                                                                             |   |                                       | ** **  |                       |     |
| Regulatory  assets                                                                                                                           |   | **9,441**                                  | ** **  | 5,134                      |     |
| Other                                                                                                                                        |   | **19,095**                                 | ** **  | 16,811                     |     |
| **Total Other Assets**                                                                                                                       |   | **28,536**                                 | ** **  | 21,945                     |     |
|                                                                                                                                         |   |                                       | ** **  |                       |     |
| **Total Assets**                                                                                                                             |   | **$**                                      | **394,952** | ** **                 | $        | 382,227 |   |

 

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

 

23

----

 

**THE UNION LIGHT, HEAT AND POWERCOMPANY**

**CONDENSED BALANCE SHEETS**

 

**LIABILITIES AND SHAREHOLDER’S EQUITY**

** **
|                                                                                                                                                  |   | **September 30  2003**                |        | **December 31  2002** |     |
|-------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------|-------------|----------------------------|----------|
|                                                                                                                                                  |   | ***(dollars  in thousands)  (unaudited)*** |        |
|                                                                                                                                                  |   |                                       | * *    |                       | * * |
| **Current Liabilities**                                                                                                                               |   |                                       |        |                       |     |
| Accounts  payable                                                                                                                                     |   | **$**                                      | **3,775**   | ** **                 | $        | 8,816 |   |
| Accounts  payable to affiliated companies                                                                                                             |   | **17,291**                                 | ** **  | 22,297                     |     |
| Accrued  taxes                                                                                                                                        |   | **3,877**                                  | ** **  | 1,487                      |     |
| Accrued  interest                                                                                                                                     |   | **1,289**                                  | ** **  | 1,226                      |     |
| Long-term  debt due within one year                                                                                                                   |   | **20,000**                                 | ** **  | 20,000                     |     |
| Notes  payable to affiliated companies (Note 5)                                                                                                       |   | **23,726**                                 | ** **  | 14,076                     |     |
| Other                                                                                                                                                 |   | **6,146**                                  | ** **  | 6,368                      |     |
| **Total Current  Liabilities**                                                                                                                        |   | **76,104**                                 | ** **  | 74,270                     |     |
|                                                                                                                                                  |   |                                       | ** **  |                       |     |
| **Non-Current  Liabilities**                                                                                                                          |   |                                       | ** **  |                       |     |
| Long-term  debt                                                                                                                                       |   | **54,676**                                 | ** **  | 54,653                     |     |
| Deferred  income taxes                                                                                                                                |   | **47,716**                                 | ** **  | 43,360                     |     |
| Unamortized  investment tax credits                                                                                                                   |   | **2,945**                                  | ** **  | 3,143                      |     |
| Accrued  pension and other postretirement benefit costs                                                                                               |   | **15,958**                                 | ** **  | 15,620                     |     |
| Other                                                                                                                                                 |   | **15,217**                                 | ** **  | 14,017                     |     |
| **Total Non-Current  Liabilities**                                                                                                                    |   | **136,512**                                | ** **  | 130,793                    |     |
|                                                                                                                                                  |   |                                       | ** **  |                       |     |
| **Commitments and  Contingencies**(Note 7)                                                                                                            |   |                                       | ** **  |                       |     |
|                                                                                                                                                  |   |                                       | ** **  |                       |     |
| **Total Liabilities**                                                                                                                                 |   | **212,616**                                | ** **  | 205,063                    |     |
|                                                                                                                                                  |   |                                       | ** **  |                       |     |
| **Common Stock  Equity**                                                                                                                              |   |                                       | ** **  |                       |     |
| Common  stock - $15.00 par value; authorized shares - 1,000,000; outstanding shares -  585,333 at September 30, 2003, and December 31, 2002 |   | **8,780**                                  | ** **  | 8,780                      |     |
| Paid-in  capital                                                                                                                                      |   | **23,644**                                 | ** **  | 23,644                     |     |
| Retained  earnings                                                                                                                                    |   | **149,972**                                | ** **  | 144,800                    |     |
| Accumulated  other comprehensive income (loss)                                                                                                        |   | **(60**                                    | **)**       | (60                        | )        |
| **Total Common Stock  Equity**                                                                                                                        |   | **182,336**                                | ** **  | 177,164                    |     |
|                                                                                                                                                  |   |                                       | ** **  |                       |     |
| **Total Liabilities  and Shareholder’s Equity**                                                                                                  |   | **$**                                      | **394,952** | ** **                 | $        | 382,227 |   |

 

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

 

24

----

 

**THE UNION LIGHT, HEAT AND POWERCOMPANY**

**CONDENSEDSTATEMENTS OF CASH FLOWS**

** **
|                                                                                  |   | **Year to Date  September 30**        |       |
|---------------------------------------------------------------------------------------|--------|--------------------------------------------|------------|
|                                                                                  |   | **2003**                                   |       | **2002** |   |
|                                                                                  |   | ***(dollars in  thousands)  (unaudited)*** |       |
|                                                                                  |   |                                       | * *   |   | * * |
| **Operating Activities**                                                              |   |                                       |       |   |   |
| Net  income                                                                           |   | **$**                                      | **11,477** | ** ** | $ | 9,110 |   |
| Items  providing or (using) cash currently:                                           |   |                                       | ** ** |   |   |
| Depreciation                                                                          |   | **13,582**                                 | ** ** | 13,009 |   |
| Deferred  income taxes and investment tax credits - net                               |   | **4,157**                                  | ** ** | 1,395 |   |
| Allowance  for equity funds used during construction                                  |   | **(224**                                   | **)**      | (523 | ) |
| Regulatory  assets deferrals                                                          |   | **(424**                                   | **)**      | 4,168 |   |
| Regulatory  assets amortization                                                       |   | **505**                                    | ** ** | (1,064 | ) |
| Accrued  pension and other postretirement benefit costs                               |   | **338**                                    | ** ** | 1,417 |   |
| Deferred  costs under gas cost recovery mechanism                                     |   | **(7,279**                                 | **)**      | 7,246 |   |
| Changes  in current assets and current liabilities:                                   |   |                                       | ** ** |   |   |
| Accounts  and notes receivable                                                        |   | **10,776**                                 | ** ** | 17,142 |   |
| Materials,  supplies, and fuel                                                        |   | **(1,592**                                 | **)**      | (1,671 | ) |
| Prepayments                                                                           |   | **(102**                                   | **)**      | (174 | ) |
| Accounts  payable                                                                     |   | **(10,047**                                | **)**      | (1,619 | ) |
| Accrued  taxes and interest                                                           |   | **2,453**                                  | ** ** | 2,194 |   |
| Other  assets                                                                         |   | **1,071**                                  | ** ** | 3,284 |   |
| Other  liabilities                                                                    |   | **375**                                    | ** ** | (627 | ) |
|                                                                                  |   |                                       | ** ** |   |   |
| **Net cash provided  by (used in) operating activities**                              |   | **25,066**                                 | ** ** | 53,287 |   |
|                                                                                  |   |                                       | ** ** |   |   |
| **Financing  Activities**                                                             |   |                                       | ** ** |   |   |
| Change  in short-term debt, including net affiliate notes                             |   | **9,650**                                  | ** ** | (24,581 | ) |
| Dividends  on common stock                                                            |   | **(6,305**                                 | **)**      | (2,675 | ) |
|                                                                                  |   |                                       | ** ** |   |   |
| **Net cash provided  by (used in) financing activities**                              |   | **3,345**                                  | ** ** | (27,256 | ) |
|                                                                                  |   |                                       | ** ** |   |   |
| **Investing  Activities**                                                             |   |                                       | ** ** |   |   |
| Construction  expenditures (less allowance for equity funds used during construction) |   | **(27,229**                                | **)**      | (26,268 | ) |
| Other  investments                                                                    |   | **—**                                 | ** ** | (70 | ) |
|                                                                                  |   |                                       | ** ** |   |   |
| **Net cash provided  by (used in) investing activities**                              |   | **(27,229**                                | **)**      | (26,338 | ) |
|                                                                                  |   |                                       | ** ** |   |   |
| **Net increase  (decrease) in cash and cash equivalents**                             |   | **1,182**                                  | ** ** | (307 | ) |
|                                                                                  |   |                                       | ** ** |   |   |
| **Cash and cash  equivalents at beginning of period**                                 |   | **3,926**                                  | ** ** | 4,099 |   |
|                                                                                  |   |                                       | ** ** |   |   |
| **Cash and cash  equivalents at end of period**                                       |   | **$**                                      | **5,108**  | ** ** | $ | 3,792 |   |
|                                                                                  |   |                                       | ** ** |   |   |
| **Supplemental  Disclosure of Cash Flow Information**                                 |   |                                       | ** ** |   |   |
| Cash  paid during the period for:                                                     |   |                                       | ** ** |   |   |
| Interest  (net of amount capitalized)                                                 |   | **$**                                      | **4,240**  | ** ** | $ | 4,194 |   |
| Income  taxes                                                                         |   | **$**                                      | **3,001**  | ** ** | $ | 2,398 |   |

 

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

 

25

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### **NOTES TO CONDENSED FINANCIALSTATEMENTS**

### ** **

In this report**Cinergy** (which includes **Cinergy Corp.** and all of our regulated andnon-regulated subsidiaries) is, at times, referred to in the first person as“we”, “our”, or “us”.

 

**1.**              Summary ofSignificant Accounting Policies

** **

***(a)***                                  Presentation

*** ***

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

 

Managementmakes estimates and assumptions when preparing financial statements undergenerally accepted accounting principles (GAAP).  Actual results could differ, as these estimates and assumptionsinvolve judgment.

 

***(b)***                                  Revenue Recognition

*** ***

*(i)*          Operating Revenues

* *

The CincinnatiGas & Electric Company (**CG&E**),PSI Energy, Inc. (**PSI**), and TheUnion Light, Heat and Power Company (**ULH&P**)(collectively, our operating companies) record *OperatingRevenues* for electric and gas service when delivered tocustomers.  Customers are billedthroughout the month as both gas and electric meters are read.  We recognize revenues for retail energysales that have not yet been billed, but where gas or electricity has beenconsumed.  This is termed “unbilledrevenue” 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 ourcalculation of retail customer consumption at the end of each month.  Given the use of these systems and the factthat customers are billed monthly, we believe it is unlikely that materiallydifferent results will occur in future periods when revenue is subsequentlybilled.

 

The amount ofunbilled revenues for **Cinergy**, **CG&E**, **PSI**,and **ULH&P** as ofSeptember 30, 2003 and 2002, were as follows:

 

|                          |   | **2003**            |     | **2002** |     |
|-------------------------------|--------|---------------------|----------|----------|----------|
|                          |   | ***(in millions)*** |     |
|                          |   |                | * * |     | * * |
| **Cinergy**                   |   | **$**               | **117**  |     | $        | 124 |   |
| **CG&E**and  subsidiaries |   | **60**              |     | 63       |     |
| **PSI**                       |   | **57**              |     | 61       |     |
| **ULH&P**                 |   | **11**              |     | 11       |     |
|                               |        |                     |          |          |          |  |  |

 

26

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*(ii)*      EnergyMarketing and Trading Revenues

* *

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

 

1.               Gross Reporting

 

Grossreporting requires presentation of sales contracts in *Operating Revenues* and purchase contractsin *Fuel and purchased and exchanged power*expense or *Gas purchased*expense.  Non-trading derivativestypically involve physical delivery of the underlying commodity and aretherefore generally presented on a gross basis.

 

Derivativesare classified as non-trading only when (a) the contracts involve the purchaseof gas or electricity to serve our native load requirements (end-use customerswithin our public utility companies’ franchise service territory), or (b) thecontracts involve the sale of gas or electricity and we have the intent andprojected ability to fulfill substantially all obligations from company-ownedassets, which generally is limited to the sale of generation to third partieswhen it is not required to meet native load requirements.

 

Energyactivities that do not principally involve derivatives (e.g., natural gas salesfrom storage) are presented on a gross basis.

 

2.               Net Reporting

 

Net reportingrequires presentation of realized and unrealized gains and losses on tradingderivatives on a net basis in *OperatingRevenues*.  In 2003, we beganreflecting the results of trading derivatives on a net basis pursuant to therequirements of EITF 02-3, regardless of whether the transactions were settledphysically.  Prior to 2003, the realizedresults for trading contracts that were physical in nature were presented on agross basis.  The presentation for 2002has been reclassified to conform to the new presentation.  See (g)(*i*)below for further discussion.

 

Energyderivatives that are not classified as non-trading based on the aboverequirements are deemed to be trading. Trading typically involves frequent buying and selling with theobjective of generating profits from differences in price.

 

***(c)***                                  Derivatives

*** ***

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

 

27

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losses onderivatives that qualify as hedges can (a) offset related fair value changes onthe hedged item in the Statements of Income for fair value hedges; or (b) berecorded in other comprehensive income for cash flow hedges.  To qualify for hedge accounting, derivativesmust be designated as a hedge (for example, an offset of interest rate risks)and must be effective at reducing the risk associated with the hedgeditem.  Accordingly, changes in the fairvalues or cash flows of instruments designated as hedges must be highlycorrelated with changes in the fair values or cash flows of the related hedgeditems.

 

*(i)*          EnergyMarketing and Trading

* *

We account forall energy trading derivatives at fair value. These derivatives are shown in our Balance Sheets as *Energy risk management assets* and *Energy risk management liabilities*.  Changes in the derivative’s fair valuerepresent unrealized gains and losses and are recognized as revenues in ourStatements of Income unless specific hedge accounting criteria are met.

 

InOctober 2002, the EITF reached a consensus in EITF 02-3 to rescind EITFIssue 98-10, *Accounting for Contracts Involvedin Energy Trading and Risk Management Activities*(EITF 98-10).  EITF 98-10 permitted non-derivativecontracts to be accounted for at fair value if certain criteria were met.  Effective with the adoption of EITF 02-3 onJanuary 1, 2003, non-derivative contracts and natural gas inventorypreviously accounted for at fair value were required to be accounted for on anaccrual basis.  See (d) for furtherdiscussion.

 

As a responseto this discontinuance of fair value accounting, in June 2003, **Cinergy** began designating derivatives asfair value hedges for certain volumes of our natural gas inventory.  Under this accounting election, changes inthe fair value of both the derivative as well as the hedged item (the specifiedinventory) are included in the Statements of Income.  We assess the effectiveness of the derivatives in offsetting thechange in fair value of the inventory on a quarterly basis.  For the three months ended, September 30,2003, the hedges’ ineffectiveness was not material.

 

Non-trading derivatives involve the physicaldelivery of energy and are therefore typically accounted for as accrualcontracts, unless the contract does not qualify for the normal purchases andsales scope exception in Statement 133.

 

Although weintend to settle accrual contracts with company-owned assets, occasionally wesettle these contracts with purchases on the open trading markets.  The cost of these purchases could be inexcess of the associated revenues.  Werecognize the gains or losses on these transactions as delivery occurs.  Open market purchases may occur for thefollowing reasons:

 

•                  generatingstation outages;

•                  least-costalternative;

•                  native loadrequirements; and

•                  extreme weather.

 

28

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We valuederivatives using end-of-the-period fair values, utilizing the followingfactors (as applicable):

 

•                  closing exchangeprices (that is, closing prices for standardized electricity and natural gasproducts traded on an organized exchange, such as the New York MercantileExchange);

•                  broker-dealerand over-the-counter price quotations; and

•                  model pricing(which considers time value and historical volatility factors of electricityand natural gas).

 

*(ii)**      Financial*

* *

We useinterest rate swaps (an agreement by two parties to exchange fixed-interestrate cash flows for floating-interest rate cash flows) and treasury locks (anagreement that fixes the yield or price on a specific treasury security for aspecific period, which we sometimes use in connection with the issuance offixed rate debt).  We account for suchderivatives at fair value and assess the effectiveness of any such derivativeused in hedging activities.

 

AtSeptember 30, 2003, the ineffectiveness of instruments that we haveclassified as fair value or cash flow hedges of debt instruments was notmaterial.  Reclassification ofunrealized gains or losses on cash flow hedges of debt instruments from *Accumulated other comprehensive income (loss)*occurs as interest is accrued on the debt instrument.  The unrealized losses that will be reclassified as a charge to *Interest Expense* during the twelve-monthperiod ending September 30, 2004 is not expected to be material.

 

***(d)***                                  Inventory

*** ***

Prior toJanuary 1, 2003, natural gas inventory for our gas trading operation wasaccounted for at fair value.  All otherinventory was accounted for at the lower of cost or market, cost beingdetermined through the weighted average method.  Effective January 1, 2003, accounting for our gas tradingoperation’s inventory was adjusted to the lower of cost or market method with acumulative effect adjustment, as required by EITF 02-3.  The impacts of adopting EITF 02-3 arediscussed in (g)(*i*).

 

***(e)***                                  Stock-BasedCompensation

*** ***

EffectiveJanuary 1, 2003, **Cinergy**adopted prospectively the fair value recognition provisions of Statement ofFinancial Accounting Standards No. 123, *Accountingfor Stock-Based Compensation*, as amended by Statement of FinancialAccounting Standards No. 148, *Accounting forStock-Based Compensation—Transition and Disclosure*, for all employeeawards granted or modified after January 1, 2003.  Prior to 2003, we accounted for allstock-based compensation plans using the intrinsic value method underAccounting Principles Board Opinion No. 25, *Accountingfor Stock Issued to Employees*. The following table illustrates the effect on our *Net Income* and *Earnings Per Common Share* (EPS) if the fair value basedmethod had been applied to all outstanding and unvested awards in each period.

 

29

----

 
|                                                                                                                                                                                                                                                          |   | **Quarter Ended  September 30**          |     | **Year to Date  September 30** |       |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------|----------|-------------------------------------|------------|
|                                                                                                                                                                                                                                                          |   | ***(in millions, except per share amounts)*** |     |
|                                                                                                                                                                                                                                                          |   | **2003**                                      |     | **2002**                            |       | **2003** |   | **2002** |   |
|                                                                                                                                                                                                                                                          |   |                                          |     |                                |       |   |   |   |   |
| Net income, as reported                                                                                                                                                                                                                                       |   | **$**                                         | **112**  |                                | $          | 131 | ** ** | **$** | **363** |   | $ | 260 |   |
|                                                                                                                                                                                                                                                          |   |                                          |     |                                |       |   |   |   |   |
| Add:                         Stock-based employee  compensation expense included in reported net income, net of related tax  effects. |   | **3**                                         |     | 5                                   | ** ** | **12** |   | 10 |   |
|                                                                                                                                                                                                                                                          |   |                                          |     |                                |       |   |   |   |   |
| Deduct:          Stock-based employee compensation expense determined under fair value based  method for all awards, net of related tax effects.                                                                 |   | **4**                                         |     | 5                                   | ** ** | **14** |   | 11 |   |
|                                                                                                                                                                                                                                                          |   |                                          |     |                                |       |   |   |   |   |
| Pro-forma net income                                                                                                                                                                                                                                          |   | **$**                                         | **111**  | ** **                          | **$**      | **131** | ** ** | **$** | **361** | ** ** | **$** | **259** | ** ** |
|                                                                                                                                                                                                                                                          |   |                                          |     |                                |       |   |   |   |   |
| EPS - as reported                                                                                                                                                                                                                                             |   | **$**                                         | **0.63** |                                | $          | 0.78 | ** ** | **$** | **2.06** |   | $ | 1.57 |   |
| EPS - pro-forma                                                                                                                                                                                                                                               |   | **$**                                         | **0.63** |                                | $          | 0.78 | ** ** | **$** | **2.05** |   | $ | 1.56 |   |
|                                                                                                                                                                                                                                                          |   |                                          |     |                                |       |   |   |   |   |
| EPS assuming dilution - as reported                                                                                                                                                                                                                           |   | **$**                                         | **0.62** |                                | $          | 0.77 | ** ** | **$** | **2.04** |   | $ | 1.55 |   |
| EPS assuming dilution - pro-forma                                                                                                                                                                                                                             |   | **$**                                         | **0.62** |                                | $          | 0.77 | ** ** | **$** | **2.03** |   | $ | 1.54 |   |

 

The pro-formaamounts reflect certain assumptions used in estimating fair values.  As a result of this and other factors whichmay affect the timing and amounts of stock-based compensation, the pro-formaeffect on *Net Income* and EPS maynot be representative of future periods.

 

***(f)***                                    Asset RetirementObligations

*** ***

We recognizethe fair value of legal obligations associated with the retirement or removalof long-lived assets at the time the obligations are incurred.  The initial recognition of this liability isaccompanied by a corresponding increase in property, plant, and equipment.  Subsequent to the initial recognition, theliability is adjusted for any revisions to the expected cash flows of theretirement obligation (with corresponding adjustments to property, plant, andequipment), and for accretion of the liability due to the passage of time(recognized as *Operation and maintenance*expense).  Additional depreciationexpense is recorded prospectively for any property, plant, and equipmentincreases.

 

We do notrecognize liabilities for asset retirement obligations for which the fair valuecannot be reasonably estimated.  **CG&E** and **PSI** have asset retirement obligations associated with riverstructures at certain generating stations. However, the retirement date for these river structures cannot bereasonably estimated; therefore, the fair value of the associated liabilitycurrently cannot be estimated and no amounts are recognized in the financialstatements herein.

 

Effective withour adoption of Statement of Financial Accounting Standards No. 143, *Accounting for Asset Retirement Obligations*(Statement 143), on January 1, 2003, we do not accrue the estimated costof removal when no obligation associated with retirement or removal exists forany of our non-regulated assets, even if removal of the asset is likely.  For our rate-regulated assets where ourtariff rate includes a cost of removal component, we recognize a charge forestimated cost of removal under Statement of Financial Accounting Standards No.71, 

 

30

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*Accounting for the Effects of Certain Types of Regulation*(Statement71), as part of depreciation.  Thisincludes most assets for **PSI**, **CG&E**, except for its generating assets,and **ULH&P**.  See (g)(*vi*)for additional information.

 

***(g)***                                 Accounting Changes

*** ***

*(i)*          EnergyTrading

* *

InOctober 2002, the EITF reached consensus in EITF 02-3, to (a) rescind EITF98-10, (b) generally preclude the recognition of gains at the inception ofderivatives, and (c) require all realized and unrealized gains and losses onenergy trading derivatives to be presented net in the Statements of Income,whether or not settled physically.  Theconsensus to rescind EITF 98-10 required most energy trading contracts that donot qualify as derivatives to be accounted for on an accrual basis, rather thanat fair value.  The consensus wasimmediately effective for all new contracts executed after October 25,2002, and required a cumulative effect adjustment to income, net of tax, onJanuary 1, 2003, for all contracts executed on or prior toOctober 25, 2002.  The cumulativeeffect adjustment, on a net of tax basis, was a loss of $13 million for **Cinergy** and $8 million for **CG&E**, which includes primarily theimpact of certain coal contracts, gas inventory, and certain gas contracts,which were all accounted for at fair value. We expect this rescission to have the largest ongoing impact on our gastrading business, which uses financial contracts, physical contracts, and gasinventory to take advantage of various arbitrage opportunities.  Prior to the rescission of EITF 98-10, allof these activities were accounted for at fair value.  Under the revised guidance, only certain items are accounted forat fair value, which could increase inter-period volatility in reported resultsof operations.  As a result, we beganapplying fair value hedge accounting in June 2003 to certain quantities ofgas inventory (more fully discussed in (c)(*i*)above) and are further reviewing additional applications for hedge accounting.

 

The consensusto require all gains and losses on energy trading derivatives to be presentednet in the Statements of Income was effective January 1, 2003, andrequired reclassification for all periods presented.  This resulted in substantial reductions in reported *Operating Revenues, Fuel and purchased and exchangedpower*expense, and *Gas purchased*expense.  However, *Operating Income* and *Net Income* were not affected by thischange.

 

31

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The followingtable presents the effect of the change in revenue presentation in *Operating Revenues, Fuel and purchased and exchangedpower*expense, and*Gas purchased*expensefor the quarter ended and year to date September 30, 2002.

 
|                                                                     |   | **Cinergy(1)** |      | **CG&E  and  subsidiaries** |     | **PSI**   |     |
|--------------------------------------------------------------------------|--------|----------------|-----------|---------------------------------|----------|-----------|----------|
|                                                                     |   |           |      | ***(in thousands)***            |     |      |     |
|                                                                     |   |           | * *  |                            | * * |      | * * |
| **Quarter Ended September 30, 2002**                                |   |           |      |                            |     |      |     |
|                                                                     |   |           |      |                            |     |      |     |
| *Electric Operating Revenues*  as previously reported                    |   | $              | 2,554,687 |                            | $        | 1,747,379 |     | $ | 776,837 |   |
|                                                                     |   |           |      |                            |     |      |     |
| Adjustment for effect of EITF 02-3  implementation                       |   | (1,574,214     | )         | (1,254,762                      | )        | (306,065  | )        |
| Other(2)                                                                 |   | (15,038        | )         | —                          |     | —    |     |
|                                                                     |   |           |      |                            |     |      |     |
| *Electric Operating Revenues*  as adjusted                               |   | $              | 965,435   |                            | $        | 492,617   |     | $ | 470,772 |   |
|                                                                     |   |           |      |                            |     |      |     |
| *Gas Operating Revenues*  as previously reported                         |   | $              | 1,281,411 |                            | $        | 41,452    |     | $ | — |   |
|                                                                     |   |           |      |                            |     |      |     |
| Adjustment for effect of EITF 02-3  implementation                       |   | (1,171,709     | )         | —                          |     | —    |     |
| Other(2)                                                                 |   | (5,629         | )         | —                          |     | —    |     |
|                                                                     |   |           |      |                            |     |      |     |
| *Gas Operating Revenues*  as adjusted                                    |   | $              | 104,073   |                            | $        | 41,452    |     | $ | — |   |
|                                                                     |   |           |      |                            |     |      |     |
| *Fuel and purchased and  exchanged power* expense as previously reported |   | $              | 1,871,365 |                            | $        | 1,391,221 |     | $ | 474,748 |   |
|                                                                     |   |           |      |                            |     |      |     |
| Adjustment for effect of EITF 02-3  implementation                       |   | (1,555,263     | )         | (1,254,762                      | )        | (306,065  | )        |
| Other(2)                                                                 |   | (13,736        | )         | —                          |     | —    |     |
|                                                                     |   |           |      |                            |     |      |     |
| *Fuel and purchased and  exchanged power* expense as adjusted            |   | $              | 302,366   |                            | $        | 136,459   |     | $ | 168,683 |   |
|                                                                     |   |           |      |                            |     |      |     |
| *Gas purchased*  expense as previously reported                          |   | $              | 1,243,507 |                            | $        | 12,594    |     | $ | — |   |
|                                                                     |   |           |      |                            |     |      |     |
| Adjustment for effect of EITF 02-3  implementation                       |   | (1,190,659     | )         | —                          |     | —    |     |
| Other(2)                                                                 |   | (3,565         | )         | —                          |     | —    |     |
|                                                                     |   |           |      |                            |     |      |     |
| *Gas purchased*  expense as adjusted                                     |   | $              | 49,283    |                            | $        | 12,594    |     | $ | — |   |
|                                                                     |   |           |      |                            |     |      |     |
| **Year to Date September 30, 2002**                                 |   |           |      |                            |     |      |     |
|                                                                     |   |           |      |                            |     |      |     |
| *Electric Operating Revenues*  as previously reported                    |   | $              | 5,178,481 |                            | $        | 3,249,715 |     | $ | 1,874,109 |   |
|                                                                     |   |           |      |                            |     |      |     |
| Adjustment for effect of EITF 02-3  implementation                       |   | (2,578,261     | )         | (1,948,273                      | )        | (658,318  | )        |
| Other(2)                                                                 |   | (68,937        | )         | —                          |     | —    |     |
|                                                                     |   |           |      |                            |     |      |     |
| *Electric Operating Revenues*  as adjusted                               |   | $              | 2,531,283 |                            | $        | 1,301,442 |     | $ | 1,215,791 |   |
|                                                                     |   |           |      |                            |     |      |     |
| *Gas Operating Revenues*  as previously reported                         |   | $              | 3,301,625 |                            | $        | 277,069   |     | $ | — |   |
|                                                                     |   |           |      |                            |     |      |     |
| Adjustment for effect of EITF 02-3  implementation                       |   | (2,921,651     | )         | —                          |     | —    |     |
| Other(2)                                                                 |   | (5,629         | )         | —                          |     | —    |     |
|                                                                     |   |           |      |                            |     |      |     |
| *Gas Operating Revenues*  as adjusted                                    |   | $              | 374,345   |                            | $        | 277,069   |     | $ | — |   |
|                                                                     |   |           |      |                            |     |      |     |
| *Fuel and purchased and  exchanged power* expense as previously reported |   | $              | 3,357,585 |                            | $        | 2,300,565 |     | $ | 1,078,596 |   |
|                                                                     |   |           |      |                            |     |      |     |
| Adjustment for effect of EITF 02-3  implementation                       |   | (2,549,301     | )         | (1,948,273                      | )        | (658,318  | )        |
| Other(2)                                                                 |   | (46,426        | )         | —                          |     | —    |     |
|                                                                     |   |           |      |                            |     |      |     |
| *Fuel and purchased and  exchanged power* expense as adjusted            |   | $              | 761,858   |                            | $        | 352,292   |     | $ | 420,278 |   |
|                                                                     |   |           |      |                            |     |      |     |
| *Gas purchased*  expense as previously reported                          |   | $              | 3,142,899 |                            | $        | 145,033   |     | $ | — |   |
|                                                                     |   |           |      |                            |     |      |     |
| Adjustment for effect of EITF 02-3  implementation                       |   | (2,950,609     | )         | —                          |     | —    |     |
| Other(2)                                                                 |   | (3,565         | )         | —                          |     | —    |     |
|                                                                     |   |           |      |                            |     |      |     |
| *Gas purchased*  expense as adjusted                                     |   | $              | 188,725   |                            | $        | 145,033   |     | $ | — |   |

 

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(1)          Theresults of **Cinergy** also includeamounts related to non-registrants and include the elimination of certainintercompany amounts.

(2)          Itemrepresents amounts reclassified to *Discontinuedoperations, net of tax*.

 

32

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*(ii)*      Derivatives

 

InMay 2003, the Financial Accounting Standards Board (FASB) issued Statementof Financial Accounting Standards No. 149, *Amendmentof Statement 133 on Derivative Instruments and Hedging Activities*(Statement 149).  Statement 149primarily amends Statement 133 to incorporate implementation conclusionspreviously cleared by the FASB staff, to clarify the definition of a derivativeand to require derivative instruments that include up-front cash payments to beclassified as a financing activity in the Statements of Cash Flows.  Implementation issues that had beenpreviously cleared by the FASB staff were effective at the time that they werecleared and new guidance was effective in the third quarter of 2003.  In connection with our adoption, we reviewedcertain power purchase or sale contracts to determine if they met the revisednormal purchase and normal sale scope exception criteria in Statement 149.  If these criteria were not met, the contractwas accounted for at fair value.  Theimpact of adopting Statement 149 was not material to our results of operationsor financial position.

 

InJune 2003, the FASB issued final guidance on the use of broad marketindices (e.g., consumer price index) in power purchase and salescontracts.  This guidance clarifies thatthe normal purchases and sales scope exception is precluded if a contractcontains a broad market index that is not clearly and closely related to theasset being sold or purchased (or a direct factor in the production of theasset sold or purchased).  The guidanceprovides criteria that must be met for the index to be considered clearly andclosely related.  This guidance, whichis effective in the fourth quarter of 2003, is not expected to have a materialimpact on our results of operations or financial position upon adoption.

 

*(iii)*  Consolidation ofVariable Interest Entities (VIE)

* *

InJanuary 2003, the FASB issued Interpretation No. 46, *Consolidation of Variable Interest Entities*(Interpretation 46), which significantly changes the consolidation requirementsfor traditional special purpose entities (SPE) and certain other entitiessubject to its scope.  Thisinterpretation defines a VIE as (a) an entity that does not have sufficientequity to support its activities without additional financial support or (b) anentity that has equity investors that do not have voting rights or do notabsorb losses or receive returns.  Theseentities must be consolidated when certain criteria are met.  The interpretation was originally to beeffective as of July 1, 2003 for **Cinergy**;however, the FASB subsequently permitted deferral of the effective date toDecember 31, 2003 for either some or all potential VIEs.  During this deferral period, the FASB plansto clarify and amend several provisions, much of which is intended to assist inthe application of Interpretation 46 to operating entities.  Clarifications were not needed for mosttraditional SPEs and we therefore elected to implement Interpretation 46 forsuch entities, as discussed below, in accordance with the original implementationdate of July 1, 2003.  Prior periodfinancial statements were not restated for these changes.

 

Interpretation46 requires us to consolidate two SPEs that have individual power saleagreements to Central Maine Power Company (CMP) for approximately 45 megawatts(MW) of capacity, ending in 2009, and 35 MW of capacity, ending in 2016.  In addition, these SPEs have individualpower purchase agreements with Cinergy Capital & Trading, Inc. (Capital& Trading) to supply the power. Capital & Trading also provides various services, including certaincredit support 

 

33

----

 

facilities.  Upon the initial consolidation of these twoSPEs, approximately $239 million of notes receivable, $225 million ofnon-recourse debt, and miscellaneous other assets and liabilities were includedon **Cinergy’s** Balance Sheets.  The debt was incurred by the SPEs to financethe buyout of existing power contracts that CMP held with formersuppliers.  The cash flows from thenotes receivable are designed to repay the debt.  Notes 3 and 4 provide additional information regarding the debtand the notes receivable, respectively.

 

In accordancewith Interpretation 46, we are no longer permitted to consolidate a trust thatwas established by **Cinergy Corp.**in 2001 to****issue approximately$316 million of combined preferred trust securities and stock purchasecontracts.  These securities are morefully described in the 2002 10-K.  In2001, the trust loaned the proceeds from the issuance of the securities to **Cinergy Corp.**in exchange for a notepayable to the trust that was eliminated in consolidation.  As a result of no longer consolidating thetrust beginning July 1, 2003, the preferred trust securities (previouslyrecorded as *Company obligated, mandatorilyredeemable, preferred trust securities of subsidiary, holding solely debtsecurities of the company*) are no longer included in **Cinergy’s**Balance Sheets.  In addition, the note payable owed to thetrust, which has a current carrying value of approximately $319 million, wasincluded in *Long-term debt*.  The impact of not consolidating the trustwas immaterial to **Cinergy’s**results of operations.

 

**Cinergy**has concluded that its accounts receivable sale facility, as discussed in the2002 10-K, will remain unconsolidated since it involves transfers of financialassets to a qualifying SPE, which is exempted from consolidation byInterpretation 46 and Statement of Financial Accounting Standards No. 140, *Accounting for Transfers and Servicing of FinancialAssets and Extinguishments of Liabilities*.

 

**Cinergy**is continuing to evaluate the impact of Interpretation 46 on several operatingjoint ventures, primarily involved in cogeneration and energy efficiencyoperations, that we currently do not consolidate.  If all these entities were consolidated, their total assets ofapproximately $675 million (the majority of which is non-current) and totalliabilities of approximately $225 million (which includes long-term debt ofapproximately $100 million) would be recognized on our Balance Sheets.  **Cinergy’s**current investment in these entities is approximately $250 million.  We also guarantee certain performanceobligations of these entities with an estimated maximum potential exposure ofapproximately $55 million, as disclosed in Note 7(a).  As discussed above, we expect additional interpretative guidanceto be issued by the FASB during the fourth quarter of 2003 and **Cinergy** will adopt those provisionseffective December 31, 2003.

 

*(iv)*    FinancialInstruments with Characteristics of Both Liabilities and Equity

* *

InMay 2003, the FASB issued Statement of Financial Accounting Standards No.150, *Accounting for Certain FinancialInstruments with Characteristics of Both Liabilities and Equity*(Statement150).  Statement 150 establishesstandards for how an issuer classifies and measures certain financialinstruments with characteristics of both liabilities and equity.  This statement was effective for financialinstruments entered into or modified after May 31, 2003, and was effectiveon July 1, 2003, for financial instruments held prior to issuance of thisstatement.  Statement 150 would haverequired **Cinergy Corp.’s** preferredtrust securities to be reported as a liability; however, as described morefully above, the trust holding these securities is no longer permitted to beconsolidated and the preferred trust securities are no longer reported on

 

34

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**Cinergy’s**BalanceSheets.  However, **Cinergy’s** note payable to the trust isrecorded on the Balance Sheets as *Long-termdebt*.  As a result, theimpact of adopting Statement 150 was not material to our results of operationsor financial position.

 

As discussedin the 2002 10-K, **Cinergy** issuedforward stock sale contracts that require purchase by the holder of a certainnumber of **Cinergy** shares inFebruary 2005 (stock contracts). The number of shares to be issued is contingent on the market price of **Cinergy Corp.** stock, but subject to apredetermined ceiling and floor price. In October 2003, the FASB Staff released an interpretation ofStatement 150 that requires an evaluation of these stock contracts to determinewhether they constitute a liability, with any changes in accounting required inJanuary 2004.  We believe that thisinterpretation will have no impact on our current accounting.

 

*(v)*        IntangibleAssets

* *

InJune 2001, the FASB issued Statement of Financial Accounting Standards No.142, *Goodwill and Other Intangible Assets*(Statement 142).  With the adoption ofStatement 142, goodwill and other intangibles with indefinite lives are nolonger subject to amortization. Statement 142 requires that goodwill be assessed for impairment uponadoption (transition impairment test) and at least annually thereafter byapplying a fair-value-based test, as opposed to the undiscounted cash flow testapplied under prior accounting standards.

 

We beganapplying Statement 142 in the first quarter of 2002.  We finalized our transition impairment test in the fourth quarterof 2002 and recognized a non-cash impairment charge of approximately $11million (net of tax) for goodwill related to certain of our internationalassets.  This amount is reflected in **Cinergy’s**Statements of Income as acumulative effect adjustment, net of tax. While Statement 142 did not require the initial transition impairmenttest to be completed until December 31, 2002, it required the cumulativeeffect adjustment to be reflected as of January 1, 2002.

 

**CinergyCorp.’s** condensed financial results below revisepreviously reported results as filed in the Form 10-Q for the year to dateperiod ended September 30, 2002, to reflect the impairment charge as ofJanuary 1, 2002.

 
|                                                               |   | **Year  to Date  September 30, 2002** |     |
|--------------------------------------------------------------------|--------|--------------------------------------------|----------|
|                                                               |   | **Net  Income**                            |     | **EPS** |   | **EPS-  Assuming  Dilution** |   |
|                                                               |   | ***(in millions,  except for EPS)***       |     |
|                                                               |   |                                       | * * |   | * * |   | * * |
| Reported results                                                   |   | $                                          | 271      |   | $ | 1.63 |   | $ | 1.61 |   |
| Cumulative effect of a change in accounting  principle, net of tax |   | (11                                        | )        | (0.06 | ) | (0.06 | ) |
| Revised results                                                    |   | $                                          | 260      |   | $ | 1.57 |   | $ | 1.55 |   |

 

35

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*(vi)*    AssetRetirement Obligations

 

InJuly 2001, the FASB issued Statement 143, which requires fair valuerecognition beginning January 1, 2003, of legal obligations associatedwith the retirement or removal of long-lived assets, at the time theobligations are incurred.  Ouraccounting policy for such legal obligations is described in (f) above.

 

We adoptedStatement 143 on January 1, 2003, and **Cinergy**and **CG&E** bothrecognized a gain of $39 million (net of tax) for the cumulative effect of thischange in accounting principle. Substantially all of this adjustment reflects the reversal of previouslyaccrued cost of removal for **CG&E’s**generating assets, which do not apply Statement 71.  *Accumulated depreciation*at adoption includes $316 million, $25 million, and $146 million of accumulatedcost of removal related to **PSI’s**, **ULH&P’s**, and **CG&E’s**utility plant in service assets, respectively,which represent regulatory liabilities and were not included as part of thecumulative effect adjustment.  Theincreases in assets and liabilities from adopting Statement 143 were notmaterial to our financial position.

 

Pro-formaresults as if Statement 143 was applied retroactively for the years endedDecember 31, 2002, 2001, and 2000 and the quarter ended and year to dateSeptember 30, 2002 are not materially different from reported results.

 

*(vii)  Cumulative Effect of Changes in Accounting Principles, Net of Tax*

 

The followingtable summarizes the various cumulative effect adjustments (net of tax)discussed above for the rescission of EITF 98-10 and the adoption of Statement142 and Statement 143:

 
|                                                  |   | **Year to Date  September 30** |       |
|-------------------------------------------------------|--------|-------------------------------------|------------|
|                                                  |   | **2003**                            |       | **2002** |   |
|                                                  |   | ***(in thousands)***                |       |
|                                                  |   |                                | * *   |   | * * |
| **Cinergy**(1)                                        |   |                                |       |   |   |
| Goodwill impairment (Statement 142  adoption)         |   | **$**                               | **—** | ** ** | $ | (10,899 | ) |
| Rescission of EITF 98-10 (EITF 02-3  adoption)        |   | **(12,512**                         | **)**      | — |   |
| Asset retirement obligation (Statement 143  adoption) |   | **38,974**                          | ** ** | — |   |
|                                                  |   | **$**                               | **26,462** |   | $ | (10,899 | ) |
| **CG&E**                                          |   |                                | ** ** |   |   |
| Rescission of EITF 98-10 (EITF 02-3  adoption)        |   | **$**                               | **(8,239** | **)** | $ | — |   |
| Asset retirement obligation (Statement 143  adoption) |   | **39,177**                          | ** ** | — |   |
|                                                  |   | **$**                               | **30,938** |   | $ | — |   |
| **PSI**                                               |   |                                | ** ** |   |   |
| Rescission of EITF 98-10 (EITF 02-3  adoption)        |   | **$**                               | **(494**   | **)** | $ | — |   |
|                                                  |   | **$**                               | **(494**   | **)** | $ | — |   |

 

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(1)          Theresults of **Cinergy** also includeamounts related to non-registrants.

 

36

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**2.**              Common Stock Equity

** **

***(a)***                                  Changes In CommonStock Outstanding

*** ***

As discussedin the 2002 10-K, **Cinergy** issuesnew **Cinergy Corp.** common stockshares to satisfy obligations under its various employee stock plans and theCinergy Corp. Direct Stock Purchase and Dividend Reinvestment Plan.  During 2003, **Cinergy** has issued approximately 3.5 million shares underthese plans.

 

OnJanuary 15, 2003, **Cinergy Corp.**filed a registration statement with the Securities and Exchange Commission(SEC) with respect to the issuance of common stock, preferred stock, and othersecurities in an aggregate offering amount of $750 million.  On February 5, 2003, **Cinergy** sold 5.7 million shares of commonstock of **Cinergy Corp.** with netproceeds of approximately $175 million under this registration statement.  The net proceeds from the transaction wereused to reduce short-term debt of **CinergyCorp.** and for other general corporate purposes.

 

***(b)***                                  Stock-BasedCompensation Plan

*** ***

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

 

***(c)***                                  Contributed Capital

*** ***

**CinergyCorp.**contributed $200 million in capital to **PSI** in two separate $100 million capitalcontributions in the second and third quarters of 2003, respectively.  These capital contributions were made tosupport **PSI’s** current creditratings.

 

**3.**              Long-term Debt

** **

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

 

In March 2003,**PSI** borrowed the proceeds from theissuance by the Indiana Development Finance Authority of $35 million of itsEnvironmental Refunding Revenue Bonds Series 2003,

 

37

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

 

InApril 2003, **PSI** redeemed$26.8 million of the following Series A, Medium-term Notes:

 
| **Principal  Amount** |    | **Interest  Rate** |         | **Maturity  Date** |           |
|-----------------------|---------|--------------------|--------------|--------------------|----------------|
| ***(in  millions)***  |    |               |         |               |           |
|                  |    |               | *** *** |               | *** ***   |
| **$**                 | **2.0** |               | **8.37**     | **%**              | **11/08/2006** | ** ** |
| **5.0**               |    | **8.81**           | ** **   | **05/16/2022**     | ** **     |
| **3.0**               |    | **8.80**           | ** **   | **05/18/2022**     | ** **     |
| **16.8**              |    | **8.67**           | ** **   | **06/01/2022**     | ** **     |
|                       |         |                    |              |                    |                |  |

 

InJune 2003, **CG&E** issued$200 million principal amount of its 5 3/8% 2003 Series B Debentures dueJune 15, 2033 (effective interest rate of 5.66%).  Proceeds from this issuance were used forgeneral corporate purposes, including the funding of capital expendituresrelated to construction projects and environmental compliance initiatives, andthe repayment of outstanding indebtedness.

 

Also, inJune 2003, **CG&E** modifiedexisting debt resulting in a $200 million principal amount 5.40% 2003 Series ADebenture with a 30 year maturity.  Theeffective interest rate is 6.90%.  InJune 2003, **CG&E** redeemedits $100 million 8.28% Junior Subordinated Debentures due July 1, 2025.

 

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

 

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

 

•                  **Cinergy** consolidated two SPEs effectiveJuly 1, 2003.  As a result, **Cinergy** has approximately $221 million ofadditional non-recourse debt as of September 30, 2003, comprised of twoseparate notes.

 

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

 

38

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Thefollowing table reflects the long-term maturities for this non-recourse debt.

 

**SelectedLong-term Debt Maturities**

** **

|           |   | **Cinergy**         |   |
|----------------|--------|---------------------|--------|
|           |   | ***(in millions)*** |   |
|           |   |                |   |
| Next 12 months |   | $                   | 17     |   |
|           |   |                |   |   |
| 13-24 months   |   | 19                  |   |
|           |   |                |   |
| 25-36 months   |   | 22                  |   |
|           |   |                |   |
| 37-48 months   |   | 24                  |   |
|           |   |                |   |
| 49-60 months   |   | 27                  |   |
|           |   |                |   |
| Thereafter     |   | 112                 |   |
|           |   |                |   |
|           |   | $                   | 221    |   |

 

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

 

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

 

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

 

**4.**              Notes Receivable

** **

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

 

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

 

39

----

 

The followingtable reflects the maturities of these notes.

 

**NotesReceivable Maturities**

 

|           |   | **Cinergy**         |   |
|----------------|--------|---------------------|--------|
|           |   | ***(in millions)*** |   |
|           |   |                |   |
| Next 12 months |   | $                   | 17     |   |
|           |   |                |   |   |
| 13-24 months   |   | 19                  |   |
|           |   |                |   |
| 25-36 months   |   | 22                  |   |
|           |   |                |   |
| 37-48 months   |   | 24                  |   |
|           |   |                |   |
| 49-60 months   |   | 28                  |   |
|           |   |                |   |
| Thereafter     |   | 125                 |   |
|           |   |                |   |
|           |   | $                   | 235    |   |

 

**5.**              Notes Payable andOther Short-term Obligations

** **

AtSeptember 30, 2003, **Cinergy Corp.** had $776 million remainingunused and available capacity relating to its $1 billion revolving creditfacilities.  These revolving creditfacilities included the following:

 
| **Credit  Facility**        |   | **Expiration**  |     | **Established  Lines** |     | **Outstanding  and  Committed** |     | **Unused and  Available** |     |
|-----------------------------|--------|-----------------|----------|------------------------|----------|---------------------------------|----------|---------------------------|----------|
|                        |   |            |     |                   |     | ***(in millions)***             |     |                      |     |
|                        |   |            | * * |                   | * * |                            | * * |                      | * * |
| 364-day senior revolving    |   | April 2004 |     |                   |     |                            |     |                      |     |
| Direct borrowing            |   |            |     | $                      |     |                            | $        | —                    |     | $ |   |   |
| Commercial paper support    |   |            |     |                   |     | 209                             |     |                      |     |
|                        |   |            |     |                   |     |                            |     |                      |     |
| Total 364-day facility      |   |            |     | 600                    |     | 209                             |     | 391                       |     |
|                        |   |            |     |                   |     |                            |     |                      |     |
| Three-year senior revolving |   | May 2004   |     |                   |     |                            |     |                      |     |
| Direct borrowing            |   |            |     |                   |     | —                          |     |                      |     |
| Commercial paper support    |   |            |     |                   |     | —                          |     |                      |     |
| Letter of Credit support    |   |            |     |                   |     | 15                              |     |                      |     |
|                        |   |            |     |                   |     |                            |     |                      |     |
| Total three-year facility   |   |            |     | 400                    |     | 15                              |     | 385                       |     |
|                        |   |            |     |                   |     |                            |     |                      |     |
| Total credit facilities     |   |            |     | $                      | 1,000    |                            | $        | 224                       |     | $ | 776 |   |

 

InApril 2003, **Cinergy Corp.**successfully placed a $600 million, 364-day senior unsecured revolving creditfacility.  This facility replaced the$600 million, 364-day facility that expired April 30, 2003.

 

InAugust 2003, **CG&E** causedthe remarketing by the Ohio Air Quality Development Authority of $84 million ofits State of Ohio Air Quality Development Revenue Refunding Bonds, due

 

40

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

 

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

 

41

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The followingtable summarizes our *Notes payable and othershort-term obligations*, and *Notespayable to affiliated companies*.

 
|                          |   | **September 30, 2003** |       | **December 31, 2002** |       |
|-------------------------------|--------|-----------------------------|------------|----------------------------|------------|
|                          |   | **Established  Lines**      |       | **Outstanding**            |       | **Established  Lines** |   | **Outstanding** |   |
|                          |   | ***(in millions)***         |       |
| **Cinergy**                   |   |                        |       |                       |       |   |   |   |   |
| **Cinergy Corp.**             |   |                        |       |                       |       |   |   |   |   |
| Revolving  lines              |   | **$**                       | **1,000**  | ** **                 | **$**      | **—** |   | $ | 1,000 |   | $ | 25 |   |
| Uncommitted  lines (1)        |   | **65**                      | ** ** | **—**                 |       | 65 |   | — |   |
| Commercial  paper (2)         |   |                        | ** ** | **209**                    |       |   |   | 473 |   |
|                          |   |                        | ** ** |                       |       |   |   |   |   |
| Operating  companies          |   |                        | ** ** |                       |       |   |   |   |   |
| Uncommitted  lines (1)        |   | **75**                      | ** ** | **—**                 |       | 75 |   | — |   |
| Pollution  control notes      |   |                        | ** ** | **112**                    |       |   |   | 147 |   |
|                          |   |                        | ** ** |                       |       |   |   |   |   |
| Non-regulated  subsidiaries   |   |                        | ** ** |                       |       |   |   |   |   |
| Revolving  lines              |   | **17**                      | ** ** | **9**                      |       | 7 |   | 1 |   |
| Short-term  debt              |   |                        | ** ** | **7**                      |       |   |   | 22 |   |
|                          |   |                        | ** ** |                       |       |   |   |   |   |
| **Cinergy Total**             |   |                        | ** ** | **$**                      | **337**    |   |   |   | $ | 668 |   |
|                          |   |                        | ** ** |                       |       |   |   |   |   |
| **CG&E** and subsidiaries |   |                        | ** ** |                       |       |   |   |   |   |
| Uncommitted  lines (1)        |   | **$**                       | **15**     | ** **                 | **$**      | **—** |   | $ | 15 |   | $ | — |   |
| Pollution  control notes      |   |                        |       | **112**                    | ** ** |   |   | 112 |   |
| Money  pool                   |   |                        |       | **9**                      | ** ** |   |   | 9 |   |
|                          |   |                        | ** ** |                       |       |   |   |   |   |
| **CG&E Total**            |   |                        | ** ** | **$**                      | **121**    |   |   |   | $ | 121 |   |
|                          |   |                        | ** ** |                       |       |   |   |   |   |
| **PSI**                       |   |                        | ** ** |                       |       |   |   |   |   |
| Uncommitted  lines (1)        |   | **$**                       | **60**     | ** **                 | **$**      | **—** |   | $ | 60 |   | $ | — |   |
| Pollution  control notes      |   |                        | ** ** | **—**                 |       |   |   | 35 |   |
| Money  pool                   |   |                        | ** ** | **165**                    |       |   |   | 138 |   |
|                          |   |                        | ** ** |                       |       |   |   |   |   |
| **PSI Total**                 |   |                        | ** ** | **$**                      | **165**    |   |   |   | $ | 173 |   |
|                          |   |                        | ** ** |                       |       |   |   |   |   |
| **ULH&P**                 |   |                        | ** ** |                       |       |   |   |   |   |
| Money  pool                   |   |                        | ** ** | **$**                      | **24**     |   |   |   | $ | 14 |   |
|                          |   |                        | ** ** |                       |       |   |   |   |   |
| **ULH&P Total**           |   |                        | ** ** | **$**                      | **24**     |   |   |   | $ | 14 |   |

 

----

(1)          Outstandingamounts may be greater than established lines as uncommitted lenders are, attimes, willing to loan funds in excess of the established lines.

(2)          Thecommercial paper program is limited to $800 million and is supported by **Cinergy Corp.’s** revolving lines.

 

In our creditfacilities, **Cinergy Corp.** hascovenanted to maintain:

 

•                  a consolidatednet worth of $2 billion; and

•                  a ratio ofconsolidated indebtedness to consolidated total capitalization not in excess of65 percent.

 

42

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

 

•                  bankruptcy;

•                  defaults in thepayment of other indebtedness; and

•                  judgmentsagainst the company that are not paid or insured.

 

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

 

As discussedin Note 1(g)(*iii*), long-term debtincreased in the third quarter of 2003 resulting from the adoption ofInterpretation 46.  The debt which wasrecorded as a result of this new accounting pronouncement did not cause **Cinergy** to be in breach of any covenants.

 

**6.**                                      Energy TradingCredit Risk

** **

**Cinergy’s**extension of credit for energy marketing and trading is governed by a CorporateCredit Policy.  Written guidelinesdocument the management approval levels for credit limits, evaluation ofcreditworthiness, and credit risk mitigation procedures.  Exposures to credit risks are measured andmonitored daily by our Corporate Credit Risk function, which is independent ofall trading operations.  As ofSeptember 30, 2003, approximately 99 percent of the credit exposurerelated to energy trading and marketing activity was with counterparties ratedInvestment Grade or the counterparties’ obligations were guaranteed or securedby an Investment Grade entity.  Nosingle non-investment grade counterparty accounts for more than one percent ofour total credit exposure.  Energycommodity prices can be extremely volatile and the market can, at times, lackliquidity.  Because of these issues,credit risk for energy commodities is generally greater than with othercommodity trading.

 

We continuallyreview and monitor our credit exposure to all counterparties and secondarycounterparties.  If appropriate, we mayadjust our credit reserves to attempt to compensate for increased credit riskwithin the industry.  Counterpartycredit limits may be adjusted on a daily basis in response to changes in acounterparty’s creditworthiness, financial status, or public debt ratings.

 

**7.**                                      Commitments andContingencies

** **

***(a)***                                  Guarantees

*** ***

In theordinary course of business, **Cinergy**entersinto various agreements providing financial or performance assurances to thirdparties on behalf of certain unconsolidated subsidiaries and jointventures.  These agreements are enteredinto primarily to support or enhance the creditworthiness otherwise attributedto these entities****on a stand-alonebasis, thereby facilitating the extension of sufficient credit to accomplishtheir intended commercial purposes.  Theguarantees have various termination dates, from short-term (less than one year)to open-ended.

 

43

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In many cases,the maximum potential amount of an outstanding guarantee is an express term,set forth in the guarantee agreement, representing the maximum potentialobligation of **Cinergy**under thatguarantee (excluding, at times, certain legal fees to which a guarantybeneficiary may be entitled).  In thosecases where there is no maximum potential amount expressly set forth in theguarantee agreement, we calculate the maximum potential amount by consideringthe terms of the guaranteed transactions, to the extent such amount isestimable.

 

**Cinergy**has guaranteed the payment of $32 million as ofSeptember 30, 2003, for unconsolidated subsidiaries’ debt and forborrowings by individuals under the Director, Officer, and Key Employee StockPurchase Program.  **Cinergy**may be obligated to pay the debt’sprincipal and any related interest in the event of an unexcused breach of aguaranteed payment obligation by the unconsolidated subsidiaries or by certaindirectors, officers, and key employees. Most of the guarantees do not have a set termination date; however, theborrowings associated with the majority of the guarantees are due in the firstquarter of 2005.

 

**CinergyCorp.** has also provided performance guarantees onbehalf of certain unconsolidated subsidiaries and joint ventures.  These guarantees support performance undervarious agreements and instruments (such as construction contracts, operationand maintenance agreements, and energy service agreements).  **CinergyCorp.**may be liable in the event of an unexcused breach of aguaranteed performance obligation by an unconsolidated subsidiary.  **CinergyCorp.** has estimated its maximum potential amount to be $133 millionunder these guarantees as of September 30, 2003.  **Cinergy Corp.** mayalso have recourse to third parties for claims required to be paid undercertain of these guarantees.  Themajority of these guarantees expire at the completion of the underlyingperformance agreements, the majority of which expire from 2016 to 2019.

 

**Cinergy**has entered into contracts that includeindemnification provisions as a routine part of its business activities.  Examples of these****contracts include purchase and sale agreements and operatingagreements.  In general, theseprovisions indemnify the counterparty for matters such as breaches ofrepresentations and warranties and covenants contained in the contract.  In some cases, particularly with respect topurchase and sale agreements, the potential liability for certainindemnification obligations is capped, in whole or in part (generally at anaggregate amount not exceeding the sale price), and subject to a deductibleamount before****any payments wouldbecome due.** **In other cases (such as indemnifications for willfulmisconduct of employees in a joint venture), the maximum potential amount isnot estimable given that the magnitude of any claims under thoseindemnifications would be a function of the extent of damages actuallyincurred, which is not practicable to estimate unless and until the eventoccurs.  **Cinergy** has estimated the maximum potential amount, whereestimable, to be $124 million under these indemnification provisions.  The termination period for the majority ofmatters provided by indemnification provisions in purchase and sale agreementsgenerally ranges from 2003 to 2009.

 

We believe thelikelihood that **Cinergy**would berequired to perform or otherwise incur any significant losses associated withany or all of the guarantees described in the preceding paragraphs is remote.

 

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***(b)***                                  Ozone TransportRulemakings

*** ***

InJune 1997, the Ozone Transport Assessment Group, which consisted of 37states, made a wide range of recommendations to the Environmental ProtectionAgency (EPA) to address the impact of ozone transport on serious non-attainmentareas (geographic areas defined by the EPA as non-compliant with ozonestandards) in the Northeast, Midwest, and South.  Ozone transport refers to wind-blown movement of ozone andozone-causing materials across city and state boundaries.

 

*(i)*          NitrogenOxide (NOX) State Implementation Plan (SIP) Call

* *

InOctober 1998, the EPA finalized its ozone transport rule, also known asthe NOX SIP Call.  It appliedto 22 states in the eastern half of the United States (U.S.), including thethree states in which our electric utilities operate, and proposed a model NOXemission allowance trading program. This rule recommended that states reduce NOX emissionsprimarily from industrial and utility sources to a certain level byMay 2003.

 

InAugust 2000, the U.S. Circuit Court of Appeals for the District ofColumbia (Court of Appeals) extended the deadline for NOX reductionsto May 31, 2004.  The states ofWest Virginia and Illinois, along with various industry groups (some of whichwe are a member), have challenged portions of the final rule that was publishedon May 1, 2002, in an action filed in the Court of Appeals.  A decision is expected some time afterDecember 2003.  It is unclearwhether the Court of Appeals’ decision in this matter will result in anincrease or decrease in the size of the NOX reduction requirement,or a deferral of the May 31, 2004 compliance deadline.

 

The states ofIndiana and Kentucky developed final NOX SIP rules in response tothe NOX SIP Call, through cap and trade programs, in June andJuly of 2001, respectively.  TheEPA has approved Indiana’s and Kentucky’s SIP rules, which have both becomeeffective, and has conditionally approved Ohio’s SIP rules.  Ohio EPA is still promulgating the changesto its rules to satisfy the EPA’s conditions for approval.  **Cinergy’s**current plans for compliance with the EPA’s NOX SIP Call would alsosatisfy compliance with Indiana’s, Kentucky’s, and Ohio’s SIP rules.

 

OnSeptember 25, 2000, **Cinergy**announced a plan for its subsidiaries, **CG&E**and **PSI**, to invest in pollutioncontrol equipment and other methods to reduce NOX emissions.  This plan includes the following:

 

•                  installselective catalytic reduction units at several different generating stations;

•                  install otherpollution control technologies, including new computerized combustion controls,at all generating stations;

•                  make combustionimprovements; and

•                  utilize the NOXallowance market to buy or sell NOX allowances as appropriate.

 

The currentestimate for additional expenditures for this plan is approximately $167million and is in addition to the $682 million already incurred to comply withthis program.

 

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*(ii)*      Section 126Petitions

* *

InFebruary 1998, several northeast states filed petitions seeking the EPA’sassistance in reducing ozone in the Eastern U.S. under Section 126 of theClean Air Act (CAA).  The EPA believesthat Section 126 petitions allow a state to claim that sources in anotherstate are contributing to its air quality problem and request that the EPArequire the upwind sources to reduce their emissions.

 

InDecember 1999, the EPA granted four Section 126 petitions relating toNOX emissions.  This rulingaffected all of our Ohio and Kentucky facilities, as well as some of ourIndiana facilities, and required us to reduce our NOX emissions to acertain level by May 2003.  The EPAsubsequently extended the Section 126 rule compliance deadline toMay 31, 2004, thus harmonizing the deadline with that for the NOXSIP Call.

 

OnApril 4, 2003, the EPA issued a proposed rule withdrawing theSection 126 rule in states with approved SIPs under the NOX SIPCall, which include the states of Indiana and Kentucky.  The proposed rule states that the EPA willwithdraw the Section 126 in Ohio once Ohio has a fully approved SIP.  As a result of these actions, we anticipatethat the Section 126 rule will not affect any of our facilities.

 

See (e) belowfor a discussion of the tentative EPA Agreement, which could affect ourstrategy for compliance with the final NOX SIP Call.

 

***(c)***                                  New Source Review(NSR)

*** ***

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

 

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

 

Consistentwith a Revised Case Management Plan, the Indiana District Court set the casefor trial by jury commencing on June 6, 2005.

 

OnDecember 21, 2000, **Cinergy**, **CG&E**, and **PSI** reached an agreement in principle with the parties in thelitigation for a negotiated resolution of the CAA claims in thelitigation.  See (e) below for adiscussion of the tentative EPA Agreement, which relates to matters discussedwithin this note.  At this time, webelieve it is unlikely that a final agreement will be reached on the 

 

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termscurrently proposed by the plaintiffs. If the settlement is not completed, we intend to defend against theallegations vigorously in court.  Atthis time, it is not possible to determine the likelihood that the plaintiffswould prevail upon their claims, whether resolution of these matters will be onterms similar to the terms of the tentative agreement, or whether resolution ofthese matters would have a material effect on our financial position or resultsof operations.

 

On March 1, 2000, the EPA also filed anamended complaint in a separate lawsuit alleging violations of the CAA relatingto NSR, Prevention of Significant Deterioration (PSD), and Ohio SIPrequirements regarding various generating stations, including a generatingstation operated by the Columbus Southern Power Company (CSP) and jointly-ownedby CSP, the Dayton Power and Light Company (DP&L), and **CG&E**. The EPA is seeking injunctive relief and civil penalties of up to$27,500 per day for each violation.  Thissuit is being defended by CSP.  OnApril 4, 2001, the District Court in that case ruled that neither theGovernment nor the intervening plaintiff environmental groups could obtaincivil penalties for any alleged violations that occurred more than five yearsprior to the filing of the complaint, but that both parties could seekinjunctive relief for alleged violations that occurred more than five yearsbefore the filing of the complaint. Thus, if the plaintiffs prevail in their claims, any calculation forpenalties will not start on the date of the alleged violations, unless thosealleged violations occurred after November 3, 1994, but CSP would beforced to install the controls required under the CAA.  Neither party appealed that decision.

 

In addition, **Cinergy** and **CG&E** have been informed by DP&L, that on June 30,2000, the EPA issued a Notice of Violation (NOV) to DP&L for allegedviolations of NSR, PSD, and SIP requirements at a generating station operatedby DP&L and jointly-owned by **CG&E**.  The NOVs indicated the EPA may (1) issue anorder requiring compliance with the requirements of the SIP, or (2) bring acivil action seeking injunctive relief and civil penalties of up to $27,500 perday for each violation.

 

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

 

***(d)***                                  Beckjord Station NOV

*** ***

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

 

See (e) belowfor a discussion of the tentative EPA Agreement, which relates to mattersdiscussed within this note.

 

***(e)***                                  EPA Agreement

*** ***

OnDecember 21, 2000, **Cinergy**, **CG&E**, and **PSI** reached an agreement in principle with the United States,three northeast states, and two environmental groups for a negotiatedresolution of 

 

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CAA claims andother related matters brought against coal-fired power plants owned andoperated by **Cinergy’s** operatingsubsidiaries.  The complete resolutionof these issues is contingent upon establishing a final agreement with the EPAand other parties.  If a final agreementis reached with these parties, it would resolve past claims of alleged NSRviolations as well as the Beckjord Station NOVs/FOV discussed previously under(c) and (d).

 

In return forresolution of claims regarding past maintenance activities, as well as futureoperational certainty, we tentatively committed in the agreement in principleto:

 

•                  shut down orrepower with natural gas, nine small coal-fired boilers at three power plantsbeginning in 2004;

•                  build fouradditional sulfur dioxide (SO2) scrubbers, the first of which mustbe operational by December 31, 2007;

•                  upgrade existingparticulate control systems;

•                  phase in theoperation of NOX reduction technology year-round starting in 2004;

•                  reduce ourexisting Title IV SO2 cap by 35 percent in 2013;

•                  pay a civilpenalty of $8.5 million to the U.S. government; and

•                  implement $21.5million in environmental mitigation projects, including retiring 50,000 tons ofSO2 allowances by 2005.

 

In reachingthe tentative agreement, we did not admit to any wrongdoing.

 

The estimatedcost for these capital expenditures is expected to be approximately $700million through 2013.  These capitalexpenditures are in addition to our previously announced commitment to installNOX controls as discussed in (b) above, but does include capitalcosts that **Cinergy** would expect tospend regardless of the settlement due to new environmental requirementsexpected in the second half of this decade.

 

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

 

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

 

***(f)***                                    Manufactured GasPlant (MGP) Sites

*** ***

Prior to the1950s, gas was produced at MGP sites through a process that involved theheating of coal and/or oil.  The gasproduced from this process was sold for residential, commercial, and industrialuses.

 

Coal tarresidues, related hydrocarbons, and various metals have been found at formerMGP sites in Indiana, including at least 22 sites that **PSI** or its predecessors previously ownedand sold in a 

 

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series oftransactions with Northern Indiana Public Service Company (NIPSCO) and IndianaGas Company, Inc. (IGC).

 

In acombination of lawsuits and notices of violation, the 22 sites are in theprocess of being studied and will be remediated, if necessary.  In 1998 NIPSCO, IGC, and **PSI** entered into Site Participation and CostSharing Agreements to allocate liability and responsibilities betweenthem.  The Indiana Department ofEnvironmental Management (IDEM) oversees investigation and cleanup of all ofthese sites.  Thus far, **PSI** has primary responsibility forinvestigating, monitoring and remediating, if necessary, nine of these sites.

 

**PSI**notified its insurance carriers of the claims related to MGP sites raised byIGC, NIPSCO, and IDEM.  InApril 1998, **PSI** filed suit inHendricks County in the State of Indiana against its general liabilityinsurance carriers.  **PSI** sought a declaratory judgment toobligate its insurance carriers to (1) defend MGP claims against **PSI**, or (2) pay **PSI’s** costs of defense and compensate **PSI** for its costs of investigating,preventing, mitigating, and remediating damage to property and paying claimsrelated to MGP sites.  The trial courtissued a variety of rulings with respect to the claims and defenses in thelitigation.  **PSI**has appealed certain adverse rulings to the Indiana Courtof Appeals.  Oral argument on the appealoccurred on November 5, 2003.  Atthe present time, **PSI** cannotpredict the outcome of this litigation, including the outcome of the appeals.

 

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

 

**PSI**and **CG&E**, including itsutility subsidiaries, have accrued costs related to investigation, remediation,and groundwater monitoring for those sites where such costs are probable andcan be reasonably estimated.  As wecontinue to investigate and remediate the sites and additional facts becomeknown, additional costs may be incurred beyond those currently accrued.  Until all investigation and remediation iscomplete, we are unable to determine the overall impact on our financialposition or results of operations.

 

***(g)***                                 Asbestos ClaimsLitigation

*** ***

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

 

Of theselawsuits, one case filed against **PSI**has been tried to verdict.  The juryreturned a verdict against **PSI** inthe amount of approximately $500,000 on a negligence claim and for **PSI** on punitive damages.  **PSI**is appealing the judgment in this case. In addition, we have settled a number of other lawsuits forsubstantially less than $500,000.

 

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At this time, **CG&E** and **PSI**are not able to predict the ultimate outcome of theselawsuits or the impact on **CG&E’s**and **PSI’s** financial position orresults of operations.

 

***(h)***                                 Gas Customer Choice

*** ***

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

 

In March 2001, **Cinergy**, **CG&E**, andInvestments were named as defendants in a lawsuit filed by Energy Cooperativeand Resources.  This lawsuit concernsany obligations or liabilities Investments may have to Energy Cooperativefollowing its sale of Resources.  Thislawsuit is pending in the Licking County Common Pleas Court.  Trial is anticipated to occur inNovember 2004.  InOctober 2001, **Cinergy**, **CG&E**, and Investments initiatedlitigation against the Energy Cooperative requesting indemnification by theEnergy Cooperative for the claims asserted by former customers in the classaction litigation.  We intend to vigorously defend theselawsuits.  At the present time, wecannot predict the outcome of these suits.

 

***(i)***                                    PSI Fuel AdjustmentCharge

*** ***

InJune 2001, **PSI** filed apetition with the IURC requesting authority to recover $16 million in underbilled deferred fuel costs incurred from March 2001 throughMay 2001.  The IURC approvedrecovery of these costs subject to refund pending the findings of aninvestigative sub-docket.  Thesub-docket was opened to investigate the reasonableness of, and underlyingreasons for, the under billed deferred fuel costs.  A hearing was held in July 2002, and in March 2003 theIURC issued an order giving final approval to **PSI’s**recovery of the $16 million.

 

***(j)***                                    PSI Retail Electric Rate Case

*** ***

InDecember 2002, **PSI** filed apetition with the IURC seeking approval of a base retail electric rateincrease.  **PSI** has filed initial and rebuttal testimony in this case andthe final set of hearings will take place in November 2003.  Based on updated testimony filed in October 2003,**PSI** proposes an increase in annualrevenues of approximately $180 million, or an average increase of approximately14 percent over **PSI’s** retailelectric rates in effect at the end of 2002. An IURC decision is expected in the first quarter of 2004.

 

***(k)***                                PSI Construction Work in Progress (CWIP)Ratemaking Treatment for NOX Equipment

*** ***

InApril 2003, PSI filed an application with the IURC requesting that itsCWIP rate adjustment mechanism be updated for expenditures throughDecember 2002 related to NOX equipment currently being installed atcertain PSI generation facilities.  CWIPratemaking treatment allows 

 

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for therecovery of carrying costs on certain pollution control equipment while andafter the equipment is under construction. A final order was issued on September 24, 2003.  The order granted substantially all of **PSI’s** requested relief, leaving only theissue of whether certain equipment qualified for CWIP ratemaking treatment tobe decided in the first quarter of 2004. Amounts approved for recovery are presented below:

 

**PSI CWIP Ratemaking for NOXEquipment**

 
|                                                         |   | **PSI**             |   |
|--------------------------------------------------------------|--------|---------------------|--------|
|                                                         |   | ***(in millions)*** |   |
|                                                         |   |                |   |
| Total retail CWIP expenditures as of  December 31, 2002 |   | $                   | 305    |   |
|                                                         |   |                |   |
| Total amount requested through CWIP  mechanism(1)            |   | 35                  |   |
| Less: previously approved CWIP mechanism  amounts            |   | (28                 | )      |
| Incremental CWIP mechanism amounts                           |   | $                   | 7      |   |

 

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(1)          Amountsinclude retail customers’ portion only and represent an annual return onqualified NOX equipment expenditures.

 

**PSI’s**initial CWIP rate mechanism adjustment (authorized in July 2002) resultedin an approximately one percent increase in customer rates.  Under the IURC’s CWIP rules, **PSI**may update its CWIP tracker atsix-month intervals.  The first suchupdate to **PSI’s** CWIP ratemechanism occurred in the first quarter of 2003.  The IURC’s July 2002 order also authorized **PSI** to defer, for subsequent recovery,post-in-service depreciation and to continue the accrual for allowance forfunds used during construction (AFUDC). Pursuant to Statement of Financial Accounting Standards No. 92, *Regulated Enterprises-Accounting for Phase-in Plans*,the equity component of AFUDC will not be deferred for financial reportingafter the related assets are placed in service.

 

***(l)***                                    Environmental Compliance Cost Recovery

*** ***

In 2002, theIndiana General Assembly passed legislation that, among other things,encourages the deployment of advanced technologies that reduce regulated airemissions, while allowing the continued use of high sulfur Midwestern coal inexisting electric generating plants. The legislation authorizes the IURC to provide financial incentives toutilities that deploy such advanced technologies.  **PSI**is currentlyseeking IURC approval, under this new law, of a cost tracking mechanism for **PSI’s** NOX equipment-relateddepreciation and operation and maintenance costs, authority to use accelerated(18-year) depreciation for its NOX compliance equipment, andapproval of a NOX emission allowance purchase and salestracker.  In October, **PSI** reached a settlement with the otherparties to this case that, if approved by the IURC, will provide for the reliefdescribed above for most of **PSI’s**environmental compliance equipment.**  PSI** expects an IURC orderaddressing approval of the settlement agreement by the end of 2003.  The issue of whether the remainder of **PSI’s** environmental compliance projectsqualify for financial incentives is expected to be decided in the secondquarter of 2004.

 

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***(m)***                              PSI Purchased Power Tracker (Tracker)

*** ***

The Trackerwas designed to provide for the recovery of costs related to purchases of powernecessary to meet native load requirements to the extent such costs are notrecovered through the existing fuel adjustment clause.

 

**PSI**is authorized to seek recovery of 90 percent of its purchased power expensesthrough the Tracker (net of the displaced energy portion recovered through thefuel recovery process and net of the mitigation credit portion), with theremaining 10 percent deferred for subsequent recovery in **PSI’s**general retail electric ratecase.  In March 2002, **PSI** filed a petition with the IURC seekingapproval to extend the Tracker process beyond the summer of 2002.  A hearing was held in January 2003, andin June 2003 the IURC approved the extension for up to an additional twoyears with the ultimate determination concerning **PSI’s** continued use of the Tracker process to be made in **PSI’s** pending retail electric rate case.

 

InJune 2002, **PSI** also filed apetition with the IURC seeking approval of the recovery through the Tracker ofits actual summer 2002 purchased power costs. In May 2003, the IURC approved **PSI’s**recovery of $18 million related to its summer 2002 purchased power costs, andalso authorized $2 million of deferred costs sought for recovery in **PSI’s** general retail electric rate case.

 

InJune 2003, **PSI** filed apetition with the IURC seeking approval of the recovery through the Tracker ofits actual summer 2003 purchased power costs. Testimony was filed in support of **PSI’s**request in August 2003.  Anevidentiary hearing is scheduled for March 2004.

 

***(n)***                                 CG&E Gas Rate Case

*** ***

In the thirdquarter of 2001, **CG&E** filed aretail gas rate case with the Public Utilities Commission of Ohio (PUCO)seeking to increase base rates for natural gas distribution service andrequesting recovery through a tracking mechanism of the costs of an acceleratedgas main replacement program with an estimated capital cost of $716 millionover 10 years.  **CG&E** entered into a settlementagreement with most of the parties and a hearing on this matter was held inApril 2002.  An order was issued inMay 2002, in which the PUCO approved the settlement agreement andauthorized a base rate increase of approximately $15 million, or 3.3 percent overall,effective May 30, 2002.  Inaddition, the PUCO authorized **CG&E**to implement the tracking mechanism to recover the costs of the accelerated gasmain replacement program, subject to certain rate caps that increase in amountannually through May 2007, through the effective date of new rates in **CG&E’s** next retail gas rate case.  In the fourth quarter of 2002, **CG&E**filed an application to increaseits rates under the tracking mechanism. In April 2003, **CG&E**entered into a settlement agreement with the parties, providing for an increaseof $6.5 million, which the PUCO subsequently approved.  This increase was effective inMay 2003.  **CG&E** expects to file anotherapplication to increase its rates by approximately $6.4 million under thetracking mechanism in the fourth quarter of 2003.  **CG&E** expects thePUCO will rule on this application by May 2004.

 

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***(o)***                                  ULH&P Gas Rate Case

*** ***

As discussed in the 2002 10-K, in the second quarter of 2001, **ULH&P** filed a retail gas rate case with theKentucky Public Service Commission (KPSC) seeking to increase base rates fornatural gas distribution services and requesting recovery through a trackingmechanism of the costs of an accelerated gas main replacement program with an estimatedcapital cost of $112 million over 10 years. **ULH&P** made itssecond annual filing for an increase under the tracking mechanism inMarch 2003.  The application soughtan increase of $2 million.  A hearingwas held in July 2003, and the KPSC approved the application inAugust 2003.  The Kentucky Attorney General has appealed tothe Franklin Circuit Court the KPSC’s approval of the tracking mechanism andthe KPSC’s orders approving the new tracking mechanism rates.  At the present time, **ULH&P** cannot predict the timing or outcome of thislitigation.

 

***(p)***                                  Gas DistributionPlant

*** ***

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

 

***(q)***                                  Contract Disputes

*** ***

**Cinergy**,through a subsidiary of Investments, is currently involved in negotiations toresolve a customer billing dispute.  Theprimary issue of contention between the parties relates to the determinantsused in calculating the monthly charge billed for electricity.  Receivables from the customer are recordedat what **Cinergy** believes to betheir net realizable value.  Although wecannot predict the outcome of this matter, we believe the ultimate impact on **Cinergy’s** financial position and results ofoperations will not be material.

 

CinergyMarketing & Trading, LP (Marketing & Trading) was in arbitration withApache Corporation (Apache) concerning disputes under an agreement whereby wemarketed natural gas that Apache produced or acquired in North America.  Effective July 1, 2003, Marketing &Trading terminated its marketing relationship with Apache.  The termination of the marketingrelationship ended the arbitration and all outstanding monetary issues relatedto the arbitration were settled.  Theimpact of the settlement was not material to our financial position or resultsof operations.

 

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***(r)***                                  Enron Corp. (Enron)Bankruptcy

*** ***

InDecember 2001, 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 monthsprior to its bankruptcy filing and have filed a motion with the bankruptcycourt overseeing the Enron bankruptcy seeking appropriate netting of thevarious payables and receivables between and among Enron and **Cinergy** entities.  We intend to resolve any contract differences pursuant to theterms of those contracts, business practices, and the applicable provisions ofthe U.S. Bankruptcy Code, as approved by the court.  We have recently been involved in a court-sponsored mediation ofour claims in the bankruptcy case and are attempting to resolve our disputesthrough that process.  Based on judicialdecisions regarding the permissibility of certain broad netting arrangementsand the results of our mediation, we have entered into a tentative settlementagreement with Enron, which must go through creditors’ committee and bankruptcycourt approval before becoming final. As a result of this tentative agreement, we believe the resolution ofour contract differences will result in a net payable to Enron of approximately$14 million.  During the third quarterof 2003, an additional $12 million was charged to expense to reflect ourcurrent assessment of this matter.  Webelieve this would resolve all of our claims with the Enron entities, exceptfor one claim being handled outside the United States proceeding involving therecovery of an insignificant amount.

 

***(s)***                                  Synthetic FuelProduction

*** ***

InJuly 2002, Capital & Trading acquired a coal-based synthetic fuelproduction facility.  As ofSeptember 30, 2003, Capital & Trading’s net book value in thisfacility was approximately $60 million. The synthetic fuel produced at this facility qualifies for tax creditsin accordance with Section 29 of the Internal Revenue Code.  Eligibility for these credits expires after2007.  **Cinergy**received a private letter ruling from the Internal Revenue Service (IRS) inconnection with the acquisition of the facility.  To date, **Cinergy** hasproduced and sold approximately 3.6 million tons of synthetic fuel at thisfacility, resulting in approximately $100 million in tax credits, includingapproximately $60 million in 2003.

 

In the secondquarter of 2003, the IRS announced, as a result of an audit of anothertaxpayer, that it had reason to question and was reviewing the scientificvalidity of test procedures and results that were presented as evidence thefuel underwent a significant chemical change. The IRS recently announced that it has finished its review and hasdetermined that test procedures and results used by taxpayers arescientifically valid if the procedures are applied in a consistent and unbiasedmanner.  The IRS also announced that itplans to impose new testing and record-keeping requirements on synthetic fuelproducers and plans to issue guidance extending these requirements to taxpayersalready holding private letter rulings on the issue of significant chemicalchange.

 

**Cinergy**believes that its testing procedures comply with the standards recentlyannounced by the IRS.  We do notanticipate that any new testing or record-keeping requirements imposed by theIRS will have a material effect on our financial position or results ofoperations.

 

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***(t)***                                    Energy MarketInvestigations

*** ***

InJuly 2003, **Cinergy** received asubpoena from the Commodity Futures Trading Commission (CFTC).  As has been previously reported by thepress, the CFTC has served subpoenas on numerous other energy companies.  The CFTC request sought certain informationregarding our trading activities, including price reporting to energy industrypublications.  The CFTC soughtparticular information concerning these matters for the period May 2000through January 2001 as to one of **Cinergy’s**employees.  Based on an initial reviewof these matters, we placed that employee on administrative leave and havesubsequently terminated his employment. **Cinergy** is continuing aninvestigation of these matters and has been cooperating fully with the CFTC.

 

InSeptember 2003, **Cinergy**,along with 38 other companies, was named as a defendant in civil litigationfiled as a purported class action on behalf of all persons who purchased and/orsold New York Mercantile Exchange natural gas futures and options contractsbetween January 1, 2000 and December 31, 2002.  The complaint alleges that improper pricereporting caused damages to the class. Responsive pleadings in the case are due on November 17, 2003.  We believe this action against us is withoutmerit.  At this time, it is not possibleto predict the outcome of this matter.

 

In the secondquarter of 2003, **Cinergy** receivedinitial and follow-up third-party subpoenas from the SEC requesting informationrelated to particular trading activity with one of its counterparties who wasthe target of an investigation by the SEC. **Cinergy** has and intends tofully cooperate with the SEC in connection with this matter.

 

At this timeit is not possible to predict the outcome of these investigations and lawsuitor the impact on **Cinergy’s**financial position or results of operations; although, in the opinion ofmanagement, they are not likely to have a material adverse effect on ourfinancial position or results of operations.

 

***(u)***                                 CG&E Transmissionand Distribution Rate Filings

*** ***

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

 

**CG&E**is also proposing a mechanism to recover costs related to net additions totransmission and distribution utility plant in service after the end of themarket development period.  Themechanism would work in a similar manner to the monthly customer charge thePUCO approved for **CG&E’s**accelerated natural gas main replacement program, discussed above****in (n), which is adjusted annually basedon expenditures in the previous year.

 

55

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**8.**              DiscontinuedOperations

** **

During thesecond quarter of 2003, **Cinergy**completed the disposal of its gas distribution operation in South Africa, soldits remaining wind assets in the United States, and substantially sold orliquidated the assets of its energy trading operation in the Czech Republic.

 

GAAP requiresconsolidated entities, which have been disposed of, to be presented as *Discontinued operations, net of tax* in theStatements of Income and as *Assets/Liabilitiesof Discontinued Operations* in the Balance Sheets.  The accompanying financial statements havebeen reclassified to account for the disposals occurring during the secondquarter of 2003, as well as disposals in prior periods, as discontinuedoperations.

 

As a result ofthe second quarter 2003 transactions, assets of discontinued operations ofapproximately $140 million have been sold or converted into cash andliabilities of discontinued operations of approximately $100 million have beenassumed by buyers or liquidated.  Thenet, after-tax, gain from these disposal and liquidation transactions wasapproximately $9 million (including a net after-tax cumulative currencytranslation gain of approximately $6 million).

 

The tablebelow reflects the results of operations and the income (loss) on disposalrelated to investments accounted for as discontinued operations for the quarterended and year to date September 30, 2003 and 2002:

 
|                                                  |   | **Quarter Ended  September 30** |       | **Year to Date  September 30** |   |
|-------------------------------------------------------|--------|--------------------------------------|------------|-------------------------------------|--------|
|                                                  |   | **2003**                             |       | **2002**                            |   | **2003** |   | **2002** |   |
|                                                  |   | ***(in thousands)***                 |       |
|                                                  |   |                                 |       |                                |   |   |   |   |   |
| **Revenues (1)**                                      |   | **$**                                | **—** |                                | $      | 20,827 |   | **$** | **22,257** |   | $ | 74,945 |   |
|                                                  |   |                                 |       |                                |   |   |   |   |   |
| **Income (Loss)  Before Taxes**                       |   | **$**                                | **—** |                                | $      | (4,954 | ) | **$** | **(593** | ) | $ | (2,903 | ) |
|                                                  |   |                                 |       |                                |   |   |   |   |   |
| **Income (Loss) from  Discontinued Operations**       |   |                                 |       |                                |   |   |   |   |   |
| Income (Loss) from operations                         |   | **$**                                | **—** |                                | $      | (1,790 | ) | **$** | **(3** | ) | $ | (561 | ) |
| Gain on disposal, net of tax                          |   | **—**                           |       | —                              |   | **8,878** |   | — |   |
|                                                  |   |                                 |       |                                |   |   |   |   |   |
| **Total Income (Loss)  from Discontinued Operations** |   | **$**                                | **—** |                                | $      | (1,790 | ) | **$** | **8,875** |   | $ | (561 | ) |

 

----

(1)          Presented for informational purposesonly.  All results of operations arereported net in our Statements of Income.

 

56

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The tablebelow reflects the assets and liabilities related to the investments accountedfor as discontinued operations as of September 30, 2003 andDecember 31, 2002:

 
|                                                           |   | **September 30  2003** |      | **December 312002** |     |
|----------------------------------------------------------------|--------|-----------------------------|-----------|--------------------------|----------|
|                                                           |   | ***(in thousands)***        |      |
|                                                           |   |                        | * *  |                     | * * |
| **Assets**                                                     |   |                        |      |                     |     |
| Current assets                                                 |   | **$**                       | **7,187** |                     | $        | 48,719 |   |
| Property, plant, and equipment-net                             |   | **—**                  |      | 78,309                   |     |
| Other assets                                                   |   | **—**                  |      | 20,237                   |     |
|                                                           |   |                        |      |                     |     |
| **Total Assets**                                               |   | **$**                       | **7,187** |                     | $        | 147,265 |   |
|                                                           |   |                        |      |                     |     |
| **Liabilities**                                                |   |                        |      |                     |     |
| Current liabilities                                            |   | **$**                       | **8,877** |                     | $        | 6,632 |   |
| Long-term debt (including Long-term debt  due within one year) |   | **—**                  |      | 84,654                   |     |
| Other                                                          |   | **—**                  |      | 17,547                   |     |
|                                                           |   |                        |      |                     |     |
| **Total Liabilities**                                          |   | **$**                       | **8,877** |                     | $        | 108,833 |   |

 

**9.**                                      FinancialInformation by Business Segment

** **

As discussedin the 2002 10-K, we conduct operations through our subsidiaries, and managethrough the following three business units:

 

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

•                  RegulatedBusinesses Business Unit (Regulated Businesses); and

•                  Power Technologyand Infrastructure Services Business Unit (Power Technology).

 

The followingsection describes the activities of our business units as ofSeptember 30, 2003.

 

Commercialmanages wholesale generation and energy marketing and trading of energycommodities.  Additionally, Commercialoperates and maintains our electric generating plants including some of ourjointly-owned plants.  Commercial isalso responsible for all of our international operations and performs thefollowing activities:

 

•                  energy riskmanagement;

•                  proprietaryarbitrage activities; and

•                  customizedenergy solutions.

 

RegulatedBusinesses consists of **PSI’s**regulated, integrated utility operations, and **Cinergy’s**other regulated electric and gas transmission and distribution systems.  Regulated Businesses plans, constructs,operates, and maintains **Cinergy’s**transmission and distribution systems and delivers gas and electric energy toconsumers.  Regulated Businesses alsoearns revenues from wholesale customers primarily by transmitting electricpower through **Cinergy’s**transmission system.

 

57

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PowerTechnology primarily manages the development, marketing, and sales of ournon-regulated retail energy and energy-related businesses.  This is accomplished through varioussubsidiaries and joint ventures.  PowerTechnology also manages Cinergy Ventures, LLC (Ventures), **Cinergy’s** venture capital subsidiary.  Ventures invests in emerging energytechnologies that can benefit future **Cinergy**business development activities.

 

Following arethe financial results by business unit. Certain amounts for the prior year have been restated to reflectimplementation of EITF 02-3 and other prior year amounts have been reclassifiedto conform to the current presentation.

 

58

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Financialresults by business unit for the quarters ended September 30, 2003, andSeptember 30, 2002, are as indicated below.

 

**BusinessUnits**

 
|                                       |   | ***Cinergy  Business Units*** |        |                      |          |                  |       |
|--------------------------------------------|--------|-------------------------------|-------------|---------------------------|---------------|-----------------------|------------|
|                                       |   | **Commercial**                |        | **Regulated  Businesses** |          | **Power  Technology** |       | **Total** |   | **Reconciling Eliminations   (1)** |   | **Consolidated** |   |
|                                       |   | ***(in thousands)***          |        |
|                                       |   |                          |        |                      |          |                  |       |   |   |   |   |   |   |
| **Quarter Ended  September 30, 2003** |   |                          |        |                      |          |                  |       |   |   |   |   |   |   |
|                                       |   |                          |        |                      |          |                  |       |   |   |   |   |   |   |
| **Operating revenues -**                   |   |                          | ** **  |                      | ** **    |                  | ** ** |   | ** ** |   | ** ** |   | ** ** |
| **External customers**                     |   | **$**                         | **439,059** | ** **                | **$**         | **652,946**           | ** ** | **$** | **(28** | **)** | **$** | **1,091,977** | ** ** | **$** | **—** | ** ** | **$** | **1,091,977** | ** ** |
| **Intersegment revenues**                  |   | **44,526**                    | ** **  | **—**                | ** **    | **—**            | ** ** | **44,526** | ** ** | **(44,526** | **)** | **—** | ** ** |
|                                       |   |                          | ** **  |                      | ** **    |                  | ** ** |   | ** ** |   | ** ** |   | ** ** |
| **Cost of sales -**                        |   |                          | ** **  |                      | ** **    |                  | ** ** |   | ** ** |   | ** ** |   | ** ** |
| **Fuel and purchased and exchanged power** |   |                          | ** **  |                      | ** **    |                  | ** ** |   | ** ** |   | ** ** |   | ** ** |
| **External customers**                     |   | **188,356**                   | ** **  | **141,641**               | ** **    | **—**            | ** ** | **329,997** | ** ** |   | ** ** | **329,997** | ** ** |
| **Intersegment costs**                     |   | **—**                    | ** **  | **44,526**                | ** **    | **—**            | ** ** | **44,526** | ** ** | **(44,526** | **)** | **—** | ** ** |
| **Gas purchased**                          |   | **47,360**                    | ** **  | **32,222**                | ** **    | **—**            | ** ** | **79,582** | ** ** |   | ** ** | **79,582** | ** ** |
|                                       |   |                          | ** **  |                      | ** **    |                  | ** ** |   | ** ** |   | ** ** |   | ** ** |
| **Segment profit (loss)(2)**               |   | **52,204**                    | ** **  | **62,814**                | **(3) ** | **(3,037**            | **)**      | **111,981** | ** ** | **—** | ** ** | **111,981** |   |
|                                       |   |                          | ** **  |                      | ** **    |                  | ** ** |   | ** ** |   | ** ** |   | ** ** |
| **Quarter Ended  September 30, 2002** |   |                          | ** **  |                      | ** **    |                  | ** ** |   | ** ** |   | ** ** |   | ** ** |
|                                       |   |                          | ** **  |                      | ** **    |                  | ** ** |   | ** ** |   | ** ** |   | ** ** |
| Operating revenues -                       |   |                          |        |                      |          |                  |       |   |   |   |   |   |   |
| External customers                         |   | $                             | 449,571     |                      | $             | 669,605               |       | $ | 62 |   | $ | 1,119,238 |   | $ | — |   | $ | 1,119,238 |   |
| Intersegment  revenues                     |   | 51,590                        |        | —                    |          | —                |       | 51,590 |   | (51,590 | ) | — |   |
|                                       |   |                          |        |                      |          |                  |       |   |   |   |   |   |   |
| Cost  of sales -                           |   |                          |        |                      |          |                  |       |   |   |   |   |   |   |
| Fuel  and purchased and exchanged power    |   |                          |        |                      |          |                  |       |   |   |   |   |   |   |
| External  customers                        |   | 174,224                       |        | 128,142                   |          | —                |       | 302,366 |   |   |   | 302,366 |   |
| Intersegment  costs                        |   | —                        |        | 51,590                    |          | —                |       | 51,590 |   | (51,590 | ) | — |   |
| Gas  purchased                             |   | 36,689                        |        | 12,594                    |          | —                |       | 49,283 |   |   |   | 49,283 |   |
|                                       |   |                          |        |                      |          |                  |       |   |   |   |   |   |   |
| Discontinued operations, net of tax        |   | (1,790                        | )           | —                    |          | —                |       | (1,790 | ) | — |   | (1,790 | ) |
|                                       |   |                          |        |                      |          |                  |       |   |   |   |   |   |   |
| Segment  profit (loss)(2)                  |   | 57,534                        |        | 74,939                    |          | (1,905                | )          | 130,568 |   | — |   | 130,568 |   |
|                                            |        |                               |             |                           |               |                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

(1)          TheReconciling Eliminations category eliminates the intersegment revenues ofCommercial and the intersegment costs of Regulated Businesses.

(2)          Managementutilizes segment profit (loss) to evaluate segment performance.

(3)          Thedecrease in 2003 is primarily due to lower megawatt hour (MWh) sales resultingfrom milder weather and the effects of a continuing sluggish economy.

 

59

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Financialresults by business unit for year to date September 30, 2003 andSeptember 30, 2002, are as indicated below.

 

**Business Units**

 
|                                                                   |   | **Cinergy  Business Units** |          |                      |       |                  |       |
|------------------------------------------------------------------------|--------|-----------------------------|---------------|---------------------------|------------|-----------------------|------------|
|                                                                   |   | **Commercial**              |          | **Regulated  Businesses** |       | **Power  Technology** |       | **Total** |   | **Reconciling  Eliminations (1)** |   | **Consolidated** |   |
|                                                                   |   | **(in  thousands)**         |          |
| **Year to Date  September 30, 2003**                              |   |                        |          |                      |       |                  |       |   |   |   |   |   |   |
|                                                                   |   |                        |          |                      |       |                  |       |   |   |   |   |   |   |
| **Operating revenues -**                                               |   |                        |          |                      |       |                  |       |   |   |   |   |   |   |
| **External customers**                                                 |   | **$**                       | **1,222,898** | **(3) **             | **$**      | **2,070,984**         | **(4)**    | **$** | **(25** | **)** | **$** | **3,293,857** |   | **$** | **—** |   | **$** | **3,293,857** |   |
| **Intersegment revenues**                                              |   | **120,805**                 | ** **    | **—**                | ** ** | **—**            | ** ** | **120,805** | ** ** | **(120,805** | **)** | **—** |   |
|                                                                   |   |                        | ** **    |                      | ** ** |                  | ** ** |   | ** ** |   | ** ** |   | ** ** |
| **Cost of sales -**                                                    |   |                        | ** **    |                      | ** ** |                  | ** ** |   | ** ** |   | ** ** |   | ** ** |
| **Fuel and purchased and exchanged power**                             |   |                        | ** **    |                      | ** ** |                  | ** ** |   | ** ** |   | ** ** |   | ** ** |
| **External customers**                                                 |   | **450,219**                 | ** **    | **390,113**               | ** ** | **—**            | ** ** | **840,332** | ** ** | **—** | ** ** | **840,332** | ** ** |
| **Intersegment costs**                                                 |   | **—**                  | ** **    | **120,805**               | ** ** | **—**            | ** ** | **120,805** | ** ** | **(120,805** | **)** | **—** | ** ** |
| **Gas purchased**                                                      |   | **116,823**                 | ** **    | **252,073**               | ** ** | **—**            | ** ** | **368,896** | ** ** | **—** | ** ** | **368,896** | ** ** |
|                                                                   |   |                        | ** **    |                      | ** ** |                  | ** ** |   | ** ** |   | ** ** |   | ** ** |
| **Discontinued operations, net of tax**                                |   | **8,875**                   | ** **    | **—**                | ** ** | **—**            | ** ** | **8,875** | ** ** | **—** | ** ** | **8,875** | ** ** |
| **Cumulative effect of changes in accounting  principles, net of tax** |   | **26,462**                  | ** **    | **—**                | ** ** | **—**            | ** ** | **26,462** | ** ** | **—** | ** ** | **26,462** | ** ** |
|                                                                   |   |                        | ** **    |                      | ** ** |                  | ** ** |   | ** ** |   | ** ** |   | ** ** |
| **Segment profit (loss)(2)**                                           |   | **213,641**                 | **(5) ** | **162,988**               | **(6)**    | **(13,910**           | **)**      | **362,719** |   | **—** |   | **362,719** | ** ** |
|                                                                   |   |                        | ** **    |                      | ** ** |                  | ** ** |   | ** ** |   | ** ** |   | ** ** |
| **Year to Date  September 30, 2002**                              |   |                        | ** **    |                      | ** ** |                  | ** ** |   | ** ** |   | ** ** |   | ** ** |
|                                                                   |   |                        | ** **    |                      | ** ** |                  | ** ** |   | ** ** |   | ** ** |   | ** ** |
| Operating revenues -                                                   |   |                        |          |                      |       |                  |       |   |   |   |   |   |   |
| External customers                                                     |   | $                           | 1,052,068     |                      | $          | 1,942,789             |       | $ | 62 |   | $ |   2,994,919 |   | $ | — |   | $ | 2,994,919 |   |
| Intersegment  revenues                                                 |   | 127,788                     |          | —                    |       | —                |       | 127,788 |   | (127,788 | ) | — |   |
| Cost of sales -                                                        |   |                        |          |                      |       |                  |       |   |   |   |   |   |   |
| Fuel  and purchased and exchanged power                                |   |                        |          |                      |       |                  |       |   |   |   |   |   |   |
| External  customers                                                    |   | 417,084                     |          | 344,774                   |       | —                |       | 761,858 |   | — |   | 761,858 |   |
| Intersegment  costs                                                    |   | —                      |          | 127,788                   |       | —                |       | 127,788 |   | (127,788 | ) | — |   |
| Gas  purchased                                                         |   | 43,692                      |          | 145,033                   |       | —                |       | 188,725 |   | — |   | 188,725 |   |
| Discontinued operations, net of tax                                    |   | (561                        | )             | —                    |       | —                |       | (561 | ) | — |   | (561 | ) |
| Cumulative effect of changes in accounting  principles, net of tax     |   | (10,899                     | )             | —                    |       | —                |       | (10,899 | ) | — |   | (10,899 | ) |
| Segment  profit (loss)(2)                                              |   | 97,677                      |          | 176,877                   |       | (14,174               | )          | 260,380 |   | — |   | 260,380 |   |
|                                                                        |        |                             |               |                           |            |                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

(1)          TheReconciling Eliminations category eliminates the intersegment revenues ofCommercial and the intersegment costs of Regulated Businesses.

(2)          Managementutilizes segment profit (loss) to evaluate segment performance.

(3)          Theincrease in 2003 is primarily due to the increase in average price realized onwholesale commodity transactions and the sale of synthetic fuel which began inJuly 2002.

(4)          Theincrease in 2003 is primarily due to the increase in the average price receivedper thousand cubic feet (mcf) of gas delivered reflecting a substantialincrease in the wholesale gas commodity costs, which is passed directly to theretail customer dollar-for-dollar under the state mandated gas cost recoverymechanism.  Also contributing to thisincrease was higher mcf volumes sold due to colder weather.

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

(6)          Thedecrease in 2003 is primarily due to lower MWh sales resulting from milder thannormal weather during the summer and the effects of a continuing sluggisheconomy.

 

 

60

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Total segmentassets at September 30, 2003, and December 31, 2002, were as follows:

 

**BusinessUnits**

 
|                                                |   | **Cinergy Business Units** |          |                      |       |                  |       |
|-----------------------------------------------------|--------|----------------------------|---------------|---------------------------|------------|-----------------------|------------|
|                                                |   | **Commercial**             |          | **Regulated  Businesses** |       | **Power  Technology** |       | **Total** |   | **All  Other(1)** |   | **Consolidated** |   |
|                                                |   | **(in thousands)**         |          |
| **Segment assets from continuing operations**       |   | $                          | **5,339,831** | **(2)**                   | **$**      | **7,866,961**         | **(2)**    | **$** | **168,117** | ** ** | **$** | **13,374,909** | ** ** | **$** | **101,063** | ** ** | **$** | **13,475,972** |   |
| **Segment assets from discontinued operations**     |   | **7,187**                  | ** **    | **—**                | ** ** | **—**            | ** ** | **7,187** | ** ** | **—** | ** ** | **7,187** |   |
| **Total segment assets at September 30, 2003** |   | **$**                      | **5,347,018** | ** **                | **$**      | **7,866,961**         | ** ** | **$** | **168,117** | ** ** | **$** | **13,382,096** | ** ** | **$** | **101,063** | ** ** | **$** | **13,483,159** |   |
|                                                |   |                       |          |                      |       |                  |       |   |   |   |   |   |   |
| Segment  assets from continuing operations          |   | $                          | 5,627,485     |                      | $          | 7,283,812             |       | $ | 155,252 |   | $ | 13,066,549 |   | $ | 93,214 |   | $ | 13,159,763 |   |
| Segment  assets from discontinued operations        |   | 147,265                    |          | —                    |       | —                |       | 147,265 |   | — |   | 147,265 |   |
| Total  segment assets at December 31, 2002     |   | $                          | 5,774,750     |                      | $          | 7,283,812             |       | $ | 155,252 |   | $ | 13,213,814 |   | $ | 93,214 |   | $ | 13,307,028 |   |

 

----

(1)          TheAll Other category represents miscellaneous corporate items which are notallocated to business units for purposes of segment performance measurement.

(2)          September 30,2003 balances reflect the transfer of generating assets as discussed in Note12.

 

61

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**10.**       EPS

** **

Areconciliation of EPS to EPS – assuming dilution is presented below for thequarters ended September 30, 2003 and 2002:

 
|                                       |   | **Income**                                     |        | **Shares** |        | **EPS**    |       |
|--------------------------------------------|--------|------------------------------------------------|-------------|------------|-------------|------------|------------|
|                                       |   | ***(in thousands, except per share amounts)*** |        |
| **Quarter Ended  September 30, 2003** |   |                                           |        |       |        |       |       |
| **EPS:**                                   |   |                                           | ** **  |       | ** **  |       | ** ** |
| **Net Income**                             |   | **$**                                          | **111,981** | ** ** | **177,751** | ** ** | **$**      | **0.63** | ** ** |
|                                       |   |                                           | ** **  |       | ** **  |       | ** ** |
| **Effect of dilutive securities:**         |   |                                           | ** **  |       | ** **  |       | ** ** |
| **Common stock options**                   |   |                                           | ** **  | **629**    | ** **  |       | ** ** |
| **Directors’ compensation plans**     |   |                                           | ** **  | **148**    | ** **  |       | ** ** |
| **Contingently issuable common stock**     |   |                                           | ** **  | **891**    | ** **  |       | ** ** |
| **Stock purchase contracts**               |   |                                           | ** **  | **118**    | ** **  |       | ** ** |
|                                       |   |                                           | ** **  |       | ** **  |       | ** ** |
| **EPS - assuming dilution:**               |   |                                           | ** **  |       | ** **  |       | ** ** |
| **Net income plus assumed conversions**    |   | **$**                                          | **111,981** | ** ** | **179,537** | ** ** | **$**      | **0.62** | ** ** |
|                                       |   |                                           | ** **  |       | ** **  |       | ** ** |
| Quarter Ended September 30, 2002      |   |                                           |        |       |        |       |       |
| EPS:                                       |   |                                           |        |       |        |       |       |
| Income  before discontinued operations     |   | $                                              | 132,358     |       |        |       | $          | 0.79 |   |
| Discontinued  operations, net of tax       |   | (1,790                                         | )           |       |        | (0.01      | )     |
| Net  Income                                |   | $                                              | 130,568     |       | 167,967     |       | $          | 0.78 |   |
|                                       |   |                                           |        |       |        |       |       |
| 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     |       | $          | 0.77 |   |

 

Options topurchase shares of common stock are excluded from the calculation of EPS -assuming dilution when the exercise price of these options plus unrecognizedcompensation expense are greater than the average market price of a commonshare during the period multiplied by the number of options outstanding at theend of the period because they are anti-dilutive.  Approximately 2.1 million and 3.3 million shares were excludedfrom the EPS - assuming dilution calculation for the quarters endedSeptember 30, 2003 and 2002, respectively.

 

Also excludedfrom the EPS - assuming dilution calculation for the quarters endedSeptember 30, 2003 and 2002, are up to 10.7 million and 10.8 millionshares, respectively, issuable pursuant to the stock purchase contracts issuedby **Cinergy Corp.** inDecember 2001 associated with the preferred trust securitiestransaction.  The number of sharesissuable pursuant to the stock purchase contracts is contingent upon the marketprice of **Cinergy Corp.** stock inFebruary 2005 and could range between 9.2 and 10.8 million shares.

 

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Areconciliation of EPS to EPS - assuming dilution is presented below for theyear to date September 30, 2003 and 2002:

 
|                                                                                                 |   | **Income**                                     |        | **Shares** |        | **EPS**    |       |
|------------------------------------------------------------------------------------------------------|--------|------------------------------------------------|-------------|------------|-------------|------------|------------|
|                                                                                                 |   | ***(in thousands, except per share amounts)*** |        |
| **Year to Date September 30,  2003**                                                            |   |                                           |        |       |        |       |       |
| **EPS:**                                                                                             |   |                                           | ** **  |       | ** **  |       | ** ** |
| **Income before discontinued operations and cumulative effect of changes  in accounting principles** |   | **$**                                          | **327,382** | ** ** |        | ** ** | **$**      | **1.86** | ** ** |
| **Discontinued operations, net of tax**                                                              |   | **8,875**                                      | ** **  |       | ** **  | **0.05**   | ** ** |
| **Cumulative effect of changes in accounting principles, net of tax**                                |   | **26,462**                                     | ** **  |       | ** **  | **0.15**   | ** ** |
| **Net Income**                                                                                       |   | **$**                                          | **362,719** | ** ** | **175,944** | ** ** | **$**      | **2.06** | ** ** |
|                                                                                                 |   |                                           | ** **  |       | ** **  |       | ** ** |
| **Effect of dilutive securities:**                                                                   |   |                                           | ** **  |       | ** **  |       | ** ** |
| **Common stock options**                                                                             |   |                                           | ** **  | **738**    | ** **  |       | ** ** |
| **Directors’ compensation plans**                                                               |   |                                           | ** **  | **147**    | ** **  |       | ** ** |
| **Contingently issuable common stock**                                                               |   |                                           | ** **  | **811**    | ** **  |       | ** ** |
| **Stock purchase contracts**                                                                         |   |                                           | ** **  | **39**     | ** **  |       | ** ** |
|                                                                                                 |   |                                           | ** **  |       | ** **  |       | ** ** |
| **EPS - assuming dilution:**                                                                         |   |                                           | ** **  |       | ** **  |       | ** ** |
| **Net income plus assumed conversions**                                                              |   | **$**                                          | **362,719** | ** ** | **177,679** | ** ** | **$**      | **2.04** | ** ** |
|                                                                                                 |   |                                           | ** **  |       | ** **  |       | ** ** |
| Year to Date September 30, 2002                                                                 |   |                                           |        |       |        |       |       |
| EPS:                                                                                                 |   |                                           |        |       |        |       |       |
| Income  before discontinued operations and cumulative effect of changes in accounting  principles    |   | $                                              | 271,840     |       |        |       | $          | 1.63 |   |
| Discontinued  operations, net of tax                                                                 |   | (561                                           | )           |       |        | —     |       |
| Cumulative  effect of changes in accounting principles, net of tax                                   |   | (10,899                                        | )           |       |        | (0.06      | )          |
| Net  Income                                                                                          |   | $                                              | 260,380     |       | 166,544     |       | $          | 1.57 |   |
|                                                                                                 |   |                                           |        |       |        |       |       |
| Effect  of dilutive securities:                                                                      |   |                                           |        |       |        |       |       |
| Common  stock options                                                                                |   |                                           |        | 981        |        |       |       |
| Employee  stock purchase and savings plan                                                            |   |                                           |        | 5          |        |       |       |
| Directors’  compensation plans                                                                  |   |                                           |        | 160        |        |       |       |
| Contingently  issuable common stock                                                                  |   |                                           |        | 1,138      |        |       |       |
|                                                                                                 |   |                                           |        |       |        |       |       |
| EPS  - assuming dilution:                                                                            |   |                                           |        |       |        |       |       |
| Net  income plus assumed conversions                                                                 |   | $                                              | 260,380     |       | 168,828     |       | $          | 1.55 |   |

 

Options topurchase shares of common stock are excluded from the calculation of EPS -assuming dilution when the exercise price of these options plus unrecognizedcompensation expense are greater than the average market price of a commonshare during the period multiplied by the number of options outstanding at theend of the period because they are anti-dilutive.  For year to date September 30, 2003 and 2002, approximately2.1 million and 2.7 million shares, respectively, were excluded from the EPS -assuming dilution calculation.

 

Also excludedfrom the EPS - assuming dilution calculation for year to dateSeptember 30, 2003 and 2002, are up to 10.8 million shares issuablepursuant to the stock purchase contracts issued by **Cinergy Corp.** in December 2001 associated with thepreferred trust securities transaction. The number of shares issuable pursuant to the stock purchase contractsis contingent upon the market price of **CinergyCorp.** stock in February 2005 and could range between 9.2 and10.8 million shares.

 

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**11.**       Ohio Deregulation

** **

As discussedin the 2002 10-K, **CG&E** is in amarket development period, transitioning to electric deregulation in the stateof Ohio.  The transition period isgoverned by Amended Substitute Senate Bill No. 3 (Electric Restructuring Bill)and a stipulated transition plan adopted and approved by the PUCO.  Under **CG&E’s**transition plan, retail customers continue to receive electric distributionservices from **CG&E**, but maypurchase electricity from another supplier. Retail customers that purchase electricity from another supplier receiveshopping credits from **CG&E**.  The shopping credits generally reflect thecosts of electric generation included in **CG&E’s**frozen rates.  However, shopping creditsfor the first 20 percent of electricity usage in each customer class to switchsuppliers are higher than shopping credits for subsequent switchers in order tostimulate the development of the competitive retail electric service market,pursuant to **CG&E’s** stipulatedagreement.

 

**CG&E**recovers its generation related regulatory assets andcertain other transition costs deferred during the market development periodthrough a Regulatory Transition Charge (RTC) paid by all retail customers.  As the RTC is collected from customers, **CG&E** amortizes the deferred balance ofregulatory assets and other transition costs. A portion of the RTC collected from customers is recognized in earningscurrently as a return on the deferred balance of regulatory assets and othertransition costs and as reimbursement for the difference between the shoppingcredits provided to customers and the wholesale revenues from switchedgeneration.  The ability of **CG&E** to recover its regulatory assetsand other transition costs is dependent on several factors, including, but notlimited to, the level of **CG&E’s**electric sales, prices in the wholesale power markets, and the amount ofcustomers switching to other electric suppliers.

 

OnJanuary 10, 2003, **CG&E**filed an application with the PUCO for approval of a methodology to establishhow market-based rates for non-residential customers will be determined whenthe market development period ends.  Inthe filing, **CG&E** seeks toestablish a market-based standard service offer rate for non-residentialcustomers that do not switch suppliers and a process for establishing thecompetitively bid generation service option required by the ElectricRestructuring Bill.  As ofSeptember 30, 2003, more than 20 percent of the load of **CG&E’s** commercial and industrialcustomer classes have switched to other electric suppliers.  Under its transition plan, **CG&E** may end the market developmentperiod for those classes of customers once 20 percent switching has beenachieved; however, PUCO approval of the standard service offer rate andcompetitive bidding process is required before the market development periodcan be ended.  **CG&E** is not requesting to end themarket development period for any customers at this time.  **CG&E**is unable to predict the outcome of this proceeding.

 

**12.**       Transfer of GeneratingAssets

** **

InDecember 2002, the IURC approved a settlement agreement among **PSI**, the Indiana Office of the UtilityConsumer Counselor, and the IURC Testimonial Staff authorizing **PSI’s** purchases of the Henry County,Indiana and Butler County, Ohio, gas-fired peaking plants from two non-regulatedaffiliates.  In February 2003, theFederal Energy Regulatory Commission (FERC) issued an order underSection 203 of the Federal Power Act authorizing **PSI’s** acquisitions of the plants, whichoccurred on February 5, 2003. Subsequently, in April 2003, the FERC issued a 

 

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

 

OnJuly 21, 2003, **ULH&P**filed an application with the KPSC requesting a certificate of publicconvenience and necessity to acquire **CG&E’s**ownership interests in the East Bend Generating Station, located in BooneCounty, Kentucky, the Woodsdale Generating Station, located in Butler County,Ohio, and one generating unit at the four-unit Miami Fort Generating Stationlocated in Hamilton County, Ohio.  **ULH&P** also requested KPSC approval of aback-up power supply agreement under which **CG&E**would provide replacement power to **ULH&P**whenthe transferred generating facilities are out of service, and for approval ofanother agreement under which the transferred units would be jointly dispatchedwith **CG&E’s** remaining fleet ofgenerating units.  An order from the KPSCis expected by the end of the year.  Thetransfer, which will be made at net book value, will not affect currentelectric rates for **ULH&P’s**customers, as power will be provided under the same terms as under the currentwholesale power contract with **CG&E**through at least December 31, 2006. This transfer is also contingent upon receipt of approval from the FERCand the SEC.  **ULH&P** is unable to predict the outcome of this matter.

 

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**CAUTIONARY STATEMENTS**

 

## **CAUTIONARY STATEMENTS REGARDINGFORWARD-LOOKING INFORMATION**

## ** **

This documentincludes forward-looking statements within the meaning of Section 27A ofthe Securities Act of 1933 and Section 21E of the Securities Exchange Actof 1934.  Forward-looking statements arebased on management’s beliefs and assumptions. These forward-looking statements are identified by terms and phrasessuch as “anticipate”, “believe”, “intend”, “estimate”, “expect”, “continue”,“should”, “could”, “may”, “plan”, “project”, “predict”, “will”, and similarexpressions.

 

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

 

•                  Factorsaffecting operations, such as:

 

(1)          unanticipatedweather conditions;

(2)          unscheduledgeneration outages;

(3)          unusualmaintenance or repairs;

(4)          unanticipatedchanges in costs;

(5)          environmentalincidents, including costs of compliance with existing and future environmentalrequirements; and

(6)          electrictransmission or gas pipeline system constraints.

 

•                  Legislative andregulatory initiatives.

 

•                  Additionalcompetition in electric or gas markets and continued industry consolidation.

 

•                  Financial orregulatory accounting principles.

 

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

 

•                  Changing marketconditions and other factors related to physical energy and financial tradingactivities.

 

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

 

•                  Availability of,or cost of, capital.

 

•                  Employeeworkforce factors.

 

•                  Delays and otherobstacles associated with mergers, acquisitions, and investments in jointventures.

 

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•                  Costs andeffects of legal and administrative proceedings, settlements, investigations,and claims.  Examples can be found inNote 7 of the “Notes to Condensed Financial Statements” in “Part I. FinancialInformation”.

 

We undertakeno obligation to update the information contained herein.

 

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**MD&A - LIQUIDITY AND CAPITAL RESOURCES**

 

## **ITEM 2.**  MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS

## ** **

In this report**Cinergy**(which includes **Cinergy Corp.** and all of our regulated and non-regulatedsubsidiaries) is, at times, referred to in the first person as “we”, “our”, or“us”.

 

The followingdiscussion should be read in conjunction with the accompanying condensedfinancial statements and related notes included elsewhere in this report andthe combined Form 10-K for the year ended December 31, 2002 and Form 8-Kfiled on June 10, 2003 (together, the 2002 10-K).  The results discussed below are notnecessarily indicative of the results that may occur in any future periods.

 

### **INTRODUCTION**

### ** **

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

 

•                  factorsaffecting current and future operations;

•                  potentialsources of cash for future capital expenditures;

•                  why revenues andexpenses changed from period to period; and

•                  how the aboveitems affect our overall financial condition.

 

### **ORGANIZATION**

### ** **

**CinergyCorp.**, a Delaware corporation created inOctober 1994, owns all outstanding common stock of The Cincinnati Gas& Electric Company (**CG&E**)and PSI Energy, Inc. (**PSI**), bothof which are public utility subsidiaries. As a result of this ownership, we are considered a utility holdingcompany.  Because we are a holdingcompany with material utility subsidiaries operating in multiple states, we areregistered with and are subject to regulation by the Securities and Exchange Commission(SEC) under the Public Utility Holding Company Act of 1935, as amended(PUHCA).  Our other principalsubsidiaries are:

 

•                  CinergyWholesale Energy, Inc. (Wholesale Energy);

•                  CinergyServices, Inc. (Services); and

•                  CinergyInvestments, Inc. (Investments).

 

**CG&E**,an Ohio corporation, is a combination electric and gas public utility companythat provides service in the southwestern portion of Ohio and, through itssubsidiaries, in nearby areas of Kentucky and Indiana.  **CG&E**is responsible for the majority of our power marketing and tradingactivity.  **CG&E’s** principal subsidiary, The Union Light, Heat andPower Company (**ULH&P**), is aKentucky corporation that provides electric and gas service in northernKentucky.  **CG&E’s** other subsidiaries are insignificant to its resultsof operations.

 

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

 

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Public UtilitiesCommission of Ohio (PUCO) approved costs and retail electric rates are frozenduring this market development period.

 

**PSI**,an Indiana corporation, is a vertically integrated and regulated electricutility that provides service in north central, central, and southern Indiana.

 

Services is aservice company that provides our subsidiaries with a variety of centralizedadministrative, management, and support services.  Investments holds most of our domestic non-regulated,energy-related businesses and investments, including gas marketing and tradingoperations.

 

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

 

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

 

### **LIQUIDITY AND CAPITAL RESOURCES**

### ** **

##### ***Ambient AirStandards***

##### *** ***

In 1997, theEnvironmental Protection Agency (EPA) revised the National Ambient Air QualityStandards (NAAQS) for ozone and fine particulate matter.  State ozone non-attainment area designationswere due to the EPA on July 15, 2003, and the EPA is under a court-ordereddeadline to make final designations by April 15, 2004.  The following counties in which we operatehave been tentatively designated (by their respective states) as being innon-attainment with the new ozone standard: Boone County, Kentucky; Hamilton County, Indiana; Floyd County, Indiana;Clermont County, Ohio; and Hamilton County, Ohio.  The EPA has stated that it will require state fine particulatenon-attainment designations on February 15, 2004, and will make finaldesignations by December 15, 2004. Following identification of non-attainment areas, each individual statewill identify the sources of emissions and develop emission reductionplans.  Under the Clean Air Act (CAA),individual states have up to 12 years from the date of designation to secureemissions reductions from sources contributing to the problem.  **Cinergy**cannot predict the timing or effect of either the ozone or fine particulatematter non-attainment designations at this time.

 

In the secondquarter of 2003, the EPA announced that it would propose, within the next yearor so, a regional or national regulation requiring significant reductions insulfur dioxide and nitrogen oxide (NOX) emissions from power plantsto implement the fine particulate matter NAAQS.  This regulation would be expected to impact all of **Cinergy’s** coal-fired power plants.  However, **Cinergy**cannot predict the exact amount and timing of these reductions at thistime.  Nonetheless, **Cinergy** expects that compliance costs withthese new standards will be significant.

 

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##### ***Global ClimateChange***

##### *** ***

OnSeptember 9, 2003, **Cinergy**announced an internal voluntary greenhouse gas (GHG) management goal to reduceits GHG emissions by 2010.  **Cinergy** expects to spend $21 millionbetween 2004 and 2010 on projects to reduce or offset its emissions.  **Cinergy’s**goal is to support the President’s voluntary initiative, to address shareholderinterest in the issue, and to build internal expertise in GHG management andGHG markets.

 

Our plan formanaging the potential risk and uncertainty of regulations relating to climatechange includes the following:

 

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

•                  measuring and inventoryingcompany related sources of GHG emissions;

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

•                  funding researchof more efficient and alternative electric generating technologies;

•                  funding researchto better understand the causes and consequences of climate change;

•                  encouraging aglobal discussion of the issues and how best to manage them; and

•                  advocatingcomprehensive legislation for fossil-fired power plants.

 

As discussedin **Cinergy’s** 2002 10-K, additionalenvironmental issues that could affect our liquidity include:

 

•                  Air ToxicsRegulation;

•                  Regional Haze;and

•                  Global ClimateChange

 

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

 

##### ***Pensions***

##### *** ***

**Cinergy**maintains qualified defined benefit pension plans covering substantially allUnited States (U.S.) employees meeting certain minimum age and servicerequirements.  Plan assets consist ofinvestments in equity and fixed income securities.  Due to the decline in market value of the investment portfolioover the last few years, assets held in trust to satisfy plan obligations havedecreased.  Additionally, recentdecreases in long-term interest rates have the effect of increasing themeasured liability for funding purposes. As a result of these events, future funding obligations could increasesubstantially.  **Cinergy’s** minimum required contributionsfor the calendar year 2003 are $11 million, as compared to $4 million for thecalendar year 2002.  We made anadditional contribution of $63 million in the calendar year 2003.

 

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##### ***Long-term debtdue within one year***

##### *** ***

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

 

As discussedin Note 3 of the “Notes to Condensed Financial Statements” in “Part I.  Financial Information”, proceeds from theJune 2003 issuance of debt by **CG&E**wereused for the repayment of outstanding indebtedness including**the early redemption of the 7.20% firstmortgage bonds mentioned above.  InSeptember 2003, **PSI** issued$400 million principal amount of its 5.00% Debentures largely using theproceeds from this issuance for the early redemption of two intercompanypromissory notes to **Cinergy Corp.**totaling$376 million.  **Cinergy Corp.**plans to use the proceeds topartially fund the maturity of the 6.125% and 6.25% debentures discussedabove.  In the interim, **Cinergy Corp.**has used the proceeds torepay short-term indebtedness.

 

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

 

##### ***Other InvestingActivities***

##### *** ***

Our ability toinvest in growth initiatives is limited by certain legal and regulatoryrequirements, including PUHCA.  ThePUHCA limits the types of non-utility businesses in which **Cinergy** and other registered holdingcompanies under PUHCA can invest as well as the amount of capital that can beinvested in permissible non-utility businesses.  Also, the timing and amount of investments in the non-utilitybusinesses is dependent on the development and favorable evaluations ofopportunities.  Under the PUHCArestrictions, we are allowed to invest or commit to invest in certainnon-utility businesses, including:

 

•                  Exempt WholesaleGenerators (EWG) and Foreign Utility Companies (FUCO)

 

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

 

A FUCO is a company all of whose utility assets andoperations are located outside the U.S. and which are used for the generation,transmission, or distribution of electric energy for sale at retail orwholesale, or the distribution of gas at retail.  A FUCO may not derive any income, directly or indirectly, fromthe generation, transmission or distribution of electric energy for sale or thedistribution of gas at retail within the U.S. An entity claiming status as a FUCO must provide notification thereof tothe SEC under PUHCA.

 

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

 

•                  QualifyingFacilities and Energy-Related Non-utility Entities

 

SEC regulations under the PUHCA permit **Cinergy** and other registered holdingcompanies to invest and/or guarantee an amount equal to 15 percent ofconsolidated capitalization (consolidated capitalization is the sum of *Notes payable and other short-term obligations*,*Long-term debt* (including amountsdue within one year), *Preferred TrustSecurities*, *Cumulative PreferredStock of Subsidiaries*, and total *CommonStock Equity*) in domestic qualifying cogeneration and small powerproduction plants (qualifying facilities) and certain other domesticenergy-related non-utility entities.  AtSeptember 30, 2003, we had invested and/or guaranteed approximately $735****million of the $1.4 billion available.

 

•                  Energy-RelatedAssets

 

**Cinergy**has been granted SEC authority under PUHCA to invest up to $1 billion innon-utility Energy-Related Assets within the U.S., Canada, and Mexico.  Energy-Related Assets include, natural gasexploration, development, production, gathering, processing, storage andtransportation facilities and equipment, liquid oil reserves and storagefacilities, and associated assets, facilities and equipment, but would excludeany assets, facilities or equipment that would cause the owner or operatorthereof to be deemed a public utility company. As of September 30, 2003, we did not have any investments in theseEnergy-Related Assets.

 

•                  InfrastructureServices Companies

 

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

 

•                  Design,construction, retrofit and maintenance of utility transmission and distributionsystems;

•                  Installation andmaintenance of natural gas pipelines, water and sewer pipelines, andunderground and overhead telecommunications networks; and

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

 

At September 30, 2003, we had investedapproximately $25 million in these Infrastructure Services companies.

 

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##### ***Guarantees***

##### *** ***

We are subjectto an SEC order under the PUHCA, which limits the amounts **Cinergy Corp.** can have outstanding underguarantees at any one time to $2 billion. As of September 30, 2003, we had $538 million outstanding under theguarantees issued, of which approximately 86 percent represents guarantees ofobligations reflected on **Cinergy’s**Balance Sheets.  The amount outstandingrepresents **Cinergy Corp.’s**guarantees of liabilities and commitments of its consolidated subsidiaries,unconsolidated subsidiaries, and joint ventures.  SeeNote 7(a) of the “Notes to Condensed Financial Statements” in “Part I. Financial Information” for adiscussion of guarantees in accordance with Financial Accounting StandardsBoard (FASB) Interpretation No. 45, *Guarantor’sAccounting and Disclosure Requirements for Guarantees, Including IndirectGuarantees of Indebtedness of Others* (Interpretation 45).  Interpretation 45 requires disclosure ofmaximum potential liabilities for guarantees issued on behalf of unconsolidatedsubsidiaries and joint ventures and under indemnification clauses in variouscontracts.  The Interpretation 45disclosure differs from the PUHCA restrictions in that it requires acalculation of maximum potential liability, rather than actual amountsoutstanding; it excludes guarantees issued on behalf of consolidatedsubsidiaries; and it includes potential liabilities under indemnificationclauses.

 

##### ***CollateralRequirements***

##### *** ***

**Cinergy**has certain contracts in place, primarily with tradingcounterparties, that require the issuance of collateral in the event our debtratings are downgraded below investment grade. Based upon our September 30, 2003 trading portfolio, if such anevent were to occur, **Cinergy** wouldbe required to issue up to approximately $64 million in collateral related toits gas and power trading operations, of which $34 million is related to **CG&E**.

 

#### **Capital Resources**

#### ** **

We meet ourcurrent and future capital requirement needs through a combination ofinternally and externally generated funds, including the issuance of debtand/or equity securities.  **Cinergy** believes that it has adequate financialresources to meet its future needs.

 

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##### ***Notes Payableand Other Short-term Obligations***

##### *** ***

We arerequired to secure authority to issue short-term debt from the SEC under thePUHCA and from the PUCO.  The SEC underthe PUHCA regulates the issuance of short-term debt by **Cinergy Corp.**, **PSI**, and **ULH&P**.  The PUCO has regulatory jurisdiction overthe issuance of short-term debt by **CG&E**.

 
|                          |   | **Short-term Regulatory  Authority  September 30, 2003** |   |
|-------------------------------|--------|---------------------------------------------------------------|--------|
|                          |   | ***(millions)***                                              |   |
|                          |   | **Authority**                                                 |   | **Outstanding** |   |
|                          |   |                                                          |   |   |   |
| **Cinergy Corp.**             |   | $                                                             | 5,000  | (1) | $ | 209 |   |
| **CG&E**and  subsidiaries |   | 671                                                           |   | 9 |   |
| **PSI**                       |   | 600                                                           |   | 165 |   |
| **ULH&P**                 |   | 65                                                            |   | 24 |   |
|                               |        |                                                               |        |  |  |  |  |

 

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

 

For thepurposes of quantifying regulatory authority, short-term debt includesrevolving credit borrowings, uncommitted credit line borrowings, intercompanymoney pool obligations, and commercial paper.

 

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**CinergyCorp.’s**short-term borrowing consists primarily ofunsecured revolving lines of credit and the sale of commercial paper.  **CinergyCorp.’s** $1 billion revolving credit facilities and $800 millioncommercial paper program also support the short-term borrowing needs of **CG&E** and **PSI**.  In addition, **Cinergy**, **CG&E**,and **PSI** maintain uncommitted linesof credit.  These facilities are notfirm sources of capital but rather informal agreements to lend money, subjectto availability, with pricing determined at the time of advance.  The following is a summary of outstandingshort-term borrowings for **Cinergy**,**CG&E**, **PSI**, and **ULH&P**,including variable rate pollution control notes:

 
|                           |   | **Short-term Borrowings  September 30, 2003** |         |
|--------------------------------|--------|----------------------------------------------------|--------------|
|                           |   | **Established  Lines**                             |         | **Outstanding** | ** ** | **Unused** | ** ** | **Standby  Liquidity(3)** |   | **Available  Revolving  Lines of  Credit** | ** ** |
|                           |   | ***(in millions)***                                | *** *** |
|                           |   |                                               | * *     |   | * * |   | * * |   | * * |   | * * |
| **Cinergy**                    |   |                                               |         |   |   |   |   |   |   |   |   |
| **Cinergy Corp.**              |   |                                               |         |   |   |   |   |   |   |   |   |
| Revolving lines                |   | $                                                  | 1,000        |   | $ | — |   | $ | 1,000 |   | $ | 224 |   | $ | 776 |   |
| Uncommitted lines(1)           |   | 65                                                 |         | — |   | 65 |   |   |   |   |   |
| Commercial paper(2)            |   |                                               |         | 209 |   | 591 |   |   |   |   |   |
|                           |   |                                               |         |   |   |   |   |   |   |   |   |
| Operating companies            |   |                                               |         |   |   |   |   |   |   |   |   |
| Uncommitted lines(1)           |   | 75                                                 |         | — |   | 75 |   |   |   |   |   |
| Pollution control notes        |   |                                               |         | 112 |   |   |   |   |   |   |   |
|                           |   |                                               |         |   |   |   |   |   |   |   |   |
| Non-regulated subsidiaries     |   |                                               |         |   |   |   |   |   |   |   |   |
| Revolving lines                |   | 17                                                 |         | 9 |   | 8 |   |   |   | 8 |   |
| Short-term debt                |   |                                               |         | 7 |   |   |   |   |   |   |   |
|                           |   |                                               |         |   |   |   |   |   |   |   |   |
| **Cinergy Total**              |   |                                               |         | $ | 337 |   |   |   |   |   | $ | 784 |   |
|                           |   |                                               |         |   |   |   |   |   |   |   |   |
| **CG&E**  and subsidiaries |   |                                               |         |   |   |   |   |   |   |   |   |
| Uncommitted lines(1)           |   | $                                                  | 15           |   | $ | — |   | $ | 15 |   |   |   |   |   |
| Pollution control notes        |   |                                               |         | 112 |   |   |   |   |   |   |   |
| Money pool                     |   |                                               |         | 9 |   |   |   |   |   |   |   |
| **CG&E Total**             |   |                                               |         | $ | 121 |   |   |   |   |   |   |   |
|                           |   |                                               |         |   |   |   |   |   |   |   |   |
| **PSI**                        |   |                                               |         |   |   |   |   |   |   |   |   |
| Uncommitted lines(1)           |   | $                                                  | 60           |   | $ | — |   | $ | 60 |   |   |   |   |   |
| Money pool                     |   |                                               |         | 165 |   |   |   |   |   |   |   |
| **PSI Total**                  |   |                                               |         | $ | 165 |   |   |   |   |   |   |   |
|                           |   |                                               |         |   |   |   |   |   |   |   |   |
| **ULH&P**                  |   |                                               |         |   |   |   |   |   |   |   |   |
| Money pool                     |   |                                               |         | $ | 24 |   |   |   |   |   |   |   |
| **ULH&P Total**            |   |                                               |         | $ | 24 |   |   |   |   |   |   |   |
|                                |        |                                                    |              |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

(1)       Outstandingamounts may be greater than established lines as uncommitted lenders are, attimes, willing to loan funds in excess of the established lines.

(2)       Thecommercial paper program is limited to $800 million and is supported by **Cinergy Corp.’s** revolving lines.

(3)       Standbyliquidity is reserved against the revolving lines to support the commercialpaper program and outstanding letters of credit (currently $209 million and $15million, respectively).

 

75

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AtSeptember 30, 2003, **Cinergy Corp.**had $776 million remaining unused and available capacity relating to its $1billion revolving credit facilities. These revolving credit facilities included the following:

 
| **Credit Facility**         |   | **Expiration**  |     | **Established  Lines** |     | **Outstanding  and  Committed** |     | **Unused and  Available** |     |
|-----------------------------|--------|-----------------|----------|------------------------|----------|---------------------------------|----------|---------------------------|----------|
|                        |   |            |     |                   |     | ***(in millions)***             |     |                      |     |
|                        |   |            | * * |                   | * * |                            | * * |                      | * * |
| 364-day senior revolving    |   | April 2004 |     |                   |     |                            |     |                      |     |
| Direct borrowing            |   |            |     | $                      |     |                            | $        | —                    |     | $ |   |   |
| Commercial paper support    |   |            |     |                   |     | 209                             |     |                      |     |
|                        |   |            |     |                   |     |                            |     |                      |     |
| Total 364-day facility      |   |            |     | 600                    |     | 209                             |     | 391                       |     |
|                        |   |            |     |                   |     |                            |     |                      |     |
| Three-year senior revolving |   | May 2004   |     |                   |     |                            |     |                      |     |
| Direct borrowing            |   |            |     |                   |     | —                          |     |                      |     |
| Commercial paper support    |   |            |     |                   |     | —                          |     |                      |     |
| Letter of Credit support    |   |            |     |                   |     | 15                              |     |                      |     |
|                        |   |            |     |                   |     |                            |     |                      |     |
| Total three-year facility   |   |            |     | 400                    |     | 15                              |     | 385                       |     |
|                        |   |            |     |                   |     |                            |     |                      |     |
| Total credit facilities     |   |            |     | $                      | 1,000    |                            | $        | 224                       |     | $ | 776 |   |

 

InApril 2003, **Cinergy Corp.**successfully placed a $600 million, 364-day senior unsecured revolving creditfacility.  This facility replaced the$600 million, 364-day facility that expired April 30, 2003.

 

In our creditfacilities, **Cinergy Corp.** hascovenanted to maintain:

 

•                  a consolidatednet worth of $2 billion; and

•                  a ratio ofconsolidated indebtedness to consolidated total capitalization not in excess of65 percent.

 

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

 

•                  bankruptcy;

•                  defaults in thepayment of other indebtedness; and

•                  judgmentsagainst the company that are not paid or insured.

 

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

 

As discussedin Note 1(g)(*iii*) of the “Notesto Condensed Financial Statements” in “Part I. Financial Information”,long-term debt increased in the third quarter of 2003 resulting from theadoption of Interpretation No. 46, *Consolidationof Variable Interest Entities* (Interpretation 46).

 

76

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

 

*Variable Rate Pollution Control Notes*

* *

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

 

*Money Pool*

* *

**CinergyCorp.**, Services, and our operating companiesparticipate in a money pool arrangement to better manage cash and workingcapital requirements.  Under thisarrangement, those companies with surplus short-term funds provide short-termloans 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 moneypool arrangement are shown as a component of *Notesreceivable from affiliated companies* and/or *Notes payable to affiliated companies* onthe Balance Sheets of **CG&E**, **PSI**, and **ULH&P**.  Any money pool borrowings outstanding reducethe unused and available short-term debt regulatory authority of **CG&E**, **PSI**,and **ULH&P**.

 

##### ***Long-term Debt***

##### *** ***

We arerequired to secure authority to issue long-term debt from the SEC under thePUHCA and the state utility commissions of Ohio, Kentucky, and Indiana.  The SEC under the PUHCA regulates theissuance of long-term debt by **Cinergy Corp.**  The respective state utility commissionsregulate the issuance of long-term debt by our operating companies.

 

77

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A summary ofour long-term debt authorizations at September 30, 2003, was as follows:

 
|                              |   | **Authorized**      |     | **Used** |     | **Available** |     |
|-----------------------------------|--------|---------------------|----------|----------|----------|---------------|----------|
|                              |   | ***(in millions)*** |     |
|                              |   |                | * * |     | * * |          | * * |
| **Cinergy Corp.**                 |   |                |     |     |     |          |     |
| PUHCA total capitalization(1)     |   | $                   | 5,000    |     | $        | 1,601         |     | $ | 3,399 |   |
|                              |   |                |     |     |     |          |     |
| **CG&E**  and subsidiaries(2) |   |                |     |     |     |          |     |
| State Public Utility Commissions  |   | 575                 |     | 400      |     | 175           |     |
|                              |   |                |     |     |     |          |     |
| **PSI**                           |   |                |     |     |     |          |     |
| State Public Utility Commission   |   | 500                 |     | 483      |     | 17            |     |
|                              |   |                |     |     |     |          |     |
| **ULH&P**                     |   |                |     |     |     |          |     |
| State Public Utility Commission   |   | 75                  |     | —   |     | 75            |     |
|                                   |        |                     |          |          |          |               |          |  |  |  |

 

----

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

(2)          Includesamounts for **ULH&P**.

 

**CinergyCorp.** has an effective shelf registration statementwith the SEC relating to the issuance of up to $750 million in any combinationof common stock, preferred stock, stock purchase contracts or unsecured debtsecurities, of which approximately $574 million remains available for issuance.  **CG&E**has an effective shelf registration statement with the SEC relating to theissuance of up to $500 million in any combination of unsecured debt securities,first mortgage bonds, or preferred stock, of which $100 million remainsavailable for issuance.  **PSI** has an effective shelf registrationstatement with the SEC relating to the issuance of up to $700 million in anycombination of unsecured debt securities, first mortgage bonds, or preferredstock, of which $300 million remains available for issuance.  **ULH&P**has effective shelf registration statements with the SEC relating to theissuance of up to $50 million in unsecured debt securities and up to $40million in first mortgage bonds, of which $30 million in unsecured debtsecurities and $20 million in first mortgage bonds remain available forissuance.

 

##### ***Off-BalanceSheet Financing***

##### *** ***

As discussedin the 2002 10-K, **Cinergy** usesspecial-purpose entities (SPE) to finance various projects.  The FASB issued Interpretation 46 inJanuary 2003.  This interpretationsignificantly changes the consolidation requirements for SPEs and certain otherentities subject to its scope.  Forfurther discussions see “Consolidation of Variable Interest Entities” under“Accounting Changes” in MD&A-Future.

 

As ofSeptember 30, 2003, **Cinergy**held investments in various unconsolidated subsidiaries which are accounted forunder the equity method and had guaranteed approximately $8 million of the debtof these entities.  InOctober 2003, **Cinergy Corp.**acquiredcontrolling interest in these entities, and as a result, the entities will beconsolidated by **Cinergy Corp.**

 

78

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***Securities Ratings***

 

As ofSeptember 30, 2003, the major credit ratings agencies rated our securitiesas follows:

 
|                        |   | **Fitch(1)** |   | **Moody’s(2)** |   | **S&P(3)** |   |
|-----------------------------|--------|--------------|--------|---------------------|--------|----------------|--------|
|                        |   |         |   |                |   |           |   |
| **Cinergy Corp.**           |   |         |   |                |   |           |   |
| Corporate  Credit           |   | BBB+         |   | Baa2                |   | BBB+           |   |
| Senior  Unsecured Debt      |   | BBB+         |   | Baa2                |   | BBB            |   |
| Commercial  Paper           |   | F-2          |   | P-2                 |   | A-2            |   |
| Preferred  Trust Securities |   | BBB+         |   | Baa2                |   | BBB            |   |
|                        |   |         |   |                |   |           |   |
| **CG&E**                |   |         |   |                |   |           |   |
| Senior  Secured Debt        |   | A-           |   | A3                  |   | A-             |   |
| Senior  Unsecured Debt      |   | BBB+         |   | Baa1                |   | BBB            |   |
| Junior  Unsecured Debt      |   | BBB          |   | Baa2                |   | BBB-           |   |
| Preferred  Stock            |   | BBB          |   | Baa3                |   | BBB-           |   |
| Commercial  Paper           |   | F-2          |   | P-2                 |   | Not Rated      |   |
|                        |   |         |   |                |   |           |   |
| **PSI**                     |   |         |   |                |   |           |   |
| Senior  Secured Debt        |   | A-           |   | A3                  |   | A-             |   |
| Senior  Unsecured Debt      |   | BBB+         |   | Baa1                |   | BBB            |   |
| Junior  Unsecured Debt      |   | BBB          |   | Baa2                |   | BBB-           |   |
| Preferred  Stock            |   | BBB          |   | Baa3                |   | BBB-           |   |
| Commercial  Paper           |   | F-2          |   | P-2                 |   | Not Rated      |   |
|                        |   |         |   |                |   |           |   |
| **ULH&P**               |   |         |   |                |   |           |   |
| Senior  Unsecured Debt      |   | Not Rated    |   | Baa1                |   | BBB            |   |

 

----

(1)          FitchIBCA (Fitch)

(2)          Moody’sInvestors Service (Moody’s)

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

 

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

 

Thesesecurities ratings may be revised or withdrawn at any time, and each ratingshould be evaluated independently of any other rating.

 

##### ***Equity***

##### *** ***

As discussedin the 2002 10-K, the SEC has granted **CinergyCorp.** authority to increase its total capitalization by $5billion.  The proceeds from any newissuances will be used for general corporate purposes.

 

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

 

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

 

**Cinergy Corp**.contributed $200 million in capital to **PSI**intwo separate $100 million capital contributions in the second and thirdquarters of 2003, respectively.  Thesecapital contributions were made to support **PSI’s**current credit ratings.

### ** **

### **79**

### ****

###  

**MD&A – QUARTERLY RESULTS OF OPERATIONS -HISTORICAL**

 

### **2003 QUARTERLY RESULTS OF OPERATIONS -HISTORICAL**

### ** **

#### **Summary of Results**

#### ** **

Electric andgas gross margins and net income for **Cinergy**,**CG&E**, and **PSI** for the quarters endedSeptember 30, 2003 and 2002 were as follows:

 
|                   |   | **Cinergy (1)**      |        | **CG&E and subsidiaries** |     | **PSI**    |     |
|------------------------|--------|----------------------|-------------|-------------------------------|----------|------------|----------|
|                   |   | **2003**             |        | **2002**                      |     | **2003**   |     | **2002** |   | **2003** |   | **2002** |   |
|                   |   | ***(in thousands)*** |        |
|                   |   |                 | * *    |                          | * * |       | * * |   | * * |   | * * |   | * * |
| Electric  gross margin |   | **$**                | **590,641** |                          | $        | 663,069    |     | **$** | **330,046** |   | $ | 356,158 |   | **$** | **259,298** |   | $ | 302,089 |   |
| Gas  gross margin      |   | **44,951**           |        | 54,790                        |     | **34,176** |     | 28,858 |   | **—** |   | — |   |
| Net  income            |   | **111,981**          |        | 130,568                       |     | **78,863** |     | 71,769 |   | **37,592** |   | 67,643 |   |
|                        |        |                      |             |                               |          |            |          |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

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

 

**Cinergy’s**net income for the third quarter of 2003 was $112million ($.62 per share on a diluted basis) as compared to $131 million ($.77per share on a diluted basis) for the same period last year.  Income before taxes for the period was $148million compared to $181 million for the same period a year ago.  Electric margins at **PSI** and **CG&E**declined due to milder weather during the quarter.  Gas margins decreased primarily due to the results of our gastrading operation, Cinergy Marketing & Trading, LP (Marketing &Trading), although this was partially offset by higher usage by **CG&E’s** retail customers due to coolerweather.  During the quarter, fewertrading opportunities were available as a result of market conditions.  Also contributing to the decrease in net incomewere costs associated with the likely resolution of claims with respect to thebankruptcy of Enron Corp. (Enron). Partially offsetting these decreases in net income were reductions intransmission costs and property taxes.

 

#### **Electric Operating Revenues**

 
|      |   | **Cinergy (1)**     |     | **CG&E and subsidiaries** |     | **PSI**      |     |
|-----------|--------|---------------------|----------|-------------------------------|----------|--------------|----------|
|      |   | **2003**            |     | **2002**                      |     | **% Change** |     | **2003** |   | **2002** |   | **% Change** |   | **2003** |   | **2002** |   | **% Change** |   |
|      |   | ***(in millions)*** |     |
|      |   |                | * * |                          | * * |         | * * |   | * * |   | * * |   | * * |   | * * |   | * * |   | * * |
| Retail    |   | **$**               | **744**  |                          | $        | 805          |     | (8 | ) | **$** | **377** |   | $ | 429 |   | (12 | ) | **$** | **367** |   | $ | 377 |   | (3 | ) |
| Wholesale |   | **141**             |     | 109                           |     | 29           |     | **65** |   | 27 |   | N/M |   | **61** |   | 79 |   | (23 | ) |
| Other     |   | **36**              |     | 51                            |     | (29          | )        | **33** |   | 37 |   | (11 | ) | **9** |   | 15 |   | (40 | ) |
| Total     |   | **$**               | **921**  |                          | $        | 965          |     | (5 | ) | **$** | **475** |   | $ | 493 |   | (4 | ) | **$** | **437** |   | $ | 471 |   | (7 | ) |

 

----

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

N/M Not meaningful to an understanding of thechange.

 

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

 

80

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comparableperiod of 2002, contributing to a reduction in residential MWh sales ofapproximately 15 percent and 10 percent for **CG&E**and **PSI**, respectively.  Also contributing to the decrease were lowercommercial and industrial MWh sales reflecting the effects of a continuingsluggish economy.  Partially offsettingthis decrease for **PSI** were increased tariff adjustmentsassociated with the fuel cost recovery mechanism and certain constructionprograms.

 

Wholesalerevenues increased for **Cinergy** and**CG&E** for the quarter endedSeptember 30, 2003, as compared to the same period last year.  Due to lower retail demand as a result ofmild weather, more **Cinergy**generation capacity was available for wholesale transactions.  In addition **CG&E’s** increase and **PSI’s**decrease in wholesale revenues reflects the implementation of the new jointoperating agreement as discussed in the 2002 10-K.  With this agreement, the majority of new wholesale contractsentered into are originated on behalf of **CG&E**.

 

Other electricoperating revenues decreased for **Cinergy**,**CG&E** and **PSI**for the quarter endedSeptember 30, 2003, as compared to 2002. **Cinergy’s**and **CG&E’s**decrease was primarily the result ofdecreased third party coal sales and lower transmission revenues.  **PSI’s** decrease was primarily the result of decreased transmission revenues.

 

#### **Gas Operating Revenues**

 
|                        |   | **Cinergy (1)**     |     | **CG&E and subsidiaries** |     |
|-----------------------------|--------|---------------------|----------|-------------------------------|----------|
|                        |   | **2003**            |     | **2002**                      |     | **% Change** |   | **2003** |   | **2002** |   | **% Change** |   |
|                        |   | ***(in millions)*** |     |
|                        |   |                | * * |                          | * * |   | * * |   | * * |   | * * |   | * * |
| Retail                      |   | **$**               | **66**   |                          | $        | 41 |   | 61 |   | **$** | **66** |   | $ | 41 |   | 61 |   |
| Wholesale                   |   | **10**              |     | 26                            |     | (62 | ) | **—** |   | — |   | — |   |
| Storage  and transportation |   | **49**              |     | 36                            |     | 36 |   | **—** |   | — |   | — |   |
| Other                       |   | **—**          |     | 1                             |     | N/M |   | **—** |   | — |   | — |   |
| Total                       |   | **$**               | **125**  |                          | $        | 104 |   | 20 |   | **$** | **66** |   | $ | 41 |   | 61 |   |

 

----

(1) The results of **Cinergy** alsoinclude amounts related to non-registrants.

N/M Not meaningful to an understanding of thechange.

 

*Gas operating revenues* increased for **Cinergy** and **CG&E** for the quarter ended September 30, 2003, ascompared to 2002.  Retail gas revenuesincreased due to both an increase in thousand cubic feet (mcf) delivered and anincrease in price received per mcf.  **CG&E’s** volumes delivered increasedprimarily due to cooler weather in the third quarter of 2003, as compared to2002.  The higher prices per mcf reflectan increase in tariff adjustments associated with the gas main replacementprogram, the Ohio excise taxes, and the gas cost recovery mechanism.

 

**CG&E’s**wholesale gas commodity cost is passed directly to the retail customerdollar-for-dollar under the gas cost recovery mechanism mandated by statelaw.  For further information see Note7(n) in the “Notes to Condensed Financial Statements” in “Part I. FinancialInformation”.

 

**Cinergy**began reporting revenues from energy trading derivative contracts on a netbasis in 2003, in accordance with the required adoption of Emerging Issues TaskForce (EITF) Issue 02-3, *Issues Involved inAccounting for Derivatives Contracts Held for Trading Purposes and*

 

81

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

 

**Cinergy’s**wholesale gas revenues (which represent net gains and losses on energy tradingactivity) decreased for the quarter ended September 30, 2003, as comparedto 2002, primarily due to fewer trading opportunities in 2003 as a result ofmarket conditions.

 

**Cinergy’s**gas storage and transportation revenues increased forthe quarter ended September 30, 2003, as compared to 2002 due to anoverall increase in the number of storage contracts that were entered into inthe third quarter of 2003.

 

#### **Other Revenues**

#### ** **

*Other revenues*for **Cinergy** decreased for the quarter ended September 30,2003, as compared to 2002, primarily due to a decrease in the production of syntheticfuel as a result of a reduction in electric production by the third partypurchaser of our synthetic fuel.

 

#### **Operating Expenses**

 
|                            |   | **Cinergy (1)**     |     | **CG&E and subsidiaries** |     | **PSI**      |     |
|---------------------------------|--------|---------------------|----------|-------------------------------|----------|--------------|----------|
|                            |   | **2003**            |     | **2002**                      |     | **% Change** |     | **2003** |   | **2002** |   | **% Change** |   | **2003** |   | **2002** |   | **% Change** |   |
|                            |   | ***(in millions)*** |     |
|                            |   |                | * * |                          | * * |         | * * |   | * * |   | * * |   | * * |   | * * |   | * * |   | * * |
| Fuel                            |   | **$**               | **287**  |                          | $        | 270          |     | 6 |   | **$** | **111** |   | $ | 114 |   | (3 | ) | **$** | **164** |   | $ | 140 |   | 17 |   |
| Purchased  and exchanged power  |   | **43**              |     | 32                            |     | 34           |     | **34** |   | 23 |   | 48 |   | **14** |   | 29 |   | (52 | ) |
| Gas  purchased                  |   | **30**              |     | 13                            |     | N/M          |     | **32** |   | 13 |   | N/M |   | **—** |   | — |   | — |   |
| Gas  storage and transportation |   | **50**              |     | 36                            |     | 39           |     | **—** |   | — |   | — |   | **—** |   | — |   | — |   |
| Operation  and maintenance      |   | **317**             |     | 364                           |     | (13          | )        | **133** |   | 150 |   | (11 | ) | **113** |   | 129 |   | (12 | ) |
| Depreciation                    |   | **105**             |     | 100                           |     | 5            |     | **43** |   | 49 |   | (12 | ) | **48** |   | 40 |   | 20 |   |
| Taxes  other than income taxes  |   | **56**              |     | 65                            |     | (14          | )        | **45** |   | 50 |   | (10 | ) | **10** |   | 13 |   | (23 | ) |
| Total                           |   | **$**               | **888**  |                          | $        | 880          |     | 1 |   | **$** | **398** |   | $ | 399 |   | — |   | **$** | **349** |   | $ | 351 |   | (1 | ) |

 

----

(1) The results of **Cinergy** also include amounts related tonon-registrants.

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

 

82

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##### ***Fuel***

##### *** ***

*Fuel* primarilyrepresents the cost of coal, natural gas, and oil that is used to generateelectricity.  The following tabledetails the changes to fuel expense from the quarter ended September 30,2002, to the quarter ended September 30, 2003:

 
|                                           |   | **Cinergy (1)**     |       | **CG&E** |       | **PSI** |       |
|------------------------------------------------|--------|---------------------|------------|--------------|------------|---------|------------|
|                                           |   | ***(in millions)*** |       |
|                                           |   |                | * *   |         | * *   |    | * *   |
| Fuel  expense – September 30, 2002   |   | $                   | 270        |         | $          | 114     |       | $ | 140 |   |
|                                           |   |                |       |         |       |    |       |
| *Increase (decrease) due to changes in:*       |   |                |       |         |       |    |       |
| Price  of fuel                                 |   | 3                   |       | 2            |       | 1       |       |
| Deferred  fuel cost(2)                         |   | 21                  |       | —       |       | 21      |       |
| Fuel  consumption                              |   | 2                   |       | —       |       | 2       |       |
| Other(3)                                       |   | (9                  | )          | (5           | )          | —  |       |
|                                           |   |                | ** ** |         | ** ** |    | ** ** |
| **Fuel expense –**September 30, 2003 |   | **$**               | **287**    | ** **   | **$**      | **111** | ** ** | **$** | **164** | ** ** |

 

----

(1) The results of **Cinergy** also include amounts related tonon-registrants.

(2) Deferred fuelcost represents changes in fuel expense associated with **PSI's** fuel adjustment charge, whichrecovers retail fuel costs from customers on a dollar-for-dollar basis.  Amounts that have been deferred are adjustedthrough fuel expense as fuel adjustment charge revenue is collected fromcustomers.

(3) Includes costsof third party coal sales.

 

##### ***Purchased andExchanged Power***

##### *** ***

*Purchased and exchanged power expense*increased for **Cinergy** for thequarter ended September 30, 2003, as compared to the same period lastyear.  The majority of **Cinergy’s** and **CG&E’s**increase is a result of an increase in the pricepaid per MWh and a lower amount of deferred purchased power cost.  Offsetting the increase was a decrease inpurchased and exchanged power expense at **PSI**.  More generation is available to serve **PSI** native load customers due to therepowering of **PSI’s** NoblesvilleStation and the addition of peaking plants as discussed in Note 12 in the“Notes to Condensed Financial Statements” in “Part I. Financial Information”.

 

##### ***Gas Purchased***

##### *** ***

*Gas purchased* expense increased for **Cinergy** and **CG&E** for the quarter ended September 30, 2003, ascompared to 2002.  This increase wasprimarily due to an increase in the average cost per mcf of gas purchased.  In addition, **CG&E’s** gas customers usage increased approximately 17percent in the quarter as compared to the same period last year.  **CG&E’s**wholesale commodity cost is passed directly to the retail customerdollar-for-dollar under the gas cost recovery mechanism mandated by state law.

 

##### ***Gas Storage andTransportation***

##### *** ***

Gas storageand transportation expense increased for **Cinergy**for the quarter ended September 30, 2003, as compared to 2002, primarilydue to an increase in storage withdrawals which reflects increased storagecontract activity.  Gas storage expenseis recognized on our Statements of Income as natural gas is sold frominventory.

 

83

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##### ***Operation andMaintenance***

##### *** ***

*Operation and maintenance* expense decreasedfor **Cinergy**,**CG&E**, and **PSI**for the quarter ended September 30, 2003, as comparedto 2002.  The decrease for **Cinergy** was a result of a decrease in thecosts associated with the production of synthetic fuel in the third quarter of2003 compared to 2002.  Partiallyoffsetting the decrease for **Cinergy**were the costs associated with our anticipated resolution of claims withrespect to the bankruptcy of Enron.  **Cinergy’s**, **CG&E’s**, and **PSI’s**decreases were also affected by a decrease in the amortization of certainregulatory assets due to lower electric revenues.  Also contributing to the decrease for **Cinergy**,**CG&E**,and **PSI** were decreasedtransmission costs.

 

##### ***Depreciation***

##### *** ***

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

 

##### ***Taxes OtherThan Income Taxes***

##### *** ***

*Taxes other than income taxes*expensedecreased for **Cinergy**, **CG&E**, and **PSI**for the quarter ended September 30, 2003, as comparedto 2002.  This decrease was primarilydue to lower property taxes.

 

#### **Miscellaneous Income (Expense) - Net**

#### ** **

*Miscellaneous Income (Expense) - Net* increasedfor **Cinergy**for the quarter endedSeptember 30, 2003, as compared to 2002. **Cinergy’s** increaseprimarily reflects the interest income on the notes receivable of two newlyconsolidated subsidiaries.  See Note1(g)(*iii*) of the “Notes toCondensed Financial Statements” in “Part I. Financial Information” for furtherdetails regarding the consolidation of these entities.  In addition, **CG&E’s** increase and **PSI’s**decrease was a result of a final reconciliation between the two entities of aprevious demutualization of a medical insurance carrier used by both companies.

 

#### **Interest Expense**

#### ** **

*Interest**Expense*increased for **Cinergy**, **CG&E**, and **PSI**for the quarter ended September 30, 2003, as comparedto 2002.  The impact of a decrease inshort-term interest rates was more than offset by an increase in the amount oflong-term debt outstanding for **Cinergy**,**CG&E**, and **PSI**. Interest on long-term debt increased as a result of the additional debtrecorded with the 

 

84

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consolidationof two new entities and the recognition of a note payable to a trust inaccordance with the adoption of Interpretation 46, see Note 1(g)(*iii*) of the “Notes to Condensed FinancialStatements” in “Part I. Financial Information”.

 

#### **Preferred Dividend Requirement of SubsidiaryTrust**

#### ** **

*Preferred Dividend Requirement of Subsidiary Trust*decreased for **Cinergy** for thequarter ended September 30, 2003, as a result of the implementation ofInterpretation 46.  EffectiveJuly 1, 2003, the preferred trust securities and the related dividends areno longer reported in **Cinergy’s**financial statements.  See Note 1(g)(*iii*) of the “Notes to Condensed FinancialStatements” in “Part I. Financial Information” for further details.

 

#### **Income Taxes**

#### ** **

*Income Taxes* expense decreased for **Cinergy** and **PSI**for the quarter ended September 30, 2003, as comparedto 2002.  **Cinergy’s** decrease was primarily a result of a decrease intaxable book income.  Based on itscurrent estimates, **Cinergy** expectsthat its effective income tax rate for 2003 will approximate 24 percent.  **PSI’s**decrease was primarily due to a decrease in taxable book income.  This decrease was partially offset by anincrease in the Indiana state income tax rate in 2003.

 

85

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

** **

** **

### **2003 YEAR TO DATE RESULTS OF OPERATIONS -HISTORICAL**

### ** **

#### **Summary of Results**

#### ** **

Electric andgas gross margins and net income for **Cinergy**,**CG&E**, and **PSI** for the nine months endedSeptember 30, 2003 and 2002 were as follows:

 
|                   |   | **Cinergy (1)**      |          | **CG&E and subsidiaries** |     | **PSI**     |     |
|------------------------|--------|----------------------|---------------|-------------------------------|----------|-------------|----------|
|                   |   | **2003**             |          | **2002**                      |     | **2003**    |     | **2002** |   | **2003** |   | **2002** |   |
|                   |   | ***(in thousands)*** |          |
|                   |   |                 | * *      |                          | * * |        | * * |   | * * |   | * * |   | * * |
| Electric  gross margin |   | **$**                | **1,672,622** |                          | $        | 1,769,425   |     | **$** | **919,244** |   | $ | 949,150 |   | **$** | **743,501** |   | $ | 795,513 |   |
| Gas  gross margin      |   | **269,482**          |          | 185,620                       |     | **174,912** |     | 132,036 |   | **—** |   | — |   |
| Net  income            |   | **362,719**          |          | 260,380                       |     | **247,018** |     | 202,024 |   | **94,398** |   | 135,440 |   |
|                        |        |                      |               |                               |          |             |          |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

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

 

**Cinergy’s**net income for the nine months endedSeptember 30, 2003, was $363 million ($2.04 per share on a diluted basis)as compared to $260 million ($1.55 per share on a diluted basis) for the sameperiod last year.  Income before taxesfor the period was $432 million compared to $398 million for the same period ayear ago.  The increase in 2003 incomeprimarily reflects higher gas margins from wholesale and retail operations in2003 and $66 million in charges associated with employee severance programs andthe write-offs of certain equipment and technology investments that were takenin the second quarter of 2002.  Theincreased gas margins primarily reflect the results of our domestic gas tradingoperation, Marketing & Trading, as well as increased volume of retail gassales due to colder weather during the first and third quarters of 2003.  Also contributing to the gas margin increaseover 2002 was the impact of accounting changes that required certain gas contractsand inventory to be accounted for on the accrual basis beginning in 2003.  Offsetting the increase in gas margins was adecrease in electric margins due to milder than normal weather in the secondand third quarter of 2003.  **Cinergy’s**increased net income alsoreflects a net gain resulting from the implementation of certain accountingchanges, which have been reflected as a cumulative effect of changes inaccounting principles (see Note 1(g)(*v*)of the “Notes to Condensed Financial Statements” in “Part I. FinancialInformation”), and gains realized in the second quarter of 2003 from thedisposal of discontinued operations and lower income taxes resulting primarilyfrom tax credits associated with the production of synthetic fuel which beganin July 2002.

 

86

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#### **Electric Operating Revenues**

 
|      |   | **Cinergy  (1)**    |      | **CG&E  and subsidiaries** |     | **PSI**      |     |
|-----------|--------|---------------------|-----------|--------------------------------|----------|--------------|----------|
|      |   | **2003**            |      | **2002**                       |     | **% Change** |     | **2003** |   | **2002** |   | **% Change** |   | **2003** |   | **2002** |   | **% Change** |   |
|      |   | ***(in millions)*** |      |
|      |   |                | * *  |                           | * * |         | * * |   | * * |   | * * |   | * * |   | * * |   | * * |   | * * |
| Retail    |   | **$**               | **2,063** |                           | $        | 2,129        |     | (3 | ) | **$** | **1,030** |   | $ | 1,110 |   | (7 | ) | **$** | **1,033** |   | $ | 1,020 |   | 1 |   |
| Wholesale |   | **364**             |      | 283                            |     | 29           |     | **194** |   | 95 |   | N/M |   | **156** |   | 168 |   | (7 | ) |
| Other     |   | **86**              |      | 119                            |     | (28          | )        | **77** |   | 96 |   | (20 | ) | **21** |   | 28 |   | (25 | ) |
| Total     |   | **$**               | **2,513** |                           | $        | 2,531        |     | (1 | ) | **$** | **1,301** |   | $ | 1,301 |   | — |   | **$** | **1,210** |   | $ | 1,216 |   | — |   |

 

----

(1) The results of **Cinergy** also include amounts related tonon-registrants.

N/M  Not meaningful to anunderstanding of the change.

 

*Electric operating revenues* decreased for **Cinergy**and **PSI** for the nine months ended September 30, 2003, ascompared to 2002.

 

Electricretail operating revenues decreased for **Cinergy**for the nine months ended September 30, 2003, compared to the same periodlast year.  Contributing to **Cinergy’s** decrease was a decrease in MWhsales for **PSI** and **CG&E** due to milder than normal weatherduring the summer and a sluggish economy. For the nine months ended September 30, 2003, cooling degree-dayswere 39 percent lower for **CG&E**and 37 percent lower for **PSI** ascompared to 2002.  The mild summerweather was offset by a colder heating season during the first half of theyear.  For the nine months endedSeptember 30, 2003, heating degree-days were approximately 17 percent and19 percent higher for **CG&E** and**PSI**, respectively.  The net effect contributed to a decrease inresidential MWh of approximately four percent for **CG&E** and approximately two percent for **PSI**. The sluggish economy caused **CG&E’s**and **PSI’s** commercial andindustrial MWh sales to decrease by approximately two percent for the ninemonths ended September 30, 2003, compared to the same period lastyear.  Partially offsetting **Cinergy’s** decrease in electric retailrevenue from lower MWh sales was an increase in the price paid per MWh at **PSI**during 2003.  Increases in tariff adjustments associated with the fuel costrecovery mechanism and certain construction projects caused **PSI’s** retail operating revenue to increasefor 2003.

 

**Electric wholesalerevenues increased for**Cinergy and CG&Eand decreased for PSI for the nine months ended September 30, 2003,as compared to the same period last year. Due to lower retail demand as a result of milder weather, more Cinergygeneration capacity was available for wholesale transactions in the second andthird quarters of 2003.  In addition, CG&E’s increase and PSI’s decrease in wholesale revenues reflects theimplementation of the new joint operating agreement as discussed in the 200210-K.  With this agreement, the majorityof new wholesale contracts entered into are originated on behalf of CG&E.

** **

Other electricoperating revenues decreased for **Cinergy**,**CG&E**, and **PSI** for the nine months ended September 30, 2003, ascompared to 2002, primarily reflecting lowertransmission revenues.  The decrease for**Cinergy**and **CG&E** also reflects a reduction in thirdparty coal sales.

 

87

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#### **Gas Operating Revenues**

 
|                        |   | **Cinergy  (1)**    |     | **CG&E  and subsidiaries** |     |
|-----------------------------|--------|---------------------|----------|--------------------------------|----------|
|                        |   | **2003**            |     | **2002**                       |     | **% Change** |   | **2003** |   | **2002** |   | **% Change** |   |
|                        |   | ***(in millions)*** |     |
|                        |   |                | * * |                           | * * |   | * * |   | * * |   | * * |   | * * |
| Retail                      |   | **$**               | **424**  |                           | $        | 274 |   | 55 |   | **$** | **424** |   | $ | 274 |   | 55 |   |
| Wholesale                   |   | **73**              |     | 50                             |     | 46 |   | **—** |   | — |   | — |   |
| Storage  and transportation |   | **140**             |     | 48                             |     | N/M |   | **—** |   | — |   | — |   |
| Other                       |   | **1**               |     | 2                              |     | (50 | ) | **3** |   | 3 |   | — |   |
| Total                       |   | **$**               | **638**  |                           | $        | 374 |   | 71 |   | **$** | **427** |   | $ | 277 |   | 54 |   |

 

----

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

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

 

*Gas operating revenues* increased for **Cinergy** and **CG&E** for the nine months ended September 30, 2003, ascompared to 2002.  **Cinergy’s**and **CG&E’s** retail gas revenues increased due to an increase inretail sales volumes and higher prices received per mcf.  The increase in retail gas sales volumes wasprimarily the result of the colder weather in the first and third quarters of2003 as compared to the same period in 2002. The higher price per mcf reflects an increase in **CG&E’s** base rates, as approved by thePUCO in May 2002, and tariff adjustments associated with the gas mainreplacement program and gas cost recovery mechanism.  For further information see Note 7(n) in the “Notes to CondensedFinancial Statements” in “Part I. Financial Information”.**  CG&E’s**wholesale gas commodity cost is passed directly to the retail customerdollar-for-dollar under the gas cost recovery mechanism mandated by state law.

 

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

 

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

 

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

 

88

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#### **Operating Expenses**

 
|                            |   | **Cinergy (1)**      |      | **CG&E and subsidiaries** |     | **PSI**      |     |
|---------------------------------|--------|----------------------|-----------|-------------------------------|----------|--------------|----------|
|                            |   | **2003**             |      | **2002**                      |     | **% Change** |     | **2003** |   | **2002** |   | **% Change** |   | **2003** |   | **2002** |   | **% Change** |   |
|                            |   | ***(in  millions)*** |      |
|                            |   |                 | * *  |                          | * * |         | * * |   | * * |   | * * |   | * * |   | * * |   | * * |   | * * |
| Fuel                            |   | **$**                | **746**   |                          | $        | 680          |     | 10 |   | **$** | **304** |   | $ | 304 |   | — |   | **$** | **415** |   | $ | 349 |   | 19 |   |
| Purchased  and exchanged power  |   | **94**               |      | 82                            |     | 15           |     | **78** |   | 48 |   | 63 |   | **52** |   | 71 |   | (27 | ) |
| Gas  purchased                  |   | **252**              |      | 145                           |     | 74           |     | **252** |   | 145 |   | 74 |   | **—** |   | — |   | — |   |
| Gas  storage and transportation |   | **117**              |      | 44                            |     | N/M          |     | **—** |   | — |   | — |   | **—** |   | — |   | — |   |
| Operation  and maintenance      |   | **973**              |      | 962                           |     | 1            |     | **394** |   | 394 |   | — |   | **349** |   | 387 |   | (10 | ) |
| Depreciation                    |   | **314**              |      | 294                           |     | 7            |     | **142** |   | 146 |   | (3 | ) | **135** |   | 116 |   | 16 |   |
| Taxes  other than income taxes  |   | **201**              |      | 202                           |     | —       |     | **155** |   | 150 |   | 3 |   | **42** |   | 47 |   | (11 | ) |
| Total                           |   | **$**                | **2,697** |                          | $        | 2,409        |     | 12 |   | **$** | **1,325** |   | $ | 1,187 |   | 12 |   | **$** | **993** |   | $ | 970 |   | 2 |   |

 

----

(1) The results of **Cinergy** also include amounts related tonon-registrants.

N/M  Not meaningful to anunderstanding of the change.

 

##### ***Fuel***

##### *** ***

*Fuel* primarilyrepresents the cost of coal, natural gas, and oil that is used to generateelectricity. The following table details the changes to fuel expense from thenine months ended September 30, 2002, to the nine months endedSeptember 30, 2003:

 
|                                       |   | **Cinergy  (1)**     |       | **CG&E** |       | **PSI** |       |
|--------------------------------------------|--------|----------------------|------------|--------------|------------|---------|------------|
|                                       |   | ***(in  millions)*** |       |
|                                       |   |                 | * *   |         | * *   |    | * *   |
| Fuel  expense - September 30, 2002    |   | $                    | 680        |         | $          | 304     |       | $ | 349 |   |
|                                       |   |                 |       |         |       |    |       |
| *Increase (decrease) due to changes in:*   |   |                 |       |         |       |    |       |
| Price  of fuel                             |   | 15                   |       | —       |       | 15      |       |
| Deferred  fuel cost(2)                     |   | 44                   |       | —       |       | 44      |       |
| Fuel  consumption                          |   | 9                    |       | 2            |       | 7       |       |
| Other  (3)                                 |   | (2                   | )          | (2           | )          | —  |       |
|                                       |   |                 | ** ** |         | ** ** |    | ** ** |
| **Fuel expense - September 30, 2003** |   | **$**                | **746**    | ** **   | **$**      | **304** | ** ** | **$** | **415** | ** ** |

 

----

(1) The results of **Cinergy** also include amounts related tonon-registrants.

(2) Deferred fuelcost represents changes in fuel expense associated with **PSI's** fuel adjustment charge, whichrecovers retail fuel costs from customers on a dollar-for-dollar basis.  Amounts that have been deferred are adjustedthrough fuel expense as fuel adjustment charge revenue is collected fromcustomers.

(3) Includes costsof third party coal sales.

 

##### ***Purchased andExchanged Power***

##### *** ***

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

 

89

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**PSI’s** Noblesville station and the addition ofpeaking plants as discussed in Note 12 in the “Notes to Condensed FinancialStatements” in “Part I. Financial Information”.

 

##### ***Gas Purchased***

##### *** ***

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

 

##### ***Gas Storageand Transportation***

##### *** ***

Gas storageand transportation expense increased for **Cinergy**for the nine months ended September 30, 2003, as compared to 2002,primarily due to an increase in storage activity in 2003.  Also contributing to this increase was anincrease in storage capacity in the third quarter of 2002 that was optimizedduring the first quarter of 2003. Marketing & Trading began engaging in significant storage activitiesat the end of the second quarter of 2002. Gas storage expense is recognized on our Statements of Income as naturalgas is sold from inventory.

 

##### ***Operation andMaintenance***

##### *** ***

*Operation and maintenance* expense increasedfor **Cinergy** and decreased for**PSI**for the nine months endedSeptember 30, 2003, as compared to 2002. **Cinergy’s**increase includescosts associated with the production of synthetic fuel, which began inJuly 2002, and the costs associated with **Cinergy’s**anticipated resolution of claims with respect to the bankruptcy of Enron.  Partially offsetting **Cinergy’s** increase and primarilyattributing to **PSI’s** decrease werelower transmission costs and costs associated with employee severance programsin 2002.

 

##### ***Depreciation***

##### *** ***

*Depreciation* expense increased for **Cinergy** and **PSI** and decreased for **CG&E**for the nine months ended September 30, 2003, as compared to 2002.  **Cinergy’s**and **PSI’s** increase was primarilydue to the addition of depreciable plant. Also contributing to **Cinergy’s**increase was the addition of the depreciable equipment associated with theproduction of synthetic fuel.  **CG&E’s** decrease was primarilyattributable to an increase in the estimated useful lives of certain assetsresulting from a new depreciation study completed during the third quarter of2003.  Also contributing to **CG&E’s** decrease was the discontinuanceof accruing costs of removal for our generating assets (which was previouslyincluded as part of *Depreciation*expense) as a result of the adoption of Statement 143.  See Note 1(g)(*vii*) of the “Notes to Condensed Financial Statements” in“Part I. Financial Information” for further details.  Prior periods were not restated for the adoption of Statement143.

 

90

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##### ***Taxes OtherThan Income Taxes***

##### *** ***

*Taxes other than income taxes* expenseincreased for **CG&E**anddecreased for **PSI** for the ninemonths ended September 30, 2003, as compared to 2002.  The increase for **CG&E** was primarily attributable to an increase in Ohioexcise taxes.  **PSI’s** decrease was primarily the result oflower property taxes.

 

#### **Equity in Earnings of UnconsolidatedSubsidiaries**

#### ** **

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

 

#### **Miscellaneous Income (Expense) - Net**

#### ** **

*Miscellaneous Income (Expense) - Net* increasedfor **Cinergy** and **CG&E** for the nine months endedSeptember 30, 2003, as compared to 2002. **Cinergy’s** increaseprimarily reflects the 2002 write-offs of certain equipment and technologyinvestments and the interest income on the notes receivable of two newlyconsolidated subsidiaries.  See Note 4of the “Notes to Condensed Financial Statements” in “Part I. FinancialInformation” for further details.  **Cinergy’s**and**CG&E’s** increase also reflects a gain on the sale of non-utilityproperty and the recognition of expenses in 2002 for previously deferred coststhat were denied recovery in the final order of **ULH&P’s** gas rate case. In addition, **CG&E’s**increase and **PSI’s** decrease was aresult of a final reconciliation between the two entities of a previousdemutualization of a medical insurance carrier used by both companies.

 

#### **Interest Expense**

#### ** **

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

 

#### **Income Taxes**

#### ** **

*Income Taxes*expense decreased for **Cinergy**and **PSI** for the nine months ended September 30, 2003, ascompared to 2002.  **Cinergy’s** decrease was primarily a resultof the tax credits associated with the production and sale of synthetic fuel,which began in July 2002.  Based onits current estimates, **Cinergy**expects that its effective income tax rate for 2003 will approximate 24percent.  **PSI’s** decrease was primarily due to a decrease in taxable bookincome.  This decrease was partiallyoffset by a reversal in 2002 of tax reserves, which were no longer needed, andan increase in the Indiana state income tax rate in 2003.

 

91

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#### **Cumulative Effect of Changes in AccountingPrinciples, Net of Tax**

#### ** **

In 2003, **Cinergy**,**CG&E**, and **PSI**recognizeda *Cumulative effect of changes in accountingprinciples, net of tax* gain/(loss) of approximately $26 million, $31million, and $(0.5) million, respectively. The cumulative effect of changes in accounting principles was a resultof the adoption of Statement 143 and the rescission of EITF Issue 98-10, *Accounting for Contracts Involved in Energy Tradingand Risk Management Activities* (EITF 98-10).  See Note 1(g)(*vii*) of the “Notes to Condensed Financial Statements” in“Part I. Financial Information” for further information.

 

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

 

#### **Discontinued Operations**

#### ** **

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

 

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**ULH&P**

 

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

 

Electric andgas gross margins and net income for **ULH&P**for the nine months ended September 30, 2003 and 2002, were as follows:

 
|                   |   | **ULH&P**        |       |
|------------------------|--------|----------------------|------------|
|                   |   | **2003**             |       | **2002** |   |
|                   |   | ***(in thousands)*** |       |
|                   |   |                 | * *   |   | * * |
| Electric  gross margin |   | **$**                | **49,419** |   | $ | 52,255 |   |
| Gas  gross margin      |   | **28,437**           |       | 22,652 |   |
| Net  income            |   | **11,477**           |       | 9,110 |   |
|                        |        |                      |            |  |  |  |  |

 

#### **Electric Operating Revenues**

#### ** **

*Electric operating revenues* decreased for thenine months ended September 30, 2003, as compared to 2002.  The majority of the decrease was a result ofthe milder weather in the second and third quarter of 2003, as compared to thesame period in 2002, that resulted in residential usage decreasing byapproximately four percent.  Theresidential usage decrease accounts for approximately 75 percent of theelectric operating revenue decrease.  The remaining electric operating revenue decrease is associatedwith decreased usage of commercial and industrial customers reflecting theeffects of a continuing sluggish economy.

 

#### **Electricity Purchased from Parent Company forResale**

#### ** **

*Electricity purchased from parent company for resale*decreased for the nine months ended September 30, 2003, as compared to2002, primarily due to the mild weather in the second and third quarters of2003 and the sluggish economy.

 

#### **Gas Operating Revenues**

#### ** **

*Gas operating revenues* increased for the ninemonths ended September 30, 2003, as compared to 2002.  This increase was primarily due to anincrease in mcf sold and higher prices received per mcf, as a result of colderweather in the first and third quarters of 2003.  New base rates for **ULH&P**,which were effective January 31, 2002, and tariff adjustments associatedwith the gas main replacement program and gas cost recovery mechanism alsocontributed to this increase.  **ULH&P’s** wholesale gas commodity cost ispassed directly to the retail customer dollar-for-dollar under the gas costrecovery mechanism mandated by state law. For further information see Note 6(o) in the “Notes to CondensedFinancial Statements” in “Part I. Financial Information”.

 

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#### **Gas Purchased**

#### ** **

*Gas purchased* expense increased for the ninemonths ended September 30, 2003, as compared to 2002, due to increasedpurchases and higher prices paid per mcf, primarily the result of colderweather in the first three months of 2003, which drove up the demand and theprice for natural gas.  In addition, thethird quarter of 2003 was colder than 2002 necessitating a slight increase ingas purchases.  The wholesale gascommodity cost is passed directly to the retail customer dollar-for-dollarunder the gas cost recovery mechanism mandated under state law.

 

##### ***Operation andMaintenance***

##### *** ***

*Operation and maintenance* expense increasedfor the nine months ended September 30, 2003, as compared to 2002,primarily due to increased amortization of demand side management program costsand increased maintenance of overhead lines.

 

#### **Miscellaneous Income (Expense) - Net**

#### ** **

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

 

#### **Income Taxes**

#### ** **

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

 

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**MD&A - RESULTS OFOPERATIONS - FUTURE**

 

### **FUTUREEXPECTATIONS/TRENDS**

### ** **

In the “FutureExpectations/Trends” section, we discuss electric and gas industrydevelopments, market risk sensitive instruments and positions, and accountingmatters.  Each of these discussions willaddress the current status and potential future impact on our results ofoperations and financial position.

 

### **ELECTRIC INDUSTRY**

### ** **

#### **Wholesale Market Developments**

#### ** **

##### ***Supply-sideActions***

##### *** ***

InDecember 2001, the  Indiana UtilityRegulatory Commission (IURC) approved **PSI’s**plan for converting its Noblesville generating station from coal to naturalgas.  The conversion increases theelectric generating capacity at the plant from approximately 100 megawatts (MW)to 300 MW.  The conversion was completedand the station became operational in June 2003.  In addition to increasing capacity, overall emissions to theenvironment will be reduced.

 

InDecember 2002, the IURC approved a settlement agreement among **PSI**, the Indiana Office of the UtilityConsumer Counselor, and the IURC Testimonial Staff authorizing **PSI’s** purchases of the Henry County,Indiana and Butler County, Ohio, gas-fired peaking plants from twonon-regulated affiliates.  InFebruary 2003, the FERC issued an order under Section 203 of theFederal Power Act authorizing **PSI’s**acquisition of the plants, which occurred on February 5, 2003.  Subsequently, in April 2003, the FERCissued a tolling order allowing additional time to consider a request forrehearing filed in response to the February 2003 FERC order.  At this time, we cannot predict the outcomeof this matter.

 

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

 

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#### **Retail Market Developments**

#### ** **

##### ***Ohio***

##### *** ***

As discussedin the 2002 10-K, **CG&E** is in amarket development period, transitioning to electric deregulation in the stateof Ohio.  The transition period isgoverned by Amended Substitute Senate Bill No. 3 (Electric Restructuring Bill)and a stipulated transition plan adopted and approved by the PUCO.  Under **CG&E’s**transition plan, retail customers continue to receive electric distributionservices from **CG&E**, but maypurchase electricity from another supplier. Retail customers that purchase electricity from another supplier receiveshopping credits from **CG&E**.  The shopping credits generally reflect thecosts of electric generation included in **CG&E’s**frozen rates.  However, shopping creditsfor the first 20 percent of electricity usage in each customer class to switchsuppliers are higher than shopping credits for subsequent switchers in order tostimulate the development of the competitive retail electric service market,pursuant to **CG&E’s** stipulatedagreement.

 

**CG&E**recovers its generation related regulatory assets andcertain other transition costs deferred during the market development periodthrough a Regulatory Transition Charge (RTC) paid by all retail customers.  As the RTC is collected from customers, **CG&E** amortizes the deferred balance ofregulatory assets and other transition costs. A portion of the RTC collected from customers is recognized in earningscurrently as a return on the deferred balance of regulatory assets and othertransition costs and as reimbursement for the difference between the shoppingcredits provided to customers and the wholesale revenues from switchedgeneration.  The ability of **CG&E** to recover its regulatory assetsand other transition costs is dependent on several factors, including, but notlimited to, the level of **CG&E’s**electric sales, prices in the wholesale power markets, and the amount ofcustomers switching to other electric suppliers.

 

OnJanuary 10, 2003, **CG&E**filed an application with the PUCO for approval of a methodology to establishhow market-based rates for non-residential customers will be determined whenthe market development period ends.  Inthe filing, **CG&E** seeks toestablish a market-based standard service offer rate for non-residentialcustomers that do not switch suppliers and a process for establishing thecompetitively bid generation service option required by the ElectricRestructuring Bill.  As ofSeptember 30, 2003, more than 20 percent of the load of **CG&E’s** commercial and industrialcustomer classes have switched to other electric suppliers.  Under its transition plan, **CG&E** may end the market developmentperiod for those classes of customers once 20 percent switching has beenachieved; however, PUCO approval of the standard service offer rate andcompetitive bidding process is required before the market development periodcan be ended.  **CG&E** is not requesting to end themarket development period for any customers at this time.  **CG&E**is unable to predict the outcome of this proceeding.

 

##### ***Federal Update***

##### *** ***

*Energy Bill*

* *

The U.S. Houseof Representatives (House) passed the Energy Policy Act inApril 2003.  The legislation, as itpassed the House, includes repeal of the PUHCA, as well as tax incentives forgas and electric distribution lines, and combined heat and power and renewableenergy projects.

 

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

 

*Clear Skies Legislation*

* *

President Bushhas proposed environmental legislation that would replace a series of CAArequirements for coal-fired power plants with a cap and trade program.  The President’s “Clear Skies Initiative”would seek an overall 70 percent reduction in emissions from power plants overa phased-in reduction schedule beginning in 2010 and continuing to2018.  The Senate Environment and PublicWorks Committee has held several hearings on the “Clear Skies Initiative”proposal and is expected to vote on the legislation in the third quarter of2003.  The House Subcommittee on Energyand Air Quality of the House Energy and Commerce Committee has also heldhearings on the “Clear Skies Initiative” but timing for consideration of thebill in subcommittee is less certain. At this time,**Cinergy**cannot predict whether or not “Clear Skies Initiative” legislation will pass.

 

#### **Midwest Independent Transmission SystemOperator, Inc. (Midwest ISO)**

#### ** **

##### ***Historical***

##### *** ***

As part of theeffort to create a competitive wholesale power marketplace, the FERC approvedthe formation of the Midwest ISO during 1998. In that same year, **Cinergy**agreed to join the Midwest ISO in preparation for meeting anticipated changesin the FERC regulations and future deregulation requirements.  The Midwest ISO was established as anon-profit organization to maintain functional control over the combinedtransmission systems of its members.

 

##### ***FERC Orders***

##### *** ***

The FERCissued an order in December 2001, in response to protests of the MidwestISO’s proposed methodology related to the calculation of its administrativeadder fees for the services it provides. **Cinergy** and a number ofother parties filed protests to the proposed methodology, suggesting, amongother things, that the methodology was inconsistent with the transmissionowners’ prior agreement with the Midwest ISO and selectively allowed onlyindependent transmission companies to choose which unbundled administrativeadder services they wished to purchase from the Midwest ISO.  A partial settlement was reached in the FERCproceeding, resolving the issues addressed by **Cinergy’s**protest in a manner favorable to **Cinergy**.  The settlement agreement was approved by theFERC in a February 24, 2003 order with implementation initiated onMarch 1, 2003.  The settlementresults in approximately $25 million of administrative adder credits to beshared among the Midwest ISO transmission owners and customers responsible forSchedule 10 charges.  **Cinergy’s** share was approximately $3million.

 

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As discussedin the 2002 10-K, the FERC issued a Notice of Proposed Rulemaking (NOPR) in2002 on “Remedying Undue Discrimination through Open Access TransmissionService and Standard Electricity Market Design”.  This NOPR would have required all public utilities with openaccess transmission tariffs to file modifications to their tariffs to implementFERC’s proposed standardization transmission services and standardizedwholesale electric market design.  TheFERC has not taken action on this NOPR and has indicated that they will notrequire such tariff revisions if the utility has filed similar tariff revisionsin their own region, in our case, the Midwest ISO.

 

In response toprior FERC orders, on July 25, 2003, the Midwest ISO filed with the FERCproposed changes to its existing transmission tariff to add terms andconditions to implement Day-Ahead and Real-Time Energy Markets and FinancialTransmission Rights (Energy Markets Tariff). In October 2003, the FERC approved a Midwest ISO filing to withdrawthis Energy Markets Tariff.  **Cinergy** anticipates that the Midwest ISOwill file a new Energy Markets Tariff at sometime in the future; however, atthis time, **Cinergy** cannot predictthe effect any such filing will have on its results of operations.

 

#### **Significant Rate Developments**

#### ** **

##### ***PSI RetailElectric Rate Case***

##### *** ***

InDecember 2002, **PSI** filed apetition with the IURC seeking approval of a base retail electric rateincrease.  **PSI** has filed initial and rebuttal testimony in this case andthe final set of hearings will take place in November 2003.  Based on updated testimony filed inOctober 2003, **PSI** proposes anincrease in annual revenues of approximately $180 million, or an averageincrease of approximately 14 percent over **PSI’s**retail electric rates in effect at the end of 2002.  An IURC decision is expected in the first quarter of 2004.

 

##### ***PSI PurchasedPower Tracker (Tracker)***

##### *** ***

The Trackerwas designed to provide for the recovery of costs related to purchases of powernecessary to meet native load requirements to the extent such costs are notrecovered through the existing fuel adjustment clause.

 

**PSI**is authorized to seek recovery of 90 percent of its purchased power expensesthrough the Tracker (net of the displaced energy portion recovered through thefuel recovery process and net of the mitigation credit portion), with theremaining 10 percent deferred for subsequent recovery in **PSI’s**general retail electric ratecase.  In March 2002, **PSI** filed a petition with the IURC seekingapproval to extend the Tracker process beyond the summer of 2002.  A hearing was held in January 2003, andin June 2003 the IURC approved the extension for up to an additional twoyears with the ultimate determination concerning **PSI’s** continued use of the Tracker process to be made in **PSI’s** pending retail electric rate case.

 

InJune 2002, **PSI** also filed apetition with the IURC seeking approval of the recovery through the Tracker ofits actual summer 2002 purchased power costs. In May 2003, the IURC approved **PSI’s**recovery of $18 million related to its summer 2002 purchased power costs, andalso 

 

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

 

InJune 2003, **PSI** filed a petitionwith the IURC seeking approval of the recovery through the Tracker of itsactual summer 2003 purchased power costs. Testimony was filed in support of **PSI’s**request in August 2003.  Anevidentiary hearing is scheduled for March 2004.

 

##### ***PSI FuelAdjustment Charge***

##### *** ***

InJune 2001, **PSI** filed apetition with the IURC requesting authority to recover $16 million in underbilled deferred fuel costs incurred from March 2001 throughMay 2001.  The IURC approvedrecovery of these costs subject to refund pending the findings of aninvestigative sub-docket.  Thesub-docket was opened to investigate the reasonableness of, and underlyingreasons for, the under billed deferred fuel costs.  A hearing was held in July 2002, and in March 2003 theIURC issued an order giving final approval to **PSI’s**recovery of the $16 million.

 

##### ***PSIConstruction Work in Progress (CWIP) Ratemaking Treatment for NOXEquipment***

##### *** ***

InApril 2003, **PSI** filed anapplication with the IURC requesting that its CWIP rate adjustment mechanism beupdated for expenditures through December 2002 related to NOXequipment currently being installed at certain **PSI** generation facilities. CWIP ratemaking treatment allows for the recovery of carrying costs oncertain pollution control equipment while and after the equipment is underconstruction.  A final order was issuedon September 24, 2003.  The ordergranted substantially all of **PSI’s**requested relief, leaving only the issue of whether certain equipment qualifiedfor CWIP ratemaking treatment to be decided in the first quarter of 2004.  Amounts approved for recovery are presentedbelow:

 

**PSI CWIP Ratemaking for NOX Equipment**

 
|                                                         |   | **PSI**             |   |
|--------------------------------------------------------------|--------|---------------------|--------|
|                                                         |   | ***(in millions)*** |   |
|                                                         |   |                |   |
| Total retail CWIP expenditures as of  December 31, 2002 |   | $                   | 305    |   |
|                                                         |   |                |   |
| Total amount requested through CWIP mechanism(1)             |   | 35                  |   |
| Less: previously approved CWIP mechanism  amounts            |   | (28                 | )      |
| Incremental CWIP mechanism amounts                           |   | $                   | 7      |   |

 

----

(1)          Amountsinclude retail customers’ portion only and represent an annual return onqualified NOX equipment expenditures.

 

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

 

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component ofAFUDC will not be deferred for financial reporting after the related assets areplaced in service.

 

##### ***Environmental ComplianceCost Recovery***

##### *** ***

In 2002, theIndiana General Assembly passed legislation that, among other things,encourages the deployment of advanced technologies that reduce regulated airemissions, while allowing the continued use of high sulfur Midwestern coal inexisting electric generating plants. The legislation authorizes the IURC to provide financial incentives toutilities that deploy such advanced technologies.  **PSI** is currentlyseeking IURC approval, under this new law, of a cost tracking mechanism for **PSI’s** NOX equipment-relateddepreciation and operation and maintenance costs, authority to use accelerated(18-year) depreciation for its NOX compliance equipment, andapproval of a NOX emission allowance purchase and salestracker.  In October, **PSI** reached a settlement with the other partiesto this case that, if approved by the IURC, will provide for the reliefdescribed above for most of **PSI’s** environmental compliance equipment.  **PSI** expects an IURCorder addressing approval of the settlement agreement by the end of 2003.  The issue of whether the remainder of **PSI’s** environmental compliance projectsqualify for financial incentives is expected to be decided in the secondquarter of 2004.

 

##### ***CG&ETransmission and Distribution Rate Filings***

##### *** ***

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

 

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

 

### **GAS INDUSTRY**

### ** **

#### **ULH&P Gas Rate Case**

#### ** **

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

 

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the new tracking mechanism rates. At the present time, **ULH&P** cannot predict the timing or outcome of this litigation.

 

#### **CG&E Gas Rate Case**

#### ** **

In the thirdquarter of 2001, **CG&E** filed aretail gas rate case with the PUCO seeking to increase base rates for naturalgas distribution service and requesting recovery through a tracking mechanismof the costs of an accelerated gas main replacement program with an estimatedcapital cost of $716 million over 10 years. **CG&E** entered into asettlement agreement with most of the parties and a hearing on this matter washeld in April 2002.  An order wasissued in May 2002, in which the PUCO approved the settlement agreementand authorized a base rate increase of approximately $15 million, or 3.3percent overall, effective May 30, 2002. In addition, the PUCO authorized **CG&E**to implement the tracking mechanism to recover the costs of the accelerated gasmain replacement program, subject to certain rate caps that increase in amountannually through May 2007, through the effective date of new rates in **CG&E’s** next retail gas rate case.  In the fourth quarter of 2002, **CG&E**filed an application to increaseits rates under the tracking mechanism. In April 2003, **CG&E**entered into a settlement agreement with the parties, providing for an increaseof $6.5 million, which the PUCO subsequently approved.  This increase was effective inMay 2003.  **CG&E** expects to file anotherapplication to increase its rates by approximately $6.4 million under thetracking mechanism in the fourth quarter of 2003.  **CG&E** expects thePUCO will rule on this application by May 2004.

 

#### **Gas Distribution Plant**

#### ** **

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

 

#### **Gas Prices**

#### ** **

Natural gas prices escalated dramaticallyduring the fourth quarter of 2002 and peaked midway through the first quarterof 2003.  These higher natural gasprices have moderated throughout the spring and summer but are still expectedto remain higher than previous years for the remainder of 2003 and into2004.  Currently, neither **CG&E** nor **ULH&P** profit from changes in the cost of gas since naturalgas purchase costs are passed directly to the customer dollar-for-dollar underthe gas cost recovery mechanism that is mandated under state law.  These higher natural gas prices could leadto increases in write-offs of our customer receivables, however we believe theoverall impact will be immaterial.

 

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

 

In May 2003, **ULH&P** filed an application with the KPSC requestingapproval of a gas procurement-hedging program designed to mitigate the effectsof gas price volatility on customers. In June 2003, the KPSC approved the hedging program throughMarch 31, 2005.  The program willallow the pre-arranging of between 20-75 percent of winter heating season baseload gas requirements and up to 50 percent of summer season base load gasrequirements.  **CG&E** similarly hedges its gasprocurement costs, however **CG&E’s**gas procurement-hedging program has not been pre-approved by the PUCO butrather it is subject to PUCO review as part of the normal fuel adjustmentprocess.

 

**CG&E**and **ULH&P**useprimarily fixed price forward contracts and contracts with a ceiling and flooron the price.  These contracts employthe normal purchases and sales scope exception, and do not involve hedges underStatement of Financial Accounting Standards No. 133, *Accounting for Derivative Instruments and Hedging Activity*(Statement 133).

 

### **MARKET RISKSENSITIVE INSTRUMENTS AND POSITIONS**

### ** **

Thetransactions associated with the Commercial Business Unit’s (Commercial)(formerly named the Energy Merchant Business Unit) energy marketing and tradingactivities give rise to various risks, including price risk.  Price risk represents the potential risk ofloss from adverse changes in the market price of electricity or other energycommodities.  As Commercial continues todevelop its energy marketing and trading business (and due to its substantialinvestment in generation assets), its exposure to movements in the price of electricityand other energy commodities may become greater.  As a result, we may be subject to increased future earningsvolatility.

 

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*Changes in Fair Value*

* *

The changes infair value of the energy risk management assets and liabilities, for theperiods ended September 30, 2003 and 2002, are presented in the tablebelow:

 
|                                                                                        |   | **Change in Fair Value  Year to Date** |       |
|---------------------------------------------------------------------------------------------|--------|----------------------------------------|------------|
|                                                                                        |   | **September 30, 2003**            |       | **September 30, 2002** |   |
|                                                                                        |   | **Cinergy(1)**                         |       | **CG&E** |   | **PSI** |   | **Cinergy(1)** |   | **CG&E** |   | **PSI** |   |
|                                                                                        |   | ***(in millions)***                    |       |
|                                                                                        |   |                                   | * *   |   | * * |   | * * |   | * * |   | * * |   | * * |
| Fair  value of contracts outstanding at beginning of year                                   |   | **$**                                  | **75**     | ** ** | **$** | **42** | ** ** | **$** | **—** | ** ** | $ | 18 |   | $ | 28 |   | $ | (7 | ) |
|                                                                                        |   |                                   | ** ** |   | ** ** |   | ** ** |   |   |   |   |   |   |
| Inception  value of new contracts when entered (2)                                          |   | **—**                             | ** ** | **—** | ** ** | **—** | ** ** | 6 |   | 5 |   | 2 |   |
|                                                                                        |   |                                   | ** ** |   | ** ** |   | ** ** |   |   |   |   |   |   |
| Changes  in fair value attributable to changes in valuation techniques and assumptions  (3) |   | **1**                                  | ** ** | **1** | ** ** | **—** | ** ** | 14 |   | 6 |   | 9 |   |
|                                                                                        |   |                                   | ** ** |   | ** ** |   | ** ** |   |   |   |   |   |   |
| Other  changes in fair value (4)                                                            |   | **120**                                | ** ** | **40** | ** ** | **1** | ** ** | 72 |   | 26 |   | 3 |   |
|                                                                                        |   |                                   | ** ** |   | ** ** |   | ** ** |   |   |   |   |   |   |
| Option  premiums paid/(received)                                                            |   | **(6**                                 | **)**      | **3** | ** ** | **—** | ** ** | 24 |   | — |   | — |   |
|                                                                                        |   |                                   | ** ** |   | ** ** |   | ** ** |   |   |   |   |   |   |
| Accounting  Changes (5)                                                                     |   |                                   | ** ** |   | ** ** |   | ** ** |   |   |   |   |   |   |
|                                                                                        |   |                                   | ** ** |   | ** ** |   | ** ** |   |   |   |   |   |   |
| Cumulative  effect of changes in accounting principle                                       |   | **(20**                                | **)**      | **(14** | **)** | **(1** | **)** | — |   | — |   | — |   |
|                                                                                        |   |                                   | ** ** |   | ** ** |   | ** ** |   |   |   |   |   |   |
| Consolidation  of previously unconsolidated entities                                        |   | **7**                                  | ** ** | **—** | ** ** | **—** | ** ** | — |   | — |   | — |   |
|                                                                                        |   |                                   | ** ** |   | ** ** |   | ** ** |   |   |   |   |   |   |
| Contract  reclassification (6)                                                              |   | **—**                             | ** ** | **—** | ** ** | **—** | ** ** | 14 |   | 18 |   | 5 |   |
|                                                                                        |   |                                   | ** ** |   | ** ** |   | ** ** |   |   |   |   |   |   |
| Contract  acquisitions (7)                                                                  |   | **—**                             | ** ** | **—** | ** ** | **—** | ** ** | (16 | ) | — |   | — |   |
|                                                                                        |   |                                   | ** ** |   | ** ** |   | ** ** |   |   |   |   |   |   |
| Contracts  settled                                                                          |   | **(129**                               | **)**      | **(48** | **)** | **(2** | **)** | (38 | ) | (28 | ) | (11 | ) |
|                                                                                        |   |                                   | ** ** |   | ** ** |   | ** ** |   |   |   |   |   |   |
| Fair  value of contracts outstanding at end of period                                       |   | **$**                                  | **48**     | ** ** | **$** | **24** | ** ** | **$** | **(2** | **)** | $ | 94 |   | $ | 55 |   | $ | 1 |   |

 

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(1)          Theresults of **Cinergy** also includeamounts related to non-registrants.

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

(3)          Representschanges in fair value recognized in income, caused by changes in assumptionsused in calculating fair value or changes in modeling techniques.

(4)          Representschanges in fair value, recognized in income, primarily attributable tofluctuations in price.  This amountincludes both realized and unrealized gains on energy trading contracts.

(5)          SeeNote 1(g)(*i*) and Note 1(g)(*iii*) of the “Notes to Condensed FinancialStatements” in “Part I. Financial Information” for further information.

(6)          Representsreclassifications of the settlement value of contracts that have beenterminated as a result of counterparty non-performance to non-current otherliabilities.  These contracts no longerhave price risk and are therefore not considered energy trading contracts.

(7)          CinergyCapital & Trading, Inc. (Capital & Trading) acquired a portfolio of gascontracts and inventory in July 2002. This amount represents the fair value of net *Energy risk management liabilities* assumed.  There was no inception gain or lossrecognized at the date of acquisition.

 

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The followingtable presents the expected maturity of the energy risk management assets andliabilities, as of September 30, 2003:

 
|                                                |   | **Fair Value of Contracts as of September 30, 2003** |     |
|-----------------------------------------------------|--------|-----------------------------------------------------------|----------|
|                                                |   | **Maturing**                                              |     |   |   |
| **Source of Fair Value(1)**                         |   | **Within  12 months**                                     |     | **12-36  months** |   | **36-60  months** |   | **Thereafter** |   | **Total  Fair Value** |   |
|                                                |   | **(in millions)**                                         |     |
|                                                |   |                                                      | * * |   | * * |   | * * |   | * * |   | * * |
| **Cinergy(2)**                                      |   |                                                      |     |   |   |   |   |   |   |   |   |
| Prices  actively quoted                             |   | $                                                         | 32       |   | $ | (2 | ) | $ | — |   | $ | — |   | $ | 30 |   |
|                                                |   |                                                      |     |   |   |   |   |   |   |   |   |
| Prices  based on models and other valuation methods |   | 6                                                         |     | 12 |   | 5 |   | (5 | ) | 18 |   |
|                                                |   |                                                      |     |   |   |   |   |   |   |   |   |
| Total                                               |   | $                                                         | 38       |   | $ | 10 |   | $ | 5 |   | $ | (5 | ) | $ | 48 |   |
|                                                |   |                                                      |     |   |   |   |   |   |   |   |   |
| **CG&E**                                        |   |                                                      |     |   |   |   |   |   |   |   |   |
| Prices  actively quoted                             |   | $                                                         | (2       | ) | $ | 5 |   | $ | — |   | $ | — |   | $ | 3 |   |
|                                                |   |                                                      |     |   |   |   |   |   |   |   |   |
| Prices  based on models and other valuation methods |   | 8                                                         |     | 9 |   | 4 |   | — |   | 21 |   |
|                                                |   |                                                      |     |   |   |   |   |   |   |   |   |
| Total                                               |   | $                                                         | 6        |   | $ | 14 |   | $ | 4 |   | $ | — |   | $ | 24 |   |
|                                                |   |                                                      |     |   |   |   |   |   |   |   |   |
| **PSI**                                             |   |                                                      |     |   |   |   |   |   |   |   |   |
| Prices  actively quoted                             |   | $                                                         | (9       | ) | $ | 1 |   | $ | — |   | $ | — |   | $ | (8 | ) |
|                                                |   |                                                      |     |   |   |   |   |   |   |   |   |
| Prices  based on models and other valuation methods |   | 2                                                         |     | 3 |   | 1 |   | — |   | 6 |   |
|                                                |   |                                                      |     |   |   |   |   |   |   |   |   |
| Total                                               |   | $                                                         | (7       | ) | $ | 4 |   | $ | 1 |   | $ | — |   | $ | (2 | ) |
|                                                     |        |                                                           |          |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(1)          Whileliquidity varies by trading regions, active quotes are generally available fortwo years for standard electricity transactions and three years for standardgas transactions.  Non-standardtransactions are classified based on the extent, if any, of modeling used indetermining fair value.  Long-termtransactions can have portions in both categories depending on the tenor.

(2)          Theresults of **Cinergy** also includeamounts related to non-registrants.

 

*Energy Trading Credit Risk*

* *

**Cinergy’s**extension of credit for energy marketing and trading is governed by a CorporateCredit Policy.  Written guidelinesdocument the management approval levels for credit limits, evaluation ofcreditworthiness, and credit risk mitigation procedures.  Exposures to credit risks are measured andmonitored daily by our Corporate Credit Risk function, which is independent ofall trading operations.  As ofSeptember 30, 2003, approximately 99 percent of the credit exposurerelated to energy trading and marketing activity was with counterparties ratedInvestment Grade or the counterparties’ obligations were guaranteed or securedby an Investment Grade entity.  Nosingle non-investment grade counterparty accounts for more than one percent ofour total credit exposure.  Energycommodity prices can be extremely volatile and the market can, at times, lackliquidity.  Because of these issues,credit risk for energy commodities is generally greater than with othercommodity trading.

 

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We continually review and monitor our creditexposure to all counterparties and secondary counterparties.  If appropriate, we may adjust our creditreserves to attempt to compensate for increased credit risk within theindustry.  Counterparty credit limitsmay be adjusted on a daily basis in response to changes in a counterparty’screditworthiness, financial status, or public debt ratings.

 

### **ACCOUNTING MATTERS**

### ** **

#### **Critical Accounting Policies**

#### ** **

Preparation offinancial statements and related disclosures in compliance with generallyaccepted accounting principles (GAAP) requires the use of assumptions andestimates.  In certain instances, theapplication of GAAP requires judgments regarding future events, including thelikelihood of success of particular initiatives, legal and regulatorychallenges, and anticipated recovery of costs. Therefore, the possibility exists for materially different reportedamounts under different conditions or assumptions.

 

**Cinergy’s**2002 10-K includes a discussion of accounting policies that are significant tothe presentation of **Cinergy’s**financial position and results of operations. These include:

 

•                  Fair ValueAccounting for Energy Marketing and Trading;

•                  Retail CustomerRevenue Recognition;

•                  RegulatoryAccounting;

•                  Pension andOther Postretirement Benefits; and

•                  Impairment ofLong-lived Assets.

 

#### **Accounting Changes**

#### ** **

##### ***Energy Trading***

##### *** ***

In October 2002,the EITF reached consensus in EITF 02-3, to (a) rescind EITF 98-10, (b)generally preclude the recognition of gains at the inception of derivatives,and (c) require all realized and unrealized gains and losses on energy tradingderivatives to be presented net in the Statements of Income, whether or notsettled physically.  The consensus torescind EITF 98-10 required most energy trading contracts that do not qualifyas derivatives to be accounted for on an accrual basis, rather than at fairvalue.  The consensus was immediatelyeffective for all new contracts executed after October 25, 2002, andrequired a cumulative effect adjustment to income, net of tax, on  January 1, 2003, for all contractsexecuted on or prior to October 25, 2002. The cumulative effect adjustment, on a net of tax basis, was a loss of$13 million for **Cinergy** and $8million for **CG&E**, whichincludes primarily the impact of certain coal contracts, gas inventory, andcertain gas contracts, which were all accounted for at fair value.  We expect this rescission to have thelargest ongoing impact on our gas trading business, which uses financialcontracts, physical contracts, and gas inventory to take advantage of variousarbitrage opportunities.  Prior to therescission of EITF 98-10, all of these activities were accounted for at fairvalue.  Under the revised guidance, onlycertain items are accounted for at fair value, which could increaseinter-period volatility in reported results of operations.  As a result, we began applying fair valuehedge accounting in June 2003 to certain quantities of gas inventory (morefully discussed in Note 1(d) of the “Notes to Condensed 

 

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FinancialStatements” in “Part I.  FinancialInformation”) and are further reviewing additional applications for hedgeaccounting.

 

##### ***Derivatives***

##### *** ***

InMay 2003, the FASB issued Statement of Financial Accounting Standards No.149, *Amendment of Statement 133 onDerivative Instruments and Hedging Activities* (Statement 149).  Statement 149 primarily amends Statement 133to incorporate implementation conclusions previously cleared by the FASB staff,to clarify the definition of a derivative and to require derivative instrumentsthat include up-front cash payments to be classified as a financing activity inthe Statements of Cash Flows. Implementation issues that had been previously cleared by the FASB staffwere effective at the time that they were cleared and new guidance was effectivein the third quarter of 2003.  In connectionwith our adoption, we reviewed certain power purchase or sale contracts todetermine if they met the revised normal purchase and normal sale scopeexception criteria in Statement 149.  Ifthese criteria were not met, the contract was accounted for at fair value.  The impact of adopting Statement 149 was notmaterial to our results of operations or financial position.

 

InJune 2003, the FASB issued final guidance on the use of broad marketindices (e.g., consumer price index) in power purchase and salescontracts.  This guidance clarifies thatthe normal purchases and sales scope exception is precluded if a contractcontains a broad market index that is not clearly and closely related to theasset being sold or purchased (or a direct factor in the production of theasset sold or purchased).  The guidanceprovides criteria that must be met for the index to be considered clearly andclosely related.  This guidance, whichis effective in the fourth quarter of 2003, is not expected to have a materialimpact on our results of operations or financial position upon adoption.

 

##### ***Consolidationof Variable Interest Entities***(VIE)

##### *** ***

InJanuary 2003, the FASB issued Interpretation 46, which significantlychanges the consolidation requirements for traditional SPEs and certain otherentities subject to its scope.  Thisinterpretation defines a VIE as (a) an entity that does not have sufficientequity to support its activities without additional financial support or (b) anentity that has equity investors that do not have voting rights or do notabsorb losses or receive returns.  Theseentities must be consolidated when certain criteria are met.  The interpretation was originally to beeffective as of July 1, 2003 for **Cinergy**;however, the FASB subsequently permitted deferral of the effective date toDecember 31, 2003 for either some or all potential VIEs.  During this deferral period, the FASB plansto clarify and amend several provisions, much of which is intended to assist inthe application of Interpretation 46 to operating entities.  Clarifications were not needed for mosttraditional SPEs and we therefore elected to implement Interpretation 46 forsuch entities, as discussed below, in accordance with the originalimplementation date of July 1, 2003. Prior period financial statements were not restated for these changes.

 

Interpretation46 requires us to consolidate two SPEs that have individual power saleagreements to Central Maine Power Company (CMP) for approximately 45 MW ofcapacity, ending in 2009, and 35 MW of capacity, ending in 2016.  In addition, these SPEs have individualpower purchase agreements with Capital & Trading to supply the power.  Capital & Trading also provides 

 

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variousservices, including certain credit support facilities.  Upon the initial consolidation of these twoSPEs, approximately $239 million of notes receivable, $225 million ofnon-recourse debt, and miscellaneous other assets and liabilities were includedon **Cinergy’s** Balance Sheets.  The debt was incurred by the SPEs to financethe buyout of existing power contracts that CMP held with formersuppliers.  The cash flows from thenotes receivable are designed to repay the debt.  Notes 3 and 4 in the “Notes to Condensed Financial Statements” in“Part I. Financial Information” provide additional information regarding thedebt and the notes receivable, respectively.

 

In accordancewith Interpretation 46, we are no longer permitted to consolidate a trust thatwas established by **Cinergy Corp.**in 2001 to****issue approximately$316 million of combined preferred trust securities and stock purchasecontracts.  These securities are morefully described in the 2002 10-K.  In2001, the trust loaned the proceeds from the issuance of the securities to **Cinergy Corp.**in exchange for a notepayable to the trust that was eliminated in consolidation.  As a result of no longer consolidating thetrust beginning July 1, 2003, the preferred trust securities (previouslyrecorded as *Company obligated, mandatorilyredeemable, preferred trust securities of subsidiary, holding solely debtsecurities of the company*) are no longer included in **Cinergy’s**Balance Sheets.  In addition, the note payable owed to thetrust, which has a current carrying value of approximately $319 million, wasincluded in *Long-term debt*.  The impact of not consolidating the trustwas immaterial to **Cinergy’s**results of operations.

 

**Cinergy**has concluded that its accounts receivable sale facility, as discussed in the2002 10-K, will remain unconsolidated since it involves transfers of financialassets to a qualifying SPE, which is exempted from consolidation byInterpretation 46 and Statement of Financial Accounting Standards No. 140, *Accounting for Transfers and Servicing of FinancialAssets and Extinguishments of Liabilities*.

 

**Cinergy**is continuing to evaluate the impact of Interpretation 46 on several operatingjoint ventures, primarily involved in cogeneration and energy efficiencyoperations, that we currently do not consolidate.  If all these entities were consolidated, their total assets ofapproximately $675 million (the majority of which is non-current) and totalliabilities of approximately $225 million (which includes long-term debt ofapproximately $100 million) would be recognized on our Balance Sheets.  **Cinergy’s**current investment in these entities is approximately $250 million.  We also guarantee certain performanceobligations of these entities with an estimated maximum potential exposure ofapproximately $55 million, as disclosed in Note 7(a) of the “Notes to CondensedFinancial Statements” in “Part I. Financial Information”.  As discussed above, we expect additionalinterpretative guidance to be issued by the FASB during the fourth quarter of2003 and **Cinergy** will adopt thoseprovisions effective December 31, 2003.

 

##### ***FinancialInstruments with Characteristics of Both Liabilities and Equity***

##### *** ***

InMay 2003, the FASB issued Statement of Financial Accounting Standards No.150, *Accounting for Certain FinancialInstruments with Characteristics of Both Liabilities and Equity*(Statement150).  Statement 150 establishesstandards for how an issuer classifies and measures certain financialinstruments with characteristics of both liabilities and equity.  This statement was effective for financialinstruments entered into or modified after May 31, 2003, and was effectiveon July 1, 2003, for financial instruments held prior to issuance of thisstatement.  Statement 150 would haverequired **Cinergy Corp.’s** preferredtrust securities to be reported as a 

 

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liability;however, as described more fully above, the trust holding these securities isno longer permitted to be consolidated and the preferred trust securities areno longer reported on **Cinergy’s**BalanceSheets.  However, **Cinergy’s** note payable to the trust isrecorded on the Balance Sheet as *Long-termdebt*.  As a result, theimpact of adopting Statement 150 was not material to our results of operationsor financial position.

 

As discussedin the 2002 10-K, **Cinergy** issuedforward stock sale contracts that require purchase by the holder of a certainnumber of **Cinergy** shares inFebruary 2005 (stock contracts). The number of shares to be issued is contingent on the market price of **Cinergy Corp.** stock, but subject to apredetermined ceiling and floor price. In October 2003, the FASB Staff released an interpretation ofStatement 150 that requires an evaluation of these stock contracts to determinewhether they constitute a liability, with any changes in accounting required inJanuary 2004.  We believe that thisinterpretation will have no impact on our current accounting.

 

##### ***IntangibleAssets***

##### *** ***

InJune 2001, the FASB issued Statement 142. With the adoption of Statement 142, goodwill and other intangibles withindefinite lives are no longer subject to amortization.  Statement 142 requires that goodwill beassessed for impairment upon adoption (transition impairment test) and at leastannually thereafter by applying a fair-value-based test, as opposed to theundiscounted cash flow test applied under prior accounting standards.

 

We beganapplying Statement 142 in the first quarter of 2002.  We finalized our transition impairment test in the fourth quarterof 2002 and recognized a non-cash impairment charge of approximately $11million (net of tax) for goodwill related to certain of our internationalassets.  This amount is reflected in **Cinergy’s**Statements of Income as acumulative effect adjustment, net of tax. While Statement 142 did not require the initial transition impairmenttest to be completed until December 31, 2002, it required the cumulativeeffect adjustment to be reflected as of January 1, 2002.

 

##### ***AssetRetirement Obligations***

##### *** ***

InJuly 2001, the FASB issued Statement 143, which requires fair valuerecognition beginning January 1, 2003, of legal obligations associatedwith the retirement or removal of long-lived assets, at the time theobligations are incurred.  Ouraccounting policy for such legal obligations is described in Note 1(f) of the“Notes to Condensed Financial Statements” in “Part I.  Financial Information”.

 

#### **Other Matters**

#### ** **

##### ***EmployeeSeverance Programs***

##### *** ***

During thesecond quarter of 2003, **Cinergy**offered a Voluntary Early Retirement Program (VERP) and other severancebenefits (Severance Programs) to certain non-union employees.  As a result of the non-union employeeselecting the Severance Programs, **Cinergy**recorded expenses of approximately $9 million during the quarter.

 

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**Cinergy**recorded $4 million in the third quarter of 2003 as a result of union employeeselecting Severance Programs that ended in July 2003 under a separateprogram than mentioned above.

 

Additionally,in the third quarter 2003, a VERP was offered to certain non-unionemployees.  **Cinergy** recorded expenses of approximately $1 million.

 

##### ***Synthetic Fuel Production***

##### *** ***

InJuly 2002, Capital & Trading acquired a coal-based synthetic fuelproduction facility.  As ofSeptember 30, 2003, Capital & Trading’s net book value in thisfacility was approximately $60 million. The synthetic fuel produced at this facility qualifies for tax creditsin accordance with Section 29 of the Internal Revenue Code.  Eligibility for these credits expires after2007.  **Cinergy**received a private letter ruling from the Internal Revenue Service (IRS) inconnection with the acquisition of the facility.  To date, **Cinergy** hasproduced and sold approximately 3.6 million tons of synthetic fuel at thisfacility, resulting in approximately $100 million in tax credits, includingapproximately $60 million in 2003.

 

In the secondquarter of 2003, the IRS announced, as a result of an audit of anothertaxpayer, that it had reason to question and was reviewing the scientificvalidity of test procedures and results that were presented as evidence thefuel underwent a significant chemical change. The IRS recently announced that it has finished its review and hasdetermined that test procedures and results used by taxpayers arescientifically valid if the procedures are applied in a consistent and unbiasedmanner.  The IRS also announced that itplans to impose new testing and record-keeping requirements on synthetic fuelproducers and plans to issue guidance extending these requirements to taxpayersalready holding private letter rulings on the issue of significant chemicalchange.

 

**Cinergy**believes that its testing procedures comply with the standards recentlyannounced by the IRS.  We do notanticipate that any new testing or record-keeping requirements imposed by theIRS will have a material effect on our financial position or results ofoperations.

 

##### ***Energy MarketInvestigations***

##### *** ***

InJuly 2003, **Cinergy** received asubpoena from the Commodity Futures Trading Commission (CFTC).  As has been previously reported by thepress, the CFTC has served subpoenas on numerous other energy companies.  The CFTC request sought certain informationregarding our trading activities, including price reporting to energy industrypublications.  The CFTC soughtparticular information concerning these matters for the period May 2000through January 2001 as to one of **Cinergy’s**employees.  Based on an initial reviewof these matters, we placed that employee on administrative leave and havesubsequently terminated his employment. **Cinergy** is continuing aninvestigation of these matters and has been cooperating fully with the CFTC.

 

InSeptember 2003, **Cinergy**,along with 38 other companies, was named as a defendant in civil litigationfiled as a purported class action on behalf of all persons who purchased and/orsold New York Mercantile Exchange natural gas futures and options contractsbetween January 1, 2000, and December 31, 2002.  The complaint alleges that improper pricereporting caused damages to the class. Responsive pleadings in the case are due on November 17, 2003.  We 

 

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believe thisaction against us is without merit.  Atthis time, it is not possible to predict the outcome of this matter.

 

In the secondquarter of 2003, **Cinergy** receivedinitial and follow-up third-party subpoenas from the SEC requesting informationrelated to particular trading activity with one of its counterparties who wasthe target of an investigation by the SEC. **Cinergy** has and intends tofully cooperate with the SEC in connection with this matter.

 

At this timeit is not possible to predict the outcome of these investigations and lawsuitor the impact on **Cinergy’s**financial position or results of operations; although, in the opinion ofmanagement, they are not likely to have a material adverse effect on ourfinancial position or results of operations.

 

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**QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK**

 

## **ITEM 3.  QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK**

## ** **

Thisinformation is provided in, and incorporated by reference from, the “MarketRisk Sensitive Instruments and Positions” section in “Item 2.  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations” in “Part I. FinancialInformation”.

 

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**CONTROLS AND PROCEDURES**

 

## **ITEM 4.  CONTROLS ANDPROCEDURES**

## ** **

Disclosure controls and procedures are ourcontrols and other procedures that are designed to provide reasonable assurancethat information required to be disclosed by us in the reports that we file orsubmit under the Securities Exchange Act of 1934 (Exchange Act) is recorded,processed, summarized, and reported, within the time periods specified in theSecurities and Exchange Commission’s (SEC) rules and forms.  Disclosure controls and procedures include,without limitation, controls and procedures designed to provide reasonableassurance that information required to be disclosed by us in the reports thatwe file under the Exchange Act is accumulated and communicated to ourmanagement, including our chief executive officer and chief financial officer,as appropriate to allow timely decisions regarding required disclosure.

 

Under the supervision and with theparticipation of our management, including our chief executive officer andchief financial officer, we have evaluated the effectiveness of our disclosurecontrols and procedures as of September 30, 2003, and, based upon thisevaluation, our chief executive officer and chief financial officer haveconcluded that these controls and procedures are effective in providingreasonable assurance that information requiring disclosure is communicated tomanagement in a timely manner and reported within the timeframe specified bythe SEC’s rules and forms.

 

Under thesupervision and with the participation of our management, including our chiefexecutive officer and chief financial officer, we have evaluated any change inour internal control over financial reporting (as such term is defined in Rules13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter endedSeptember 30, 2003 and found no change that has materially affected, or isreasonably likely to materially affect, our internal control over financialreporting.

 

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## **PART II. - OTHER INFORMATION**

## ** **

**PART II. OTHER INFORMATION**

## **ITEM 1.  LEGAL PROCEEDINGS**

## ** **

OnAugust 18, 2003, Cornerstone Propane Partners L.P. filed suit against **Cinergy** and 38 other companies in theSouthern District of New York.  The suitis a purported class action on behalf of all persons who purchased and/or soldNew York Mercantile Exchange natural gas futures and options contracts betweenJanuary 1, 2000 and December 31, 2002.  The complaint alleges that improper price reporting causeddamages to the class.  The plaintiffsare seeking unspecified damages.  Weintend to defend this lawsuit vigorously; however, we cannot predict theoutcome of this matter at this time.

 

We currently,and from time to time, are involved in lawsuits, claims, and complaintsincidental to the conduct of our business. In the opinion of management, no such proceeding is likely to have amaterial adverse effect on us.

 

See Note 7 ofthe “Notes to Condensed Financial Statements” in “Part I.  Financial Information” for furtherinformation regarding our commitments and contingencies.

 

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## **ITEM 4.  SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS**

## ** **

In lieu of aspecial meeting of shareholders of The Cincinnati Gas & Electric Company (**CG&E**), a resolution was duly adoptedvia unanimous written consent of **CinergyCorp.**, **CG&E’s**soleshareholder, effective July 23, 2003, amending the Regulations toeffectuate changes with respect to certain officer titles at **CG&E.**

 

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## **ITEM 6.  EXHIBITSAND REPORTS ON FORM 8-K**

## ** **

(a)               Thedocuments listed below are being furnished or filed on behalf of **Cinergy Corp.**, The Cincinnati Gas &Electric Company (**CG&E**), PSIEnergy, Inc. (**PSI**), and The UnionLight, Heat and Power Company (**ULH&P**).  Exhibits not identified as previouslyfurnished or filed are furnished or filed herewith:

 
| **Exhibit  Designation** |   | **Registrant**                              |   | **Nature of  Exhibit**                                                                                                                                                                       |   | **Previously  Filed  as Exhibit to:** |
|--------------------------|--------|---------------------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------|
| **Additional  Exhibits** |   |                                        |   |                                                                                                                                                                                         |   |                                  |
|                     |   |                                        |   |                                                                                                                                                                                         |   |                                  |
| 4.2                      |   | **PSI**                                     |   | Eighth Supplemental Indenture between **PSI** and Fifth Third Bank, as Trustee,  dated as of September 23, 2003 to Indenture dated as of  November 15, 1996.                       |   |                                  |
|                     |   |                                        |   |                                                                                                                                                                                         |   |                                  |
| 4.3                      |   | **PSI**                                     |   | Fifty-fifth Supplemental Indenture dated as  of February 15, 2003 between **PSI**  and LaSalle Bank National Association, as Trustee, to Indenture dated as of  September 1, 1939. |   |                                  |
|                     |   |                                        |   |                                                                                                                                                                                         |   |                                  |
| 31.1                     |   | **Cinergy Corp.  CG&E  PSI  ULH&P** |   | Certification of James E. Rogers under  Section 302 of Sarbanes-Oxley Act.                                                                                                              |   |                                  |
|                     |   |                                        |   |                                                                                                                                                                                         |   |                                  |
| 31.2                     |   | **Cinergy Corp.  CG&E  PSI  ULH&P** |   | Certification of R. Foster Duncan under  Section 302 of Sarbanes-Oxley Act.                                                                                                             |   |                                  |
|                     |   |                                        |   |                                                                                                                                                                                         |   |                                  |
| 32.1                     |   | **Cinergy Corp.  CG&E  PSI  ULH&P** |   | Certification of James E. Rogers under  Section 906 of Sarbanes-Oxley Act.                                                                                                              |   |                                  |
|                     |   |                                        |   |                                                                                                                                                                                         |   |                                  |
| 32.2                     |   | **Cinergy Corp.  CG&E  PSI  ULH&P** |   | Certification of R. Foster Duncan under  Section 906 of Sarbanes-Oxley Act.                                                                                                             |   |                                  |

 

(b)              Thefollowing reports on Form 8-K were furnished or filed during the quarter endedSeptember 30, 2003.

 
| **Date of Report**  |   | **Registrant**              |   | **Item Furnished or Filed**                             |
|---------------------|--------|-----------------------------|--------|---------------------------------------------------------|
|                |   |                        |   |                                                    |
| July 22, 2003  |   | **CG&E  ULH&P**     |   | Item 5. Other Events and Regulation FD  Disclosure      |
|                |   |                        |   |                                                    |
| July 25,  2003 |   | **Cinergy Corp.**           |   | Item 12.  Results of Operations and Financial Condition |
|                |   |                        |   |                                                    |
| July 25, 2003  |   | **Cinergy Corp.  CG&E** |   | Item 5. Other Events and Regulation FD  Disclosure      |
|                |   |                        |   |                                                    |
|                |   |                        |   | Item 7. Financial Statements and Exhibits               |

## ** **

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## **SIGNATURES**

## ** **

Pursuant tothe requirements of the Securities Exchange Act of 1934, each of theRegistrants has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

 

CINERGY CORP.

THE CINCINNATI GAS & ELECTRIC COMPANY

PSI ENERGY, INC.

THE UNION LIGHT, HEAT AND POWER COMPANY

Registrants

 

 
|   | Date:  November 13, 2003                           | /s/             | David L.  Wozny |   |
|--------|--------------------------------------------------------------|-----------------|-----------------|--------|
|   |                                                         | David L.  Wozny |            |
|   | (duly authorized officer  and  principal accounting officer) |            |

 

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