**UNITED STATESSECURITIES AND EXCHANGE COMMISSIONW****ASHINGTON**, D.C. 20549

**FORM 10-Q**

(Mark One)

**x**   QUARTERLY REPORT PURSUANT TO SECTION 13 OR15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterlyperiod ended June 30, 2006

**or**

**o**   TRANSITION REPORT PURSUANT TO SECTION 13 OR15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

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

 

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Indicate by check markwhether the registrants (1) have filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrants were required tofile such reports), and (2) have been subject to such filing requirements forthe past 90 days.

| **Cinergy Corp.**                             | Yes | x | No | o |
|-----------------------------------------------|-----|---|----|---|
| **The Cincinnati Gas & Electric Company** | Yes | x | No | o |
| **PSI Energy, Inc.**                          | Yes | x | No | o |

 

Indicate by check markwhether each registrant is a large accelerated filer, an accelerated filer, ora non-accelerated filer.  See definitionof “accelerated filer and large accelerated filer” in Rule 12b-2 of theExchange Act.

|                                               | ** ** | **Large  Accelerated  Filer** | ** ** | **Accelerated  Filer** | ** ** | **Non-  Accelerated  Filer** | ** ** |
|-----------------------------------------------|------------|-------------------------------|------------|------------------------|------------|------------------------------|------------|
| **Cinergy Corp.**                             |       | x                             |       | o                      |       | o                            |       |
| **The Cincinnati Gas & Electric Company** |       | o                             |       | o                      |       | x                            |       |
| **PSI Energy, Inc.**                          |       | o                             |       | o                      |       | x                            |       |

 

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Indicate by check markwhether the registrant is a shell (as defined in Rule 12b-2 of the ExchangeAct).Yes o No x

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This combined Form 10-Qis separately filed by **Cinergy Corp.**,**The Cincinnati Gas & Electric Company**,and **PSI Energy, Inc.**  Information contained herein relating to anyindividual registrant is filed by such registrant on its own behalf.  Each registrant makes no representation as toinformation relating to the other registrants.

**CinergyCorp.**, **The Cincinnati Gas& Electric Company**,****and**PSIEnergy, Inc.**meet the conditions set forth in GeneralInstruction H(1)(a) and (b) of Form 10-Q and are therefore filing their companyspecific information with the reduced disclosure format specified in GeneralInstruction H(2) of Form 10-Q. 

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As of July 31, 2006,shares of common stock outstanding for each registrant were as follows:
| Registrant                                    | ** ** | **Description**                                | ** ** | **Shares** |
|-----------------------------------------------|------------|------------------------------------------------|------------|------------|
|                                          |       |                                           |       |       |
| **Cinergy Corp.**                             |       | Par value $.01 per share                       |       | 100        |
| ** **                                    |       |                                           |       |       |
| **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 |

 

 

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**TABLE OF CONTENTS**
| Item  Number | ** ** | ** **                                                                                                                                                                                                               | ** ** | ** ** |
|--------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|
|         |       | **PART I. FINANCIAL INFORMATION**                                                                                                                                                                                        |       |       |
|         |       |                                                                                                                                                                                                                     |       |       |
|         |       | **Cautionary  Statement Regarding Forward-Looking Information**                                                                                                                                                          |       |       |
|         |       |                                                                                                                                                                                                                     |       |       |
| 1            |       | **Financial  Statements**                                                                                                                                                                                                |       |       |
|         |       | **Cinergy  Corp. and Subsidiary Companies**                                                                                                                                                                              |       |       |
|         |       | Consolidated Statements of Operations for the Three  Months Ended March 31, 2006; June 30, 2006 and 2005; and the Six Months Ended  June 30, 2005, as revised                                                            |       |       |
|         |       | Consolidated  Balance Sheets as of June 30, 2006 and December 31, 2005, as revised                                                                                                                                       |       |       |
|         |       | Consolidated Statements of Changes in Common  Stockholder’s Equity and Comprehensive Income (Loss) for the Three Months  Ended March 31, 2006 and June 30, 2006 and the Six Months Ended June 30,  2005, as revised |       |       |
|         |       | Consolidated Statements of Cash Flows for the Three  Months Ended March 31, 2006 and June 30, 2006 and the Six Months Ended June  30, 2005, as revised                                                                   |       |       |
|         |       |                                                                                                                                                                                                                     |       |       |
|         |       | **The Cincinnati Gas & Electric Company and  Subsidiary Companies**                                                                                                                                                  |       |       |
|         |       | Consolidated Statements of Operations for the Three  Months Ended March 31, 2006; June 30, 2006 and 2005; and the Six Months Ended  June 30, 2005, as revised                                                            |       |       |
|         |       | Consolidated  Balance Sheets as of June 30, 2006 and December 31, 2005, as revised                                                                                                                                       |       |       |
|         |       | Consolidated Statements of Changes in Common  Stockholder’s Equity and Comprehensive Income (Loss) for the Three Months  Ended March 31, 2006 and June 30, 2006 and the Six Months Ended June 30,  2005, as revised |       |       |
|         |       | Consolidated Statements of Cash Flows for the Three  Months Ended March 31, 2006 and June 30, 2006 and the Six Months Ended June  30, 2005, as revised                                                                   |       |       |
|         |       |                                                                                                                                                                                                                     |       |       |
|         |       | **PSI Energy,  Inc. and Subsidiary Company**                                                                                                                                                                             |       |       |
|         |       | Consolidated Statements of Operations for the Three  and Six Months Ended June 30, 2006 and 2005, as revised                                                                                                             |       |       |
|         |       | Consolidated  Balance Sheets as of June 30, 2006 and December 31, 2005, as revised                                                                                                                                       |       |       |
|         |       | Consolidated Statements of Cash Flows for the Six  Months Ended June 30, 2006 and 2005, as revised                                                                                                                       |       |       |
|         |       |                                                                                                                                                                                                                     |       |       |
|         |       | Notes to Consolidated Financial Statements                                                                                                                                                                               |       |       |
|         |       |                                                                                                                                                                                                                     |       |       |
| 2            |       | **Management’s  Discussion and Analysis of Financial Condition and Results of Operations**                                                                                                                          |       |       |
|         |       | Cinergy Merger with Duke Energy                                                                                                                                                                                          |       |       |
|         |       | 2006 Quarterly Results of Operations - Cinergy                                                                                                                                                                           |       |       |
|         |       | 2006 Quarterly Results of Operations - CG&E                                                                                                                                                                          |       |       |
|         |       | 2006 Year to Date Results of Operations - PSI                                                                                                                                                                            |       |       |
|         |       |                                                                                                                                                                                                                     |       |       |
| 4            |       | **Controls and Procedures**                                                                                                                                                                                              |       |       |
|         |       |                                                                                                                                                                                                                     |       |       |
|         |       | **PART  II. OTHER INFORMATION**                                                                                                                                                                                          |       |       |
|         |       |                                                                                                                                                                                                                     |       |       |
| 1            |       | **Legal Proceedings**                                                                                                                                                                                                    |       |       |
|         |       | ** **                                                                                                                                                                                                               |       |       |
| 1A           |       | **Risk Factors**                                                                                                                                                                                                         |       |       |
|         |       | ** **                                                                                                                                                                                                               |       |       |
| 6            |       | **Exhibits**                                                                                                                                                                                                             |       |       |
|         |       | ** **                                                                                                                                                                                                               |       |       |
|         |       | **Signatures**                                                                                                                                                                                                           |       |       |

###  

2

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### **CAUTIONARY STATEMENT**

### **CAUTIONARYSTATEMENT REGARDING FORWARD-LOOKING INFORMATION**

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

Forward-lookingstatements involve risks and uncertainties that may cause actual results to bematerially different from the results predicted.  Factors that could cause actual results todiffer materially from those indicated in any forward-looking statementinclude, but are not limited to:

·                  Factorsaffecting operations, such as:

(1)          unanticipated weatherconditions;

(2)          unscheduled generationoutages;

(3)          unusual maintenance orrepairs;

(4)          unanticipated changes incosts;

(5)          environmental incidents;and

(6)          electric transmission orgas pipeline system constraints.

·                  Legislativeand regulatory initiatives and legal developments, including costs ofcompliance with existing and future environmental requirements.

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

·                  Financialor regulatory accounting principles.

·                  Changingmarket conditions and other factors related to physical energy and financialtrading activities.

·                  Theperformance of projects undertaken by **Cinergy’s** and **CG&E’s** non-regulated businesses and the success ofefforts to invest in and develop new opportunities.

·                  Availabilityof, or cost of, capital.

·                  Employeeworkforce factors.

·                  Delaysand other obstacles associated with mergers, acquisitions, and investments injoint ventures.

·                  Costsand effects of legal and administrative proceedings, settlements,investigations, and claims.

·                  Businessuncertainties, contractual restrictions, and the potential inability to attractand retain key personnel.

**Cinergy**, **CG&E**, and **PSI** undertakeno obligation to update the information contained herein.

3

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**CINERGYCORP.AND SUBSIDIARY COMPANIES**

4

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**CINERGY CORP.**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**(dollars in thousands)**

**(unaudited)**
| ** **                                                             | ** ** | **Successor**               | ** **  | ** ** | ** ** | **Predecessor**              | ** ** |
|------------------------------------------------------------------------|------------|-----------------------------|-------------|------------|------------|------------------------------|------------|
| ** **                                                             | ** ** | **Three Months**       | ** **  | ** ** | ** ** | **Three Months**        | ** ** | **Three Months** | ** ** | **Six Months** | ** ** |
| ** **                                                             | ** ** | **Ended**                   | ** **  | ** ** | ** ** | **Ended**                    | ** ** | **Ended** | ** ** | **Ended** | ** ** |
| ** **                                                             | ** ** | **June 30, 2006** | ** **  | ** ** | ** ** | **March 31, 2006** | ** ** | **June 30, 2005** | ** ** | **June 30, 2005** | ** ** |
|                                                                   |       |                        |        |       |       |                         |       |   |   |   |   |
| **Operating Revenues**                                                 |       |                        |        |       |       |                         |       |   |   |   |   |
| Non-regulated  electric, natural gas, natural gas liquids, and other   |       | **$**                       | **464,481** | ** ** |       |                         | $          | 551,658 |   | $ | 366,883 |   | $ | 747,282 |   |
| Regulated  electric                                                    |       | **750,149**                 | ** **  |       |       | 702,701                      |       | 591,625 |   | 1,160,544 |   |
| Regulated  natural gas and natural gas liquids                         |       | **93,238**                  | ** **  |       |       | 321,316                      |       | 92,640 |   | 392,747 |   |
| **Total  operating revenues**                                          |       | **1,307,868**               | ** **  |       |       | 1,575,675                    |       | 1,051,148 |   | 2,300,573 |   |
|                                                                   |       | ** **                  | ** **  |       |       |                         |       |   |   |   |   |
| **Operating Expenses**                                                 | ** ** | ** **                  | ** **  | ** ** | ** ** | ** **                   | ** ** | ** ** | ** ** | ** ** | ** ** |
| Natural gas and  petroleum products purchased                          |       | **50,993**                  | ** **  |       |       | 232,006                      |       | 56,089 |   | 264,689 |   |
| Operation,  maintenance, and other                                     |       | **360,071**                 | ** **  |       |       | 400,358                      |       | 305,100 |   | 585,782 |   |
| Fuel used in  electric generation and purchased power                  |       | **531,296**                 | ** **  |       |       | 416,531                      |       | 298,716 |   | 590,224 |   |
| Costs of fuel  resold                                                  |       | **39,986**                  | ** **  |       |       | 146,298                      |       | 93,087 |   | 178,849 |   |
| Depreciation and  amortization                                         |       | **183,777**                 | ** **  |       |       | 162,039                      |       | 148,756 |   | 298,801 |   |
| Property and  other taxes                                              |       | **70,739**                  | ** **  |       |       | 86,083                       |       | 64,056 |   | 141,897 |   |
| **Total  operating expenses**                                          |       | **1,236,862**               | ** **  |       |       | 1,443,315                    |       | 965,804 |   | 2,060,242 |   |
|                                                                   |       | ** **                  | ** **  |       |       |                         |       |   |   |   |   |
| **(Losses) Gains on Sales of  Other Assets and Other, net**            |       | **(5,227**                  | **)**       |       |       | 26,069                       |       | 39,535 |   | 70,345 |   |
| ** **                                                             |       | ** **                  | ** **  |       |       |                         |       |   |   |   |   |
| **Operating Income**                                                   |       | **65,779**                  | ** **  |       |       | 158,429                      |       | 124,879 |   | 310,676 |   |
| ** **                                                             |       | ** **                  | ** **  |       |       |                         |       |   |   |   |   |
| **Other Income and Expenses**                                          | ** ** | ** **                  | ** **  | ** ** | ** ** | ** **                   | ** ** | ** ** | ** ** | ** ** | ** ** |
| Equity in  earnings of unconsolidated affiliates                       |       | **5,606**                   | ** **  |       |       | 4,095                        |       | 13,576 |   | 18,411 |   |
| Other income and  expenses, net                                        |       | **22,968**                  | ** **  |       |       | 16,667                       |       | 14,690 |   | 17,569 |   |
| **Total  other income and expenses**                                   |       | **28,574**                  | ** **  |       |       | 20,762                       |       | 28,266 |   | 35,980 |   |
|                                                                   |       | ** **                  | ** **  |       |       |                         |       |   |   |   |   |
| **Interest Expense**                                                   |       | **81,520**                  | ** **  |       |       | 83,933                       |       | 67,893 |   | 131,660 |   |
| **Preferred dividend requirement  of subsidiaries**                    |       | **38**                      | ** **  |       |       | 277                          |       | 858 |   | 1,716 |   |
| ** **                                                             |       | ** **                  | ** **  |       |       |                         |       |   |   |   |   |
| **Income from Continuing  Operations Before Income Taxes**             |       | **12,795**                  | ** **  |       |       | 94,981                       |       | 84,394 |   | 213,280 |   |
| ** **                                                             |       | ** **                  | ** **  |       |       |                         |       |   |   |   |   |
| **Income Tax Expense from  Continuing Operations**                     |       | **5,979**                   | ** **  |       |       | 16,883                       |       | 21,212 |   | 45,776 |   |
| ** **                                                             |       | ** **                  | ** **  |       |       |                         |       |   |   |   |   |
| **Income from Continuing  Operations**                                 |       | **6,816**                   | ** **  |       |       | 78,098                       |       | 63,182 |   | 167,504 |   |
| ** **                                                             |       | ** **                  | ** **  |       |       |                         |       |   |   |   |   |
| **(Loss) Income from Discontinued  Operations, net of tax**            |       | **(6,071**                  | **)**       |       |       | 4,759                        |       | (12,474 | ) | 560 |   |
| ** **                                                             | ** ** | ** **                  | ** **  | ** ** | ** ** | ** **                   | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Cumulative Effect of a Change  in Accounting Principle, net of tax** |       | **—**                  | ** **  |       |       | (3,493                       | )          | — |   | — |   |
| ** **                                                             | ** ** | ** **                  | ** **  | ** ** | ** ** | ** **                   | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Net Income**                                                         |       | **$**                       | **745**     | ** ** |       |                         | $          | 79,364 |   | $ | 50,708 |   | $ | 168,064 |   |

 

**See Notes to UnauditedConsolidated Financial Statements**

** **

5

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**CINERGYCORP.**

**CONSOLIDATEDBALANCE SHEETS**

**(dollarsin thousands)**

**(unaudited)**

**ASSETS**
| ** **                                                                                                       | ** ** | **Successor**     | ** **     | ** ** | ** ** | **Predecessor**       | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|-------------------|----------------|------------|------------|-----------------------|------------|
| ** **                                                                                                       | ** ** | **June 30,** | ** **     | ** ** | ** ** | **December 31,** | ** ** |
| ** **                                                                                                       | ** ** | **2006**          | ** **     | ** ** | ** ** | **2005**              | ** ** |
|                                                                                                             |       |              |           |       |       |                  |       |
| **Current  Assets**                                                                                              | ** ** | ** **        | ** **     | ** ** | ** ** | ** **            | ** ** |
| Cash and cash equivalents                                                                                        |       | **$**             | **121,010**    |       |       |                  | $          | 146,056 |   |
| Receivables (net of allowance for doubtful accounts  of $7,747 at June 30, 2006 and $4,767 at December 31, 2005) |       | **611,955**       |           |       |       | 1,659,411             |       |
| Inventory                                                                                                        |       | **308,673**       |           |       |       | 473,440               |       |
| Assets held for sale                                                                                             |       | **1,252,563**     |           |       |       | 15,803                |       |
| Unrealized gains on mark-to-market and hedging  transactions                                                     |       | **81,022**        |           |       |       | 1,002,131             |       |
| Other                                                                                                            |       | **130,270**       |           |       |       | 398,096               |       |
| **Total current assets**                                                                                         |       | **2,505,493**     |           |       |       | 3,694,937             |       |
|                                                                                                             |       | ** **        |           |       |       |                  |       |
| **Investments  and Other Assets**                                                                                | ** ** | ** **        | ** **     | ** ** | ** ** | ** **            | ** ** |
| Restricted funds held in trust                                                                                   |       | **261,088**       |           |       |       | 301,800               |       |
| Investments in unconsolidated affiliates                                                                         |       | **499,248**       |           |       |       | 479,466               |       |
| Goodwill                                                                                                         |       | **4,127,697**     |           |       |       | 33,352                |       |
| Intangible assets                                                                                                |       | **977,058**       |           |       |       | 310,294               |       |
| Notes receivable                                                                                                 |       | **158,933**       |           |       |       | 171,325               |       |
| Unrealized gains on mark-to-market and hedging  transactions                                                     |       | **110,266**       |           |       |       | 306,959               |       |
| Assets held for sale                                                                                             |       | **426,111**       |           |       |       | 18,412                |       |
| Other                                                                                                            |       | **234,790**       |           |       |       | 208,214               |       |
| **Total investments and other assets**                                                                           |       | **6,795,191**     |           |       |       | 1,829,822             |       |
|                                                                                                             |       | ** **        |           |       |       |                  |       |
| **Property,  Plant, and Equipment**                                                                              | ** ** | ** **        | ** **     | ** ** | ** ** | ** **            | ** ** |
| Cost                                                                                                             |       | **16,920,605**    |           |       |       | 15,990,864            |       |
| Less accumulated depreciation and amortization                                                                   |       | **4,363,848**     |           |       |       | 5,477,782             |       |
| **Net property, plant, and equipment**                                                                           |       | **12,556,757**    |           |       |       | 10,513,082            |       |
|                                                                                                             |       | ** **        |           |       |       |                  |       |
| **Regulatory  Assets and Deferred Debits**                                                                       | ** ** | ** **        | ** **     | ** ** | ** ** | ** **            | ** ** |
| Deferred debt expense                                                                                            |       | **76,071**        |           |       |       | 91,538                |       |
| Regulatory assets related to income taxes                                                                        |       | **84,551**        |           |       |       | 98,146                |       |
| Other                                                                                                            |       | **1,265,701**     |           |       |       | 926,315               |       |
| **Total regulatory assets and deferred debits**                                                                  |       | **1,426,323**     |           |       |       | 1,115,999             |       |
|                                                                                                             |       | ** **        |           |       |       |                  |       |
| **Total Assets**                                                                                                 |       | **$**             | **23,283,764** |       |       |                  | $          | 17,153,840 |   |

 

**SeeNotes to Unaudited Consolidated Financial Statements**

6

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**CINERGY CORP.**

**CONSOLIDATED BALANCE SHEETS**

**(dollars in thousands, except pershare amounts)**

**(unaudited)**

**LIABILITIES AND COMMON STOCKHOLDER’S EQUITY**
| ** **                                                                                                                                                                                                                      | ** ** | **Successor**     | ** **     | ** ** | ** ** | **Predecessor**       | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|----------------|------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                                      | ** ** | **June 30,** | ** **     | ** ** | ** ** | **December 31,** | ** ** |
| ** **                                                                                                                                                                                                                      | ** ** | **2006**          | ** **     | ** ** | ** ** | **2005**              | ** ** |
|                                                                                                                                                                                                                            |       |              |           |       |       |                  |       |
| **Current  Liabilities**                                                                                                                                                                                                        | ** ** | ** **        | ** **     | ** ** | ** ** | ** **            | ** ** |
| Accounts payable                                                                                                                                                                                                                |       | **$**             | **657,624**    | ** ** |       |                  | $          | 1,647,106 |   |
| Notes payable and commercial paper                                                                                                                                                                                              |       | **1,271,590**     | ** **     |       |       | 923,600               |       |
| Taxes accrued                                                                                                                                                                                                                   |       | **62,934**        | ** **     |       |       | 219,469               |       |
| Interest accrued                                                                                                                                                                                                                |       | **75,608**        | ** **     |       |       | 64,725                |       |
| Liabilities associated with assets held for sale                                                                                                                                                                                |       | **825,019**       | ** **     |       |       | 5,721                 |       |
| Current maturities of long-term debt and preferred  stock                                                                                                                                                                       |       | **385,369**       | ** **     |       |       | 360,730               |       |
| Unrealized losses on mark-to-market and hedging  transactions                                                                                                                                                                   |       | **91,827**        | ** **     |       |       | 1,010,585             |       |
| Other                                                                                                                                                                                                                           |       | **248,307**       | ** **     |       |       | 417,643               |       |
| **Total current liabilities**                                                                                                                                                                                                   |       | **3,618,278**     | ** **     |       |       | 4,649,579             |       |
|                                                                                                                                                                                                                            |       | ** **        | ** **     |       |       |                  |       |
| **Long-term  Debt**                                                                                                                                                                                                             |       | **4,592,755**     | ** **     |       |       | 4,459,694             |       |
|                                                                                                                                                                                                                            |       | ** **        | ** **     |       |       |                  |       |
| **Deferred  Credits and Other Liabilities**                                                                                                                                                                                     | ** ** | ** **        | ** **     | ** ** | ** ** | ** **            | ** ** |
| Deferred income taxes                                                                                                                                                                                                           |       | **1,813,882**     | ** **     |       |       | 1,523,070             |       |
| Investment tax credit                                                                                                                                                                                                           |       | **86,502**        | ** **     |       |       | 90,852                |       |
| Accrued pension and other postretirement benefit  costs                                                                                                                                                                         |       | **1,279,117**     | ** **     |       |       | 729,221               |       |
| Regulatory liabilities                                                                                                                                                                                                          |       | **624,924**       | ** **     |       |       | 546,047               |       |
| Unrealized losses on mark-to-market and hedging  transactions                                                                                                                                                                   |       | **91,613**        | ** **     |       |       | 341,671               |       |
| Liabilities associated with assets held for sale                                                                                                                                                                                |       | **278,009**       | ** **     |       |       | 23,155                |       |
| Asset retirement obligations                                                                                                                                                                                                    |       | **59,611**        | ** **     |       |       | 57,425                |       |
| Other                                                                                                                                                                                                                           |       | **336,171**       | ** **     |       |       | 123,988               |       |
| **Total deferred credits and other liabilities**                                                                                                                                                                                |       | **4,569,829**     | ** **     |       |       | 3,435,429             |       |
|                                                                                                                                                                                                                            |       | ** **        | ** **     |       |       |                  |       |
| **Commitments  and Contingencies**                                                                                                                                                                                              | ** ** | ** **        | ** **     | ** ** | ** ** | ** **            | ** ** |
| **Cumulative  Preferred Stock of Subsidiaries Not Subject to Mandatory Redemption**                                                                                                                                             |       | **—**        | ** **     |       |       | 31,743                |       |
|                                                                                                                                                                                                                            |       | ** **        | ** **     |       |       |                  |       |
| **Common  Stockholder’s Equity**                                                                                                                                                                                           |       | ** **        | ** **     |       |       |                  |       |
| Common stock, $.01 par value; 1,000 shares  authorized, 100 shares issued and outstanding at June 30, 2006; 600,000,000  shares authorized, 199,707,338 shares issued, and 199,565,684 shares  outstanding at December 31, 2005 |       | **—**        | ** **     |       |       | 1,997                 |       |
| Paid-in capital                                                                                                                                                                                                                 |       | **10,542,958**    | ** **     |       |       | 2,982,625             |       |
| Retained earnings                                                                                                                                                                                                               |       | **745**           | ** **     |       |       | 1,721,716             |       |
| Treasury shares at cost – 0 shares at June 30, 2006  and 141,654 shares at December 31, 2005                                                                                                                               |       | **—**        | ** **     |       |       | (4,823                | )          |
| Accumulated other comprehensive loss                                                                                                                                                                                            |       | **(40,801**       | **)**          |       |       | (124,120              | )          |
| **Total common stockholder’s equity**                                                                                                                                                                                      |       | **10,502,902**    | ** **     |       |       | 4,577,395             |       |
|                                                                                                                                                                                                                            |       | ** **        | ** **     |       |       |                  |       |
| **Total  Liabilities and Common Stockholder’s Equity**                                                                                                                                                                     |       | **$**             | **23,283,764** | ** ** |       |                  | $          | 17,153,840 |   |

 

**See Notes to UnauditedConsolidated Financial Statements**

7

----

**CINERGY CORP.**

**CONSOLIDATEDSTATEMENTS OF CHANGES IN COMMON STOCKHOLDER’S EQUITY AND COMPREHENSIVE INCOME (LOSS)**

**(dollars in thousands, except pershare amounts)**

**(unaudited)**
| ** **                                                      | ** **   | ** **   | ** **   | ** **    | ** **   | ** **     | ** **   | ** **   | ** **    | **Accumulated**        | ** **   | **Total**              | ** **   |
|-----------------------------------------------------------------|--------------|--------------|--------------|---------------|--------------|----------------|--------------|--------------|---------------|------------------------|--------------|------------------------|--------------|
| ** **                                                      | ** **   | ** **   | ** **   | ** **    | ** **   | ** **     | ** **   | ** **   | ** **    | **Other**              | ** **   | **Common**             | ** **   |
| ** **                                                      | ** **   | **Common**   | ** **   | **Paid-in**   | ** **   | **Retained**   | ** **   | **Treasury** | ** **    | **Comprehensive**      | ** **   | **Stockholder’s** | ** **   |
| ** **                                                      | ** **   | **Stock**    | ** **   | **Capital**   | ** **   | **Earnings**   | ** **   | **Stock**    | ** **    | **Income (Loss)** | ** **   | **Equity**             | ** **   |
|                                                            |         |         |         |          |         |           |         |         |          |                   |         |                   |         |
| **Successor**                                                   | ** **   | ** **   | ** **   | ** **    | ** **   | ** **     | ** **   | ** **   | ** **    | ** **             | ** **   | ** **             | ** **   |
| *** ***                                                    | *** *** | *** *** | *** *** | *** ***  | *** *** | *** ***   | *** *** | *** *** | *** ***  | *** ***           | *** *** | *** ***           | *** *** |
| **Three  Months Ended June 30, 2006**                           | ** **   | ** **   | ** **   | ** **    | ** **   | ** **     | ** **   | ** **   | ** **    | ** **             | ** **   | ** **             | ** **   |
| ** **                                                      | ** **   | ** **   | ** **   | ** **    | ** **   | ** **     | ** **   | ** **   | ** **    | ** **             | ** **   | ** **             | ** **   |
| **Balance  at April 1, 2006**                                   | ** **   | **$**        | **—**   | ** **    | **$**        | **9,088,764**  | ** **   | **$**        | **—**    | ** **             | **$**        | **—**             | ** **   | **$** | **—** | ** ** | **$** | **9,088,764** | ** ** |
| ** **                                                      | ** **   | ** **   | ** **   | ** **    | ** **   | ** **     | ** **   | ** **   | ** **    | ** **             | ** **   | ** **             | ** **   |
| **Net  income**                                                 | ** **   | ** **   | ** **   | ** **    | ** **   | **745**        | ** **   | ** **   | ** **    | ** **             | ** **   | **745**                | ** **   |
| **Other  comprehensive loss, net of tax effect of $838**        | ** **   | ** **   | ** **   | ** **    | ** **   | ** **     | ** **   | ** **   | ** **    | ** **             | ** **   | ** **             | ** **   |
| **Foreign currency translation adjustment**                     | ** **   | ** **   | ** **   | ** **    | ** **   | ** **     | ** **   | ** **   | ** **    | **315**                | ** **   | **315**                | ** **   |
| **Unrealized loss on investment trusts**                        | ** **   | ** **   | ** **   | ** **    | ** **   | ** **     | ** **   | ** **   | ** **    | **(1,326**             | **)**        | **(1,326**             | **)**        |
| **Cash flow hedges**                                            | ** **   | ** **   | ** **   | ** **    | ** **   | ** **     | ** **   | ** **   | ** **    | **(134**               | **)**        | **(134**               | **)**        |
| **Total  comprehensive loss**                                   | ** **   | ** **   | ** **   | ** **    | ** **   | ** **     | ** **   | ** **   | ** **    | ** **             | ** **   | **(400**               | **)**        |
| ** **                                                      | ** **   | ** **   | ** **   | ** **    | ** **   | ** **     | ** **   | ** **   | ** **    | ** **             | ** **   | ** **             | ** **   |
| **Transfer  of generating assets from Duke Energy(1)**          | ** **   | ** **   | ** **   | **1,452,191** | ** **   | ** **     | ** **   | ** **   | ** **    | **(39,656**            | **)**        | **1,412,535**          | ** **   |
| **Other**                                                       | ** **   | ** **   | ** **   | **2,003**     | ** **   | ** **     | ** **   | ** **   | ** **    | ** **             | ** **   | **2,003**              | ** **   |
| ** **                                                      | ** **   | ** **   | ** **   | ** **    | ** **   | ** **     | ** **   | ** **   | ** **    | ** **             | ** **   | ** **             | ** **   |
| **Balance  at June 30, 2006**                                   | ** **   | **$**        | **—**   | ** **    | **$**        | **10,542,958** | ** **   | **$**        | **745**       | ** **             | **$**        | **—**             | ** **   | **$** | **(40,801** | **)** | **$** | **10,502,902** | ** ** |
| ** **                                                      | ** **   | ** **   | ** **   | ** **    | ** **   | ** **     | ** **   | ** **   | ** **    | ** **             | ** **   | ** **             | ** **   |
| ** **                                                      | ** **   | ** **   | ** **   | ** **    | ** **   | ** **     | ** **   | ** **   | ** **    | ** **             | ** **   | ** **             | ** **   |
| **Predecessor**                                                 | ** **   | ** **   | ** **   | ** **    | ** **   | ** **     | ** **   | ** **   | ** **    | ** **             | ** **   | ** **             | ** **   |
| ** **                                                      | ** **   | ** **   | ** **   | ** **    | ** **   | ** **     | ** **   | ** **   | ** **    | ** **             | ** **   | ** **             | ** **   |
| **Three  Months Ended March 31, 2006**                          | ** **   | ** **   | ** **   | ** **    | ** **   | ** **     | ** **   | ** **   | ** **    | ** **             | ** **   | ** **             | ** **   |
| ** **                                                      | ** **   | ** **   | ** **   | ** **    | ** **   | ** **     | ** **   | ** **   | ** **    | ** **             | ** **   | ** **             | ** **   |
| **Balance  at January 1, 2006 (199,565,684 shares)**            | ** **   | **$**        | **1,997**    | ** **    | **$**        | **2,982,625**  | ** **   | **$**        | **1,721,716** | ** **             | **$**        | **(4,823**             | **)**        | **$** | **(124,120** | **)** | **$** | **4,577,395** | ** ** |
| ** **                                                      | ** **   | ** **   | ** **   | ** **    | ** **   | ** **     | ** **   | ** **   | ** **    | ** **             | ** **   | ** **             | ** **   |
| **Net  income**                                                 | ** **   | ** **   | ** **   | ** **    | ** **   | **79,364**     | ** **   | ** **   | ** **    | ** **             | ** **   | **79,364**             | ** **   |
| **Other  comprehensive income, net of tax effect of $(5,413)**  | ** **   | ** **   | ** **   | ** **    | ** **   | ** **     | ** **   | ** **   | ** **    | ** **             | ** **   | ** **             | ** **   |
| **Foreign currency translation adjustment**                     | ** **   | ** **   | ** **   | ** **    | ** **   | ** **     | ** **   | ** **   | ** **    | **120**                | ** **   | **120**                | ** **   |
| **Unrealized gain on investment trusts**                        | ** **   | ** **   | ** **   | ** **    | ** **   | ** **     | ** **   | ** **   | ** **    | **1,530**              | ** **   | **1,530**              | ** **   |
| **Minimum pension liability adjustment**                        | ** **   | ** **   | ** **   | ** **    | ** **   | ** **     | ** **   | ** **   | ** **    | **916**                | ** **   | **916**                | ** **   |
| **Cash flow hedges**                                            | ** **   | ** **   | ** **   | ** **    | ** **   | ** **     | ** **   | ** **   | ** **    | **7,539**              | ** **   | **7,539**              | ** **   |
| **Total  comprehensive income**                                 | ** **   | ** **   | ** **   | ** **    | ** **   | ** **     | ** **   | ** **   | ** **    | ** **             | ** **   | **89,469**             | ** **   |
| ** **                                                      | ** **   | ** **   | ** **   | ** **    | ** **   | ** **     | ** **   | ** **   | ** **    | ** **             | ** **   | ** **             | ** **   |
| **Issuance  of common stock, net (946,650 shares)**             | ** **   | **10**       | ** **   | **28,862**    | ** **   | ** **     | ** **   | ** **   | ** **    | ** **             | ** **   | **28,872**             | ** **   |
| **Treasury  shares purchased (4,959 shares)**                   | ** **   | ** **   | ** **   | ** **    | ** **   | ** **     | ** **   | **(224**     | **)**         | ** **             | ** **   | **(224**               | **)**        |
| **Dividends  on common stock ($.64 per share)**                 | ** **   | ** **   | ** **   | ** **    | ** **   | **(127,314**   | **)**        | ** **   | ** **    | ** **             | ** **   | **(127,314**           | **)**        |
| **Other**                                                       | ** **   | ** **   | ** **   | **6,092**     | ** **   | **(27**        | **)**        | ** **   | ** **    | ** **             | ** **   | **6,065**              | ** **   |
| ** **                                                      | ** **   | ** **   | ** **   | ** **    | ** **   | ** **     | ** **   | ** **   | ** **    | ** **             | ** **   | ** **             | ** **   |
| **Balance  at March 31, 2006 (200,507,375 shares)**             | ** **   | **$**        | **2,007**    | ** **    | **$**        | **3,017,579**  | ** **   | **$**        | **1,673,739** | ** **             | **$**        | **(5,047**             | **)**        | **$** | **(114,015** | **)** | **$** | **4,574,263** | ** ** |
| ** **                                                      | ** **   | ** **   | ** **   | ** **    | ** **   | ** **     | ** **   | ** **   | ** **    | ** **             | ** **   | ** **             | ** **   |
| Six Months Ended  June 30, 2005                                 |         |         |         |          |         |           |         |         |          |                   |         |                   |         |
|                                                            |         |         |         |          |         |           |         |         |          |                   |         |                   |         |
| Balance at  January 1, 2005 (187,524,229 shares)                |         | $            | 1,877        |          | $            | 2,559,715      |         | $            | 1,613,340     |                   | $            | (4,336                 | )            | $ | (54,674 | ) | $ | 4,115,922 |   |
|                                                            |         |         |         |          |         |           |         |         |          |                   |         |                   |         |
| Net income                                                      |         |         |         | 168,064       |         |           |         |         |          |                   |         | 168,064                |         |
| Other  comprehensive income (loss), net of tax effect of $6,635 |         |         |         |          |         |           |         |         |          |                   |         |                   |         |
| Foreign currency translation adjustment                         |         |         |         |          |         |           |         |         |          | (13,107                | )            | (13,107                | )            |
| Unrealized loss on investment trusts                            |         |         |         |          |         |           |         |         |          | (954                   | )            | (954                   | )            |
| Cash flow hedges                                                |         |         |         |          |         |           |         |         |          | 1,101                  |         | 1,101                  |         |
| Total  comprehensive income                                     |         |         |         |          |         |           |         |         |          |                   |         | 155,104                |         |
|                                                            |         |         |         |          |         |           |         |         |          |                   |         |                   |         |
| Issuance of  common stock, net (11,015,306 shares)              |         | 110          |         | 377,513       |         |           |         |         |          |                   |         | 377,623                |         |
| Treasury shares  purchased (10,852 shares)                      |         |         |         |          |         |           |         | (430         | )             |                   |         | (430                   | )            |
| Dividends on  common stock ($.96 per share)                     |         |         |         |          |         | (187,076       | )            |         |          |                   |         | (187,076               | )            |
| Other                                                           |         |         |         | 4,519         |         | (275           | )            |         |          |                   |         | 4,244                  |         |
|                                                            |         |         |         |          |         |           |         |         |          |                   |         |                   |         |
| Balance at June 30, 2005  (198,528,683 shares)                  |         | $            | 1,987        |          | $            | 2,941,747      |         | $            | 1,594,053     |                   | $            | (4,766                 | )            | $ | (67,634 | ) | $ | 4,465,387 |   |

 

----

(1)                                  Includes $39,656 (net of tax benefit of $23,793) related to deferredlosses on terminated cash flow hedges included in Accumulated OtherComprehensive Income (Loss).  See Note 12(b)(*v*) to the Consolidated Financial Statements.

** **

**See Notes to Unaudited Consolidated Financial Statements**

8

----

**CINERGY CORP.**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(dollars in thousands)**

**(unaudited)**
| ** **                                                                                                           | ** ** | **Successor**               | ** **    | ** ** | ** ** | **Predecessor**              | ** ** |
|----------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|---------------|------------|------------|------------------------------|------------|
| ** **                                                                                                           | ** ** | **Three Months**       | ** **    | ** ** | ** ** | **Three Months**        | ** ** | **Six Months** | ** ** |
| ** **                                                                                                           | ** ** | **Ended**                   | ** **    | ** ** | ** ** | **Ended**                    | ** ** | **Ended** | ** ** |
| ** **                                                                                                           | ** ** | **June 30, 2006** | ** **    | ** ** | ** ** | **March 31, 2006** | ** ** | **June 30, 2005** | ** ** |
| **Cash  Flows from Operating Activities**                                                                            | ** ** | ** **                  | ** **    |       |       | ** **                   | ** ** | ** ** | ** ** |
| Net income                                                                                                           |       | **$**                       | **745**       | ** ** |       |                         | $          | 79,364 |   | $ | 168,064 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities:                                   |       | ** **                  | ** **    |       |       |                         |       |   |   |
| Depreciation and amortization                                                                                        |       | **185,868**                 | ** **    |       |       | 163,793                      |       | 306,011 |   |
| Return on equity investments                                                                                         |       | **11,887**                  | ** **    |       |       | 4,857                        |       | — |   |
| (Gains) losses on sales of equity investments and  other assets                                                      |       | **5,227**                   | ** **    |       |       | (26,069                      | )          | (70,345 | ) |
| Impairment charges                                                                                                   |       | **—**                  | ** **    |       |       | 7,398                        |       | 7,542 |   |
| Deferred income taxes                                                                                                |       | **61,198**                  | ** **    |       |       | (14,309                      | )          | 11,094 |   |
| Equity in earnings of unconsolidated subsidiaries                                                                    |       | **(5,606**                  | **)**         |       |       | (4,095                       | )          | (18,411 | ) |
| Accrued pension and postretirement benefit costs                                                                     |       | **33,310**                  | ** **    |       |       | 32,330                       |       | 57,800 |   |
| Cumulative effect of change in accounting principle                                                                  |       | **—**                  | ** **    |       |       | 3,493                        |       | — |   |
| Regulatory asset amortization                                                                                        |       | **9,020**                   | ** **    |       |       | 13,367                       |       | 13,436 |   |
| (Increase) decrease in:                                                                                              |       | ** **                  | ** **    |       |       |                         |       |   |   |
| Net realized and unrealized mark-to-market and  hedging transactions                                                 |       | **(20,872**                 | **)**         |       |       | (154,665                     | )          | 93,461 |   |
| Receivables                                                                                                          |       | **189,570**                 | ** **    |       |       | 503,549                      |       | 209,790 |   |
| Inventory                                                                                                            |       | **(44,630**                 | **)**         |       |       | 102,863                      |       | (66,419 | ) |
| Other current assets                                                                                                 |       | **(68,913**                 | **)**         |       |       | 8,498                        |       | (107,064 | ) |
| Increase (decrease) in:                                                                                              |       | ** **                  | ** **    |       |       |                         |       |   |   |
| Accounts payable                                                                                                     |       | **(59,585**                 | **)**         |       |       | (529,943                     | )          | (92,575 | ) |
| Taxes accrued                                                                                                        |       | **(128,664**                | **)**         |       |       | (60,576                      | )          | (88,091 | ) |
| Other current liabilities                                                                                            |       | **(280,646**                | **)**         |       |       | 21,309                       |       | 4,543 |   |
| Regulatory asset/liability deferrals                                                                                 |       | **89,117**                  | ** **    |       |       | (21,465                      | )          | (66,548 | ) |
| Other assets                                                                                                         |       | **214,636**                 | ** **    |       |       | 56,245                       |       | 49,111 |   |
| Other liabilities                                                                                                    |       | **(116,590**                | **)**         |       |       | (19,595                      | )          | (93,897 | ) |
|                                                                                                                 |       | ** **                  | ** **    |       |       |                         |       |   |   |
| **Net cash provided by operating activities**                                                                        |       | **75,072**                  | ** **    |       |       | 166,349                      |       | 317,502 |   |
|                                                                                                                 |       | ** **                  | ** **    |       |       |                         |       |   |   |
| **Cash  Flows from Investing Activities**                                                                            | ** ** | ** **                  | ** **    |       |       | ** **                   | ** ** | ** ** | ** ** |
| Capital expenditures                                                                                                 |       | **(301,719**                | **)**         |       |       | (298,117                     | )          | (523,979 | ) |
| Purchases of emission allowances                                                                                     |       | **(112,096**                | **)**         |       |       | (181,443                     | )          | (150,454 | ) |
| Sale of emission allowances                                                                                          |       | **84,253**                  | ** **    |       |       | 99,413                       |       | 131,805 |   |
| Net proceeds from the sales of equity investments  and other assets, and sales of and collection on notes receivable |       | **5,677**                   | ** **    |       |       | 5,466                        |       | 57,779 |   |
| Other                                                                                                                |       | **894**                     | ** **    |       |       | (1,581                       | )          | 58,965 |   |
|                                                                                                                 |       | ** **                  | ** **    |       |       |                         |       |   |   |
| **Net cash used in investing activities**                                                                            |       | **(322,991**                | **)**         |       |       | (376,262                     | )          | (425,884 | ) |
|                                                                                                                 |       | ** **                  | ** **    |       |       |                         |       |   |   |
| **Cash  Flows from Financing Activities**                                                                            | ** ** | ** **                  | ** **    |       |       | ** **                   | ** ** | ** ** | ** ** |
| Issuance of long-term debt                                                                                           |       | **325,312**                 | ** **    |       |       | 174,069                      |       | 4,612 |   |
| Issuance of common stock and common stock related to  employee benefit plans                                         |       | **—**                  | ** **    |       |       | 28,872                       |       | 377,623 |   |
| Redemption of long-term debt                                                                                         |       | **(347,656**                | **)**         |       |       | (13,612                      | )          | (9,487 | ) |
| Redemption of preferred stock of subsidiaries                                                                        |       | **(11,258**                 | **)**         |       |       | (20,485                      | )          | — |   |
| Notes payable and commercial paper                                                                                   |       | **254,974**                 | ** **    |       |       | 166,891                      |       | (93,653 | ) |
| Dividends paid                                                                                                       |       | **—**                  | ** **    |       |       | (127,314                     | )          | (187,076 | ) |
| Other                                                                                                                |       | **—**                  | ** **    |       |       | 2,993                        |       | — |   |
|                                                                                                                 |       | ** **                  | ** **    |       |       |                         |       |   |   |
| **Net cash provided by financing activities**                                                                        |       | **221,372**                 | ** **    |       |       | 211,414                      |       | 92,019 |   |
| ** **                                                                                                           | ** ** | ** **                  | ** **    |       |       | ** **                   | ** ** | ** ** | ** ** |
| **Net  (decrease) increase in cash and cash equivalents**                                                            |       | **(26,547**                 | **)**         |       |       | 1,501                        |       | (16,363 | ) |
| ** **                                                                                                           | ** ** | ** **                  | ** **    |       |       | ** **                   | ** ** | ** ** | ** ** |
| **Cash  and cash equivalents at beginning of period**                                                                |       | **147,557**                 | ** **    |       |       | 146,056                      |       | 164,541 |   |
| ** **                                                                                                           | ** ** | ** **                  | ** **    |       |       | ** **                   | ** ** | ** ** | ** ** |
| **Cash  and cash equivalents at end of period**                                                                      |       | **$**                       | **121,010**   | ** ** |       |                         | $          | 147,557 |   | $ | 148,178 |   |
|                                                                                                                 |       | ** **                  | ** **    |       |       |                         |       |   |   |
| **Significant  non-cash transactions:**                                                                              | ** ** | ** **                  | ** **    |       |       | ** **                   | ** ** | ** ** | ** ** |
| Purchase accounting adjustments                                                                                      |       | **$**                       | **4,514,501** | ** ** |       |                         | $          | — |   | $ | — |   |
| Allowance for funds used during construction (AFUDC)  – equity component                                        |       | **(4,661**                  | **)**         |       |       | (3,065                       | )          | (4,402 | ) |
| Transfer of generating assets from Duke Energy                                                                       |       | **1,452,191**               | ** **    |       |       | —                       |       | — |   |

**S**ee Notesto Unaudited Consolidated Financial Statements

9

----

** **

**THECINCINNATI GAS & ELECTRIC COMPANY**

**AND SUBSIDIARY COMPANIES**

10

----

**THE CINCINNATI GAS & ELECTRICCOMPANY**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**(dollars in thousands)**

**(unaudited)**
| ** **                                                                  | ** ** | **Successor**                | ** **  | ** ** | ** ** | **Predecessor**              | ** ** |
|-----------------------------------------------------------------------------|------------|------------------------------|-------------|------------|------------|------------------------------|------------|
| ** **                                                                  | ** ** | **Three Months  Ended** | ** **  | ** ** | ** ** | **Three Months  Ended** | ** ** | **Three Months  Ended** | ** ** | **Six Months  Ended** | ** ** |
| ** **                                                                  | ** ** | **June 30, 2006**  | ** **  | ** ** | ** ** | **March 31, 2006** | ** ** | **June 30, 2005** | ** ** | **June 30, 2005** | ** ** |
| **Operating Revenues**                                                      |       |                         |        |       |       |                         |       |   |   |   |   |
| Non-regulated  electric, natural gas, natural gas liquids, and other        |       | **$**                        | **399,385** | ** ** |       |                         | $          | 421,069 |   | $ | 307,261 |   | $ | 599,834 |   |
| Regulated electric                                                          |       | **202,622**                  | ** **  |       |       | 219,845                      |       | 142,263 |   | 294,061 |   |
| Regulated  natural gas and natural gas liquids                              |       | **93,827**                   | ** **  |       |       | 321,965                      |       | 100,468 |   | 406,822 |   |
| **Total  operating revenues**                                               |       | **695,834**                  | ** **  |       |       | 962,879                      |       | 549,992 |   | 1,300,717 |   |
|                                                                        |       | ** **                   | ** **  |       |       |                         |       |   |   |   |   |
| **Operating Expenses**                                                      | ** ** | ** **                   | ** **  | ** ** | ** ** | ** **                   | ** ** | ** ** | ** ** | ** ** | ** ** |
| Natural gas and  petroleum products purchased                               |       | **50,993**                   | ** **  |       |       | 232,006                      |       | 56,089 |   | 263,871 |   |
| Operation,  maintenance, and other                                          |       | **172,913**                  | ** **  |       |       | 173,180                      |       | 151,464 |   | 290,175 |   |
| Fuel used in  electric generation and purchased power                       |       | **249,679**                  | ** **  |       |       | 195,852                      |       | 143,581 |   | 280,171 |   |
| Costs of fuel  resold                                                       |       | **28,534**                   | ** **  |       |       | 44,291                       |       | 49,232 |   | 90,218 |   |
| Depreciation and  amortization                                              |       | **92,588**                   | ** **  |       |       | 67,918                       |       | 60,533 |   | 125,773 |   |
| Property and  other taxes                                                   |       | **54,843**                   | ** **  |       |       | 68,192                       |       | 52,256 |   | 111,546 |   |
| **Total  operating expenses**                                               |       | **649,550**                  | ** **  |       |       | 781,439                      |       | 513,155 |   | 1,161,754 |   |
|                                                                        |       | ** **                   | ** **  |       |       |                         |       |   |   |   |   |
| **(Losses) Gains on Sales of  Other Assets and Other, net**                 |       | **(5,227**                   | **)**       |       |       | 26,069                       |       | 39,535 |   | 70,345 |   |
| ** **                                                                  |       | ** **                   | ** **  |       |       |                         |       |   |   |   |   |
| **Operating Income**                                                        |       | **41,057**                   | ** **  |       |       | 207,509                      |       | 76,372 |   | 209,308 |   |
| ** **                                                                  |       | ** **                   | ** **  |       |       |                         |       |   |   |   |   |
| **Other Income and Expenses, net**                                          |       | **6,886**                    | ** **  |       |       | 8,195                        |       | 3,722 |   | 7,298 |   |
| **Interest Expense**                                                        |       | **28,395**                   | ** **  |       |       | 29,680                       |       | 23,349 |   | 46,016 |   |
| ** **                                                                  |       | ** **                   | ** **  |       |       |                         |       |   |   |   |   |
| **Income from Continuing  Operations Before Income Taxes**                  |       | **19,548**                   | ** **  |       |       | 186,024                      |       | 56,745 |   | 170,590 |   |
| ** **                                                                  |       | ** **                   | ** **  |       |       |                         |       |   |   |   |   |
| **Income Tax Expense from  Continuing Operations**                          |       | **7,336**                    | ** **  |       |       | 67,810                       |       | 12,345 |   | 59,076 |   |
| ** **                                                                  |       | ** **                   | ** **  |       |       |                         |       |   |   |   |   |
| **Income from Continuing  Operations**                                      |       | **12,212**                   | ** **  |       |       | 118,214                      |       | 44,400 |   | 111,514 |   |
| ** **                                                                  |       | ** **                   | ** **  |       |       |                         |       |   |   |   |   |
| **(Loss) Income from Discontinued  Operations, net of tax**                 |       | **(19,613**                  | **)**       |       |       | (1,851                       | )          | 9,223 |   | 26,775 |   |
| ** **                                                                  |       | ** **                   | ** **  |       |       |                         |       |   |   |   |   |
| **Net (Loss) Income**                                                       |       | **$**                        | **(7,401**  | **)**      |       |                         | $          | 116,363 |   | $ | 53,623 |   | $ | 138,289 |   |
| ** **                                                                  | ** ** | ** **                   | ** **  | ** ** | ** ** | ** **                   | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Dividends and Premiums on  Redemption of Preferred and Preference Stock** |       | **—**                   | ** **  |       |       | 164                          |       | 211 |   | 423 |   |
| ** **                                                                  |       | ** **                   | ** **  |       |       |                         |       |   |   |   |   |
| **(Loss) Earnings Available for Common  Stockholders**                      |       | **$**                        | **(7,401**  | **)**      |       |                         | $          | 116,199 |   | $ | 53,412 |   | $ | 137,866 |   |

 

**SeeNotes to Unaudited Consolidated Financial Statements**

11

----

**THE CINCINNATI GAS & ELECTRICCOMPANY**

**CONSOLIDATEDBALANCE SHEETS**

**(dollars in thousands)**

**(unaudited)**

**ASSETS**
| ** **                                                                                                       | ** ** | **Successor**     | ** **     | ** ** | ** ** | **Predecessor**       | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|-------------------|----------------|------------|------------|-----------------------|------------|
| ** **                                                                                                       | ** ** | **June 30,** | ** **     | ** ** | ** ** | **December 31,** | ** ** |
| ** **                                                                                                       | ** ** | **2006**          | ** **     | ** ** | ** ** | **2005**              | ** ** |
|                                                                                                             |       | ** **        |           |       |       |                  |       |
| **Current  Assets**                                                                                              | ** ** | ** **        | ** **     | ** ** | ** ** | ** **            | ** ** |
| Cash and cash equivalents                                                                                        |       | **$**             | **21,338**     |       |       |                  | $          | 9,674 |   |
| Receivables (net of allowance for doubtful accounts  of $7,283 at June 30, 2006 and $3,518 at December 31, 2005) |       | **367,409**       |           |       |       | 422,162               |       |
| Inventory                                                                                                        |       | **148,912**       |           |       |       | 177,638               |       |
| Assets held for sale                                                                                             |       | **205,414**       |           |       |       | —                |       |
| Unrealized gains on mark-to-market and hedging  transactions                                                     |       | **40,747**        |           |       |       | 543,787               |       |
| Other                                                                                                            |       | **88,262**        |           |       |       | 177,417               |       |
| **Total current assets**                                                                                         |       | **872,082**       |           |       |       | 1,330,678             |       |
|                                                                                                             |       | ** **        |           |       |       |                  |       |
| **Investments  and Other Assets**                                                                                | ** ** | ** **        | ** **     | ** ** | ** ** | ** **            | ** ** |
| Restricted funds held in trust                                                                                   |       | **51,214**        |           |       |       | 58,189                |       |
| Goodwill                                                                                                         |       | **2,173,206**     |           |       |       | —                |       |
| Intangible assets                                                                                                |       | **849,952**       |           |       |       | 105,275               |       |
| Unrealized gains on mark-to-market and hedging  transactions                                                     |       | **33,133**        |           |       |       | 180,197               |       |
| Assets held for sale                                                                                             |       | **89,807**        |           |       |       | —                |       |
| Other                                                                                                            |       | **21,463**        |           |       |       | 27,067                |       |
| **Total investments and other assets**                                                                           |       | **3,218,775**     |           |       |       | 370,728               |       |
|                                                                                                             |       | ** **        |           |       |       |                  |       |
| **Property,  Plant, and Equipment**                                                                              |       | ** **        |           |       |       |                  |       |
| Cost                                                                                                             |       | **8,933,359**     |           |       |       | 7,775,765             |       |
| Less accumulated depreciation and amortization                                                                   |       | **1,810,388**     |           |       |       | 2,815,852             |       |
| **Net property, plant, and equipment**                                                                           |       | **7,122,971**     |           |       |       | 4,959,913             |       |
|                                                                                                             |       | ** **        |           |       |       |                  |       |
| **Regulatory  Assets and Deferred Debits**                                                                       | ** ** | ** **        | ** **     | ** ** | ** ** | ** **            | ** ** |
| Deferred debt expense                                                                                            |       | **21,739**        |           |       |       | 30,141                |       |
| Regulatory assets related to income taxes                                                                        |       | **73,290**        |           |       |       | 79,495                |       |
| Other                                                                                                            |       | **586,974**       |           |       |       | 462,888               |       |
| **Total regulatory assets and deferred debits**                                                                  |       | **682,003**       |           |       |       | 572,524               |       |
|                                                                                                             |       | ** **        |           |       |       |                  |       |
| **Total  Assets**                                                                                                |       | **$**             | **11,895,831** |       |       |                  | $          | 7,233,843 |   |

 

**SeeNotes to Unaudited Consolidated Financial Statements**

12

----

**THECINCINNATI GAS & ELECTRIC COMPANYCONSOLIDATED BALANCE SHEETS(**dollars in thousands,except per share amounts)(unaudited)

**LIABILITIESAND COMMON STOCKHOLDER’S EQUITY**
| ** **                                                                                                                              | ** ** | **Successor**     | ** **     | ** ** | ** ** | **Predecessor**       | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|----------------|------------|------------|-----------------------|------------|
| ** **                                                                                                                              | ** ** | **June 30,** | ** **     | ** ** | ** ** | **December 31,** | ** ** |
| ** **                                                                                                                              | ** ** | **2006**          | ** **     | ** ** | ** ** | **2005**              | ** ** |
|                                                                                                                                    |       |              |           |       |       |                  |       |
| **Current  Liabilities**                                                                                                                | ** ** | ** **        | ** **     | ** ** | ** ** | ** **            | ** ** |
| Accounts payable                                                                                                                        |       | **$**             | **457,398**    | ** ** |       |                  | $          | 629,751 |   |
| Notes payable and commercial paper                                                                                                      |       | **309,910**       | ** **     |       |       | 226,352               |       |
| Taxes accrued                                                                                                                           |       | **211,401**       | ** **     |       |       | 177,551               |       |
| Interest accrued                                                                                                                        |       | **28,448**        | ** **     |       |       | 24,438                |       |
| Liabilities associated with assets held for sale                                                                                        |       | **186,570**       | ** **     |       |       | -                     |       |
| Current maturities of long-term debt and preferred  stock                                                                               |       | **5,197**         | ** **     |       |       | 5,042                 |       |
| Unrealized losses on mark-to-market and hedging  transactions                                                                           |       | **57,876**        | ** **     |       |       | 552,105               |       |
| Other                                                                                                                                   |       | **117,403**       | ** **     |       |       | 212,724               |       |
| **Total current liabilities**                                                                                                           |       | **1,374,203**     | ** **     |       |       | 1,827,963             |       |
|                                                                                                                                    |       | ** **        | ** **     |       |       |                  |       |
| **Long-term  Debt**                                                                                                                     |       | **1,756,069**     | ** **     |       |       | 1,638,027             |       |
|                                                                                                                                    |       | ** **        | ** **     |       |       |                  |       |
| **Deferred  Credits and Other Liabilities**                                                                                             | ** ** | ** **        | ** **     | ** ** | ** ** | ** **            | ** ** |
| Deferred income taxes                                                                                                                   |       | **1,587,368**     | ** **     |       |       | 1,055,093             |       |
| Investment tax credit                                                                                                                   |       | **64,313**        | ** **     |       |       | 67,229                |       |
| Accrued pension and other postretirement benefit  costs                                                                                 |       | **381,242**       | ** **     |       |       | 245,950               |       |
| Regulatory liabilities                                                                                                                  |       | **164,198**       | ** **     |       |       | 151,670               |       |
| Unrealized losses on mark-to-market and hedging  transactions                                                                           |       | **38,161**        | ** **     |       |       | 186,835               |       |
| Liabilities associated with assets held for sale                                                                                        |       | **91,407**        | ** **     |       |       | —                |       |
| Asset retirement obligations                                                                                                            |       | **43,157**        | ** **     |       |       | 41,423                |       |
| Other                                                                                                                                   |       | **187,709**       | ** **     |       |       | 23,736                |       |
| **Total deferred credits and other liabilities**                                                                                        |       | **2,557,555**     | ** **     |       |       | 1,771,936             |       |
|                                                                                                                                    |       | ** **        | ** **     |       |       |                  |       |
| **Commitments  and Contingencies**                                                                                                      | ** ** | ** **        | ** **     | ** ** | ** ** | ** **            | ** ** |
| **Cumulative  Preferred Stock Not Subject to Mandatory Redemption**                                                                     |       | **—**        | ** **     |       |       | 20,485                |       |
|                                                                                                                                    |       | ** **        | ** **     |       |       |                  |       |
| **Common  Stockholder’s Equity**                                                                                                   | ** ** | ** **        | ** **     | ** ** | ** ** | ** **            | ** ** |
| Common stock, $8.50 par value; 120,000,000 shares  authorized and 89,663,086 shares outstanding at June 30, 2006 and December  31, 2005 |       | **762,136**       | ** **     |       |       | 762,136               |       |
| Paid-in capital                                                                                                                         |       | **5,493,135**     | ** **     |       |       | 603,249               |       |
| Retained (deficit) earnings                                                                                                             |       | **(7,401**        | **)**          |       |       | 657,254               |       |
| Accumulated other comprehensive loss                                                                                                    |       | **(39,866**       | **)**          |       |       | (47,207               | )          |
| **Total common stockholder’s equity**                                                                                              |       | **6,208,004**     | ** **     |       |       | 1,975,432             |       |
|                                                                                                                                    |       | ** **        | ** **     |       |       |                  |       |
| **Total Liabilities and Common  Stockholder’s Equity**                                                                             |       | **$**             | **11,895,831** | ** ** |       |                  | $          | 7,233,843 |   |

 

**SeeNotes to Unaudited Consolidated Financial Statements**

13

----

**THE CINCINNATI GAS & ELECTRICCOMPANY**

**CONSOLIDATEDSTATEMENTS OF CHANGES IN COMMON STOCKHOLDER’S EQUITY AND COMPREHENSIVE INCOME (LOSS)**

**(dollars in thousands, except pershare amounts)**

**(unaudited)**
| ** **                                                 | ** ** | ** ** | ** **  | ** **    | ** ** | ** **    | ** ** | **Accumulated**        | ** **  | **Total**              | ** ** |
|------------------------------------------------------------|------------|------------|-------------|---------------|------------|---------------|------------|------------------------|-------------|------------------------|------------|
| ** **                                                 | ** ** | ** ** | ** **  | ** **    | ** ** | ** **    | ** ** | **Other**              | ** **  | **Common**             | ** ** |
| ** **                                                 | ** ** | **Common** | ** **  | **Paid-in**   | ** ** | **Retained**  | ** ** | **Comprehensive**      | ** **  | **Stockholder’s** | ** ** |
| ** **                                                 | ** ** | **Stock**  | ** **  | **Capital**   | ** ** | **Earnings**  | ** ** | **Income (Loss)** | ** **  | **Equity**             | ** ** |
| **Successor**                                              | * *   | * *   | * *    | * *      | * *   | * *      | * *   | * *               | * *    | * *               | * *   |
| ** **                                                 | ** ** | ** ** | ** **  | ** **    | ** ** | ** **    | ** ** | ** **             | ** **  | ** **             | ** ** |
| **Three  Months Ended June 30, 2006**                      | ** ** | ** ** | ** **  | ** **    | ** ** | ** **    | ** ** | ** **             | ** **  | ** **             | ** ** |
| ** **                                                 | ** ** | ** ** | ** **  | ** **    | ** ** | ** **    | ** ** | ** **             | ** **  | ** **             | ** ** |
| **Balance  at April 1, 2006**                              | ** ** | **$**      | **762,136** | ** **    | **$**      | **4,038,989** | ** ** | **$**                  | **-**       | ** **             | **$**      | **-** | ** ** | **$** | **4,801,125** | ** ** |
| ** **                                                 | ** ** | ** ** | ** **  | ** **    | ** ** | ** **    | ** ** | ** **             | ** **  | ** **             | ** ** |
| **Net  income**                                            | ** ** | ** ** | ** **  | ** **    | ** ** | **(7,401**    | **)**      | ** **             | ** **  | **(7,401**             | **)**      |
| **Other  comprehensive loss, net of tax effect of $(345)** | ** ** | ** ** | ** **  | ** **    | ** ** | ** **    | ** ** | ** **             | ** **  | ** **             | ** ** |
| **Cash flow hedges**                                       | ** ** | ** ** | ** **  | ** **    | ** ** | ** **    | ** ** | **(210**               | **)**       | **(210**               | **)**      |
| **Total  comprehensive loss**                              | ** ** | ** ** | ** **  | ** **    | ** ** | ** **    | ** ** | ** **             | ** **  | **(7,611**             | **)**      |
| ** **                                                 | ** ** | ** ** | ** **  | ** **    | ** ** | ** **    | ** ** | ** **             | ** **  | ** **             | ** ** |
| **Transfer  of generating assets from Duke Energy(1)**     | ** ** | ** ** | ** **  | **1,452,191** | ** ** | ** **    | ** ** | **(39,656**            | **)**       | **1,412,535**          | ** ** |
| **Other**                                                  | ** ** | ** ** | ** **  | **1,955**     | ** ** | ** **    | ** ** | ** **             | ** **  | **1,955**              | ** ** |
| ** **                                                 | ** ** | ** ** | ** **  | ** **    | ** ** | ** **    | ** ** | ** **             | ** **  | ** **             | ** ** |
| **Balance  at June 30, 2006**                              | ** ** | **$**      | **762,136** | ** **    | **$**      | **5,493,135** | ** ** | **$**                  | **(7,401**  | **)**                  | **$**      | **(39,866** | **)** | **$** | **6,208,004** | ** ** |
| ** **                                                 | ** ** | ** ** | ** **  | ** **    | ** ** | ** **    | ** ** | ** **             | ** **  | ** **             | ** ** |
| ** **                                                 | ** ** | ** ** | ** **  | ** **    | ** ** | ** **    | ** ** | ** **             | ** **  | ** **             | ** ** |
| **Predecessor**                                            | ** ** | ** ** | ** **  | ** **    | ** ** | ** **    | ** ** | ** **             | ** **  | ** **             | ** ** |
| ** **                                                 | ** ** | ** ** | ** **  | ** **    | ** ** | ** **    | ** ** | ** **             | ** **  | ** **             | ** ** |
| **Three  Months Ended March 31, 2006**                     | ** ** | ** ** | ** **  | ** **    | ** ** | ** **    | ** ** | ** **             | ** **  | ** **             | ** ** |
| ** **                                                 | ** ** | ** ** | ** **  | ** **    | ** ** | ** **    | ** ** | ** **             | ** **  | ** **             | ** ** |
| **Balance  at January 1, 2006**                            | ** ** | **$**      | **762,136** | ** **    | **$**      | **603,249**   | ** ** | **$**                  | **657,254** | ** **             | **$**      | **(47,207** | **)** | **$** | **1,975,432** | ** ** |
| ** **                                                 | ** ** | ** ** | ** **  | ** **    | ** ** | ** **    | ** ** | ** **             | ** **  | ** **             | ** ** |
| **Net  income**                                            | ** ** | ** ** | ** **  | ** **    | ** ** | **116,363**   | ** ** | ** **             | ** **  | **116,363**            | ** ** |
| **Other  comprehensive income, net of tax effect of $86**  | ** ** | ** ** | ** **  | ** **    | ** ** | ** **    | ** ** | ** **             | ** **  | ** **             | ** ** |
| **Minimum pension liability adjustment**                   | ** ** | ** ** | ** **  | ** **    | ** ** | ** **    | ** ** | **854**                | ** **  | **854**                | ** ** |
| **Cash flow hedges**                                       | ** ** | ** ** | ** **  | ** **    | ** ** | ** **    | ** ** | **897**                | ** **  | **897**                | ** ** |
| **Total  comprehensive income**                            | ** ** | ** ** | ** **  | ** **    | ** ** | ** **    | ** ** | ** **             | ** **  | **118,114**            | ** ** |
| ** **                                                 | ** ** | ** ** | ** **  | ** **    | ** ** | ** **    | ** ** | ** **             | ** **  | ** **             | ** ** |
| **Dividends  on common stock**                             | ** ** | ** ** | ** **  | ** **    | ** ** | **(102,256**  | **)**      | ** **             | ** **  | **(102,256**           | **)**      |
| **Dividends  on preferred stock**                          | ** ** | ** ** | ** **  | ** **    | ** ** | **(164**      | **)**      | ** **             | ** **  | **(164**               | **)**      |
| **Other**                                                  | ** ** | ** ** | ** **  | ** **    | ** ** | **(1**        | **)**      | **1**                  | ** **  | **—**             | ** ** |
| ** **                                                 | ** ** | ** ** | ** **  | ** **    | ** ** | ** **    | ** ** | ** **             | ** **  | ** **             | ** ** |
| **Balance  at March 31, 2006**                             | ** ** | **$**      | **762,136** | ** **    | **$**      | **603,249**   | ** ** | **$**                  | **671,196** | ** **             | **$**      | **(45,455** | **)** | **$** | **1,991,126** | ** ** |
| ** **                                                 | ** ** | ** ** | ** **  | ** **    | ** ** | ** **    | ** ** | ** **             | ** **  | ** **             | ** ** |
| Six Months Ended  June 30, 2005                            |       |       |        |          |       |          |       |                   |        |                   |       |
|                                                       |       |       |        |          |       |          |       |                   |        |                   |       |
| Balance at  January 1, 2005                                |       | $          | 762,136     |          | $          | 584,176       |       | $                      | 610,232     |                   | $          | (37,831 | ) | $ | 1,918,713 |   |
|                                                       |       |       |        |          |       |          |       |                   |        |                   |       |
| Net income                                                 |       |       |        |          |       | 138,289       |       |                   |        | 138,289                |       |
| Other  comprehensive income, net of tax effect of $(1,751) |       |       |        |          |       |          |       |                   |        |                   |       |
| Cash flow hedges                                           |       |       |        |          |       |          |       | 1,729                  |        | 1,729                  |       |
| Total  comprehensive income                                |       |       |        |          |       |          |       |                   |        | 140,018                |       |
|                                                       |       |       |        |          |       |          |       |                   |        |                   |       |
| Dividends on  common stock                                 |       |       |        |          |       | (104,061      | )          |                   |        | (104,061               | )          |
| Dividends on  preferred stock                              |       |       |        |          |       | (423          | )          |                   |        | (423                   | )          |
| Other                                                      |       |       |        |          |       | 1             |       |                   |        | 1                      |       |
|                                                       |       |       |        |          |       |          |       |                   |        |                   |       |
| Balance at June 30,  2005                                  |       | $          | 762,136     |          | $          | 584,176       |       | $                      | 644,038     |                   | $          | (36,102 | ) | $ | 1,954,248 |   |

 

----

(1)                                  Includes $39,656 (net of tax benefit of $23,793) related to deferredlosses on terminated cash flow hedges included in Accumulated OtherComprehensive Income (Loss).  See Note12(b)(*v*) to the Consolidated FinancialStatements.

**See Notes to Unaudited ConsolidatedFinancial Statements**

14

----

**THE CINCINNATI GAS & ELECTRICCOMPANY**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(dollars in thousands)**

**(unaudited)**
| ** **                                                                                                            | ** ** | **Successor**                | ** **    | ** ** | ** ** | **Predecessor**              | ** ** |
|-----------------------------------------------------------------------------------------------------------------------|------------|------------------------------|---------------|------------|------------|------------------------------|------------|
| ** **                                                                                                            | ** ** | **Three Months  Ended** | ** **    | ** ** | ** ** | **Three Months  Ended** | ** ** | **Six Months  Ended** | ** ** |
| ** **                                                                                                            | ** ** | **June 30, 2006**  | ** **    | ** ** | ** ** | **March 31, 2006** | ** ** | **June 30, 2005** | ** ** |
| ** **                                                                                                            | ** ** | ** **                   | ** **    |       |       | ** **                   | ** ** | ** ** | ** ** |
| **Cash  Flows from Operating Activities**                                                                             | ** ** |                         |          |       |       | ** **                   | ** ** | ** ** | ** ** |
| Net (loss) income                                                                                                     |       | **$**                        | **(7,401**    | **)**      |       |                         | $          | 116,363 |   | $ | 138,289 |   |
| Adjustments to reconcile net income (loss) to net cash  provided by operating activities:                             |       |                         |          |       |       |                         |       |   |   |
| Depreciation and amortization                                                                                         |       | **92,588**                   | ** **    |       |       | 67,918                       |       | 125,773 |   |
| (Gains) losses on sales of equity investments and  other assets                                                       |       | **5,227**                    | ** **    |       |       | (26,069                      | )          | (70,345 | ) |
| Deferred income taxes                                                                                                 |       | **8,093**                    | ** **    |       |       | 6,793                        |       | 8,666 |   |
| Regulatory asset/liability amortization                                                                               |       | **3,385**                    | ** **    |       |       | 6,903                        |       | 5,314 |   |
| Accrued pension and postretirement benefit costs                                                                      |       | **10,626**                   | ** **    |       |       | 8,234                        |       | 14,313 |   |
| (Increase) decrease in:                                                                                               |       | ** **                   | ** **    |       |       |                         |       |   |   |
| Net realized and unrealized mark-to-market and  hedging transactions                                                  |       | **27,778**                   | ** **    |       |       | (29,301                      | )          | 25,741 |   |
| Receivables                                                                                                           |       | **41,550**                   | ** **    |       |       | 12,038                       |       | 7,707 |   |
| Inventory                                                                                                             |       | **(15,658**                  | **)**         |       |       | 56,177                       |       | (32,071 | ) |
| Other current assets                                                                                                  |       | **25,842**                   | ** **    |       |       | 67,659                       |       | (78,503 | ) |
| Increase (decrease) in:                                                                                               |       | ** **                   | ** **    |       |       |                         |       |   |   |
| Accounts payable                                                                                                      |       | **66,812**                   | ** **    |       |       | (240,236                     | )          | 15,356 |   |
| Taxes accrued                                                                                                         |       | **(21,585**                  | **)**         |       |       | 49,735                       |       | 23,006 |   |
| Other current liabilities                                                                                             |       | **(111,124**                 | **)**         |       |       | 5,306                        |       | 855 |   |
| Regulatory asset/liability deferrals                                                                                  |       | **(7,550**                   | **)**         |       |       | (799                         | )          | (6,380 | ) |
| Other assets                                                                                                          |       | **118,606**                  | ** **    |       |       | 17,717                       |       | 45,845 |   |
| Other liabilities                                                                                                     |       | **(72,306**                  | **)**         |       |       | 106                          |       | 5,272 |   |
|                                                                                                                  |       | ** **                   | ** **    |       |       |                         |       |   |   |
| **Net cash provided by operating activities**                                                                         |       | **164,883**                  | ** **    |       |       | 118,544                      |       | 228,838 |   |
|                                                                                                                  |       | ** **                   | ** **    |       |       |                         |       |   |   |
| **Cash  Flows from Investing Activities**                                                                             | ** ** | ** **                   | ** **    |       |       | ** **                   | ** ** | ** ** | ** ** |
| Capital expenditures                                                                                                  |       | **(149,265**                 | **)**         |       |       | (134,356                     | )          | (201,733 | ) |
| Purchase of emission allowances                                                                                       |       | **(78,623**                  | **)**         |       |       | (155,866                     | )          | (114,694 | ) |
| Sale of emission allowances                                                                                           |       | **57,601**                   | ** **    |       |       | 97,621                       |       | 126,676 |   |
| Net proceeds from the sales of equity investments  and other assets, and sales of and collections on notes receivable |       | **—**                   | ** **    |       |       | —                       |       | 46 |   |
| Withdrawal of restricted funds held in trust                                                                          |       | **—**                   | ** **    |       |       | 8,137                        |       | 15,635 |   |
|                                                                                                                  |       | ** **                   | ** **    |       |       |                         |       |   |   |
| **Net cash used in investing activities**                                                                             |       | **(170,287**                 | **)**         |       |       | (184,464                     | )          | (174,070 | ) |
|                                                                                                                  |       | ** **                   | ** **    |       |       |                         |       |   |   |
| **Cash  Flows from Financing Activities**                                                                             | ** ** | ** **                   | ** **    |       |       | ** **                   | ** ** | ** ** | ** ** |
| Issuance of long-term debt                                                                                            |       | **80**                       | ** **    |       |       | 139,806                      |       | — |   |
| Redemption of long-term debt                                                                                          |       | **(16,296**                  | **)**         |       |       | (1,255                       | )          | — |   |
| Redemption of preferred stock of subsidiaries                                                                         |       | **—**                   | ** **    |       |       | (20,485                      | )          | — |   |
| Notes payable and commercial paper                                                                                    |       | **34,931**                   | ** **    |       |       | 48,627                       |       | 51,824 |   |
| Dividends paid                                                                                                        |       | **—**                   | ** **    |       |       | (102,420                     | )          | (104,484 | ) |
|                                                                                                                  |       | ** **                   | ** **    |       |       |                         |       |   |   |
| **Net cash provided by (used in) financing  activities**                                                              |       | **18,715**                   | ** **    |       |       | 64,273                       |       | (52,660 | ) |
|                                                                                                                  |       | ** **                   | ** **    |       |       |                         |       |   |   |
| **Net  increase (decrease) in cash and cash equivalents**                                                             |       | **13,311**                   | ** **    |       |       | (1,647                       | )          | 2,108 |   |
| ** **                                                                                                            | ** ** | ** **                   | ** **    |       |       | ** **                   | ** ** | ** ** | ** ** |
| **Cash  and cash equivalents at beginning of period**                                                                 |       | **8,027**                    | ** **    |       |       | 9,674                        |       | 4,154 |   |
| ** **                                                                                                            | ** ** | ** **                   | ** **    |       |       | ** **                   | ** ** | ** ** | ** ** |
| **Cash  and cash equivalents at end of period**                                                                       |       | **$**                        | **21,338**    | ** ** |       |                         | $          | 8,027 |   | $ | 6,262 |   |
|                                                                                                                  |       | ** **                   | ** **    |       |       |                         |       |   |   |
| **Significant  non-cash transactions:**                                                                               | ** ** | ** **                   | ** **    |       |       | ** **                   | ** ** | ** ** | ** ** |
| Purchase accounting adjustments                                                                                       |       | **$**                        | **2,809,999** | ** ** |       |                         | $          | — |   | $ | — |   |
| Allowance for funds used during construction (AFUDC)  – equity component                                         |       | **(917**                     | **)**         |       |       | (570                         | )          | (684 | ) |
| Transfer of generating assets from Duke Energy                                                                        |       | **1,452,191**                | ** **    |       |       | —                       |       | — |   |

 

**SeeNotes to Unaudited Consolidated Financial Statements**

15

----

**PSIENERGY, INC.AND SUBSIDIARY COMPANY**

16

----

**PSI ENERGY, INC.**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**(dollars in thousands)**

**(unaudited)**
| ** **                                                                 | ** ** | **Three Months Ended** | ** **  | **Six Months Ended** | ** ** |
|----------------------------------------------------------------------------|------------|----------------------------------|-------------|--------------------------------|------------|
| ** **                                                                 | ** ** | **June 30,**                | ** **  | **June 30,**              | ** ** |
| ** **                                                                 | ** ** | **2006**                         | ** **  | **2005**                       | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                                                       |       |                             |        |                           |       |   |   |   |   |
| **Operating Revenues**                                                     |       |                             |        |                           |       |   |   |   |   |
| Regulated  electric                                                        |       | **$**                            | **550,478** |                           | $          | 428,457 |   | **$** | **1,036,189** |   | $ | 853,864 |   |
|                                                                       |       | ** **                       |        |                           |       | ** ** |   |   |   |
| **Operating Expenses**                                                     | ** ** | ** **                       | ** **  | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Operation,  maintenance, and other                                         |       | **160,947**                      |        | 115,658                        |       | **297,809** |   | 229,372 |   |
| Fuel used in  electric generation and purchased power                      |       | **265,008**                      |        | 134,080                        |       | **466,076** |   | 266,117 |   |
| Depreciation and  amortization                                             |       | **74,083**                       |        | 73,258                         |       | **148,452** |   | 146,962 |   |
| Property and  other taxes                                                  |       | **14,794**                       |        | 10,272                         |       | **30,298** |   | 25,933 |   |
| **Total  operating expenses**                                              |       | **514,832**                      |        | 333,268                        |       | **942,635** |   | 668,384 |   |
|                                                                       |       | ** **                       |        |                           |       | ** ** |   |   |   |
| **Operating Income**                                                       |       | **35,646**                       |        | 95,189                         |       | **93,554** |   | 185,480 |   |
| ** **                                                                 |       | ** **                       |        |                           |       | ** ** |   |   |   |
| **Other Income and Expenses, net**                                         |       | **12,960**                       |        | 7,114                          |       | **21,410** |   | 10,493 |   |
| **Interest Expense**                                                       |       | **29,864**                       |        | 26,912                         |       | **64,793** |   | 51,677 |   |
| ** **                                                                 |       | ** **                       |        |                           |       | ** ** |   |   |   |
| **Income Before Income Taxes**                                             |       | **18,742**                       |        | 75,391                         |       | **50,171** |   | 144,296 |   |
| ** **                                                                 |       | ** **                       |        |                           |       | ** ** |   |   |   |
| **Income Tax Expense**                                                     |       | **6,318**                        |        | 32,661                         |       | **19,000** |   | 59,222 |   |
| ** **                                                                 | ** ** | ** **                       | ** **  | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Net Income**                                                             |       | **$**                            | **12,424**  |                           | $          | 42,730 |   | **$** | **31,171** |   | $ | 85,074 |   |
| ** **                                                                 | ** ** | ** **                       | ** **  | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Dividend and Premiums on  Redemption of Preferred and Preference Stock** |       | **38**                           |        | 647                            |       | **151** |   | 1,293 |   |
| ** **                                                                 | ** ** | ** **                       | ** **  | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Earnings Available for Common Stockholders**                             |       | **$**                            | **12,386**  |                           | $          | 42,083 |   | **$** | **31,020** |   | $ | 83,781 |   |

 

**SeeNotes to Unaudited Consolidated Financial Statements**

17

----

**PSI ENERGY, INC.**

**CONSOLIDATEDBALANCE SHEETS**

**(dollars in thousands)**

**(unaudited)**

**ASSETS**
| ** **                                                                                                   | ** ** | **June 30,** | ** **    | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------|------------|-------------------|---------------|-----------------------|------------|
| ** **                                                                                                   | ** ** | **2006**          | ** **    | **2005**              | ** ** |
|                                                                                                         |       |              |          |                  |       |
| **Current  Assets**                                                                                          | ** ** | ** **        | ** **    | ** **            | ** ** |
| Cash and cash equivalents                                                                                    |       | **$**             | **7,023**     |                  | $          | 31,860 |   |
| Receivables (net of allowance for doubtful accounts  of $436 at June 30, 2006 and $137 at December 31, 2005) |       | **90,589**        |          | 217,978               |       |
| Inventory                                                                                                    |       | **132,751**       |          | 102,976               |       |
| Other                                                                                                        |       | **34,379**        |          | 75,064                |       |
| **Total current assets**                                                                                     |       | **264,742**       |          | 427,878               |       |
|                                                                                                         |       | ** **        |          |                  |       |
| **Investments  and Other Assets**                                                                            | ** ** | ** **        | ** **    | ** **            | ** ** |
| Restricted funds held in trust                                                                               |       | **209,875**       |          | 243,612               |       |
| Intangible assets                                                                                            |       | **128,687**       |          | 113,622               |       |
| Other                                                                                                        |       | **99,971**        |          | 91,628                |       |
| **Total investments and other assets**                                                                       |       | **438,533**       |          | 448,862               |       |
|                                                                                                         |       | ** **        |          |                  |       |
| **Property,  Plant, and Equipment**                                                                          | ** ** | ** **        | ** **    | ** **            | ** ** |
| Cost                                                                                                         |       | **7,518,436**     |          | 7,289,552             |       |
| Less accumulated depreciation and amortization                                                               |       | **2,533,336**     |          | 2,456,183             |       |
| **Net property, plant, and equipment**                                                                       |       | **4,985,100**     |          | 4,833,369             |       |
|                                                                                                         |       | ** **        |          |                  |       |
| **Regulatory  Assets and Deferred Debits**                                                                   | ** ** | ** **        | ** **    | ** **            | ** ** |
| Deferred debt expense                                                                                        |       | **49,024**        |          | 49,995                |       |
| Regulatory assets related to income taxes                                                                    |       | **11,262**        |          | 18,652                |       |
| Other                                                                                                        |       | **422,814**       |          | 463,426               |       |
| **Total regulatory assets and deferred debits**                                                              |       | **483,100**       |          | 532,073               |       |
|                                                                                                         |       | ** **        |          |                  |       |
| **Total  Assets**                                                                                            |       | **$**             | **6,171,475** |                  | $          | 6,242,182 |   |

 

**SeeNotes to Unaudited Consolidated Financial Statements**

18

----

**PSI ENERGY, INC.**

**CONSOLIDATEDBALANCE SHEETS**

**(dollars in thousands, except pershare amounts)**

**(unaudited)**

**LIABILITIES AND COMMON STOCKHOLDER’S EQUITY**
| ** **                                                                                                                                       | ** ** | **June 30,** | ** **    | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|---------------|-----------------------|------------|
| ** **                                                                                                                                       | ** ** | **2006**          | ** **    | **2005**              | ** ** |
|                                                                                                                                             |       | ** **        | ** **    |                  |       |
| **Current  Liabilities**                                                                                                                         | ** ** | ** **        | ** **    | ** **            | ** ** |
| Accounts payable                                                                                                                                 |       | **$**             | **141,125**   | ** **            | $          | 170,451 |   |
| Notes payable and commercial paper                                                                                                               |       | **302,697**       | ** **    | 435,212               |       |
| Taxes accrued                                                                                                                                    |       | **66,232**        | ** **    | 33,713                |       |
| Interest accrued                                                                                                                                 |       | **40,688**        | ** **    | 34,530                |       |
| Current maturities of long-term debt and preferred  stock                                                                                        |       | **4,472**         | ** **    | 328,149               |       |
| Other                                                                                                                                            |       | **75,759**        | ** **    | 56,269                |       |
| **Total current liabilities**                                                                                                                    |       | **630,973**       | ** **    | 1,058,324             |       |
|                                                                                                                                             |       | ** **        | ** **    |                  |       |
| **Long-term  Debt**                                                                                                                              |       | **2,214,012**     | ** **    | 1,891,713             |       |
|                                                                                                                                             |       | ** **        | ** **    |                  |       |
| **Deferred  Credits and Other Liabilities**                                                                                                      | ** ** | ** **        | ** **    | ** **            | ** ** |
| Deferred income taxes                                                                                                                            |       | **581,851**       | ** **    | 609,569               |       |
| Investment tax credit                                                                                                                            |       | **22,188**        | ** **    | 23,624                |       |
| Accrued pension and other postretirement benefit  costs                                                                                          |       | **242,865**       | ** **    | 227,435               |       |
| Regulatory liabilities                                                                                                                           |       | **436,409**       | ** **    | 394,377               |       |
| Asset retirement obligations                                                                                                                     |       | **15,454**        | ** **    | 15,001                |       |
| Other                                                                                                                                            |       | **50,662**        | ** **    | 48,918                |       |
| **Total deferred credits and other liabilities**                                                                                                 |       | **1,349,429**     | ** **    | 1,318,924             |       |
|                                                                                                                                             |       | ** **        | ** **    |                  |       |
| **Commitments  and Contingencies**                                                                                                               | ** ** | ** **        | ** **    | ** **            | ** ** |
| **Cumulative  Preferred Stock Not Subject to Mandatory Redemption**                                                                              |       | **—**        | ** **    | 11,258                |       |
| ** **                                                                                                                                       |       | ** **        | ** **    |                  |       |
| **Common  Stockholder’s Equity**                                                                                                            | ** ** | ** **        | ** **    | ** **            | ** ** |
| Common stock, no par; $.01 stated value; 60,000,000  shares authorized and 53,913,701 shares outstanding at June 30, 2006 and  December 31, 2005 |       | **539**           | ** **    | 539                   |       |
| Paid-in capital                                                                                                                                  |       | **840,692**       | ** **    | 840,692               |       |
| Retained earnings                                                                                                                                |       | **1,154,176**     | ** **    | 1,148,192             |       |
| Accumulated other comprehensive loss                                                                                                             |       | **(18,346**       | **)**         | (27,460               | )          |
| **Total common stockholder’s equity**                                                                                                       |       | **1,977,061**     | ** **    | 1,961,963             |       |
| ** **                                                                                                                                       |       | ** **        | ** **    |                  |       |
| **Total  Liabilities and Common Stockholder’s Equity**                                                                                      |       | **$**             | **6,171,475** | ** **            | $          | 6,242,182 |   |

 

**SeeNotes to Unaudited Consolidated Financial Statements**

19

----

 

 

**PSI ENERGY, INC.**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(dollars in thousands)**

**(unaudited)**
| ** **                                                                         | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                         | ** ** | **June 30,**              | ** ** |
| ** **                                                                         | ** ** | **2006**                       | ** ** | **2005** | ** ** |
| **Cash  Flows from Operating Activities**                                          | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Net income                                                                         |       | **$**                          | **31,171** | ** ** | $ | 85,074 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities: |       | ** **                     | ** ** |   |   |
| Depreciation and amortization                                                      |       | **148,452**                    | ** ** | 146,962 |   |
| Deferred income taxes                                                              |       | **(22,896**                    | **)**      | 17,776 |   |
| Regulatory asset/liability amortization                                            |       | **12,099**                     | ** ** | (5,545 | ) |
| Accrued pension and postretirement benefit costs                                   |       | **21,250**                     | ** ** | 17,801 |   |
| (Increase) decrease in:                                                            |       | ** **                     | ** ** |   |   |
| Net realized and unrealized mark-to-market and  hedging transactions               |       | **22,366**                     | ** ** | 1,822 |   |
| Receivables                                                                        |       | **127,389**                    | ** ** | 20,245 |   |
| Inventory                                                                          |       | **(29,775**                    | **)**      | (26,629 | ) |
| Other current assets                                                               |       | **(1,111**                     | **)**      | (778 | ) |
| Increase (decrease) in:                                                            |       | ** **                     | ** ** |   |   |
| Accounts payable                                                                   |       | **(29,327**                    | **)**      | 19,212 |   |
| Taxes accrued                                                                      |       | **32,519**                     | ** ** | (9,387 | ) |
| Other current liabilities                                                          |       | **6,158**                      | ** ** | 3,833 |   |
| Regulatory asset/liability deferrals                                               |       | **70,586**                     | ** ** | (64,162 | ) |
| Other assets                                                                       |       | **(21,389**                    | **)**      | 2,734 |   |
| Other liabilities                                                                  |       | **30,296**                     | ** ** | (13,877 | ) |
|                                                                               |       | ** **                     | ** ** |   |   |
| **Net cash provided by operating activities**                                      |       | **397,788**                    | ** ** | 195,081 |   |
|                                                                               |       | ** **                     | ** ** |   |   |
| **Cash  Flows from Investing Activities**                                          | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Capital expenditures                                                               |       | **(257,419**                   | **)**      | (269,341 | ) |
| Investment expenditures                                                            |       | **(1,981**                     | **)**      | (699 | ) |
| Purchases of emission allowances                                                   |       | **(59,051**                    | **)**      | (35,761 | ) |
| Sale of emission allowances                                                        |       | **28,445**                     | ** ** | 5,130 |   |
| Withdrawal of restricted funds held in trust                                       |       | **37,869**                     | ** ** | 45,227 |   |
|                                                                               |       | ** **                     | ** ** |   |   |
| **Net cash used in investing activities**                                          |       | **(252,137**                   | **)**      | (255,444 | ) |
|                                                                               |       | ** **                     | ** ** |   |   |
| **Cash  Flows from Financing Activities**                                          | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Issuance of long-term debt                                                         |       | **325,000**                    | ** ** | — |   |
| Redemption of long-term debt                                                       |       | **(326,528**                   | **)**      | — |   |
| Redemption of preferred stock of subsidiaries                                      |       | **(11,258**                    | **)**      | — |   |
| Notes payable and commercial paper                                                 |       | **(132,515**                   | **)**      | (52,155 | ) |
| Dividends paid                                                                     |       | **(25,187**                    | **)**      | (82,561 | ) |
| Contribution from parent                                                           |       | **—**                     | ** ** | 200,000 |   |
|                                                                               |       | ** **                     | ** ** |   |   |
| **Net cash (used in) provided by financing  activities**                           |       | **(170,488**                   | **)**      | 65,284 |   |
|                                                                               |       | ** **                     | ** ** |   |   |
| **Net  (decrease) increase in cash and cash equivalents**                          |       | **(24,837**                    | **)**      | 4,921 |   |
| ** **                                                                         | ** ** | ** **                     | ** ** | ** ** | ** ** |
| **Cash  and cash equivalents at beginning of period**                              |       | **31,860**                     | ** ** | 10,794 |   |
| ** **                                                                         | ** ** | ** **                     | ** ** | ** ** | ** ** |
| **Cash  and cash equivalents at end of period**                                    |       | **$**                          | **7,023**  | ** ** | $ | 15,715 |   |
| ** **                                                                         |       | ** **                     | ** ** |   |   |
| **Significant  non-cash transactions:**                                            | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Allowance for funds used during construction (AFUDC)  – equity component      |       | **$**                          | **(6,239** | **)** | $ | (3,719 | ) |

 

**See Notes to Unaudited Consolidated FinancialStatements**

20

----

**INDEX**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

 
| Note       | ** ** | ** **                                 | ** ** | ** ** |
|------------|------------|--------------------------------------------|------------|------------|
| **Number** | ** ** | ** **                                 | ** ** | ** ** |
| ** ** | ** ** | ** **                                 | ** ** | ** ** |
| 1          |       | Basis of Presentation                      |       |       |
|       |       |                                       |       |       |
| 2          |       | Duke Energy/Cinergy  Merger                |       |       |
|       |       |                                       |       |       |
| 3          |       | Common Stock  and Stock-based Compensation |       |       |
|       |       |                                       |       |       |
| 4          |       | Preferred  Stock                           |       |       |
|       |       |                                       |       |       |
| 5          |       | Inventory                                  |       |       |
|       |       |                                       |       |       |
| 6          |       | Debt and Credit  Facilities                |       |       |
|       |       |                                       |       |       |
| 7          |       | Employee Benefit  Obligations              |       |       |
|       |       |                                       |       |       |
| 8          |       | Acquisitions and  Dispositions             |       |       |
|       |       |                                       |       |       |
| 9          |       | Goodwill and  Intangibles                  |       |       |
|       |       |                                       |       |       |
| 10         |       | Discontinued  Operations                   |       |       |
|       |       |                                       |       |       |
| 11         |       | Business  Segments                         |       |       |
|       |       |                                       |       |       |
| 12         |       | Risk Management  Instruments               |       |       |
|       |       |                                       |       |       |
| 13         |       | Regulatory  Matters                        |       |       |
|       |       |                                       |       |       |
| 14         |       | Commitments and  Contingencies             |       |       |
|       |       |                                       |       |       |
| 15         |       | Guarantees and  Indemnifications           |       |       |
|       |       |                                       |       |       |
| 16         |       | Related Party  Transactions                |       |       |
|       |       |                                       |       |       |
| 17         |       | New Accounting  Standards                  |       |       |
|       |       |                                       |       |       |
| 18         |       | Income  Tax Expense                        |       |       |
|       |       |                                       |       |       |
| 19         |       | Severance                                  |       |       |
|       |       |                                       |       |       |
| 20         |       | Subsequent  Events                         |       |       |

 

21

----

### **NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

In this report **Cinergy** includes **Cinergy Corp.** and all of **Cinergy’s**regulated and non-regulated subsidiaries. In addition, when discussing **Cinergy’s**financial information, it necessarily includes the results of The CincinnatiGas & Electric Company (**CG&E**),PSI Energy, Inc. (**PSI**), The UnionLight, Heat and Power Company (ULH&P)and all of **Cinergy’s** otherconsolidated subsidiaries.  Whendiscussing **CG&E’s** financialinformation, it necessarily includes the results of ULH&P and all of **CG&E’s**other consolidated subsidiaries.

**1.     Basis of Presentation**

***(a)***                                  Natureof Operations and Basis of Consolidation

On April 3, 2006, inaccordance with their previously announced merger agreement, Duke Energy****Corporation (Old Duke Energy) and **CinergyCorp.** merged into wholly owned subsidiaries of Duke Energy HoldingCorp. (Duke Energy HC), resulting in Duke Energy HC becoming the parententity.  In connection with the closingof the merger transactions, Duke Energy HC changed its name to Duke EnergyCorporation (“New Duke Energy” or “Duke Energy”) and Old Duke Energy convertedinto a limited liability company named Duke Power Company LLC.  As a result of the merger transactions, eachoutstanding share of **Cinergy** commonstock was converted into 1.56 shares of Duke Energy common stock, and eachshare of common stock of Old Duke Energy was converted into one share of DukeEnergy common stock, which resulted in the issuance of approximately1.2 billion shares of Duke Energy common stock.  See Note 2 for additional informationregarding the merger.  Both Old DukeEnergy and New Duke Energy are referred to as Duke Energy herein.

**CinergyCorp.**, a Delaware corporation organized in 1993, owns alloutstanding common stock of its public utility companies, **CG&E** and **PSI**,****as well as Cinergy Investments,Inc. (Investments) and Duke Energy Shared Services (DESS).  Investments, which is **Cinergy’s**non-regulated investment holding company, is involved in (a) cogeneration andenergy efficiency investments and (b) natural gas and power marketing andtrading operations, conducted primarily through one of **Cinergy’s**subsidiaries, Cinergy Marketing & Trading, LP (Marketing &Trading).  DESS provides administrative,management, and support services to **Cinergy’s**subsidiaries.

**CG&E**,an Ohio corporation organized in 1837, is a combination electric and gas publicutility company that provides service in the southwestern portion of Ohio andthrough ULH&P, in nearby areas of Kentucky. **CG&E’s** principal lines of businessinclude generation, transmission and distribution of electricity, the sale ofand/or transportation of natural gas, and power marketing and trading business.**  CG&E’s** principalsubsidiary, ULH&P, a Kentucky corporation organized in 1901, provideselectric and gas service in northern Kentucky. In June 2006, **Cinergy** and **CG&E** reached an agreement to sell **CG&E’s**power marketing and trading business. See Note 10 for additional information.

**PSI**,an Indiana corporation organized in 1942, is a vertically integrated andregulated electric utility that provides service in north central, central, andsouthern Indiana.  Its primary line ofbusiness is generation, transmission and distribution of electricity.

These ConsolidatedFinancial Statements reflect all normal recurring adjustments that are, in theopinion of management, necessary to fairly present **Cinergy’s**,**CG&E’s**, and **PSI’s**financial position and results of operations. Amounts reported in the interimConsolidated Statements of Operations are not necessarily indicative of amountsexpected for the respective annual periods due to the effects of seasonaltemperature variations on energy consumption, the timing of maintenance onelectric generating units, changes in mark-to-market (MTM) valuations, changingcommodity prices, and other factors. These Consolidated Financial Statementsand other information included in this quarterly report should be read inconjunction with the Consolidated Financial Statements and Notes in **Cinergy’s**combined Form 10-K for the year ended December 31,2005 (2005 10-K).

***(b)***                                  Predecessorand Successor Reporting

In connection with the Duke Energy merger, Duke Energy acquired all ofthe outstanding common stock of **Cinergy**.  The merger has been accounted for under thepurchase method of accounting with Duke Energy treated as the acquirer foraccounting purposes.  As a result, theassets and liabilities of **Cinergy** wererecorded at their

22

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respective fair values asof the merger consummation date.  Exceptfor an adjustment related to pension and other postretirement benefitobligations, as mandated by Statement of Financial Accounting Standards (SFAS)No. 87, “*Employers’ Accounting for Pension*” andSFAS No. 106, “*Employers’ Accounting for PostretirementBenefits Other Than Pensions*,” the accompanying consolidatedfinancial statements do not reflect any adjustments related to **Cinergy’s**, **CG&E’s**, and**PSI’s** regulated operations that areaccounted for pursuant to SFAS No. 71, “*Accounting for the Effectsof Certain Types of Regulation*, (SFAS No. 71)” which are comprisedof **CG&E’s** regulated transmission anddistribution, **PSI** and ULH&P.  Under the rate setting and recoveryprovisions currently in place for these regulated operations which providerevenues derived from cost, the fair values of the individual tangible andintangible assets and liabilities are considered to approximate their carryingvalues.

Purchase accountingimpacts, including goodwill recognition, have been “pushed down” to **Cinergy** and **CG&E**,resulting in the assets and liabilities of **Cinergy** and **CG&E** being recorded at their respective fair values asof April 3, 2006.  For accountingpurposes, the effective date of the merger was April 1, 2006.  **Cinergy’s** and **CG&E’s** Consolidated Statements of Operations subsequentto the merger include amortization expense relating to purchase accountingadjustments and depreciation of fixed assets based upon their fair value.   Therefore, the **Cinergy**and **CG&E** financial data prior to themerger will not generally be comparable to its financial data subsequent to themerger.  A review of the Securities andExchange Commission (SEC) regulations has indicated that **PSI’s**financial statements are not required to use push-down accounting, andtherefore, management has elected not to do so. See Note 2 for additional information.

Due to the impact of thepush-down accounting, the financial statement and certain note presentationsseparate **Cinergy’s** and **CG&E’s**presentations into two distinct periods, the period before the consummation ofthe merger (labeled “Predecessor”) and the period after that date (labeled “Successor”),to indicate the application of different bases of accounting between theperiods presented.  The push-downaccounting adjustments did not impact cash flows as previously presented.

The fair values of the assetsacquired and liabilities assumed for **Cinergy** and **CG&E** are preliminary and are subject to change asvaluation analyses are finalized and remaining information on the fair valuesis received.  However, **Cinergy** does not currently anticipate any such changes tohave a material impact on its consolidated results of operations, cash flows,or financial position.  The portion ofthe purchase price pushed down to **CG&E** isbased on preliminary estimates of **CG&E’s** fairvalue relative to the preliminary fair value of other entities acquired.  Adjustments to this preliminary allocationcould be material and such adjustments could directly impact the amountrecorded in **CG&E’s** common stockequity.  See Note 2 for additionalinformation.

***(c)***                                  Reclassificationsand Revisions

*(i)   BusinessSegments and Performance Measures*

As a result of the mergerwith Duke Energy, effective in the second quarter of 2006, **Cinergy**,**CG&E**, and **PSI**adopted new business segments, and the segment performance measure has beenchanged to earnings before interest and taxes (EBIT) from continuingoperations, after deducting minority interest expense related to thoseprofits.  As a result, certain priorperiod amounts have been retroactively adjusted to conform to the new segmentpresentation and measures.  See Note 11for further discussion of segments.

***(d)***                                  ConformingChanges in Accounting and Reporting

*(i)   EmissionAllowance Accounting*

Effective with the mergerbetween Duke Energy and **Cinergy**, **Cinergy**, **CG&E**, and **PSI** classifies emission allowances as Intangible Assets inthe accompanying Consolidated Balance Sheets and includes cash flows frompurchases and sales of emission allowances as investing activities.  Historically, **Cinergy**,**CG&E**, and **PSI**classified emission allowances as Inventory and Other non-current assets in theConsolidated Balance Sheets, presented revenues from sales of emissionallowances as operating revenues and the cost of emission allowances sold ascost of fuel resold in the Consolidated Statements of Operations and presentedcash flows from purchases and sales of emission allowances as operatingactivities in the accompanying Consolidated Statements of Cash Flows.  The classification of Inventory or Othernon-current assets was determined by the emission allowances vintage year.

23

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**Cinergy** and **CG&E**changed their method of accounting for emission allowances in connection withtheir application in push-down accounting in order to conform to the accountingpolicies of Duke Energy. While the historical policy of classifying emissionallowances as Inventory and Other non-current assets was considered acceptable,**PSI**changed its method of accountingfor emission allowances because it believes the classification of emissionallowances as Intangible Assets is preferable since emission allowances arecontractual rights, which have no physical substance and meet the intangibledefinition of identifiable non-monetary assets without physical substance.  As a result of this change in classification,gains or losses on sales of emission allowances are presented on a net basis inGain (Loss) on Sales of Other Assets and Other, net in the accompanyingConsolidated Statements of Operations and cash flows from purchases and sales ofemission allowances are presented in investing activities in the accompanyingConsolidated Statements of Cash Flows.  

SFAS No. 154, “*AccountingChanges and Error Corrections—A Replacement of Accounting Principles Board(APB) Opinion No. 20 and SFAS No. 3*”, requires that **Cinergy**, **CG&E**, and **PSI** report this change in accounting policy throughretrospective application of the new policy to all prior periodspresented.  This change does not impactincome from continuing operations, net income, or total assets as previouslypresented.  A summary of the financialstatement items affected by the retroactive application of this change inaccounting principle is as follows:
| ** **                                                  | ** ** | ** **                                                  | ** ** | ** ** | ** ** | ** **                                                   | ** ** | ** **                                                  | ** ** | ** **                                                | ** ** |
|-------------------------------------------------------------|------------|-------------------------------------------------------------|------------|------------|------------|--------------------------------------------------------------|------------|-------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                                  | ** ** | **Successor**(1)                                            | ** ** | ** ** | ** ** | **Predecessor**(1)                                           | ** ** |
| ** **                                                  | ** ** | ** **                                                  | ** ** | ** ** | ** ** | ** **                                                   | ** ** | ** **                                                  | ** ** | ** **                                                | ** ** |
| **Cinergy**                                                 | ** ** | **Three Months   Ended  June 30, 2006** | ** ** | ** ** | ** ** | **Three Months   Ended  March 31, 2006** | ** ** | **Three Months   Ended  June 30, 2005** | ** ** | **Six Months   Ended  June 30, 2005** | ** ** |
| ** **                                                  | ** ** | ** **                                                  | ** ** | ** ** | ** ** | **(in millions)**                                       | ** ** |
| **Total Operating Revenues**                      |       |                                                        |       |       |       |                                                         |       |                                                        |       |                                                      |       |
|                                                        | ** ** | ** **                                                  |       |       |       |                                                         | ** ** |                                                        |       |                                                      |       |
| Before  reclassification of emission allowances             | ** ** | **$**                                                       | **1,372**  |       |       |                                                         | $          | 1,620                                                       | ** ** | $                                                         | 1,101      |   | $ | 2,391 |   |
| Effect of  emission allowance reclassification              | ** ** | **(64**                                                     | **)**      |       |       | (44                                                          | )          | (50                                                         | )          | (90                                                       | )          |
| After  reclassification of emission allowances              | ** ** | **$**                                                       | **1,308**  |       |       |                                                         | $          | 1,576                                                       | ** ** | $                                                         | 1,051      |   | $ | 2,301 |   |
|                                                        |       |                                                        |       |       |       |                                                         |       |                                                        |       |                                                      |       |
|                                                        |       |                                                        |       |       |       |                                                         |       |                                                        |       |                                                      |       |
| **Total  Operating Expenses**                               |       |                                                        |       |       |       |                                                         |       |                                                        |       |                                                      |       |
|                                                        |       |                                                        |       |       |       |                                                         |       |                                                        |       |                                                      |       |
| Before  reclassification of emission allowances             | ** ** | **$**                                                       | **1,306**  |       |       |                                                         | $          | 1,461                                                       | ** ** | $                                                         | 976        |   | $ | 2,080 |   |
| Effect of  emission allowance reclassification              | ** ** | **(69**                                                     | **)**      |       |       | (18                                                          | )          | (10                                                         | )          | (20                                                       | )          |
| After  reclassification of emission allowances              | ** ** | **$**                                                       | **1,237**  |       |       |                                                         | $          | 1,443                                                       | ** ** | $                                                         | 966        |   | $ | 2,060 |   |
|                                                        |       |                                                        |       |       |       |                                                         |       |                                                        |       |                                                      |       |
|                                                        |       |                                                        |       |       |       |                                                         |       |                                                        |       |                                                      |       |
| **(Losses)  Gains on Sales of Other Assets and Other, net** |       |                                                        |       |       |       |                                                         |       |                                                        |       |                                                      |       |
|                                                        |       |                                                        |       |       |       |                                                         |       |                                                        |       |                                                      |       |
| Before  reclassification of emission allowances             | ** ** | **$**                                                       | **-**      |       |       |                                                         | $          | -                                                           | ** ** | $                                                         | -          |   | $ | - |   |
| Effect of  emission allowance reclassification              | ** ** | **(5**                                                      | **)**      |       |       | 26                                                           |       | 40                                                          |       | 70                                                        |       |
| After reclassification  of emission allowances              | ** ** | **$**                                                       | **(5**     | **)**      |       |                                                         | $          | 26                                                          | ** ** | $                                                         | 40         |   | $ | 70 |   |

----

(1)    See Note1(b) for additional information on Predecessor and Successor reporting.

 

|                                                 | ** ** | **Successor**(1)       | ** ** | ** ** | ** ** | **Predecessor**(1)    | ** ** |
|-------------------------------------------------|------------|------------------------|------------|------------|------------|-----------------------|------------|
| ** **                                      | ** ** | **June 30,**      | ** ** | ** ** | ** ** | **December 31,** | ** ** |
| **Cinergy**                                     | ** ** | **2006**               | ** ** | ** ** | ** ** | **2005**              | ** ** |
| ** **                                      | ** ** | **(in millions)** | ** ** |
| **Inventory**                                   |       |                   |       |       |       |                  |       |
| Before  reclassification of emission allowances |       | **$**                  | **501**    | ** ** |       |                  | $          | 589 |   |
| Effect of  emission allowance reclassification  |       | **(192**               | **)**      |       |       | (116                  | )          |
| After  reclassification of emission allowances  |       | **$**                  | **309**    | ** ** |       |                  | $          | 473 |   |
|                                            |       | ** **             | ** ** |       |       |                  |       |
| **Other  Assets**                               |       | ** **             | ** ** |       |       |                  |       |
| Before  reclassification of emission allowances |       | **$**                  | **730**    | ** ** |       |                  | $          | 185 |   |
| Effect of  emission allowance reclassification  |       | **(495**               | **)**      |       |       | (59                   | )          |
| After  reclassification of emission allowances  |       | **$**                  | **235**    | ** ** |       |                  | $          | 208 |   |
|                                            |       | ** **             | ** ** |       |       |                  |       |
| **Intangible  Assets**                          |       | ** **             | ** ** |       |       |                  |       |
| Before  reclassification of emission allowances |       | **$**                  | **290**    | ** ** |       |                  | $          | 135 |   |
| Effect of  emission allowance reclassification  |       | **687**                | ** ** |       |       | 175                   |       |
| After reclassification  of emission allowances  |       | **$**                  | **977**    | ** ** |       |                  | $          | 310 |   |

----

(1)    See Note1(b) for additional information on Predecessor and Successor reporting.

 

24

----

 

|                                                 | ** ** | ** **                  | ** ** | ** ** | ** ** | ** **                   | ** ** | ** **                  | ** ** |
|-------------------------------------------------|------------|-----------------------------|------------|------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                      | ** ** | **Successor(1)**            | ** ** | ** ** | ** ** | **Predecessor(1)**           | ** ** |
| ** **                                      | ** ** | **Three Months**       | ** ** | ** ** | ** ** | **Three Months**        | ** ** | **Six Months**         | ** ** |
| ** **                                      | ** ** | **Ended**                   | ** ** | ** ** | ** ** | **Ended**                    | ** ** | **Ended**                   | ** ** |
| **Cinergy**                                     | ** ** | **June 30, 2006** | ** ** | ** ** | ** ** | **March 31, 2006** | ** ** | **June 30, 2005** | ** ** |
| ** **                                      | ** ** | **(in millions)**      | ** ** | ** ** | ** ** |
| **Cash  Flows from Operating Activities**       | ** ** | ** **                  | ** ** |       |       | ** **                   | ** ** | ** **                  | ** ** |
| Before  reclassification of emission allowances |       | **$**                       | **47**     |       |       |                         | $          | 84                          |       | $ | 299 |   |
| Effect of  emission allowance reclassification  |       | **28**                      |       |       |       | 82                           |       | 19                          |       |
| After  reclassification of emission allowances  |       | **$**                       | **75**     |       |       |                         | $          | 166                         |       | $ | 318 |   |
|                                            |       | ** **                  |       |       |       |                         |       |                        |       |
| **Cash  Flows from Investing Activities**       | ** ** | ** **                  | ** ** |       |       | ** **                   | ** ** | ** **                  | ** ** |
| Before  reclassification of emission allowances |       | **$**                       | **(295**   | )          |       |                         | $          | (294                        | )          | $ | (407 | ) |
| Effect of  emission allowance reclassification  |       | **(28**                     | )          |       |       | (82                          | )          | (19                         | )          |
| After reclassification  of emission allowances  |       | **$**                       | **(323**   | )          |       |                         | $          | (376                        | )          | $ | (426 | ) |

 

(1)    See Note1(b) for additional information on Predecessor and Successor reporting.
| ** **                                                  | ** ** | **Successor(1)**                                      | ** ** | ** ** | ** ** | **Predecessor(1)**                                     | ** ** |
|-------------------------------------------------------------|------------|-------------------------------------------------------|------------|------------|------------|--------------------------------------------------------|------------|
| **CG&E**                                                | ** ** | **Three Months  Ended  June 30, 2006** | ** ** | ** ** | ** ** | **Three Months  Ended  March 31, 2006** | ** ** | **Three Months  Ended  June 30, 2005** | ** ** | **Six Months  Ended  June 30, 2005** | ** ** |
| ** **                                                  | ** ** | ** **                                            | ** ** | ** ** | ** ** | **(in millions)**                                 | ** ** |
| **Total  Operating Revenues**                               | ** ** | ** **                                            | ** ** |       |       | ** **                                             | ** ** | ** ** | ** ** | ** ** | ** ** |
| * *                                                    | * *   | * *                                              | * *   | * *   | * *   | * *                                               | * *   | * * | * * | * * | * * |
| Before  reclassification of emission allowances             | ** ** | **$**                                                 | **738**    |       |       |                                                   | $          | 1,007 | ** ** | $ | 600 |   | $ | 1,391 |   |
| Effect of  emission allowance reclassification              | ** ** | **(42**                                               | **)**      |       |       | (44                                                    | )          | (50 | ) | (90 | ) |
| After  reclassification of emission allowances              | ** ** | **$**                                                 | **696**    |       |       |                                                   | $          | 963 | ** ** | $ | 550 |   | $ | 1,301 |   |
|                                                        |       |                                                  |       |       |       |                                                   |       |   |   |   |   |
| **Total  Operating Expenses**                               | ** ** | ** **                                            | ** ** |       |       | ** **                                             | ** ** |   | ** ** | ** ** | ** ** |
|                                                        |       |                                                  |       |       |       |                                                   |       |   |   |   |   |
| Before  reclassification of emission allowances             | ** ** | **$**                                                 | **697**    |       |       |                                                   | $          | 799 | ** ** | $ | 523 |   | $ | 1,182 |   |
| Effect of  emission allowance reclassification              | ** ** | **(47**                                               | **)**      |       |       | (18                                                    | )          | (10 | ) | (20 | ) |
| After  reclassification of emission allowances              | ** ** | **$**                                                 | **650**    |       |       |                                                   | $          | 781 | ** ** | $ | 513 |   | $ | 1,162 |   |
|                                                        |       |                                                  |       |       |       |                                                   |       |   |   |   |   |
| **(Losses)  Gains on Sales of Other Assets and Other, net** | ** ** | ** **                                            | ** ** |       |       | ** **                                             | ** ** |   | ** ** | ** ** | ** ** |
|                                                        |       |                                                  |       |       |       |                                                   |       |   |   |   |   |
| Before  reclassification of emission allowances             | ** ** | **$**                                                 | **-**      |       |       |                                                   | $          | - | ** ** | $ | - |   | $ | - |   |
| Effect of  emission allowance reclassification              | ** ** | **(5**                                                | **)**      |       |       | 26                                                     |       | 40 |   | 70 |   |
| After reclassification  of emission allowances              | ** ** | **$**                                                 | **(5**     | **)**      |       |                                                   | $          | 26 | ** ** | $ | 40 |   | $ | 70 |   |

 

(1)    See Note1(b) for additional information on Predecessor and Successor reporting.
| ** **                                      | ** ** | **Successor(1)**       | ** ** | ** ** | ** ** | **Predecessor(1)**    | ** ** |
|-------------------------------------------------|------------|------------------------|------------|------------|------------|-----------------------|------------|
| ** **                                      | ** ** | **June 30,**      | ** ** | ** ** | ** ** | **December 31,** | ** ** |
| **CG&E**                                    | ** ** | **2006**               | ** ** | ** ** | ** ** | **2005**              | ** ** |
| ** **                                      | ** ** | **(in millions)** | ** ** |
| **Inventory**                                   |       |                   |       |       |       |                  |       |
| Before  reclassification of emission allowances |       | **$**                  | **288**    |       |       |                  | $          | 226 |   |
| Effect of  emission allowance reclassification  |       | **(139**               | **)**      |       |       | (48                   | )          |
| After  reclassification of emission allowances  |       | **$**                  | **149**    |       |       |                  | $          | 178 |   |
|                                            |       | ** **             |       |       |       |                  |       |
| **Other  Assets**                               |       | ** **             |       |       |       |                  |       |
| Before  reclassification of emission allowances |       | **$**                  | **466**    |       |       |                  | $          | 46 |   |
| Effect of  emission allowance reclassification  |       | **(445**               | )          |       |       | (19                   | )          |
| After  reclassification of emission allowances  |       | **$**                  | **21**     |       |       |                  | $          | 27 |   |
|                                            |       | ** **             |       |       |       |                  |       |
| **Intangible  Assets**                          |       | ** **             |       |       |       |                  |       |
| Before  reclassification of emission allowances |       | **$**                  | **266**    |       |       |                  | $          | 38 |   |
| Effect of  emission allowance reclassification  |       | **584**                |       |       |       | 67                    |       |
| After reclassification  of emission allowances  |       | **$**                  | **850**    |       |       |                  | $          | 105 |   |

 

(1)           See Note 1(b) foradditional information on Predecessor and Successor reporting.

25

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| ** **                                      | ** ** | **Successor(1)**            | ** ** | ** ** | ** ** | **Predecessor(1)**           | ** ** |
|-------------------------------------------------|------------|-----------------------------|------------|------------|------------|------------------------------|------------|
| ** **                                      | ** ** | **Three Months**       | ** ** | ** ** | ** ** | **Three Months**        | ** ** | **Six Months** | ** ** |
| ** **                                      | ** ** | **Ended**                   | ** ** | ** ** | ** ** | **Ended**                    | ** ** | **Ended** | ** ** |
| **CG&E**                                    | ** ** | **June 30, 2006** | ** ** | ** ** | ** ** | **March 31, 2006** | ** ** | **June 30, 2005** | ** ** |
| ** **                                      | ** ** | **(in millions)**      | ** ** |
| **Cash  Flows from Operating Activities**       | ** ** | ** **                  | ** ** |       |       | ** **                   | ** ** | ** ** | ** ** |
| Before  reclassification of emission allowances |       | **$**                       | **144**    | ** ** |       |                         | $          | 61 |   | $ | 241 |   |
| Effect of  emission allowance reclassification  |       | **21**                      | ** ** |       |       | 58                           |       | (12 | ) |
| After  reclassification of emission allowances  |       | **$**                       | **165**    | ** ** |       |                         | $          | 119 |   | $ | 229 |   |
|                                            |       | ** **                  | ** ** |       |       |                         |       |   |   |
| **Cash  Flows from Investing Activities**       | ** ** | ** **                  | ** ** |       |       | ** **                   | ** ** | ** ** | ** ** |
| Before  reclassification of emission allowances |       | **$**                       | **(149**   | **)**      |       |                         | $          | (126 | ) | $ | (186 | ) |
| Effect of  emission allowance reclassification  |       | **(21**                     | **)**      |       |       | (58                          | )          | 12 |   |
| After reclassification  of emission allowances  |       | **$**                       | **(170**   | **)**      |       |                         | $          | (184 | ) | $ | (174 | ) |

----

(1)    See Note1(b) for additional information on Predecessor and Successor reporting.

The change in accounting principle for emission allowances had noimpact on **PSI’s** historical ConsolidatedStatements of Operations. For these three months ended June 30, 2006, thechange in accounting principle resulted in a decrease of $22 million inOperating Revenues and Operating Expenses compared to amounts which would havebeen reported under **PSI’s** previousmethod of accounting.

 

|                                                 | ** ** | **June 30,**      | ** ** | **December 31,** | ** ** |
|-------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                      | ** ** | **2006**               | ** ** | **2005**              | ** ** |
| **PSI**                                         | ** ** | **(in millions)** | ** ** |
| **Inventory**                                   |       |                   |       |                  |       |
| Before  reclassification of emission allowances |       | **$**                  | **186**    | ** **            | $          | 170 |   |
| Effect of  emission allowance reclassification  |       | **(53**                | **)**      | (67                   | )          |
| After  reclassification of emission allowances  |       | **$**                  | **133**    | ** **            | $          | 103 |   |
|                                            |       | ** **             | ** ** |                  |       |
| **Other  Assets**                               |       | ** **             | ** ** |                  |       |
| Before  reclassification of emission allowances |       | **$**                  | **150**    | ** **            | $          | 132 |   |
| Effect of  emission allowance reclassification  |       | **(50**                | **)**      | (40                   | )          |
| After  reclassification of emission allowances  |       | **$**                  | **100**    | ** **            | $          | 92 |   |
|                                            |       | ** **             | ** ** |                  |       |
| **Intangible  Assets**                          |       | ** **             | ** ** |                  |       |
| Before  reclassification of emission allowances |       | **$**                  | **26**     | ** **            | $          | 7 |   |
| Effect of  emission allowance reclassification  |       | **103**                | ** ** | 107                   |       |
| After reclassification  of emission allowances  |       | **$**                  | **129**    | ** **            | $          | 114 |   |

 

 

|                                                 | ** ** | **Six Months Ended** | ** ** |
|-------------------------------------------------|------------|--------------------------------|------------|
| ** **                                      | ** ** | **June 30**               | ** ** |
| **PSI**                                         | ** ** | **2006**                       | ** ** | **2005** | ** ** |
| ** **                                      | ** ** | **(in millions)**         | ** ** |
| **Cash  Flows from Operating Activities**       | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Before  reclassification of emission allowances |       | **$**                          | **367**    | ** ** | $ | 164 |   |
| Effect of  emission allowance reclassification  |       | **31**                         | ** ** | 31 |   |
| After  reclassification of emission allowances  |       | **398**                        | ** ** | 195 |   |
| ** **                                      | ** ** | ** **                     | ** ** | ** ** | ** ** |
| **Cash  Flows from Investing Activities**       | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Before  reclassification of emission allowances | ** ** | **$**                          | **(221**   | **)** | $ | (224 | ) |
| Effect of  emission allowance reclassification  | ** ** | **(31**                        | **)**      | (31 | ) |
| After reclassification  of emission allowances  | ** ** | **(252**                       | **)**      | (255 | ) |

 

26

----

 

 

 

*(ii)  Assets Heldfor Sale*

When a determination wasmade that a long-lived asset or asset group should be classified as an asset “heldfor sale” pursuant to SFAS No. 144, “*Accounting for theImpairment or Disposal of Long-Lived Assets*”, the long-lived assetor asset group are presented on the Consolidated Balance Sheet with the currentand noncurrent portions separately presented based upon their previousclassification (prior to meeting the “held for sale” criteria).  Prior period balance sheets are notretrospectively adjusted for current period discontinued operations to conformto the current year presentation. Historically, **Cinergy** and **CG&E** classified all “held for sale” amounts asnoncurrent and adjusted their Consolidated Balance Sheets retrospectively toconform to the current presentation. This change in presentation has been adopted in order for the **Cinergy** and **CG&E**financial statements to conform to the Duke Energy presentation as a result ofpush-down accounting.  **PSI** does not have “held for sale” amounts for any of theperiods presented.  See Note 10 for additionalinformation.

*(iii) Reclassifications*

The financial statementshave been reclassified to conform with Duke Energy’s format.  Certain other prior period amounts have beenreclassified to conform to current year presentation.  Such reclassifications include thereclassification of income from continuing operations from **Cinergy’s**commercial marketing and trading business to discontinued operations.  See Note 10 for additional information.

***(e)***                                  Useof Estimates

To conform with generallyaccepted accounting principles (GAAP) in the United States, management makesestimates and assumptions that affect the amounts reported in the ConsolidatedFinancial Statements and Notes. Although these estimates are based onmanagement’s best available knowledge at the time, actual results could differ.

27

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***(f)***                                    Accountingfor Excise Taxes

Certain excise taxeslevied by state or local governments are collected by **Cinergy**,**CG&E**, and **PSI**from its customers.  These taxes, whichare required to be paid regardless of **Cinergy’s**, **CG&E’s**, and **PSI’s** abilityto collect from the customer, are accounted for on a gross basis.  When **Cinergy**, **CG&E**, or **PSI** acts as anagent, and the tax is not required to be remitted if it is not collected fromthe customer, the taxes are accounted for on a net basis.  **Cinergy’s** and **CG&E’s** excise taxes accounted for on a gross basis andrecorded as revenues in the accompanying Consolidated Statements of Operationsfor the three months ended June 30, 2006, March 31, 2006, and June 30, 2005 andthe six months ended June 30, 2005 were as follows:
|              | ** ** | **Successor(1)**            | ** ** | ** ** | ** ** | **Predecessor(1)**           | ** ** |
|--------------|------------|-----------------------------|------------|------------|------------|------------------------------|------------|
| ** **   | ** ** | **Three Months**       | ** ** | ** ** | ** ** | **Three Months**        | ** ** | **Three Months** | ** ** | **Six Months** | ** ** |
| ** **   | ** ** | **Ended**                   | ** ** | ** ** | ** ** | **Ended**                    | ** ** | **Ended** | ** ** | **Ended** | ** ** |
| ** **   | ** ** | **June 30, 2006** | ** ** | ** ** | ** ** | **March 31, 2006** | ** ** | **June 30, 2005** | ** ** | **June 30, 2005** | ** ** |
| ** **   | ** ** | ** **                  | ** ** | ** ** | ** ** | **(in millions)**       | ** ** | ** ** | ** ** |
|         |       |                        |       |       |       |                         |       |   |   |   |   |
| **Cinergy**  | ** ** | **$**                       | **33**     | ** ** |       |                         | $          | 44 |   | $ | 32 |   | $ | 73 |   |
| **CG&E** | ** ** | **27**                      | ** ** |       |       | 38                           |       | 26 |   | 62 |   |
|              |            |                             |            |            |            |                              |            |  |  |  |  |  |  |  |  |

 

----

(1)           See Note 1(b)for additional information on Predecessor and Successor reporting.

**PSI’s** excisetaxes accounted for on a gross basis and recorded in the accompanyingConsolidated Statements of Operations for the three months ended June 30, 2006and 2005 and the six months ended June 30, 2006 and 2005 were as follows:
|            | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** ** | ** ** | **June 30**                 | ** ** | **June 30**               | ** ** |
| ** ** | ** ** | **2006**                         | ** ** | **2005**                       | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** ** | ** ** | ** **                       | ** ** | **(in millions)**         | ** ** | ** ** | ** ** |
| * *   | * *   | * *                         | * *   | * *                       | * *   | * * | * * | * * | * * |
| **PSI**    | ** ** | **$**                            | **6**      |                           | $          | 5 |   | **$** | **12** |   | $ | 11 |   |
|            |            |                                  |            |                                |            |  |  |  |  |  |  |  |  |

 

***(g)***                                 Regulation

**Cinergy’s**utility operating companies use the same accounting policies and practices forfinancial reporting purposes as non-regulated companies under GAAP.  However, sometimes actions by the FederalEnergy Regulatory Commission (FERC) and the state utility commissions result inaccounting treatment different from that used by non-regulated companies.  When this occurs, **Cinergy**,**CG&E**, and **PSI**apply the provisions of SFAS No. 71.  Inaccordance with SFAS No. 71, **Cinergy**, **CG&E**, and **PSI** recordregulatory assets and liabilities (expenses deferred for future recovery fromcustomers or amounts provided in current rates to cover costs to be incurred inthe future, respectively) on their Balance Sheets.

Pursuant to theconsummation of the merger between Duke Energy and **Cinergy**and the application of purchase accounting, a revaluation of the definedbenefit plans was completed and resulted in the recognition of a regulatory assetof approximately $425 million for **Cinergy** and$157 million for **CG&E**.  For additional information on purchaseaccounting, see Notes 1 and 2.

**2.     Duke Energy/Cinergy Merger**

On April 3, 2006, the previously announced merger between DukeEnergy and **Cinergy** was consummated (see Note1(a) for additional information on the merger and Note 1(b) for additionalinformation on purchase accounting and Predecessor and Successorreporting).  For accounting purposes, theeffective date of the merger was April 1, 2006. The merger combines the Duke Energy and **Cinergy**regulated franchises as well as deregulated generation in the Midwestern UnitedStates (Midwest).  The merger isanticipated to provide more regulatory, geographic, and weather diversity toDuke Energy’s earnings.  In connectionwith the merger, Duke Energy issued 1.56 shares of Duke Energy common stock foreach outstanding share of **Cinergy** commonstock, which resulted in the issuance of approximately 313 million shares ofDuke Energy common stock.  Based on themarket price of Duke Energy common stock during the period, including the twotrading days before, through the two trading days after, May 9,

28

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2005, the date DukeEnergy and **Cinergy** announced the merger, thetransaction is valued at approximately $9.1 billion and has resulted inpreliminary goodwill for **Cinergy** and **CG&E** of approximately $4.3 billion and $2.2 billion,respectively.  The amount of goodwillresults from significant strategic and financial benefits expected to berealized by **Cinergy** and **CG&E**including:

·                  increased financial strength andflexibility;

·                  stronger utility business platform;

·                  greater scale and fuel diversity, aswell as improved operational efficiencies for the merchant generation business;

·                  broadened electric distribution platform;

·                  improved reliability and customerservice through the sharing of best practices;

·                  increased scale and scope of theelectric and gas businesses with stand-alone strength;

·                  complementary positions in theMidwest;

·                  greater customer diversity;

·                  combined expertise; and

·                  significantcost savings synergies.

As discussed in Note 1(b)above, purchase accounting impacts, including goodwill recognition, have been “pusheddown” to **Cinergy** and **CG&E**,resulting in the assets and liabilities of **Cinergy** and **CG&E** being recorded at their respective fair values asof April 3, 2006.

29

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*Purchaseprice allocation and goodwill*

The following tablesummarizes the differences between the estimated fair values and the carryingvalues of the **Cinergy** and **CG&E**assets and liabilities at the date of acquisition (the fair values arepreliminary and are subject to change including the amount of goodwill in totaland the amount allocated to **CG&E**) asfair value analyses are finalized and remaining information on the fair valuesis received:
| ** **                                                               | ** ** | **As of April 3, 2006**                         | ** ** |
|--------------------------------------------------------------------------|------------|---------------------------------------------------------------------|------------|
| ** **                                                               | ** ** | **Cinergy**                                                         | ** ** | **CG&E** | ** ** |
| ** **                                                               | ** ** | **(in millions, except per share amount)** | ** ** |
|                                                                     |       |                                                                |       |   |   |   |   |   |   |
| **Purchase  price**                                                      |       |                                                                |       |   |   |   |   |   |   |
| Cinergy common shares outstanding                                        |       |                                                                |       | 200.51 |   |   |   |   |   |
| Exchange ratio                                                           |       |                                                                |       | 1.56 |   |   |   |   |   |
| Duke Energy HC common shares issued                                      |       |                                                                |       | 312.80 |   |   |   |   |   |
| Purchase price per Duke Energy HC common share(1)                        |       |                                                                |       | $ | 28.75 |   |   |   |   |   |
|                                                                     |       |                                                                |       | $ | 8,993 |   |   |   |   |   |
| Fair value of vested employee stock options issued                       |       |                                                                |       | 59 |   |   |   |   |   |
| Duke Energy HC direct acquisition costs                                  |       |                                                                |       | 37 |   |   |   |   |   |
| Total purchase price                                                     |       |                                                                |       | $ | 9,089 |   |   |   | $ | 4,801 | (2) |
| Less**Cinergy/CG&E**  net book value at acquisition                  |       |                                                                |       | (4,574 | ) |   |   | (1,991 | ) |
| Excess purchase price                                                    |       |                                                                |       | $ | 4,515 |   |   |   | $ | 2,810 |   |
|                                                                     |       |                                                                |       |   |   |   |   |   |   |
| **Fair  value adjustments to assets acquired**                           |       |                                                                |       |   |   |   |   |   |   |
| Current assets                                                           |       | $                                                                   | 46         |   |   |   | $ | 5 |   |   |   |
| Property, plant, and equipment(3)                                        |       | (212                                                                | )          |   |   | (440 | ) |   |   |
| Intangibles                                                              |       | (677                                                                | )          |   |   | (738 | ) |   |   |
| Regulatory assets and deferred debits                                    |       | (439                                                                | )          |   |   | (150 | ) |   |   |
|                                                                     |       |                                                                |       |   |   |   |   |   |   |
| **Fair  value adjustments to liabilities assumed**                       |       |                                                                |       |   |   |   |   |   |   |
| Current liabilities                                                      |       | 124                                                                 |       |   |   | 12 |   |   |   |
| Accrued pension and post-retirement benefit costs                        |       | 564                                                                 |       |   |   | 124 |   |   |   |
| Deferred taxes                                                           |       | 171                                                                 |       |   |   | 390 |   |   |   |
| Other non-current liabilities                                            |       | 197                                                                 |       |   |   | 160 |   |   |   |
|                                                                     |       |                                                                |       | (226 | ) |   |   | (637 | ) |
| Goodwill resulting from merger                                           |       |                                                                |       | $ | 4,289 |   |   |   | $ | 2,173 |   |
| Less: Preliminary goodwill associated with Assets  held for sale(4) |       |                                                                |       | (161 | ) |   |   | — |   |
| Goodwill at June  30, 2006                                               |       |                                                                |       | $ | 4,128 |   |   |   | $ | 2,173 |   |
|                                                                          |            |                                                                     |            |  |  |  |  |  |  |  |  |  |  |

----

(1)       Price based on average price of Duke Energy stockduring the period two days prior to merger announcement through two days after.

(2)       Allocation of purchase price to **CG&E**was based on relative fair value of entities acquired (including **CG&E**) compared to a total purchase price of $9.089billion.  See Note 1(b) for additionalinformation.

(3)  Amounts recorded for regulated property,plant, and equipment by **Cinergy** and **CG&E** on the acquisition date include approximately$3,995 million and $1,510 million, respectively, related to accumulateddepreciation of acquired assets.

(4)       In June 2006, an agreement was reached to sellMarketing & Trading.  Approximately$161 million of goodwill has been preliminarily allocated to that business andwas classified as held for sale at June 30, 2006.  See Note 10 for additional information.

Goodwill recorded as ofJune 30, 2006 resulting from Duke Energy’s merger with **Cinergy**is $4,289 million.  Of this amount,approximately $161 million has been allocated to assets held for sale relatedto the disposition of Marketing & Trading and Cinergy Canada, Inc.  See Note 10 for additional information. Thevaluation and other assessment procedures required to allocate this goodwill tothe appropriate reporting units and reportable segments is currently in processand is anticipated to be completed during 2006. While the allocation is not yet complete, **Cinergy**anticipates that the goodwill will be allocated to the U.S. Franchised Electric& Gas and Commercial Power segments, as well as Other, and the majority ofthe goodwill will be allocated to the U.S. Franchised Electric & Gassegment.  See Note 11 for additionalinformation.

30

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The following unauditedconsolidated pro forma financial results are presented as if the merger withDuke Energy had occurred at the beginning of each of the periods presented:

**Unaudited Consolidated Pro Forma Results**

**Cinergy**
|                                    | ** ** | **Three Months Ended** | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                         | ** ** | **March 31,**               | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                         | ** ** | **2006**                         | ** ** | **2005**                         | ** ** | **2005**                       | ** ** |
| ** **                         | ** ** | **(in millions)**           | ** ** |
| * *                           | * *   | * *                         | * *   | * *                         | * *   | * *                       | * *   |
| Operating  revenues                |       | $                                | 1,579      |                             | $          | 1,055                          |       | $ | 2,308 |   |
| Income from  continuing operations |       | 49                               |       | 34                               |       | 110                            |       |
| Net income                         |       | 51                               |       | 22                               |       | 110                            |       |
|                                    |            |                                  |            |                                  |            |                                |            |  |  |  |

 

**Unaudited Consolidated Pro Forma Results**

**CG&E**
|                                             | ** ** | **Three Months Ended** | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|---------------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                  | ** ** | **March 31,**               | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                                  | ** ** | **2006**                         | ** ** | **2005**                         | ** ** | **2005**                       | ** ** |
| ** **                                  | ** ** | **(in millions)**           | ** ** |
| * *                                    | * *   | * *                         | * *   | * *                         | * *   | * *                       | * *   |
| Operating  revenues                         |       | $                                | 966        |                             | $          | 554                            |       | $ | 1,308 |   |
| Income from  continuing operations          |       | 85                               |       | 11                               |       | 45                             |       |
| Net income                                  |       | 83                               |       | 20                               |       | 72                             |       |
| Earnings available for  common stockholders |       | 83                               |       | 20                               |       | 72                             |       |
|                                             |            |                                  |            |                                  |            |                                |            |  |  |  |

 

Pro forma results for thethree months ended June 30, 2006 are not presented since the merger occurred atthe beginning of the period presented. Additionally, pro forma results do not include any significanttransactions completed by **Cinergy** otherthan the merger with Duke Energy.  Thepre-tax impacts of purchase accounting on the results of operations of **Cinergy** and **CG&E** areexpected to be charges of approximately $130 million to $140 million during2006.

Prior to consummation ofthe merger, certain regulatory approvals were received from the state utilitycommissions and the FERC.  See Note 13(a)for a discussion of the regulatory impacts of the merger.

The consummation of themerger triggered certain “change in control” provisions that provided enhancedand/or accelerated benefits to management level employees in the event of aqualifying transaction.  See Note 19(*i*) for additional information on these payments.

**3.     Common Stock and Stock-based Compensation**

***(a)***                                  CommonStock Outstanding

Priorto its merger with Duke Energy, **Cinergy**issued new **Cinergy Corp.** commonstock shares to satisfy obligations under certain of its employee stock plansand the Direct Stock Purchase and Dividend Reinvestment Plan.  **Cinergy**issued 1.7 million shares of stock under these plans in the quarter ended March 31, 2006.  After the merger, obligations under theseplans were satisfied through open market purchases of Duke Energy common stock.

Cash dividends declaredfor the quarter ended March 31, 2006 included dividends of $0.48 per share,which were declared by the Board of Directors on January 16, 2006 and partialdividends of $0.1564 per share, which were declared on March 10, 2006.

In April 2006, **CG&E**filed a petition with the FERC for a declaratory ruling that its payment of dividends out of itspaid-in capital account, usingthe balance transferred from the retained earnings account, resulting frompurchase accounting arising from the Duke Energy/**Cinergy** merger, would not violate section 305(a) of theFederal Power Act, which generally precludes dividends out of paid-incapital.  Such a ruling was necessary because purchase/push-downaccounting reset retained earnings to zero as of April 3, 2006, thusprecluding **CG&E** fromusing pre-merger retained earnings to pay dividends.  Withoutthis approval, **CG&E’s** abilityto pay dividends would have been constrained to earnings since April 3,2006.  In May 2006, the FERC issued an order approving **CG&E’s** petition.

31

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**CinergyCorp.** owns all of the common stock of **CG&E** and **PSI**.  In April 2006,Duke Energy acquired 100 percent of **Cinergy’s**outstanding stock for 1.56 shares of Duke Energy common stock per outstandingshare of **Cinergy** common stock.  This conversion resulted in the issuance ofapproximately 313 million shares of Duke Energy common stock.  See Note 2 for additional information.

***(b)***                                  Stock-basedCompensation Plans

Subsequent to the closingof the merger, **Cinergy** and its subsidiaries areallocated stock-based compensation expense from Duke Energy as certain of itsemployees participate in Duke Energy’s stock-based compensation programs.  In December of 2004, the Financial AccountingStandards Board (FASB) issued SFAS No. 123 (revised 2004),*Share-BasedPayment* (SFAS No. 123(R)), which replaces SFAS No. 123, *Accounting for Stock-Based Compensation* (SFAS No. 123)and supersedes APB Opinion No. 25, “*Accounting for StockIssued to Employees*”.  SFASNo. 123(R) requires all share-based payments to employees, includinggrants of employee stock options, to be recognized in the financial statementsbased on their fair values.  For **Cinergy**, timing for implementation of SFAS No. 123(R)was January 1, 2006.  **Cinergy** is required to determine an appropriate expense forstock-based compensation and record compensation expense in the ConsolidatedStatements of Operations for stock options. **Cinergy** implemented SFASNo. 123(R) using the modified prospective transition method.  In 2003, **Cinergy**prospectively adopted accounting for its stock-based compensation plans usingthe fair value recognition provisions of SFAS No. 123, as amended by SFAS No.148, “*Accounting for Stock-Based Compensation —Transition and Disclosure — an Amendment of FASB Statement No. 123*;”for all employee awards granted or with terms modified on or after January 1,2003.  Therefore, the impact ofimplementation of SFAS No. 123(R) on stock options and remaining awards was notmaterial.  See Note 17 for additionalinformation regarding this new standard.

Compensation expense forawards with graded vesting provisions is recognized in accordance with FASB InterpretationNo. (FIN) 28, “*Accounting for Stock Appreciation Rights andOther Variable Stock Option or Award Plans*.” Duke Energy and **Cinergy** elected to adopt the modified prospectiveapplication method as provided by SFAS No.123(R), and accordingly, financialstatement amounts from the prior periods presented in this Form 10-Q have notbeen restated. There were no modifications to outstanding stock options priorto the adoption of SFAS No. 123(R).   SeeNote 17 for additional information regarding this new standard.

Prior to the merger withDuke Energy,**Cinergy** had the followingstock-based compensation plans:

·                  Cinergy Corp. 1996 Long-termIncentive Compensation Plan (LTIP);

·                  Cinergy Corp. Stock Option Plan(SOP);

·                  Employee Stock Purchase and SavingsPlan;

·                  Retirement Plan for Directors;

·                  Directors’ Equity Compensation Plan;

·                  Directors’ Deferred CompensationPlan;

·                  401(k) Plans; and

·                  401(k)Excess Plan.

The LTIP and SOP programsare discussed below.  The activity in2006 and 2005 for the remaining stock-based compensation plans was notsignificant.

32

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**Cinergy**recorded stock-based compensation expense for the three months ended March 31,2006 and June 30, 2006, and June 30, 2005 and the six months ended June 30,2005 as follows, the components of which are further described below:
|                     | ** ** | **Successor(1)**                                          | ** ** | ** ** | ** ** | **Predecessor(1)**                                         | ** ** |
|---------------------|------------|-----------------------------------------------------------|------------|------------|------------|------------------------------------------------------------|------------|
| ** **          | ** ** | **Three Months Ended  June 30, 2006** | ** ** | ** ** | ** ** | **Three Months Ended  March 31, 2006** | ** ** | **Three Months Ended  June 30, 2005** | ** ** | **Six Months Ended  June 30, 2005** | ** ** |
| ** **          | ** ** | ** **                                                | ** ** | ** ** | ** ** | **(in millions)**                                     | ** ** | ** ** | ** ** |
|                |       | ** **                                                |       |       |       |                                                       |       |   |   |   |   |
| Stock Options       |       | **$**                                                     | **2**      |       |       |                                                       | $          | 3 |   | $ | 4 |   | $ | 5 |   |
| Phantom Stock       |       | **3**                                                     |       |       |       | 1                                                          |       | 1 |   | 2 |   |
| Performance  Awards |       | **1**                                                     |       |       |       | 12                                                         |       | (3 | ) | — |   |
| Other Stock  Awards |       | **—**                                                |       |       |       | —                                                     |       | 1 |   | 2 |   |
| Total               |       | **$**                                                     | **6**      |       |       |                                                       | $          | 16 |   | $ | 3 |   | $ | 9 |   |

 

----

(1)  See Note1(b) for additional information on Predecessor and Successor reporting.

Compensation expense for **CG&E** and **PSI** was notmaterial for any of the periods presented. The tax benefit associated with the recorded expense for the three monthsended March 31 and June 30, 2006 and the six months ended June 30, 2005 was $6million, $2 million, and $4 million, respectively.  Costs associated with the immediate vestingof shares and options in conjunction with the consummation of the merger withDuke Energy, as discussed below, were accounted for as part of purchaseaccounting.

*(i)    LTIP*

Under the LTIP plan,certain key employees may be granted incentive and non-qualified stock options,stock appreciation rights, non-vested stock awards, dividend equivalents,phantom stock, the opportunity to earn performance-based shares, and certainother stock-based awards.  Stock optionsare granted to participants with an option price equal to or greater than thefair market value on the grant date, and generally with a vesting period ofthree years.  The vesting period beginson the grant date and all options expire within 10 years from that date.  Expense for stock options granted toretirement eligible employees is recognized immediately as these employees aredeemed to immediately vest in their stock options.

Most options grantedprior to May 8, 2005 were immediately vested upon consummation of the mergerwith Duke Energy, and all such options were converted into Duke Energy optionson April 3, 2006 at the 1.56 conversion rate. All options granted after May 8, 2005 will continue to be expensed overthe remaining portion of the three-year vesting period unless granted toretirement eligible employees in which case they are expensed immediately.  Duke Energy plans to issue new Duke Energycommon shares when the above options are exercised.

Previously,performance-based share awards were paid 50 percent in common stock and 50percent in cash.  As of December 31,2005, all performance shares were classified as liabilities as managementintends to pay all outstanding awards in cash. As a result, the expected cash payout portion of the performance shareswere reported in Current Liabilities -Other and Deferred Credits andOther Liabilities.  Allperformance awards vested immediately with the consummation of the merger.  Management paid all outstanding awards incash.  Total cash paid for theperformance-based share liabilities for the three months ended March 31 andJune 30, 2006 and the six months ended June 30, 2005 were $5 million, $60million, and $14 million, respectively.

33

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Target grants ofperformance-based shares were made for the following Cycles:
|            | ** ** | **Grant**  | ** ** | **Performance** | ** ** | **Target**                    | ** ** |
|------------|------------|------------|------------|-----------------|------------|-------------------------------|------------|
| **Cycle**  | ** ** | **Date**   | ** ** | **Period**      | ** ** | **Grant of Shares** | ** ** |
| ** ** | ** ** | ** ** | ** ** | ** **      | ** ** | **(in thousands)**       | ** ** |
|       |       |       |       |            |       |                          |       |
| VIII       |       | 1/2004     |       | 2004-2006       |       | 366                           |       |
| IX         |       | 1/2005     |       | 2005-2007       |       | 340                           |       |
| X          |       | 1/2006     |       | 2006-2008       |       | 351                           |       |

 

All performance sharesunder Cycles VIII and IX vested immediately at 200 percent of target uponconsummation of the merger.  Cycle Xperformance shares vested on a pro-rata basis also at 200 percent of target atthe consummation of the merger. Executives who left **Cinergy**received the remaining prorated share of Cycle X shares paid out at target.

Stock-based performanceawards outstanding vest over three years. Certain performance awards granted in 2006 contain market conditionsbased on the total shareholder return (TSR) of Duke Energy stock.  These awards are valued using apath-dependent model that incorporates expected relative TSR into the fair valuedetermination of Duke Energy’s performance-based share awards with the adoptionof SFAS No. 123(R).  The model uses threeyear historical volatilities and correlations for all companies in thepre-defined peer group, including Duke Energy, to simulate Duke Energy’srelative TSR as of the end of the performance period.  For each simulation, Duke Energy’s relativeTSR associated with the simulated stock price at the end of the performanceperiod plus expected dividends within the period results in a value per sharefor the award portfolio.  The average ofthese simulations is the expected portfolio value per share.  Actual life to date results of Duke Energy’srelative TSR for each grant is incorporated within the model.  Other awards not containing market conditionsare measured at grant date price.  DukeEnergy awarded 482,600 shares (fair value of approximately $12 million) in thesix months ended June 30, 2006.

The following tablesummarizes information about stock-based performance awards issued to **Cinergy** employees and outstanding at June 30, 2006:
|                                            | ** ** | **Shares** | ** ** | **Weighted  Average Grant  Date Fair Value** | ** ** |
|--------------------------------------------|------------|------------|------------|-------------------------------------------------------------|------------|
|                                       |       |       |       |                                                        |       |
| Number of  Stock-based Performance Awards: |       |       |       |                                                        |       |
| Outstanding at April 1, 2006               |       | —     |       | $                                                           | —     |   |
| Granted                                    |       | 482,600    |       | 25                                                          |       |
| Vested                                     |       | —     |       | —                                                      |       |
| Forfeited                                  |       | (1,010     | )          | 18                                                          |       |
| Canceled                                   |       | —     |       | —                                                      |       |
| Outstanding at June 30,  2006              |       | 481,590    |       | $                                                           | 25         |   |

 

As of June 30, 2006, **Cinergy** had approximately $11 million of compensationexpense which is expected to be recognized over a weighted-average period of2.5 years.

Phantom stock awardsoutstanding vest over periods from one to five years.  Duke Energy awarded 364,570 shares to **Cinergy** employees (fair value of approximately $11 millionbased on the market price of Duke Energy’s common stock at the grant dates) inthe six months ended June 30, 2006. Converted **Cinergy** phantom stock awards arepaid in cash and are measured and recorded as liability awards.

34

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The following tablesummarizes information about phantom stock awards issued to **Cinergy** employees and outstanding at June 30, 2006:

|                                  | ** ** | **     Shares     ** | ** ** | **Weighted  Average Grant  Date Fair Value** | ** ** |
|----------------------------------|------------|------------------------------------------------------------------------|------------|-------------------------------------------------------------|------------|
|                             |       |                                                                   |       |                                                        |       |
| Number of Phantom Stock  Awards: |       |                                                                   |       |                                                        |       |
| Outstanding at  April 1, 2006(1) |       | 31,530                                                                 |       | $                                                           | 29         |   |
| Granted                          |       | 364,570                                                                |       | 29                                                          |       |
| Vested                           |       | (23,398                                                                | )          | 29                                                          |       |
| Forfeited                        |       | (5,229                                                                 | )          | 29                                                          |       |
| Canceled                         |       | —                                                                 |       | —                                                      |       |
| Outstanding at June 30, 2006     |       | 367,473                                                                |       | $                                                           | 29         |   |

----

(1)     Balance ofconverted **Cinergy** awards.

The total fair value ofthe shares vested during the three months ended June 30, 2006 was approximately$1 million.  As of June 30, 2006, **Cinergy** had approximately $8 million of compensation expensewhich is expected to be recognized over a weighted-average period of 3.1 years.

**Cinergy** hadother stock awards outstanding under the LTIP that vested upon the change incontrol due to the consummation of the merger. The fair value of the shares vested during the three months ended June30, 2006 was approximately $1 million.

*(ii)          Stock Option Activity*

Most options grantedprior to May 8, 2005 under the LTIP and SOP plans were immediately vested uponconsummation of the merger with Duke Energy, and all such options wereconverted into Duke Energy options at the 1.56 conversion rate.  All options granted after May 8, 2005 willcontinue to be expensed over the remaining portion of the three-year vestingperiod unless granted to retirement eligible employees in which case they areexpensed immediately.  Duke Energy plansto issue new Duke Energy common shares when the above options are exercised.

Stock option activity foroptions issued to **Cinergy**employees for the three months ended March 31, 2006 is summarized as follows:

|                                          | ** ** | **LTIP and  SOP - Predecessor** | ** ** |
|------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                               | ** ** | **Shares  Subject to  Option**                      | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Weighted  Average  Remaining  Contractual  Term** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
| ** **                               | ** ** | ** **                                               | ** ** | ** ** | ** ** | ** ** | ** ** | **(in millions)** | ** ** |
| Balance at December 31, 2005             |       | 5,484,649                                                |       | $ | 34.72 |   |   |   |   |   |
|                                     |       |                                                     |       |   |   |   |   |   |   |
| Options granted(1)                       |       | 674,900                                                  |       | 42.45 |   |   |   |   |   |
| Options exercised                        |       | (1,488,171                                               | )          | 33.37 |   |   |   | $ | 16 |   |
| Options  forfeited/expired               |       | (6,300                                                   | )          | 41.11 |   |   |   |   |   |
|                                     |       |                                                     |       |   |   |   |   |   |   |
| Balance at March 31, 2006                |       | 4,665,078                                                |       | $ | 36.30 |   | 6.32 yrs |   | $ | 43 |   |
|                                     |       |                                                     |       |   |   |   |   |   |   |
| Options Exercisable at March 31, 2006(2) |       | 2,433,378                                                |       | $ | 32.94 |   | 4.27 yrs |   | $ | 30 |   |

----

(1)       Options granted to **Cinergy** employees upon consummation of the merger with DukeEnergy.

(2)       475,867 options exercisablepertain to the SOP.

 

35

----

Stock option activity foroptions issued to **Cinergy**employees for the three months ended June 30, 2006 is summarized as follows:

|                                                   | ** ** | **LTIP and SOP - Successor** | ** ** |
|---------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                        | ** ** | **Shares Subject  to Option**          | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Weighted  Average  Remaining  Contractual  Term** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
| ** **                                        | ** ** | ** **                                       | ** ** | ** ** | ** ** | ** ** | ** ** | **(in millions)** | ** ** |
| **Balance at April 1, 2006**                      |       | 7,277,522                                        |       | $ | 23 |   |   |   |   |   |
| ** **                                        | ** ** |                                             |       |   |   |   |   |   |   |
| **Options  granted**(1)                           | ** ** | 1,877,646                                        |       | 29 |   |   |   |   |   |
| **Options  exercised**                            |       | (968,170                                         | )          | 20 |   |   |   | $ | 8 |   |
| **Options  forfeited/expired**                    |       | (52,260                                          | )          | 27 |   |   |   |   |   |
| ** **                                        | ** ** |                                             |       |   |   |   |   |   |   |
| **Balance at June 30, 2006**                      |       | **8,134,738**                                    | ** ** | **$** | **25** | ** ** | **6.9 yrs** | ** ** | **$** | **36** |   |
| ** **                                        | ** ** | ** **                                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   |
| **Options Exercisable**** at June 30, 2006** | ** ** | **5,511,412**                                    | ** ** | **$** | **23** | ** ** | **5.6 yrs** | ** ** | **$** | **34** |   |

----

(1)    Optionsgranted to **Cinergy** employees uponconsummation of the merger with Duke Energy.

For the three months ended June 30 and March 31, 2006,**Cinergy** received $20 million and $29million, respectively, in cash from the exercise of outstanding stockoptions.  The tax benefit realized fromthese exercised options for the three months ended March 31, 2006 was $14million.  The total compensation expenserelated to unvested options at June 30, 2006 was $12 million which will berecognized over a weighted average period of 2.7 years.  The total fair-value of options grantedduring the three months ended March 31 and June 30, 2006 and the six monthsended June 30, 2005, was $6.07 per share, $5.45 per share, and $5.65 per share,respectively.  The total intrinsic valueof options exercised was $16 million, $8 million, and $4 million for the threemonths ended March 31 and June 30, 2006 and the six months ended June 30, 2005,respectively.

The fair value of optionsgranted was determined using a Black-Scholes model using the assumptions listedin the following table for the periods presented:

|                          | ** ** | **LTIP**                        | ** **    |
|--------------------------|------------|---------------------------------|---------------|
| ** **               | ** ** | **Successor(1)**                | ** **    | ** ** | ** ** | **Predecessor(1)(2)** | ** ** |
| ** **               | ** ** | **Three Months**           | ** **    | ** ** | ** ** | **Three Months** | ** ** | **Six Months** | ** ** |
| ** **               | ** ** | **Ended**                       | ** **    | ** ** | ** ** | **Ended** | ** ** | **Ended** | ** ** |
| ** **               | ** ** | **June**** **30, 2006 | ** **    | ** ** | ** ** | **March 31, 2006** | ** ** | **June 30, 2005** | ** ** |
|                     |       |                            |          |   |   |   |   |   |   |
| Risk-free  interest rate | ** ** | **4.78**                        | **%**(7)      |   |   | 4.33 | %(3) | 3.62 | %(3) |
| Expected  dividend yield | ** ** | **4.40**                        | **%**(8)      |   |   | 4.41 | %(4) | 4.52 | %(4) |
| Expected life(5)         |       | **6.29**                        | ** yrs** |   |   | 5.01 |  yrs | 4.99 |  yrs |
| Expected volatility      | ** ** | **24.00**                       | **%**(9)      |   |   | 22.43 | %(6) | 21.28 | % |

----

| (1) |   | See Note 1(b) for additional information on  Predecessor and Successor reporting.                                                                                                                                                                                                                                                                                                                                                    |
|-----|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) |   | There were no stock options granted during the three  months ended June 30, 2005.                                                                                                                                                                                                                                                                                                                                                    |
| (3) |   | The risk-free rate is based upon the U.S. Treasury  zero-coupon issues with a remaining term equal to the expected term of the  options.                                                                                                                                                                                                                                                                                             |
| (4) |   | The expected dividend yield is based upon annualized  dividends and the closing stock price on the grant date.                                                                                                                                                                                                                                                                                                                       |
| (5) |   | The expected term of options is derived from  historical data.                                                                                                                                                                                                                                                                                                                                                                       |
| (6) |   | Volatility is based upon the historical volatility  with a look back period equal to the expected term of the options.                                                                                                                                                                                                                                                                                                               |
| (7) |   | The risk-free rate is based upon the U.S. Treasury  Constant Maturity rates as of the grant date.                                                                                                                                                                                                                                                                                                                                    |
| (8) |   | The expected dividend yield is based upon annualized  dividends and the 1-year average closing stock price.                                                                                                                                                                                                                                                                                                                          |
| (9) |   | Volatility is based upon 50 percent historical and  50 percent implied volatility.   Historic volatility is based on the weighted average between Duke  Energy and **Cinergy** historical volatility  over six years using daily stock prices.   Implied volatility is the average for all option contracts with a term  greater than six months using the strike price closest to the stock price on  the valuation date. |

** **

36

----

** **

**4.     Preferred Stock**

In March 2006, **CG&E** redeemed all outstanding shares of its $16.98million notional amount 4% Cumulative Preferred Stock and its $3.5 millionnotional amount 4.75% Cumulative Preferred Stock at a price of  $108 per share and $101 per share,respectively, plus accrued and unpaid dividends.

In May 2006, **PSI**redeemed all outstanding shares of its $3.7 millionnotional amount 3.5% Cumulative Preferred Stock, its $3.9 million notionalamount 4.32% Cumulative Preferred Stock, and its $3.7 million notional amount4.16% Cumulative Preferred Stock at par, plus accrued and unpaid dividends.

**5.     Inventory**

Inventory is recorded atthe lower of cost or market value, primarily using the average cost method.

|                                      | ** ** | **Successor(1)**       | ** ** | ** ** | ** ** | **Predecessor(1)**    | ** ** |
|--------------------------------------|------------|------------------------|------------|------------|------------|-----------------------|------------|
| ** **                           | ** ** | **June 30,**      | ** ** | ** ** | ** ** | **December 31,** | ** ** |
| **Cinergy**                          | ** ** | **2006**               | ** ** | ** ** | ** ** | **2005**              | ** ** |
| ** **                           | ** ** | **(in millions)** | ** ** |
| **Inventory**                        | ** ** | ** **             | ** ** |       |       | ** **            | ** ** |
| Fuel for use in  electric production | ** ** | **$**                  | **186**    | ** ** |       |                  | $          | 121 | ** ** |
| Other materials  and supplies        | ** ** | **119**                | ** ** |       |       | 109                   | ** ** |
| Gas stored for  current use          | ** ** | **4**                  | ** ** |       |       | 243                   | ** ** |
| **Total Inventory**                  | ** ** | **$**                  | **309**    | ** ** |       |                  | $          | 473 | ** ** |

----

(1)      See Note 1(b)for additional information on Predecessor and Successor reporting.

|                                      | ** ** | **Successor(1)**       | ** ** | ** ** | ** ** | **Predecessor(1)**    | ** ** |
|--------------------------------------|------------|------------------------|------------|------------|------------|-----------------------|------------|
| ** **                           | ** ** | **June 30,**      | ** ** | ** ** | ** ** | **December 31,** | ** ** |
| **CG&E**                         | ** ** | **2006**               | ** ** | ** ** | ** ** | **2005**              | ** ** |
| ** **                           | ** ** | **(in millions)** | ** ** |
| **Inventory**                        |       |                   |       |       |       |                  |       |
| Fuel for use in  electric production |       | **$**                  | **89**     |       |       |                  | $          | 58 |   |
| Other materials  and supplies        |       | **56**                 |       |       |       | 49                    |       |
| Gas stored for  current use          |       | **4**                  |       |       |       | 71                    |       |
| **Total Inventory**                  |       | **$**                  | **149**    |       |       |                  | $          | 178 |   |

 

----

(1)      See Note 1(b)for additional information on Predecessor and Successor reporting.

|                                      | ** ** | **June 30,**      | ** ** | ** ** | ** ** | **December 31,** | ** ** |
|--------------------------------------|------------|------------------------|------------|------------|------------|-----------------------|------------|
| **PSI**                              | ** ** | **2006**               | ** ** | ** ** | ** ** | **2005**              | ** ** |
| ** **                           | ** ** | **(in millions)** | ** ** |
| **Inventory**                        |       |                   |       |       |       |                  |       |
| Fuel for use in  electric production |       | **$**                  | **81**     |       |       |                  | $          | 51 |   |
| Other materials  and supplies        |       | **52**                 |       |       |       | 52                    |       |
| **Total Inventory**                  |       | **$**                  | **133**    |       |       |                  | $          | 103 |   |

**6.     Debt andCredit Facilities**

During June 2006, **Cinergy Corp.** and its subsidiaries amended their multi-yearsyndicated $2 billion revolving credit facility to extend the expiration date,reduce costs, and conform the terms to those found in the legacy Duke Energyfacilities.

**Cinergy’s**credit agreements contain various financial and other covenants. Failure tomeet those covenants beyond applicable grace periods could result in accelerateddue dates and/or termination of the agreements. As of June 30, 2006, **Cinergy** was in compliance with those covenants. In addition,some credit agreements may allow for acceleration of payments or termination ofthe agreements due to nonpayment or to the acceleration of other 

37

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significant indebtednessof the borrower or some of its subsidiaries. None of the credit agreementscontain material adverse change clauses or any covenants based on creditratings.

**CinergyCorp.’s**short-term borrowings consist primarily of unsecuredrevolving lines of credit, sale of commercial paper, and pollution controlnotes.  **CinergyCorp.’s** revolving credit facility and commercial paper program alsosupport the short-term borrowing needs of **CG&E**and **PSI**.  **Cinergy’s** pollutioncontrol notes are tax-exempt notes that are obtained to finance equipment orland development for pollution control purposes.  In addition, **Cinergy Corp.**, **CG&E**,and **PSI** maintain uncommitted linesof credit.  These facilities are not firmsources of capital but rather informal agreements to lend money, subject toavailability, with pricing determined at the time of advance.  The following table summarizes the Notespayable and Commercial paper:

**NotesPayable and Commercial Paper Summary June 30, 2006**

 
|                                 | ** ** | ** **     | ** ** | ** **     | ** ** | **Amounts Outstanding** | ** ** |
|---------------------------------|------------|----------------|------------|----------------|------------|------------------------------|------------|
| ** **                      | ** ** | ** **     | ** ** | **Credit**     | ** ** | ** **                   | ** ** | ** ** | ** ** | **Pollution** | ** ** | ** ** | ** ** |
| ** **                      | ** ** | **Expiration** | ** ** | **Facilities** | ** ** | **Commercial**               | ** ** | **Letters of** | ** ** | **Control** | ** ** | ** ** | ** ** |
| ** **                      | ** ** | **Date**       | ** ** | **Capacity**   | ** ** | **Paper**                    | ** ** | **Credit** | ** ** | **Notes** | ** ** | **Total** | ** ** |
| ** **                      | ** ** | ** **     | ** ** | ** **     | ** ** | **(in millions)**       | ** ** |
| **Cinergy**                     |       |           |       |           |       |                         |       |   |   |   |   |   |   |
| **Cinergy Corp.**(1)            |       |           |       |           |       |                         |       |   |   |   |   |   |   |
| $2,000 multi-year syndicated(2) |       | June 2011      |       | $              | 2,000      |                         | $          | 949 |   | $ | 93 |   | $ | — |   | $ | 1,042 |   |
|                            |       |           |       |           |       |                         |       |   |   |   |   |   |   |
| **Utility operating companies** |       |           |       |           |       | —                       |       | — |   | 298 |   | 298 |   |
|                            |       |           |       |           |       |                         |       |   |   |   |   |   |   |
| **Non-regulated subsidiaries**  |       |           |       |           |       | —                       |       | — |   | 25 |   | 25 |   |
|                            |       |           |       |           |       |                         |       |   |   |   |   |   |   |
| **Total Cinergy**               |       |           |       |           |       | $                            | 949        |   | $ | 93 |   | $ | 323 |   | $ | 1,365 | (3) |
|                            |       |           |       |           |       |                         |       |   |   |   |   |   |   |
| **CG&E**(4)                 |       |           |       |           |       | $                            | —     |   | $ | — |   | $ | 112 |   | $ | 112 |   |
|                            |       |           |       |           |       |                         |       |   |   |   |   |   |   |
| **PSI**(5)                      |       |           |       |           |       | $                            | —     |   | $ | — |   | $ | 186 |   | $ | 186 |   |
|                                 |            |                |            |                |            |                              |            |  |  |  |  |  |  |  |  |  |  |  |

----

| (1) |   | Excludes $150 million credit facility at Cinergy  Canada, Inc., which has $63 million outstanding as of June 30, 2006  classified on the Consolidated Balance Sheets as Liabilities associated with  assets held for sale. **Cinergy Corp.’s**  commercial paper program limit is $1.5 billion. The commercial paper program  is supported by **Cinergy Corp.’s**  revolving line of credit.                                       |
|-----|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) |   | Credit facility contains an option allowing  borrowing up to the full amount of the facility on the day of initial  expiration for up to one year. Credit facility also contains a covenant  requiring the debt-to-total capitalization ratio to not exceed 65 percent and  contains $500 million sublimits each for **CG&**E and **PSI**. In June 2006, credit facility expiration date was  extended from September 2010 to June 2011. |
| (3) |   | Includes $93 million in letters of credit which are  not included on **Cinergy’s**  Consolidated Balance Sheets.                                                                                                                                                                                                                                                                                                                        |
| (4) |   | Excludes $198 million outstanding as notes payable  to affiliated companies under the money pool arrangement.                                                                                                                                                                                                                                                                                                                                |
| (5) |   | Excludes $117 million outstanding as notes payable  to affiliated companies under the money pool arrangement.                                                                                                                                                                                                                                                                                                                                |

##### ***Long-termDebt***

In June 2006, **PSI**issued $325 million principal amount of6.05% senior unsecured notes due June 15, 2016. Proceeds from the issuance wereused to repay $325 million 6.65% First Mortgage Bonds that matured on June 15,2006.

In August 2006, ULH&Pissued approximately $77 million principal amount of floating rate tax-exemptnotes due August 1, 2027.  Proceeds fromthe issuance will be used to refund a like amount of debt on September 1, 2006currently outstanding at **CG&E**.  The **CG&E** debtwas assumed by ULH&P as part of the recent transfer of generating assetsfrom **CG&E** to ULH&P.  Approximately $27 million of the floatingrate debt was swapped to a fixed rate concurrent with closing.

**7.     Employee Benefit Obligations**

As discussed in the 200510-K, **Cinergy Corp.** sponsors bothpension and other postretirement benefits plans.  **CinergyCorp.’s** qualified defined benefit pension plans cover substantiallyall United States employees meeting certain minimum age and servicerequirements.  Funding for the qualifieddefined benefit pension plans is based on actuarially determined contributions,the maximum of which is generally the amount deductible for tax purposes andthe minimum being that required by the Employee Retirement Income Security Actof 1974, as amended.  The pension plans’assets consist of investments in equity and debt securities.  In addition, **Cinergy**sponsors non-qualified pension plans (plans that donot meet the criteria for certain tax benefits) that cover officers, certainother 

38

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key employees, andnon-employee directors.  **Cinergy**also provides certain health careand life insurance benefits to retired United States employees and theireligible dependents.  These benefits aresubject to minimum age and service requirements.  The health care benefits include medicalcoverage, dental coverage, and prescription drug coverage and are subject tocertain limitations, such as deductibles and co-payments.

There were no qualifiedpension benefit contributions for either the three months ended March 31, 2006or June 30, 2006.  **Cinergy**expects to make approximately $120 million in qualified pension contributionsduring the remainder of 2006.

**Cinergy’s**benefit plans’ costs for the periods presented include the followingcomponents:

|                                                | ** ** | **Successor(1)**                                      | ** ** | ** ** | ** ** | **Predecessor(1)**                                     | ** ** |
|------------------------------------------------|------------|-------------------------------------------------------|------------|------------|------------|--------------------------------------------------------|------------|
| ** **                                     | ** ** | **Three Months  Ended  June 30, 2006** | ** ** | ** ** | ** ** | **Three Months  Ended  March 31, 2006** | ** ** | **Three Months  Ended  June 30, 2005** | ** ** | **Six Months  Ended  June 30, 2005** | ** ** |
| ** **                                     | ** ** | ** **                                            | ** ** | ** ** | ** ** | **(in millions)**                                 | ** ** | ** ** | ** ** |
| **Qualified Pension Benefits**                 |       |                                                  |       |       |       |                                                   |       |   |   |   |   |
| ** **                                     | ** ** | ** **                                            |       | ** ** | ** ** | ** **                                             | ** ** | ** ** | ** ** | ** ** | ** ** |
| Service cost                                   | ** ** | **$**                                                 | **14.5**   |       |       |                                                   | $          | 10.9 | ** ** | $ | 9.6 |   | $ | 19.2 |   |
| Interest cost                                  | ** ** | **30.5**                                              |       |       |       | 24.7                                                   |       | 24.0 |   | 48.1 |   |
| Expected return on  plans’ assets         | ** ** | **(24.7**                                             | )          |       |       | (23.4                                                  | )          | (22.1 | ) | (44.1 | ) |
| Amortization of  transition (asset) obligation | ** ** | **—**                                            | (2)        |       |       | —                                                 |       | (0.1 | ) | (0.1 | ) |
| Amortization of prior  service cost            | ** ** | **—**                                            | (2)        |       |       | 0.9                                                    |       | 1.2 |   | 2.3 |   |
| Amortization of  actuarial loss                | ** ** | **—**                                            | (2)        |       |       | 4.6                                                    |       | 2.0 |   | 3.9 |   |
| Net periodic benefit  cost                     | ** ** | **$**                                                 | **20.3**   |       |       |                                                   | $          | 17.7 | ** ** | $ | 14.6 |   | $ | 29.3 |   |
|                                           |       |                                                  |       |       |       |                                                   |       |   |   |   |   |
| **Non-Qualified Pension Benefits**             | ** ** | ** **                                            |       | ** ** | ** ** | ** **                                             | ** ** |   | ** ** | ** ** | ** ** |
|                                           |       |                                                  |       |       |       |                                                   |       |   |   |   |   |
| Service cost                                   | ** ** | **$**                                                 | **0.5**    |       |       |                                                   | $          | 1.4 | ** ** | $ | 1.4 |   | $ | 2.8 |   |
| Interest cost                                  | ** ** | **1.5**                                               |       |       |       | 2.1                                                    |       | 1.8 |   | 3.6 |   |
| Amortization of prior  service cost            | ** ** | **—**                                            | (2)        |       |       | 0.6                                                    |       | 0.5 |   | 1.0 |   |
| Amortization of  actuarial loss                | ** ** | **—**                                            | (2)        |       |       | 1.0                                                    |       | 0.6 |   | 1.2 |   |
| Net periodic benefit  cost                     | ** ** | **$**                                                 | **2.0**    |       |       |                                                   | $          | 5.1 | ** ** | $ | 4.3 |   | $ | 8.6 |   |
|                                           |       |                                                  |       |       |       |                                                   |       |   |   |   |   |
| **Other Postretirement Benefits**              | ** ** | ** **                                            |       | ** ** | ** ** | ** **                                             | ** ** |   | ** ** | ** ** | ** ** |
|                                           |       |                                                  |       |       |       |                                                   |       |   |   |   |   |
| Service cost                                   | ** ** | **$**                                                 | **2.3**    |       |       |                                                   | $          | 1.6 | ** ** | $ | 1.6 |   | $ | 3.2 |   |
| Interest cost                                  | ** ** | **8.7**                                               |       |       |       | 5.6                                                    |       | 5.7 |   | 11.4 |   |
| Amortization of  transition (asset) obligation | ** ** | **—**                                            | (2)        |       |       | —                                                 |       | 0.1 |   | 0.2 |   |
| Amortization of prior  service cost            | ** ** | **—**                                            | (2)        |       |       | (0.2                                                   | )          | (0.3 | ) | (0.4 | ) |
| Amortization of  actuarial loss                | ** ** | **—**                                            | (2)        |       |       | 2.5                                                    |       | 2.8 |   | 5.5 |   |
| Net periodic benefit cost                      | ** ** | **$**                                                 | **11.0**   |       |       |                                                   | $          | 9.5 | ** ** | $ | 9.9 |   | $ | 19.9 |   |

----

| (1) |   | See Note 1(b) for additional information on  Predecessor and Successor reporting.                          |
|-----|--------|------------------------------------------------------------------------------------------------------------|
| (2) |   | All of these previously unrecognized amounts were  eliminated with the application of purchase accounting. |

39

----

The net periodic benefit costs by registrant for thethree months ended June 30, 2006, March 31, 2006, and June 30, 2005, and thesix months ended June 30, 2005, were as follows:

|                                    | ** ** | **Successor(1)**                                      | ** ** | ** ** | ** ** | **Predecessor(1)**                                     | ** ** |
|------------------------------------|------------|-------------------------------------------------------|------------|------------|------------|--------------------------------------------------------|------------|
| ** **                         | ** ** | **Three Months  Ended  June 30, 2006** | ** ** | ** ** | ** ** | **Three Months  Ended  March 31, 2006** | ** ** | **Three Months  Ended  June 30, 2005** | ** ** | **Six Months  Ended  June 30, 2005** | ** ** |
| ** **                         | ** ** | ** **                                            | ** ** | ** ** | ** ** | **(in millions)**                                 | ** ** | ** ** | ** ** |
| **Qualified Pension Benefits**     |       |                                                  |       |       |       |                                                   |       |   |   |   |   |
|                               |       |                                                  |       |       |       |                                                   |       |   |   |   |   |
| **Cinergy**(2)                     | ** ** | **$**                                                 | **20.3**   |       |       |                                                   | $          | 17.7 | ** ** | $ | 14.6 |   | $ | 29.3 |   |
| **CG&E**and  subsidiaries      | ** ** | **7.4**                                               |       |       |       | 5.5                                                    |       | 4.3 |   | 8.7 |   |
|                               |       |                                                  |       |       |       |                                                   |       |   |   |   |   |
| **Non-Qualified Pension Benefits** | ** ** | ** **                                            | ** ** | ** ** | ** ** | ** **                                             | ** ** | ** ** | ** ** | ** ** | ** ** |
|                               |       |                                                  |       |       |       |                                                   |       |   |   |   |   |
| **Cinergy**(2)                     | ** ** | **$**                                                 | **2.0**    |       |       |                                                   | $          | 5.1 | ** ** | $ | 4.3 |   | $ | 8.6 |   |
| **CG&E**and  subsidiaries      | ** ** | **0.2**                                               |       |       |       | 0.2                                                    |       | 0.2 |   | 0.4 |   |
|                               |       |                                                  |       |       |       |                                                   |       |   |   |   |   |
| **Other Postretirement Benefits**  | ** ** | ** **                                            | ** ** | ** ** | ** ** | ** **                                             | ** ** | ** ** | ** ** | ** ** | ** ** |
|                               |       |                                                  |       |       |       |                                                   |       |   |   |   |   |
| **Cinergy**(2)                     | ** ** | **$**                                                 | **11.0**   |       |       |                                                   | $          | 9.5 | ** ** | $ | 9.9 |   | $ | 19.9 |   |
| **CG&E**and  subsidiaries      | ** ** | **3.0**                                               |       |       |       | 2.5                                                    |       | 2.6 |   | 5.2 |   |

----

| (1) |   | See Note 1(b) for additional information on  Predecessor and Successor reporting. |
|-----|--------|-----------------------------------------------------------------------------------|
| (2) |   | The results of **Cinergy** also  include amounts related to non-registrants.      |

 

| PSI                                | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                         | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                         | ** ** | **2006**                         | ** ** | **2005**                       | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                         | ** ** | **(in millions)**           | ** ** |
| **Qualified Pension Benefits**     |       | **$**                            | **6.1**    |                           | $          | 3.7 |   | **$** | **10.5** |   | $ | 7.5 |   |
| **Non-Qualified Pension Benefits** |       | **0.2**                          |       | 0.1                            |       | **0.4** |   | 0.3 |   |
| **Other Postretirement Benefits**  |       | **5.7**                          |       | 5.0                            |       | **10.3** |   | 9.9 |   |
|                                    |            |                                  |            |                                |            |  |  |  |  |  |  |  |  |

 

Upon consummation of themerger with Duke Energy, all defined benefit plan obligations wereremeasured.  **Cinergy,CG&E,**and**PSI** updatedthe assumptions used to determine their accrued benefit obligations andprospective net periodic benefit cost. The weighted-average assumptions used to determine benefit obligationsare as follows:
| ** **                                       | ** ** | **Qualified  Pension Benefits** | ** ** | **Non-Qualified  Pension Benefits** | ** ** | **Other  Postretirement  Benefits** | ** ** |
|--------------------------------------------------|------------|--------------------------------------|------------|------------------------------------------|------------|-------------------------------------|------------|
| ** **                                       | ** ** | ** **                           | ** ** |
| Discount rate                                    |       | 6.00                                 | %          | 6.00                                     | %          | 6.00                                | %          |
| Salary increase                                  |       | 5.00                                 | %          | 5.00                                     | %          | 5.00                                | %          |
| Expected long-term rate of return on plan assets |       | 8.50                                 | %          | N/A                                      |       | N/A                                 |       |

 

The assumed health carecost trend rates are as follows:

|                                                                                    | ** ** | **Not  Medicare  Eligible** | ** ** | **Medicare  Eligible** | ** ** |
|------------------------------------------------------------------------------------|------------|-----------------------------|------------|------------------------|------------|
| Health care cost trend  rate assumed for 2006                                      |       | 8.50                        | %          | 11.50                  | %          |
| Rate to which the cost  trend rate is assumed to decline (the ultimate trend rate) |       | 5.50                        | %          | 5.50                   | %          |
| Year that the rate reaches the ultimate trend rate                                 |       | 2009                        |       | 2012                   |       |

** **

**8.     Acquisitionsand Dispositions**

***(a)***                                  Transferof Duke Energy Generating Assets to CG&E

In April 2006, DukeEnergy contributed to **CG&E** itsownership interest in five plants, representing a mix of combined cycle andpeaking plants, with a combined capacity of 3,600 megawatts (MWs), as follows:

| Generating Plant | ** ** | **Location**                  | ** ** | **Ownership  Interest** | ** ** | **Fuel Type** | ** ** | **Owned  MW Capacity** | ** ** |
|-----------------------|------------|-------------------------------|------------|-------------------------|------------|--------------------|------------|-----------------------------|------------|
|                  |       |                          |       |                    |       |               |       |                        |       |
| Fayette               |       | Fayette County,  Pennsylvania |       | 100                     | %          | Gas                |       | 620                         |       |
| Hanging  Rock         |       | Lawrence County, Ohio         |       | 100                     |       | Gas                |       | 1,240                       |       |
| Lee                   |       | Lee County, Illinois          |       | 100                     |       | Gas                |       | 640                         |       |
| Vermillion            |       | Vermillion County,  Indiana   |       | 75                      |       | Gas                |       | 480                         |       |
| Washington            |       | Washington County, Ohio       |       | 100                     |       | Gas                |       | 620                         |       |
|                  |       |                          |       |                    |       |               |       | 3,600                       |       |

The transaction was effective in April 2006 and wasaccounted for at Duke Energy’s net book value for these assets.  The entities holding these generating plants,which were indirect subsidiaries of Duke Energy, were first distributed to DukeEnergy, which then contributed them to **Cinergy** which,in turn, contributed them to **CG&E**.  In the final step, the entities were thenmerged into **CG&E**.

40

----

In connection with thecontribution of these assets, **CG&E**assumed certain related liabilities.  Inparticular, **CG&E** assumed from Duke Energyall payment, performance, and other obligations of Duke Energy, with respect tocertain deferred tax liabilities related to the assets.   The following table summarizes thistransaction for **CG&E**:

|                                          | ** ** | **(in millions)** | ** ** |
|------------------------------------------|------------|------------------------|------------|
|                                     |       |                   |       |
| **Assets Received**                      |       |                   |       |
| Generating  Assets                       |       | $                      | 1,563      |   |
| Other Assets                             |       | 74                     |       |
| **Total  Assets Received**               |       | $                      | 1,637      |   |
|                                     |       |                   |       |
| **Liabilities Assumed**                  |       |                   |       |
| Deferred Tax  Liabilities                |       | $                      | 181        |   |
| Other                                    |       | 4                      |       |
| **Total  Liabilities Assumed**           |       | $                      | 185        |   |
|                                     |       |                   |       |
| **Contributed Capital from Duke Energy** |       | $                      | 1,452      |   |

As part of this transaction, Duke Capital LLC, asubsidiary of Duke Energy, agreed to reimburse **CG&E**through April 2016 in the event of certain cash shortfalls that may result from**CG&E’s** ownership of the fivestations.

**9.     Goodwill and Intangibles**

***(a)***                                  Goodwill

**Cinergy**evaluates the impairment of goodwill under the guidance of SFAS No. 142, *Goodwill and Other Intangible Assets* (SFAS No. 142). Asdiscussed further in Note 2, in April 2006, Duke Energy and **Cinergy** consummated the merger, which resulted in **Cinergy** and **CG&E**recording preliminary goodwill of approximately $4.3 billion and $2.2 billion,respectively.  The annual impairmenttesting date for goodwill is August 31. The following table shows the components of goodwill for **Cinergy** and **CG&E** atJune 30, 2006:

**CarryingAmount of Goodwill**

 

|              | ** ** | **Successor (1)**      | ** ** | ** **  | ** ** | **Predecessor (1)**    | ** ** |
|--------------|------------|-----------------------------|------------|-------------|------------|-----------------------------|------------|
| ** **   | ** ** | **Balance at**         | ** ** | ** **  | ** ** | **Balance at**         | ** ** | ** ** | ** ** | **Balance at** | ** ** | ** ** | ** ** | **Balance at** | ** ** |
| ** **   | ** ** | **April 1, 2006** | ** ** | **Changes** | ** ** | **June 30, 2006** | ** ** | ** ** | ** ** | **December 31, 2005** | ** ** | **Changes** | ** ** | **March 31, 2006(2)** | ** ** |
| ** **   | ** ** | **(in millions)**      | ** ** |
|         |       |                        |       |        |       |                        |       |   |   |   |   |   |   |   |   |
| **Cinergy**  |       | $                           | 4,289      |        | $          | (161                        | )(3)       | **$** | **4,128** |   |   |   | $ | 33 |   | $ | 4 |   | $ | 37 |   |
|         |       |                        |       |        |       | ** **                  |       |   |   |   |   |   |   |   |   |
| **CG&E** |       | $                           | 2,173      |        | $          | —                      |       | **$** | **2,173** |   |   |   | $ | — |   | $ | — |   | $ | — |   |

----

| (1) |   | See Note 1(b) for additional information on  Predecessor and Successor reporting.                                                               |
|-----|--------|-------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) |   | All existing goodwill at March 31, 2006 was  eliminated in purchase accounting.                                                                 |
| (3) |   | Relates to goodwill allocated to the distribution of  Marketing & Trading and Cinergy Canada, Inc. See Note 10 for additional  information. |

***(b)***                                  IntangibleAssets

Effective with the mergerbetween Duke Energy and **Cinergy**, **Cinergy’s**, **CG&E’s**, and**PSI’s** emission allowances areclassified as and accounted for as Intangible assets under SFAS No. 142.  The predecessor amounts also have beenreclassified to show this presentation. Emission allowances were previously included in Inventory and Othernon-current assets.  See Note 1(d)(*i*) for more information on this change in accountingprinciple.

41

----

The carrying amount and accumulated amortization ofintangible assets are as follows:

|                                                            | ** ** | **Successor(1)**        | ** ** | ** ** | ** ** | **Predecessor(1)**          | ** ** | **Weighted  Average Life** | ** ** |
|------------------------------------------------------------|------------|-------------------------|------------|------------|------------|-----------------------------|------------|---------------------------------|------------|
| **Cinergy**                                                | ** ** | **June 30,  2006** | ** ** | ** ** | ** ** | **December 31,  2005** | ** ** | **June 30,  2006(2)**      | ** ** |
| ** **                                                 | ** ** | **(in millions)**  | ** ** | ** ** | ** ** |
| ** **                                                 | ** ** | ** **              | ** ** |       |       | ** **                  | ** ** | ** **                      | ** ** |
| Emission allowances                                        |       | **$**                   | **687**    |       |       |                        | $          | 175                             |       |   |   |
| Gas, coal, and power  contracts                            |       | **297**                 |       |       |       | 32                          |       | 19 yrs.                         |       |
| Other                                                      |       | **12**                  |       |       |       | 120                         |       | 8 yrs.                          |       |
| Total intangible  assets                                   |       | **$**                   | **996**    |       |       |                        | $          | 327                             |       |   |   |
|                                                       |       |                    |       |       |       |                        |       |                            |       |
| Accumulated  amortization - gas, coal, and power contracts |       | **(17**                 | **)**      |       |       | (10                         | )          |                            |       |
| Accumulated  amortization - other                          |       | **(2**                  | **)**      |       |       | (7                          | )          |                            |       |
| Total  accumulated amortization                            |       | **$**                   | **(19**    | )          |       |                        | $          | (17                             | )          |   |   |
|                                                       |       | ** **              |       |       |       |                        |       |                            |       |
| Total intangible assets, net                               |       | **$**                   | **977**    |       |       |                        | $          | 310                             |       |   |   |

 

----

| (1) |   | See Note 1(b) for additional information on  Predecessor and Successor reporting. |
|-----|--------|-----------------------------------------------------------------------------------|
| (2) |   | Emission allowances do not have a contractual term  or expiration date.           |

 

|                                                            | ** ** | **Successor(1)**        | ** ** | ** ** | ** ** | **Predecessor(1)**          | ** ** | **Weighted  Average Life** | ** ** |
|------------------------------------------------------------|------------|-------------------------|------------|------------|------------|-----------------------------|------------|---------------------------------|------------|
| **CG&E**                                               | ** ** | **June 30,  2006** | ** ** | ** ** | ** ** | **December 31,  2005** | ** ** | **June 30,  2006(2)**      | ** ** |
| ** **                                                 | ** ** | **(in millions)**  | ** ** | ** ** | ** ** |
| ** **                                                 | ** ** |                    | ** ** |       |       | ** **                  | ** ** | ** **                      | ** ** |
| Emission  allowances                                       |       | **$**                   | **584**    |       |       |                        | $          | 67                              |       |   |   |
| Gas, coal, and  power contracts                            |       | **276**                 |       |       |       | 29                          |       | 19 yrs.                         |       |
| Other                                                      |       | **5**                   |       |       |       | 18                          |       | 5 yrs.                          |       |
| Total intangible assets                                    |       | **$**                   | **865**    |       |       |                        | $          | 114                             |       |   |   |
|                                                       |       |                    |       |       |       |                        |       |                            |       |
| Accumulated  amortization - gas, coal, and power contracts |       | **(15**                 | **)**      |       |       | (7                          | )          |                            |       |
| Accumulated  amortization - other                          |       | —                  |       |       |       | (2                          | )          |                            |       |
| Total accumulated amortization                             |       | **$**                   | **(15**    | )          |       |                        | $          | (9                              | )          |   |   |
|                                                       |       | ** **              |       |       |       |                        |       |                            |       |
| Total intangible  assets, net                              |       | **$**                   | **850**    |       |       |                        | $          | 105                             |       |   |   |

 

----

| (1) |   | See Note 1(b)  for additional information on Predecessor and Successor reporting. |
|-----|--------|-----------------------------------------------------------------------------------|
| (2) |   | Emission  allowances do not have a contractual term or expiration date.           |

 

|                                                                 | ** ** | ** **              | ** ** | ** **                  | ** ** | **Weighted  Average Life** | ** ** |
|-----------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|---------------------------------|------------|
| **PSI**                                                         | ** ** | **June 30,  2006** | ** ** | **December  31, 2005** | ** ** | **June 30,  2006(1)(2)**   | ** ** |
| ** **                                                      | ** ** | **(in millions)**  | ** ** | ** **                  | ** ** | ** **                      | ** ** |
| * *                                                        | * *   | * *                | * *   | * *                    | * *   | * *                        | * *   |
| Emission allowances                                             |       | **$**                   | **103**    |                        | $          | 107                             |       |   |   |
| Gas, coal, and power  contracts                                 |       | **24**                  |       | 3                           |       | 15 yrs.                         |       |
| Other                                                           |       | **6**                   |       | 6                           |       |                            |       |
| Total intangible  assets                                        |       | **$**                   | **133**    |                        | $          | 116                             |       |   |   |
|                                                            |       | ** **              |       |                        |       |                            |       |
| Accumulated  amortization – gas, coal, and power contracts |       | **(4**                  | )          | (2                          | )          |                            |       |
| Total  accumulated amortization                                 |       | **$**                   | **(4**     | )                           | $          | (2                              | )          |   |   |
|                                                            |       | ** **              |       |                        |       |                            |       |
| Total intangible assets, net                                    |       | **$**                   | **129**    |                        | $          | 114                             |       |   |   |

----

| (1) |   | Emission allowances do not have a contractual term  or expiration date.                        |
|-----|--------|------------------------------------------------------------------------------------------------|
| (2) |   | Other represents intangible assets related to  pensions which does not have a definitive life. |

Emissionallowances consist of many discrete emission allowance certificates, none ofwhich have an expiration date, and will be recognized in earnings as they aresold or consumed.  When emissionallowances are sold or 

42

----

consumed, theircarrying value is recorded in Fuel used in electric generation and purchasedpower on the Consolidated Statements of Operations.

The carrying value ofemission allowances sold or consumed for **Cinergy**and**CG&E** were as follows:

|              | ** ** | **Successor(1)**            | ** ** | ** ** | ** ** | **Predecessor(1)**           | ** ** |
|--------------|------------|-----------------------------|------------|------------|------------|------------------------------|------------|
| ** **   | ** ** | **Three Months**       | ** ** | ** ** | ** ** | **Three Months**        | ** ** | **Three Months** | ** ** | **Six Months** | ** ** |
| ** **   | ** ** | **Ended**                   | ** ** | ** ** | ** ** | **Ended**                    | ** ** | **Ended** | ** ** | **Ended** | ** ** |
| ** **   | ** ** | **June 30, 2006** | ** ** | ** ** | ** ** | **March 31, 2006** | ** ** | **June 30, 2005** | ** ** | **June 30, 2005** | ** ** |
| ** **   | ** ** | ** **                  | ** ** | ** ** | ** ** | **(in millions)**       | ** ** | ** ** | ** ** |
|         |       |                        |       |       |       |                         |       |   |   |   |   |
| **Cinergy**  |       | **$**                       | **117**    |       |       |                         | $          | 70 |   | $ | 68 |   | $ | 112 |   |
| **CG&E** |       | **88**                      |       |       |       | 42                           |       | 53 |   | 91 |   |
|              |            |                             |            |            |            |                              |            |  |  |  |  |  |  |  |  |

 

----

| (1) |   | See Note 1(b) for additional information on  Predecessor and Successor reporting. |
|-----|--------|-----------------------------------------------------------------------------------|

The carrying value of emission allowances sold orconsumed for **PSI** were as follows:

|            | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|------------|------------|----------------------------------|------------|----------------------|------------|
| ** ** | ** ** | **June 30,**                | ** ** | **June 30,**    | ** ** |
| ** ** | ** ** | **2006**                         | ** ** | **2005**             | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** ** | ** ** | **(in millions)**           | ** ** |
| ** ** | ** ** | ** **                       | ** ** | ** **           | ** ** | ** ** | ** ** | ** ** | ** ** |
| **PSI**    |       | **$**                            | **29**     | ** **           | $          | 15 | ** ** | **$** | **58** |   | $ | 22 |   |
|            |            |                                  |            |                      |            |  |  |  |  |  |  |  |  |

Amortizationexpense for **Cinergy** and **CG&E**for the remaining intangible assets is presented for the periods below:

|              | ** ** | **Successor(1)**            | ** ** | ** ** | ** ** | **Predecessor(1)**           | ** ** |
|--------------|------------|-----------------------------|------------|------------|------------|------------------------------|------------|
| ** **   | ** ** | **Three Months**       | ** ** | ** ** | ** ** | **Three Months**        | ** ** | **Three Months** | ** ** | **Six Months** | ** ** |
| ** **   | ** ** | **Ended**                   | ** ** | ** ** | ** ** | **Ended**                    | ** ** | **Ended** | ** ** | **Ended** | ** ** |
| ** **   | ** ** | **June 30, 2006** | ** ** | ** ** | ** ** | **March 31, 2006** | ** ** | **June 30, 2005** | ** ** | **June 30, 2005** | ** ** |
| ** **   | ** ** | ** **                  | ** ** | ** ** | ** ** | **(in millions)**       | ** ** | ** ** | ** ** |
| * *     | * *   | * *                    | * *   |       |       | * *                     | * *   | * * | * * | * * | * * |
| **Cinergy**  | ** ** | **$**                       | **19**     |       |       |                         | $          | 7 |   | $ | 2 |   | $ | 3 |   |
| **CG&E** | ** ** | **15**                      |       |       |       | 1                            |       | 1 |   | 1 |   |
|              |            |                             |            |            |            |                              |            |  |  |  |  |  |  |  |  |

 

----

| (1) |   | See Note 1(b) for additional information on  Predecessor and Successor reporting. |
|-----|--------|-----------------------------------------------------------------------------------|

 

Amortization expense for **PSI**was $4 million for the three and six months ended June 30, 2006.  The amounts were immaterial for the three andsix months ended June 30, 2005.

The table below shows theexpected amortization expense for the next five years for intangibles(including emission allowances) as of June 30, 2006:

|              | ** ** | **     2007     ** | ** ** | **     2008     ** | ** ** | **     2009     ** | ** ** | **     2010     ** | ** ** | **     2011     ** | ** ** |
|--------------|------------|----------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|
|         |       |                                                                 |       |                                                                 |       |                                                                 |       |                                                                 |       |                                                                 |       |
| **Cinergy**  |       | $                                                                    | 186        |                                                                 | $          | 104                                                                  |       | $                                                                    | 92         |                                                                 | $          | 34 |   | $ | 41 |   |
| **CG&E** |       | 153                                                                  |       | 101                                                                  |       | 73                                                                   |       | 32                                                                   |       | 39                                                                   |       |
| **PSI**      |       | 33                                                                   |       | 3                                                                    |       | 19                                                                   |       | 1                                                                    |       | 1                                                                    |       |
|              |            |                                                                      |            |                                                                      |            |                                                                      |            |                                                                      |            |                                                                      |            |  |  |  |  |  |

The amortizationamounts discussed above are estimates. Actual amounts may differ from these estimates due to such factors aschanges in consumption patterns, sales or impairments of emission allowances,additional intangible asset acquisitions and other events.

***(c)******                                 *IntangibleLiabilities**

**Cinergy** hasintangible liabilities of $157 million associated with **CG&E’s**Market-Based Standard Service Offer (MBSSO) and other power sale contracts,which are $107 million and $50 million, respectively, that will be 

43

----

recognized in earningsover their contractual lives.  Theamounts to be recognized in earnings over the next five years are as follows:

|              | ** ** | **     2007     ** | ** ** | **     2008     ** | ** ** | **     2009     ** | ** ** | **     2010     ** | ** ** | **     2011     ** | ** ** |
|--------------|------------|----------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|
|         |       |                                                                 |       |                                                                 |       |                                                                 |       |                                                                 |       |                                                                 |       |
| **Cinergy**  |       | $                                                                    | 61         |                                                                 | $          | 73                                                                   |       | $                                                                    | 6          |                                                                 | $          | 6 |   | $ | 4 |   |
| **CG&E** |       | 61                                                                   |       | 73                                                                   |       | 6                                                                    |       | 6                                                                    |       | 4                                                                    |       |
|              |            |                                                                      |            |                                                                      |            |                                                                      |            |                                                                      |            |                                                                      |            |  |  |  |  |  |

**10.  DiscontinuedOperations**

In June 2006, Duke Energyannounced it had reached an agreement to sell Marketing & Trading andCinergy Canada, Inc., as well as certain **CG&E**trading contracts to Fortis, a Benelux-based financial services group.  Duke Energy will receive a base purchaseprice of approximately $210 million.  Inaddition, Fortis will pay an amount equal to the value of the portfolio ofcontracts and net working capital, including collateral, associated with thebusiness, both of which will be determined at closing and are subject to marketand operating changes up until that time. Duke Energy expects pre-tax cash proceeds from the sale to be at least$550 million, including the value of the portfolio of contracts and net workingcapital.  The sale is subject to FERC andFederal Reserve Board approval, as well as Canadian regulatory approvals, andis anticipated to close in the third quarter of 2006.  Results of operations for Marketing &Trading, Cinergy Canada, Inc., and certain **CG&E**trading contracts have been reflected in (Loss) Income from DiscontinuedOperations, net of tax, including prior periods for **Cinergy**and **CG&E**.  **Cinergy** and **CG&E** do not currently expect a material gain or loss tobe recognized in connection with this transaction.  As of June 30, 2006, assets and liabilitiesto be disposed of under the exit plan were classified as Assets held for salein the Consolidated Balance Sheets.

In December 2005, **Cinergy** completed the sale of a wholly owned subsidiary inthe Czech Republic that was engaged in the generation and sale of heat andelectricity.  At the time of the sale,the subsidiary had assets of approximately $113 million and liabilities ofapproximately $12 million.  The net,after-tax, gain from the sale was approximately $18 million (including a net,after-tax, cumulative currency translation gain of approximately $24 million).

In December 2005, **Cinergy** began taking steps to sell its wholly owned NorthAmerican energy management and energy performance contracting business.  In December 2005, **Cinergy**recognized a $17 million pre-tax impairment charge to value this business toits estimated fair value less cost to sell in accordance with it being deemedheld for sale.  In April 2006, **Cinergy** completed the sale of this business.  The net, after tax, loss on the sale was immaterial(excluding the $17 million impairment charge recognized in December 2005).

These consolidatedentities have been presented as (Loss) Income from Discontinued Operations, netof tax, in **Cinergy’s**Consolidated Statements of Operations and as Assets held for sale and Liabilities associated with assets held forsale in **Cinergy’s**Consolidated Balance Sheets.  Thediscontinued operations were part of Commercial Power and Other.

44

----

The following tablesreflect the assets and liabilities, the results of operations, and the income(loss) on disposal related to investments accounted for as discontinuedoperations for the three months ended June 30, 2006, March 31, 2006, and June30, 2005, and the six months ended June 30, 2005:
| ** **                                                        | ** ** | **Successor(1)**            | ** ** | ** ** | ** ** | **Predecessor(1)**           | ** ** |
|-------------------------------------------------------------------|------------|-----------------------------|------------|------------|------------|------------------------------|------------|
| ** **                                                        | ** ** | **Three Months**       | ** ** | ** ** | ** ** | **Three Months**        | ** ** | **Three Months** | ** ** | **Six Months** | ** ** |
| ** **                                                        | ** ** | **Ended**                   | ** ** | ** ** | ** ** | **Ended**                    | ** ** | **Ended** | ** ** | **Ended** | ** ** |
| ** **                                                        | ** ** | **June 30, 2006** | ** ** | ** ** | ** ** | **March 31, 2006** | ** ** | **June 30, 2005** | ** ** | **June 30, 2005** | ** ** |
| ** **                                                        | ** ** | ** **                  | ** ** | ** ** | ** ** | **(in millions)**       | ** ** | ** ** | ** ** |
|                                                              |       |                        |       |       |       |                         |       |   |   |   |   |
| **Cinergy**                                                       | ** ** | ** **                  | ** ** | ** ** | ** ** | ** **                   | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Revenues**(2)                                                   |       | **$**                       | **2.2**    | ** ** |       |                         | $          | 42.5 |   | $ | 12.7 |   | $ | 67.6 |   |
| ** **                                                        | ** ** | ** **                  | ** ** | ** ** | ** ** | ** **                   | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Operating  (Loss) Income**                                      | ** ** | ** **                  | ** ** | ** ** | ** ** | ** **                   | ** ** | ** ** | ** ** | ** ** | ** ** |
| (Loss) Income  Before Taxes                                       |       | **(10.9**                   | **)**      |       |       | 10.2                         |       | (20.1 | ) | 1.0 |   |
| Income Tax  (Benefit) Expense                                     |       | **(2.7**                    | **)**      |       |       | 3.4                          |       | (7.6 | ) | 0.4 |   |
| (Loss) Income  from Discontinued Operations, net of tax           |       | **(8.2**                    | **)**      |       |       | 6.8                          |       | (12.5 | ) | 0.6 |   |
|                                                              |       | ** **                  | ** ** |       |       |                         |       |   |   |   |   |
| **Net Loss on Dispositions**                                      | ** ** | ** **                  | ** ** | ** ** | ** ** | ** **                   | ** ** | ** ** | ** ** | ** ** | ** ** |
| Pre-tax loss on  dispositions                                     |       | **(6.4**                    | **)**      |       |       | (3.0                         | )          | — |   | — |   |
| Income tax  (benefit)                                             |       | **(8.5**                    | **)**      |       |       | (1.0                         | )          | — |   | — |   |
| Gain (Loss) on  dispositions, net of tax                          |       | **2.1**                     | ** ** |       |       | (2.0                         | )          | — |   | — |   |
| ** **                                                        | ** ** | ** **                  | ** ** | ** ** | ** ** | ** **                   | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Total  Income (Loss) from Discontinued Operations, net of tax** |       | **$**                       | **(6.1**   | **)**      |       |                         | $          | 4.8 |   | $ | (12.5 | ) | $ | 0.6 |   |
|                                                              |       | ** **                  | ** ** |       |       |                         |       |   |   |   |   |
| **CG&E**                                                      | ** ** | ** **                  | ** ** | ** ** | ** ** | ** **                   | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Revenues**(2)                                                   |       | **$**                       | **(29.0**  | **)**      |       |                         | $          | 8.7 |   | $ | 20.0 |   | $ | 52.7 |   |
| ** **                                                        | ** ** | ** **                  | ** ** | ** ** | ** ** | ** **                   | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Operating  (Loss) Income**                                      | ** ** | ** **                  | ** ** | ** ** | ** ** | ** **                   | ** ** | ** ** | ** ** | ** ** | ** ** |
| (Loss) Income  Before Taxes                                       |       | **(31.2**                   | **)**      |       |       | (2.9                         | )          | 14.6 |   | 43.5 |   |
| Income Tax  (Benefit) Expense                                     |       | **(11.6**                   | **)**      |       |       | (1.0                         | )          | 5.4 |   | 16.7 |   |
| (Loss) Income  from Discontinued Operations, net of tax           |       | **(19.6**                   | **)**      |       |       | (1.9                         | )          | 9.2 |   | 26.8 |   |
| ** **                                                        | ** ** | ** **                  | ** ** | ** ** | ** ** | ** **                   | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Net  Loss on Dispositions**                                     | ** ** | ** **                  | ** ** | ** ** | ** ** | ** **                   | ** ** | ** ** | ** ** | ** ** | ** ** |
| Pre-tax loss on  dispositions                                     |       | **—**                  | ** ** |       |       | —                       |       | — |   | — |   |
| Income tax  (benefit) expense                                     |       | **—**                  | ** ** |       |       | —                       |       | — |   | — |   |
| Loss on  dispositions, net of tax                                 |       | **—**                  | ** ** |       |       | —                       |       | — |   | — |   |
| ** **                                                        | ** ** | ** **                  | ** ** | ** ** | ** ** | ** **                   | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Total Income (Loss) from  Discontinued Operations, net of tax** |       | **$**                       | **(19.6**  | **)**      |       |                         | $          | (1.9 | ) | $ | 9.2 |   | $ | 26.8 |   |

 

----

(1)             See Note 1(b)for additional information on Predecessor and Successor reporting.

(2)             Presented for informationalpurposes only.  All results of operationsare reported net in **Cinergy’s** and **CG&E’s** Statements of Operations.

45

----

 

|                                    | ** ** | **Successor(1)**       | ** ** | ** ** | ** ** | **Predecessor(1)**    | ** ** |
|------------------------------------|------------|------------------------|------------|------------|------------|-----------------------|------------|
| ** **                         | ** ** | **June 30,**      | ** ** | ** ** | ** ** | **December 31,** | ** ** |
| ** **                         | ** ** | **2006**               | ** ** | ** ** | ** ** | **2005**              | ** ** |
| ** **                         | ** ** | **(in millions)** | ** ** |
|                               |       |                   |       |       |       |                  |       |
| **Cinergy**                        | ** ** | ** **             | ** ** | ** ** | ** ** | ** **            | ** ** |
| **Assets**                         | ** ** | ** **             | ** ** | ** ** | ** ** | ** **            | ** ** |
| Current assets                     |       | **$**                  | **1,253**  | ** ** |       |                  | $          | 16 |   |
| Property, plant, and equipment-net |       | **25**                 | ** ** |       |       | —                |       |
| Other assets(2)                    |       | **401**                | ** ** |       |       | 18                    |       |
|                               |       | ** **             | ** ** |       |       |                  |       |
| **Total Assets**                   |       | **$**                  | **1,679**  | ** ** |       |                  | $          | 34 |   |
| ** **                         |       | ** **             | ** ** |       |       |                  |       |
| **Liabilities**                    | ** ** | ** **             | ** ** | ** ** | ** ** | ** **            | ** ** |
| Current liabilities                |       | **$**                  | **825**    | ** ** |       |                  | $          | 6 |   |
| Long-term debt                     |       | **—**             | ** ** |       |       | 18                    |       |
| Other                              |       | **278**                | ** ** |       |       | 5                     |       |
| ** **                         | ** ** | ** **             | ** ** | ** ** | ** ** | ** **            | ** ** |
| **Total Liabilities**              |       | **$**                  | **1,103**  | ** ** |       |                  | $          | 29 |   |
|                               |       | ** **             | ** ** |       |       |                  |       |
| **CG&E**                       | ** ** | ** **             | ** ** | ** ** | ** ** | ** **            | ** ** |
| **Assets**                         | ** ** | ** **             | ** ** | ** ** | ** ** | ** **            | ** ** |
| Current assets                     |       | **$**                  | **205**    | ** ** |       |                  | $          | — |   |
| Other assets                       |       | **90**                 | ** ** |       |       | —                |       |
|                               |       | ** **             | ** ** |       |       |                  |       |
| **Total Assets**                   |       | **$**                  | **295**    | ** ** |       |                  | $          | — |   |
|                               |       | ** **             | ** ** |       |       |                  |       |
| **Liabilities**                    | ** ** | ** **             | ** ** | ** ** | ** ** | ** **            | ** ** |
| Current liabilities                |       | **$**                  | **187**    | ** ** |       |                  | $          | — |   |
| Other                              |       | **91**                 | ** ** |       |       | —                |       |
| ** **                         | ** ** | ** **             | ** ** | ** ** | ** ** | ** **            | ** ** |
| **Total  Liabilities**             |       | **$**                  | **278**    | ** ** |       |                  | $          | — |   |

 

----

(1)             See Note 1(b) for additional information onPredecessor and Successor reporting.

(2)             Balance includes $161 million of Goodwill resultingfrom the merger which has been allocated to Assets held for sale.

**11.  Business Segments**

Inconjunction with the merger with Duke Energy, effective April 3, 2006, DukeEnergy and **Cinergy**have adoptednew business segments that management believes properly align the variousoperations of the merged companies with how the chief operating decision makerwill view the business.  Accordingly,effective with the second quarter of 2006, the new reportable business segmentspertinent to **Cinergy** are: U.S.Franchised Electric & Gas, Commercial Power, and International.  All prior period amounts have been restatedto reflect the current segment presentation. **Cinergy’s**, **CG&E’s**, and **PSI’s** chief operating decision makers regularly reviewfinancial information about each of these business units in deciding how toallocate resources and evaluate performance. All of the business units are considered reportable segments under SFASNo. 131, “*Disclosures about Segments of an Enterprise andRelated Information*.”

Theremainders of **Cinergy’s**, **CG&E’s**,****and **PSI’s**operations are presented as “Other.” While it is not considered a business segment, “Other” for **Cinergy** primarily includes **Cinergy’s** telecommunications, sharedservices, governance costs, and certain international investments.  “Other” for **CG&E**and **PSI** includes shared servicesand governance costs.

U.S.Franchised Electric & Gas consists of **PSI’s**regulated generation and transmission and distributionoperations and **CG&E** and its subsidiaries’regulated electric and gas transmission and distribution systems and itsregulated electric generation in Kentucky. U.S. Franchised Electric &Gas plans, constructs, operates and maintains **Cinergy’s** transmission anddistribution systems and delivers gas and electric energy to consumers.  U.S. Franchised Electric & Gas also earnsrevenues from wholesale customers primarily by these customers transmittingelectric power through **Cinergy’s**transmission system.  These businessesare subject to cost of service rate making where rates to be charged tocustomers are based on prudently incurred costs over a test period plus areasonable rate of return.

CommercialPower primarily consists of **CG&E’s**non-regulated generation in Ohio and the recently acquired merchant generationassets discussed in Note 8 and manages energy marketing and tradingactivities.  Commercial

46

----

Poweralso performs energy risk management activities and provides customized energysolutions.  In June 2006, an agreementwas reached to sell Commercial Power’s energy marketing and tradingactivities.  These activities areincluded in the Commercial Power segment balance sheet presentation, however,they are not included in the revenue presentation since they are below the EBITline on the income statement.  See Note10 for additional information.

Internationalprimarily directs and manages an international business holding which suppliesand sells natural gas to international customers.  International earns equity earnings from thisunconsolidated company.

**Cinergy’s** reportable segments offer different productsand services and are managed separately as business units.  Management evaluates segment performancebased on EBIT from continuing operations, after deducting minority interestexpense related to those profits.  Cash,cash equivalents, and short-term investments are managed centrally by **Cinergy**, so the associated realized andunrealized gains and losses from foreign currency transactions and interest anddividend income on those balances are excluded from the segments’ EBIT.

47

----

Transactionsbetween reportable segments are accounted for on the same basis as unaffiliatedrevenues and expenses in the accompanying Consolidated Financial Statements.

**Cinergy**Business Segment Data(1)
|                                        | ** ** | **Unaffiliated  Revenues** | ** ** | **Intersegment  Revenues** | ** ** | **Total  Revenues** | ** ** | **Segment  EBIT/Consolidated  Earnings from  Continuing  Operations Before  Income Taxes** | ** ** |
|----------------------------------------|------------|----------------------------|------------|----------------------------|------------|---------------------|------------|-----------------------------------------------------------------------------------------------------------|------------|
| ** **                             | ** ** | ** **                 | ** ** | **(in millions)**     | ** ** | ** **          | ** ** |
| **Successor**(2)                       |       |                       |       |                       |       |                |       |                                                                                                      |       |
| * *                               | * *   | * *                   | * *   | * *                   | * *   | * *            | * *   | * *                                                                                                  | * *   |
| **Three Months  Ended June 30, 2006**  | ** ** | ** **                 | ** ** | ** **                 | ** ** | ** **          | ** ** | ** **                                                                                                | ** ** |
|                                   |       |                       |       |                       |       |                |       |                                                                                                      |       |
| U.S. Franchised  Electric & Gas    | ** ** | **$**                      | **845**    | ** **                 | **$**      | **—**          | ** ** | **$**                                                                                                     | **845**    | ** ** | **$** | **91** |   |
| Commercial Power                       | ** ** | **440**                    | ** ** | **10**                     | ** ** | **450**             | ** ** | **22**                                                                                                    |       |
| Total reportable segments              | ** ** | **1,285**                  | ** ** | **10**                     | ** ** | **1,295**           | ** ** | **113**                                                                                                   |       |
| Other                                  | ** ** | **23**                     | ** ** | **—**                 | ** ** | **23**              | ** ** | **(32**                                                                                                   | )          |
| Eliminations                           | ** ** | **—**                 | ** ** | **(10**                    | **)**      | **(10**             | **)**      | **—**                                                                                                |       |
| Interest expense                       | ** ** | **—**                 | ** ** | **—**                 | ** ** | **—**          | ** ** | **(82**                                                                                                   | )          |
| Interest income  and other(3)          | ** ** | **—**                 | ** ** | **—**                 | ** ** | **—**          | ** ** | **14**                                                                                                    |       |
| Total consolidated                     | ** ** | **$**                      | **1,308**  | ** **                 | **$**      | **—**          | ** ** | **$**                                                                                                     | **1,308**  | ** ** | **$** | **13** |   |
|                                   |       |                       |       |                       |       |                |       |                                                                                                      |       |
| ** **                             |       |                       |       |                       |       |                |       |                                                                                                      |       |
| **Predecessor**(2)                     |       |                       |       |                       |       |                |       |                                                                                                      |       |
| * *                               | * *   | * *                   | * *   | * *                   | * *   | * *            | * *   | * *                                                                                                  | * *   |
| **Three  Months Ended March 31, 2006** | ** ** | ** **                 | ** ** |                       |       |                |       |                                                                                                      |       |
|                                   |       |                       |       |                       |       |                |       |                                                                                                      |       |
| U.S. Franchised  Electric & Gas    | ** ** | $                          | 1,025      |                       | $          | —              |       | $                                                                                                         | 1,025      |   | $ | 167 |   |
| Commercial Power                       | ** ** | 546                        |       | 12                         |       | 558                 |       | 120                                                                                                       |       |
| International                          | ** ** | —                     |       | —                     |       | —              |       | 1                                                                                                         |       |
| Total reportable segments              | ** ** | 1,571                      |       | 12                         |       | 1,583               |       | 288                                                                                                       |       |
| Other                                  | ** ** | 5                          |       | —                     |       | 5                   |       | (128                                                                                                      | )          |
| Eliminations                           | ** ** | —                     |       | (12                        | )          | (12                 | )          | —                                                                                                    |       |
| Interest expense                       | ** ** | —                     |       | —                     |       | —              |       | (84                                                                                                       | )          |
| Interest income  and other(3)          | ** ** | —                     |       | —                     |       | —              |       | 19                                                                                                        |       |
| Total consolidated                     | ** ** | $                          | 1,576      |                       | $          | —              |       | $                                                                                                         | 1,576      |   | $ | 95 |   |
|                                   |       |                       |       |                       |       |                |       |                                                                                                      |       |
| **Three  Months Ended June 30, 2005**  | ** ** |                       | ** ** |                       |       |                |       |                                                                                                      |       |
|                                   |       |                       |       |                       |       |                |       |                                                                                                      |       |
| U.S. Franchised  Electric & Gas    | ** ** | $                          | 719        |                       | $          | —              |       | $                                                                                                         | 719        |   | $ | 144 |   |
| Commercial Power                       | ** ** | 328                        |       | 63                         |       | 391                 |       | 42                                                                                                        |       |
| International                          | ** ** | —                     |       | —                     |       | —              |       | (1                                                                                                        | )          |
| Total reportable segments              | ** ** | 1,047                      |       | 63                         |       | 1,110               |       | 185                                                                                                       |       |
| Other                                  | ** ** | 4                          |       | —                     |       | 4                   |       | (43                                                                                                       | )          |
| Eliminations                           | ** ** | —                     |       | (63                        | )          | (63                 | )          | —                                                                                                    |       |
| Interest expense                       | ** ** | —                     |       | —                     |       | —              |       | (68                                                                                                       | )          |
| Interest income  and other(3)          | ** ** | —                     |       | —                     |       | —              |       | 10                                                                                                        |       |
| Total consolidated                     | ** ** | $                          | 1,051      |                       | $          | —              |       | $                                                                                                         | 1,051      |   | $ | 84 |   |
|                                   |       |                       |       |                       |       |                |       |                                                                                                      |       |
| **Six  Months Ended June 30, 2005**    | ** ** |                       | ** ** |                       |       |                |       |                                                                                                      |       |
|                                   |       |                       |       |                       |       |                |       |                                                                                                      |       |
| U.S. Franchised  Electric & Gas    | ** ** | $                          | 1,633      |                       | $          | —              |       | $                                                                                                         | 1,633      |   | $ | 331 |   |
| Commercial Power                       | ** ** | 660                        |       | 108                        |       | 768                 |       | 91                                                                                                        |       |
| International                          | ** ** | —                     |       | —                     |       | —              |       | (1                                                                                                        | )          |
| Total reportable segments              | ** ** | 2,293                      |       | 108                        |       | 2,401               |       | 421                                                                                                       |       |
| Other                                  | ** ** | 8                          |       | —                     |       | 8                   |       | (97                                                                                                       | )          |
| Eliminations                           | ** ** | —                     |       | (108                       | )          | (108                | )          | —                                                                                                    |       |
| Interest expense                       | ** ** | —                     |       | —                     |       | —              |       | (132                                                                                                      | )          |
| Interest income  and other(3)          | ** ** | —                     |       | —                     |       | —              |       | 21                                                                                                        |       |
| Total  consolidated                    | ** ** | $                          | 2,301      |                       | $          | —              |       | $                                                                                                         | 2,301      |   | $ | 213 |   |

 

----

(1)            Segment results exclude results of discontinuedoperations.

(2)            See Note 1(b) for additional information onPredecessor and Successor reporting.

(3)            Other includes foreign currency transaction gains andlosses not allocated to the segment results.

48

----

**CG&E**Business SegmentData(1)
|                                        | ** ** | ** **             | ** ** | ** **       | ** ** | ** **   | ** ** | **Segment**                | ** ** |
|----------------------------------------|------------|------------------------|------------|------------------|------------|--------------|------------|----------------------------|------------|
| ** **                             | ** ** | ** **             | ** ** | ** **       | ** ** | ** **   | ** ** | **EBIT/Consolidated**      | ** ** |
| ** **                             | ** ** | ** **             | ** ** | ** **       | ** ** | ** **   | ** ** | **Earnings from**     | ** ** |
| ** **                             | ** ** | ** **             | ** ** | ** **       | ** ** | ** **   | ** ** | **Continuing**             | ** ** |
| ** **                             | ** ** | **Unaffiliated**       | ** ** | **Intersegment** | ** ** | **Total**    | ** ** | **Operations Before** | ** ** |
| ** **                             | ** ** | **Revenues**           | ** ** | **Revenues**     | ** ** | **Revenues** | ** ** | **Income Taxes**      | ** ** |
| ** **                             | ** ** | **(in millions)** | ** ** |
| **Successor**(2)                       |       |                   |       |             |       |         |       |                       |       |
|                                   |       |                   |       |             |       |         |       |                       |       |
| **Three  Months Ended June 30, 2006**  |       |                   |       |             |       |         |       |                       |       |
|                                   |       |                   |       |             |       |         |       |                       |       |
| U.S. Franchised  Electric & Gas    |       | **$**                  | **297**    | ** **       | **$**      | **—**   | ** ** | **$**                      | **297**    | ** ** | **$** | **20** |   |
| Commercial Power                       |       | **399**                | ** ** | **1**            | ** ** | **400**      | ** ** | **36**                     |       |
| Total reportable segments              |       | **696**                | ** ** | **1**            | ** ** | **697**      | ** ** | **56**                     |       |
| Other                                  |       | **—**             | ** ** | **—**       | ** ** | **—**   | ** ** | **(13**                    | )          |
| Eliminations                           |       | **—**             | ** ** | **(1**           | **)**      | **(1**       | **)**      | **—**                 |       |
| Interest expense                       |       | **—**             | ** ** | **—**       | ** ** | **—**   | ** ** | **(28**                    | )          |
| Interest income  and other(3)          |       | **—**             | ** ** | **—**       | ** ** | **—**   | ** ** | **5**                      |       |
| Total consolidated                     |       | **$**                  | **696**    | ** **       | **$**      | **—**   | ** ** | **$**                      | **696**    | ** ** | **$** | **20** |   |
|                                   |       | ** **             | ** ** |             |       |         |       |                       |       |
|                                   |       | ** **             | ** ** |             |       |         |       |                       |       |
| **Predecessor**(2)                     |       | ** **             | ** ** |             |       |         |       |                       |       |
| * *                               |       | ** **             | ** ** |             |       |         |       |                       |       |
| **Three  Months Ended March 31, 2006** |       | ** **             | ** ** |             |       |         |       |                       |       |
|                                   |       | ** **             | ** ** |             |       |         |       |                       |       |
| U.S. Franchised  Electric & Gas    |       | $                      | 543        | ** **       | $          | —       |       | $                          | 543        |   | $ | 80 |   |
| Commercial Power                       |       | 420                    | ** ** | 1                |       | 421          |       | 166                        |       |
| Total reportable segments              |       | 963                    | ** ** | 1                |       | 964          |       | 246                        |       |
| Other                                  |       | —                 | ** ** | (1               | )          | (1           | )          | (39                        | )          |
| Interest expense                       |       | —                 | ** ** | —           |       | —       |       | (30                        | )          |
| Interest income  and other(3)          |       | —                 | ** ** | —           |       | —       |       | 9                          |       |
| Total consolidated                     |       | $                      | 963        | ** **       | $          | —       |       | $                          | 963        |   | $ | 186 |   |
|                                   |       |                   | ** ** |             |       |         |       |                       |       |
| **Three  Months Ended June 30, 2005**  |       |                   | ** ** |             |       |         |       |                       |       |
|                                   |       |                   | ** ** |             |       |         |       |                       |       |
| U.S. Franchised  Electric & Gas    |       | $                      | 283        | ** **       | $          | —       |       | $                          | 283        |   | $ | 35 |   |
| Commercial Power                       |       | 267                    | ** ** | 40               |       | 307          |       | 68                         |       |
| Total reportable segments              |       | 550                    | ** ** | 40               |       | 590          |       | 103                        |       |
| Other                                  |       | —                 | ** ** | —           |       | —       |       | (26                        | )          |
| Eliminations                           |       | —                 | ** ** | (40              | )          | (40          | )          | —                     |       |
| Interest expense                       |       | —                 | ** ** | —           |       | —       |       | (23                        | )          |
| Interest income  and other(3)          |       | —                 | ** ** | —           |       | —       |       | 3                          |       |
| Total consolidated                     |       | $                      | 550        | ** **       | $          | —       |       | $                          | 550        |   | $ | 57 |   |
|                                   |       |                   | ** ** |             |       |         |       |                       |       |
| **Six  Months Ended June 30, 2005**    |       |                   | ** ** |             |       |         |       |                       |       |
|                                   |       |                   | ** ** |             |       |         |       |                       |       |
| U.S. Franchised  Electric & Gas    |       | $                      | 780        | ** **       | $          | —       |       | $                          | 780        |   | $ | 118 |   |
| Commercial Power                       |       | 521                    | ** ** | 79               |       | 600          |       | 136                        |       |
| Total reportable segments              |       | 1,301                  | ** ** | 79               |       | 1,380        |       | 254                        |       |
| Other                                  |       | —                 | ** ** | —           |       | —       |       | (45                        | )          |
| Eliminations                           |       | —                 | ** ** | (79              | )          | (79          | )          | —                     |       |
| Interest expense                       |       | —                 | ** ** | —           |       | —       |       | (46                        | )          |
| Interest income  and other(3)          |       | —                 | ** ** | —           |       | —       |       | 8                          |       |
| Total  consolidated                    |       | $                      | 1,301      | ** **       | $          | —       |       | $                          | 1,301      |   | $ | 171 |   |

 

----

(1)            Segment results exclude results of discontinuedoperations.

(2)            See Note 1(b) for additional information onPredecessor and Successor reporting.

(3)            Other includes foreign currency transaction gains andlosses not allocated to the segment results.

49

----

**PSI**Business Segment Data
|                                       | ** ** | **Unaffiliated  Revenues** | ** ** | **Total  Revenues** | ** ** | **Segment  EBIT/Consolidated  Earnings from  Continuing  Operations Before  Income Taxes** | ** ** |
|---------------------------------------|------------|----------------------------|------------|---------------------|------------|-----------------------------------------------------------------------------------------------------------|------------|
| ** **                            | ** ** | **(in millions)**     | ** ** |
|                                  |       |                       |       |                |       |                                                                                                      |       |
| **Three  Months Ended June 30, 2006** |       |                       | ** ** | ** **          | ** ** | ** **                                                                                                |       |
|                                  |       |                       | ** ** | ** **          | ** ** | ** **                                                                                                |       |
| U.S. Franchised  Electric & Gas   | ** ** | **$**                      | **550**    | ** **          | **$**      | **550**                                                                                                   | ** ** | **$** | **65** | ** ** |
| Total reportable segments             |       | **550**                    | ** ** | **550**             | ** ** | **65**                                                                                                    | ** ** |
| Other                                 |       | **—**                 | ** ** | **—**          | ** ** | **(24**                                                                                                   | **)**      |
| Interest expense                      |       | **—**                 | ** ** | **—**          | ** ** | **(30**                                                                                                   | **)**      |
| Interest income  and other            |       | **—**                 | ** ** | **—**          | ** ** | **8**                                                                                                     | ** ** |
| Total consolidated                    | ** ** | **$**                      | **550**    | ** **          | **$**      | **550**                                                                                                   | ** ** | **$** | **19** | ** ** |
|                                  |       |                       | ** ** |                |       |                                                                                                      |       |
|                                  |       |                       | ** ** |                | ** ** | ** **                                                                                                |       |
| **Three  Months Ended June 30, 2005** |       |                       | ** ** |                | ** ** | ** **                                                                                                |       |
|                                  |       |                       | ** ** |                | ** ** | ** **                                                                                                |       |
| U.S. Franchised  Electric & Gas   | ** ** | $                          | 428        |                | $          | 428                                                                                                       |       | $ | 111 |   |
| Total reportable segments             |       | 428                        |       | 428                 |       | 111                                                                                                       |       |
| Other                                 |       | —                     |       | —              |       | (13                                                                                                       | )          |
| Interest expense                      |       | —                     |       | —              |       | (27                                                                                                       | )          |
| Interest income  and other            |       | —                     |       | —              |       | 4                                                                                                         |       |
| Total  consolidated                   | ** ** | $                          | 428        |                | $          | 428                                                                                                       |       | $ | 75 |   |

 
|                                     | ** ** | **Unaffiliated  Revenues** | ** ** | **Total  Revenues** | ** ** | **Segment  EBIT/Consolidated  Earnings from  Continuing  Operations Before  Income Taxes** | ** ** |
|-------------------------------------|------------|----------------------------|------------|---------------------|------------|-----------------------------------------------------------------------------------------------------------|------------|
| ** **                          | ** ** | **(in millions)**     | ** ** |
|                                |       |                       |       |                |       |                                                                                                      |       |
| **Six  Months Ended June 30, 2006** |       |                       | ** ** | ** **          | ** ** | ** **                                                                                                |       |
|                                |       |                       | ** ** | ** **          | ** ** | ** **                                                                                                |       |
| U.S. Franchised  Electric & Gas | ** ** | **$**                      | **1,036**  | ** **          | **$**      | **1,036**                                                                                                 | ** ** | **$** | **151** |   |
| Total reportable segments           |       | **1,036**                  | ** ** | **1,036**           | ** ** | **151**                                                                                                   |       |
| Other                               |       | **—**                 | ** ** | **—**          | ** ** | **(50**                                                                                                   | )          |
| Interest expense                    |       | **—**                 | ** ** | **—**          | ** ** | **(65**                                                                                                   | )          |
| Interest income  and other          |       | **—**                 | ** ** | **—**          | ** ** | **14**                                                                                                    |       |
| Total consolidated                  | ** ** | **$**                      | **1,036**  | ** **          | **$**      | **1,036**                                                                                                 | ** ** | **$** | **50** |   |
|                                |       |                       | ** ** |                |       |                                                                                                      |       |
|                                |       |                       | ** ** |                |       |                                                                                                      |       |
| **Six  Months Ended June 30, 2005** |       |                       | ** ** |                |       |                                                                                                      |       |
|                                |       |                       | ** ** |                |       |                                                                                                      |       |
| U.S. Franchised  Electric & Gas | ** ** | $                          | 854        | ** **          | $          | 854                                                                                                       |       | $ | 216 |   |
| Total reportable segments           |       | 854                        | ** ** | 854                 |       | 216                                                                                                       |       |
| Other                               |       | —                     | ** ** | —              |       | (26                                                                                                       | )          |
| Interest expense                    |       | —                     | ** ** | —              |       | (52                                                                                                       | )          |
| Interest income  and other          |       | —                     | ** ** | —              |       | 6                                                                                                         |       |
| Total  consolidated                 | ** ** | $                          | 854        | ** **          | $          | 854                                                                                                       |       | $ | 144 |   |

 

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Segment assets in thefollowing table are net of intercompany advances, intercompany notesreceivable, intercompany current assets, intercompany derivative assets, andinvestments in subsidiaries.

Total segment assets atJune 30, 2006 and December 31, 2005 are as indicated below:
|                                        | ** ** | **Successor(1)**       | ** ** | ** ** | ** ** | **Predecessor(1)**    | ** ** |
|----------------------------------------|------------|------------------------|------------|------------|------------|-----------------------|------------|
| ** **                             | ** ** | **June 30,**      | ** ** | ** ** | ** ** | **December 31,** | ** ** |
| ** **                             | ** ** | **2006**               | ** ** | ** ** | ** ** | **2005**              | ** ** |
| ** **                             | ** ** | **(in millions)** | ** ** |
|                                   |       |                   |       |       |       |                  |       |
| **Cinergy  Segment Assets**            | ** ** | ** **             | ** ** | ** ** | ** ** | ** **            | ** ** |
| U.S. Franchised  Electric & Gas    |       | **$**                  | **10,322** | ** ** |       |                  | $          | 9,601 |   |
| Commercial Power                       | ** ** | **8,192**              | **(3)**    |       |       | 6,757                 |       |
| International                          |       | **79**                 | ** ** |       |       | 94                    |       |
| Total reportable segments              |       | **18,593**             | ** ** |       |       | 16,452                |       |
| Unallocated  goodwill                  | ** ** | **4,128**              | **(4)**    | ** ** | ** ** | ** **            | ** ** |
| Other                                  |       | **450**                | ** ** |       |       | 437                   |       |
| Eliminations and  reclassifications(2) |       | **113**                | ** ** |       |       | 265                   |       |
| Total consolidated assets              |       | **$**                  | **23,284** | ** ** |       |                  | $          | 17,154 |   |
|                                   |       | ** **             | ** ** |       |       |                  |       |
| **CG&E  Segment Assets**           | ** ** | ** **             | ** ** | ** ** | ** ** | ** **            | ** ** |
| U.S. Franchised  Electric & Gas    |       | **$**                  | **3,957**  | ** ** |       |                  | $          | 3,523 |   |
| Commercial Power                       |       | **5,656**              | ** ** |       |       | 3,496                 |       |
| Total reportable segments              |       | **9,613**              | ** ** |       |       | 7,019                 |       |
| Unallocated  goodwill                  | ** ** | **2,173**              | **(4)**    |       |       | —                |       |
| Eliminations and  reclassifications(2) |       | **110**                | ** ** |       |       | 215                   |       |
| Total consolidated  assets             |       | **$**                  | **11,896** | ** ** |       |                  | $          | 7,234 |   |

 

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(1)             See Note 1(b) for additional information onPredecessor and Successor reporting.

(2)             Eliminations and reclassifications include accountsand notes receivable from affiliates and short- and long-term intercompanyenergy risk management assets.

(3)             Includes $161 million of Goodwill related to Marketing& Trading and Cinergy Canada, Inc. See Note 10 for additional information.

(4)             Includes $4,128 million of Goodwill for **Cinergy** and $2,173 million of Goodwill for **CG&E** which has not been allocated to the segments.
|                                        | ** ** | **June 30,**      | ** ** | **December 31,** | ** ** |
|----------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                             | ** ** | **2006**               | ** ** | **2005**              | ** ** |
| ** **                             | ** ** | **(in millions)** | ** ** |
| * *                               | * *   | * *               | * *   | * *              | * *   |
| **PSI  Segment Assets**                | ** ** | ** **             | ** ** | ** **            | ** ** |
| U.S. Franchised  Electric & Gas    |       | **$**                  | **6,121**  |                  | $          | 6,078 |   |
| Total reportable segments              |       | **6,121**              |       | 6,078                 |       |
| Eliminations and  reclassifications(1) |       | **50**                 |       | 164                   |       |
| Total  consolidated assets             |       | **$**                  | **6,171**  |                  | $          | 6,242 |   |

 

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(1)             Eliminations and reclassifications includes accountsand notes receivable from affiliates and short- and long-term intercompanyenergy risk management assets.

**12.  Risk Management Instruments**

***(a)***                                  EnergyTrading Credit Risk

**Cinergy’s**extension of credit for energy marketing and trading is governed by Duke Energy’sCorporate Credit Policy.  Writtenguidelines approved by Duke Energy’sChief Risk Officer documents various required credit activities includingcredit limit delegation and approval limits, underwriting rating criteria, andcertain other credit management standards. Exposures to credit risks are monitored daily by the Corporate CreditRisk function, which is independent of all trading operations.  As of June 30, 2006, 87 percent of **Cinergy’s** credit exposure and 92 percent of **CG&E’s** credit exposure, net of credit collateral,related to energy trading and marketing activity was with counterparties ratedinvestment grade or the counterparties’ obligations were guaranteed or securedby an investment grade entity.  Themajority of these investment grade counterparties are externally rated.  If a counterparty has an external rating, thelower of Standard & Poor’s Ratings Services or Moody’s Investors Service

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is used; otherwise, Duke Energy’s internal rating of thecounterparty is used.  **Cinergy’s** remaining 13 percent represents credit exposure of$126 million and **CG&E’s** remaining eight percentrepresents credit exposure of $15 million with counterparties ratednon-investment grade.

As of June 30, 2006, **CG&E** had a concentration of tradingcredit exposure of $26 million with one counterparty accounting for greaterthan 10 percent of its totaltrading credit exposure.  Thiscounterparty is rated investment grade.

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

**Cinergy**continually reviews and monitors its credit exposure to all counterparties andsecondary counterparties.  Ifappropriate, **Cinergy** and **CG&E**may adjust the credit reserves to attempt to compensate for increased creditrisk within the industry.  Counterpartycredit limits may be adjusted on a daily basis in response to changes in acounterparty’s financial status or public debt ratings.

***(b)***                                  Derivatives

*(i)   Hedges ofNatural Gas Held in Storage*

**Cinergy**designates derivatives as fair value hedges for certain volumes of its naturalgas held in storage.  Hedging instrumentsfor gas held in storage are designated entirely for Marketing & Tradingoperations.  Thus, all amounts areincluded in discontinued operations in **Cinergy’s**Consolidated Statement of Operations. See Note 10 for additional information. **Cinergy** assesses the effectiveness ofthe derivatives in offsetting the change in fair value of the gas held instorage on a quarterly basis.  Selectedinformation on **Cinergy’s** hedge accountingactivities for the three months ended June 30, 2006, March 31, 2006, and June30, 2005, and the six months ended June 30, 2005 were as follows:
| ** **                                                                                                                   | ** ** | **Successor(1)**            | ** ** | ** ** | ** ** | **Predecessor(1)**           | ** ** |
|------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|------------|------------|------------------------------|------------|
| ** **                                                                                                                   | ** ** | **Three Months**       | ** ** | ** ** | ** ** | **Three Months**        | ** ** | **Three Months** | ** ** | **Six Months** | ** ** |
| ** **                                                                                                                   | ** ** | **Ended**                   | ** ** | ** ** | ** ** | **Ended**                    | ** ** | **Ended** | ** ** | **Ended** | ** ** |
| ** **                                                                                                                   | ** ** | **June 30, 2006** | ** ** | ** ** | ** ** | **March 31, 2006** | ** ** | **June 30, 2005** | ** ** | **June 30, 2005** | ** ** |
| ** **                                                                                                                   | ** ** | ** **                  | ** ** | ** ** | ** ** | **(in millions)**       | ** ** | ** ** | ** ** |
|                                                                                                                         |       |                        |       |       |       |                         |       |   |   |   |   |
| Portion of loss  on hedging instruments determined to be ineffective                                                         |       | **$**                       | **(1**     | **)**      |       |                         | $          | (5 | ) | $ | (4 | ) | $ | — |   |
| Portion of  (loss) gain on hedging instruments related to changes in time value excluded  from assessment of ineffectiveness |       | **(3**                      | **)**      |       |       | 36                           |       | — |   | (4 | ) |
|                                                                                                                         |       | ** **                  | ** ** |       |       |                         |       |   |   |   |   |
| Total ineffectiveness                                                                                                        |       | **$**                       | **(4**     | **)**      |       |                         | $          | 31 |   | $ | (4 | ) | $ | (4 | ) |

 

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(1)           See Note 1(b) for additionalinformation on Predecessor and Successor reporting.

*(ii)  GenerationPortfolio Optimization*

**CG&E**optimizes the value of its non-regulated portfolio. The portfolio includesgeneration assets (power and capacity), fuel, and emission allowances. Modeledforecasts of future generation output, fuel requirements, and emissionallowance requirements are based on forward power, fuel and emission allowancemarkets. The component pieces of the portfolio are bought and sold based onthis model in order to manage the economic value of the portfolio. With theissuance of SFAS No. 149, “*Amendment of Statement 133on Derivative Instruments and Hedging Activities*” (SFAS No. 149),most forward power transactions and certain coal transactions from managementof the portfolio are accounted for at fair value. The other component pieces ofthe portfolio are typically not subject to SFAS No. 149 and are accounted forusing the accrual method, where changes in fair value are not recognized. As aresult, these forward sales and purchases are subject to earnings volatilityvia mark-to-market gains or losses from changes in the value of the contractsaccounted for using fair value. In addition, the generation portfolio notutilized to serve native load or committed load is subject to commodity pricefluctuations. This is primarily related to the Midwestern generation assetsretained from DENA.  A spark spreadsensitivity on these megawatt hour (MWh) was immaterial at June 30, 2006.

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*(iii) ForwardStarting Interest Rate Swaps*

In June 2005, **PSI** executed two forward starting swaps with a combinednotional amount of $325 million.  Theforward starting swaps effectively fixed the benchmark interest rate of ananticipated issuance of fixed rate debt from June 2005 through June 2006, theexpected date of issuance of the debt securities.  Both forward starting swaps were designatedas cash flow hedges under the provisions of SFAS No. 133, “*Accountingfor Derivative Instruments and Hedging Activities.”*  As the terms of these swap agreementsmirrored the terms of the forecasted debt issuance, **PSI**anticipated that they would be highly effective hedges.  In June 2006, **PSI**terminated these swaps at a value of approximately $25 million, when it issued$325 million 6.05% senior unsecured notes at **PSI**.   The $25 million gain on the hedge will berecognized as reclassifications from Accumulated Other Comprehensive Income(AOCI) to interest expense over the life of the related bond.  At **Cinergy**, thisamount is classified as a regulatory liability and will be amortized as anoffset to Interest Expense over the life of the bond.

*(iv) Trading& Marketing*

**Cinergy**and **CG&E** measure the marketrisk inherent in the trading portfolio employing value at risk (VaR) analysis,as discussed in the 2005 10-K.  Thechange in VaR from the 2005 10-K was not material to **Cinergy’s**and **CG&E’s** financial position orresults of operations.

*(v)   Generation Related Cash Flow Hedges*

In connection with DukeEnergy’s contribution of its unregulated generating assets to **CG&E**, **CG&E**assumed approximately $63 million of pre-tax deferred losses associated withcontracts formerly designated as cash flow hedges of forecasted power sales andgas purchases from Duke Energy’s Midwestern generation fleet.  See Note 8 for additional information. These contracts were sold by Duke Energy in 2005 and the deferred losses remainon the Consolidated Balance Sheet in AOCI until the related hedged transactions(gas purchases and power sales) occur.  As of June 30, 2006, $21 millionof the pre-tax deferred net losses on derivative instruments related tocommodity cash flow hedges were accumulated on the Consolidated Balance Sheetin AOCI, and are expected to be recognized in earnings during the next 12months as the hedged transactions occur.

**13.  Regulatory Matters**

***(a)***                                  RegulatoryMerger Approvals

As discussed in Note 2,on April 3, 2006, the merger between Duke Energy and **Cinergy**was consummated to create a newly formed company, Duke Energy HC. As acondition to the merger approval, the Public Utilities Commission of Ohio(PUCO) and, the Kentucky Public Service Commission (KPSC) required that certainmerger related savings be shared with customers in Ohio and Kentucky,respectively.  Each of the commissionsalso required Duke Energy HC, **Cinergy**, **CG&E**, and/or ULH&P to meet additionalconditions.  While the merger itself wasnot subject to approval by the Indiana Utility Regulatory Commission (IURC),the IURC approved certain affiliate agreements in connection with the mergersubject to similar conditions.  Keyelements of these conditions include:

·                  The PUCO’s conditions include a requirementthat**CG&E** provide (i) arate credit of approximately $15 million for one year to facilitate economicdevelopment in a time of increasing rates and (ii) a credit of approximately$21 million to **CG&E’s** gas andelectric customers in Ohio for one year, with both credits beginning January 1,2006.  In April 2006, the office of the Ohio Consumers’ Counsel (OCC) filed aNotice of Appeal with the Supreme Court of Ohio, requesting the Court remandthe PUCO’s merger approval for a full evidentiary hearing.  The OCCalleged that the PUCO committed reversible error on both procedural andsubstantive grounds by, among other things, failing to set the matter for afull evidentiary hearing, failing to consider evidence regarding the transferof certain Duke Energy North America (DENA) assets to **CG&E**, and failing to lift the stay ondiscovery.  **CG&E** and theOCC have resolved this matter through settlement and in May 2006, the OCC fileda motion to dismiss.  In June 2006, theCourt granted the motion to dismiss.  Asof June 30, 2006, **CG&E** hasreturned $7 million and $9 million, respectively, on each of these ratecredits.

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·                  TheIURC’s conditions include a requirement that**PSI**providea rate credit of $40 million to **PSI** customersover a one year period and $5 million over a five year period for low-incomeenergy assistance and clean coal technology.  In April 2006, Citizens Action Coalition of Indiana, Inc., an intervenor in the mergerproceeding, filed a Verified Petition for Rehearing and Reconsiderationclaiming that **PSI** should be ordered to providean additional $5 million in rate credits to customers to be consistent with theterms of the North Carolina Utility Commission’s order approving themerger.  In May 2006, the IURC denied the petition for rehearing andreconsideration.  As of June 30, 2006, **PSI** has returned $3 million to customers on this ratecredit.

·                  TheKPSC’s conditions include a requirement that ULH&P provide $7.6 million inrate credits to ULH&P customers over five years, ending when new rates areestablished in the next rate case after January 1, 2008.  As of June 30, 2006, ULH&P has returned$1 million to customers on this rate credit.

In addition, the FERCapproved the merger without conditions. On January 19, 2006, Public Citizen’s Energy Program, Citizens ActionCoalition of Indiana, Inc., Ohio Partners for Affordable Energy and SouthernAlliance for Clean Energy requested rehearing of the FERC approval.  On February 21, 2006, the FERC issued anorder granting rehearing of FERC’s order for further consideration.  A decision by the FERC is expected in thethird****quarter of 2006.

***(b)***                                  PSIEnvironmental Compliance Case

In November 2004,******PSI**applied to the IURC for approval of its plan forcomplying with sulfur dioxide (SO2), nitrogen oxides (NOX), and mercury emissionreduction requirements discussed in Note 14(a)(*i*).  **PSI** alsorequested approval of cost recovery for certain proposed complianceprojects.  An evidentiary hearing washeld in May 2005.  In December 2005, **PSI**, the Indiana Office of Utility Consumer Counselor(OUCC), and the PSI Industrial Group filed a Settlement Agreement providing forapproval of **PSI’s** compliance plan and approvalof financing, depreciation, and operation and maintenance cost recovery.  In May 2006, the IURC approved the SettlementAgreement in its entirety.  The approvedSettlement Agreement provides for: (1) the construction of Phase 1 Clean AirInterstate Rule (CAIR) and Clean Air Mercury Rule (CAMR) projects withestimated expenditures of  approximately$1.08 billion, (2) timely recovery of financing, construction, operation andmaintenance cost, and depreciation associated with the Phase 1 CAIR and CAMRplan, (3) recovery of emission allowances in connection with SO2, NOX, and mercury, (4) accelerated 20 year depreciation rate,(5) timely recovery of Phase 1 plan development and presentation costs andPhase 2 costs, and (6) authority to defer post-in-service allowance for fundsused during construction (AFUDC), depreciation costs and operation andmaintenance cost until applicable costs are reflected in rates.

***(c)***                                  Integrated Gasification Combined Cycle(IGCC)

**PSI** filed anapplication with the IURC for approval of study and preconstruction costsrelated to the joint development of an IGCC project with Southern Indiana Gasand Electric Company d/b/a Vectren Energy Delivery of Indiana, Inc.(Vectren).  **PSI** and Vectren reached a SettlementAgreement with the OUCC providing for the recovery of such costs if the IGCCproject is approved and constructed and for the partial recovery of such costsif the IGCC project does not go forward.  The IURC issued an order in July2006, approving the Settlement Agreement in its entirety.

***(d)***                                  FuelAdjustment Clause

**PSI** recoversits actual fuel costs quarterly through a rate adjustment mechanism.  In two recent fuel clause proceedings,certain industrial customers and the Citizens Action Coalition of Indiana, Inc.have intervened and sub-dockets have been established to address issues raisedby the OUCC and the intervenors concerning the allocation of fuel costs betweennative load customers and non-native load sales, the reasonableness of variousMidwest Independent System Operator, Inc. (Midwest ISO) costs for which **PSI** has sought recovery and **PSI’s**recovery of costs associated with certain power hedging activities.  **PSI** isdefending its practices, its costs, and the allocation of such costs, and discoveryis underway in these cases.  **PSI** has been authorized to collect through rates its costsfor which it sought recovery in the two sub-docket proceedings, subject torefund pending the outcome of these

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proceedings.  **Cinergy** and **PSI** cannot predict the outcome of these proceedings but doesnot expect the outcome to be material to **PSI**.

***(e)***                                  CG&EElectric Rate Filings

**CG&E**operates under a MBSSO which was approved by the PUCO in November 2004. InMarch 2005, the OCC appealed the Commission’s approval of the MBSSO to theSupreme Court of Ohio.  The Supreme Courtof Ohio recently ruled on the MBSSO’s for two other Ohio utilities and in eachof those rulings upheld the market prices charged by the utility to itsconsumers as approved by the Commission but overturned the competitive bidprocess approved by the Commission on the basis that the Commission rejectedthe bid price on behalf of consumers and the applicable statute requirescustomer involvement.  **CG&E’s** MBSSO does not contain a competitive bid processpursuant to a statutory exception.  **CG&E** does not expect a significant, if any, change toits MBSSO as a result of this case but cannot predict the outcome of itscase.  **Cinergy**and **CG&E** expect the Court to decide thecase in 2006.  On August 2, 2006, **CG&E** filed an application with the PUCO to extend **CG&E’s** MBSSO.  Theproposal provides for continued electric system reliability, a simplified ratestructure, and clear price signals for customers, while helping maintain astable revenue stream for **Cinergy** and **CG&E**.  Theapplication also proposes that the PUCO review and approve the application bythe end of 2006.

**CG&E’s**MBSSO includes a fuel clause recovery component, which is audited annually bythe PUCO. In January 2006, **CG&E**entered into a settlement resolving all open issues identified in the 2005audit. The PUCO approved the settlement in February 2006. **Cinergy**and **CG&E** do not expect the agreement tohave a material impact on their consolidated results of operations.

**CG&E**fileda distribution rate case to recover certain distribution costs with ratesbecoming effective on January 1, 2006, and **CG&E** hasdeferred certain costs in 2004 and 2005 pursuant to its MBSSO.  The parties to the proceeding agreed upon andfiled a settlement setting the recommended annual revenue increase atapproximately $50 million.  In December2005, the PUCO issued an order approving the settlement agreement.

***(f)***                                    ULH&PGas Rate Case

In 2002, the KPSC approved ULH&P’s gas base ratecase which included, among other things, recovery of costs associated with anaccelerated gas main replacement program.  The approval authorized atracking mechanism to recover such costs including depreciation and a rate ofreturn on the program’s capital expenditure.  The Kentucky AttorneyGeneral has appealed to the Franklin Circuit Court the KPSC’s approval of thetracking mechanism.  In 2005, both ULH&P and the KPSC requested thatthe Court dismiss the case.  At the present time, **Cinergy**and ULH&P cannot predict the timing or outcome of this litigation.

In February 2005, ULH&P filed a gas base rate case with the KPSC requestingapproval to continue the tracking mechanism and for a $14 million annualincrease in base rates.  A portion of theincrease is attributable to including recovery of the current cost of theaccelerated gas main replacement program in base rates.  The KPSC did not rule on the base rate caserequest or the request to continue the tracking mechanism by October 1, 2005;consequently, the initial tracking mechanism expired on September 30, 2005.  In accordance with Kentucky law, ULH&Pimplemented the full amount of the requested rate increase on October 1,2005.  In December 2005, the KPSCapproved an annual rate increase of $8.1 million and approved the trackingmechanism through 2011.  Pursuant to theKPSC’s order, ULH&P filed a refund plan in January 2006 for the excessrevenues collected since October 1, 2005. In February 2006, the KPSC issued an additional order responding to arehearing request made by the Attorney General. Its rehearing order re-approved ULH&P’s refund plan, which resultedin refunds being provided to customers beginning in March 2006.  In February 2006, the Attorney Generalappealed the KPSC’s order to the Franklin Circuit Court, claiming that theorder improperly allows ULH&P to increase its rates for gas mainreplacement costs in between general rate cases, and also claiming that theorder improperly allows ULH&P to earn a return on investment for the costsrecovered under the tracking mechanism which permits ULH&P to recover itsgas main replacement costs.  At thistime, **Cinergy** and ULH&P cannot predictthe outcome of this proceeding.

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***(g)***                                 ULH&PElectric Rate Case

In May 2006, ULH&Pfiled an application for an increase in its base electric rates.  The application, which seeks an increase ofapproximately $65 million in revenue, or approximately 28 percent, to beeffective in January 2007, was filed pursuant to the KPSC’s 2003 Orderapproving the transfer of 1,100 MW of generating assets from **CG&E** to ULH&P. ULH&P is also seeking reinstitution of its fuel cost recoverymechanism which has been frozen since 2001, and has proposed to refresh thepricing for the back-up power supply contract, to reflect current market pricing.  At this time, ULH&P cannot predict theoutcome of this proceeding.

***(h)***                                 PUCOGas Pipeline System Investigation

In April 2005, the PUCOissued an order opening a statewide investigation into riser leaks in gaspipeline systems throughout Ohio.  Atthis time, **Cinergy** and**CG&E**cannotpredict the outcome or the impact of the statewide investigation.

***(i)***                                    MidwestISO Revenue Sufficiency Guarantee (RSG)

On April 25, 2006, theFERC issued an order on the Midwest ISO’s revisions to its Transmission andEnergy Markets Tariffs regarding its RSG. The FERC found that the Midwest ISO violated the tariffs when it did notcharge RSG costs to virtual supply offers. The FERC, among other things, ordered the Midwest ISO to recalculate therate and make refunds to customers, with interest, to reflect the correctallocation of RSG costs.  DESS, on behalfof **PSI**, **CG&E**,and ULH&P, has filed a Request for Rehearing, and the matter is currentlypending before the FERC.  At this time, **Cinergy**, **CG&E** and **PSI** cannot predict the outcome of this matter and whether itwill have a material effect on their financial position or results ofoperations.

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**14.  Commitments and Contingencies**

***(a)***                                  Environmental

*(i)           EmissionReduction Rulemakings*

In October 1998, the Environmental Protection Agency(EPA) finalized its ozone transport rule, also known as the NOX State Implementation Plan (SIP) Call, whichaddresses wind-blown ozone and ozone precursors that impact air quality indownwind states.

**Cinergy, CG&E**,and **PSI** have installed selective catalyticreduction units and other pollution controls and implemented certain combustionimprovements at various generating stations to comply with the NOX SIP Call. **Cinergy** also utilizes the NOX emission allowance market to buy or sell NOX emission allowances as appropriate.  As of June 30, 2006, **Cinergy**has incurred approximately $823 million in capital costs to comply with thisprogram and does not anticipate significant additional costs.

The EPA finalized itsCAIR in May 2005.  The rule limits totalannual SO2 and NOX emissions andsummer NOX emissions from electric generating facilitiesacross the Eastern United States through a two-phased cap-and-tradeprogram.  Phase 1 begins in 2009 for NOX and in 2010 for SO2. Phase 2 begins in 2015 for both NOX and SO2.  The rule requires SO2 and NOX emissions to becut by 70 percent and 65 percent, respectively, by 2015.  The rule gives states the option ofparticipating in the national trading program. If a state chooses not to participate, then the rule sets a fixed limiton that state’s annual emissions.

The EPA finalized itsCAMR in May****2005.  The rule limits total annual mercuryemissions from coal-fired power plants across the United States through atwo-phased cap-and-trade program.  Phase1 begins in 2010 and Phase 2 begins in 2018. The rule gives states the option of participating in the nationaltrading program.  If a state chooses notto participate, then the rule sets a fixed limit on that state’s annualemissions.

Numerousstates, environmental organizations, industry groups, including some of which **Cinergy** is a member, and individual companies havechallenged various portions of the rules. Those challenges are currently pending in the United States CircuitCourt for the District of Columbia.  OnOctober 21, 2005, the EPA agreed to reconsider certain aspects of the CAMR aswell as the determination not to regulate mercury under Section 112 of theClean Air Act (CAA).  On June 9, 2006,the EPA took final action on the issues being reconsidered and determined thatits original decisions were reasonable and should not be changed.  At this time, **Cinergy**cannot predict the outcome of these matters.

**Cinergy** has spent $0.45 billion through 2005 tocomply with Phase 1 of the CAIR and CAMR rules and currently estimates that itwill spend an additional $1.23 billion over the 2006-2011 time period, for atotal of $1.68 billion.  The projectedexpenditures include estimated costs to comply at plants that **Cinergy** owns but does not operate and could change whentaking into consideration compliance plans of co-owners or operatorsinvolved.  Moreover, as market conditionschange, additional compliance options may become available and **Cinergy’s** plans will be adjusted accordingly.  The IURC recently issued an order granting **PSI** approximately $1.08 billion in rate recovery, whichrepresents **PSI’s** share of **Cinergy’s** estimated $1.68 billion total projectedenvironmental compliance costs for Phase 1 of CAIR and CAMR.  See Note 13(b) for more details.  **CG&E**receives partial recovery of depreciation and financing costs related toenvironmental compliance projects for 2005-2008 through its MBSSO.  SeeNote 13(e) for more details.

TheEPA made final state non-attainment area designations to implement the revisedozone standard and to implement the new fine particulate standard in June 2004and April 2005, respectively.  Severalcounties in which **Cinergy**operates have been designated as being in non-attainment with the new ozonestandard and/or fine particulate standard. States with counties that are designated as being in non-attainment withthe new ozone and/or fine particulate standards are required to develop a planof compliance by June 2007 and April 2008, respectively.  Industrial sources in or near those countiesare potentially subject to requirements for installation of additionalpollution controls.  In March 2005,various states, local governments, environmental groups, and industry groups,including some of which **Cinergy** is amember, filed petitions for review in the U.S. Court of Appeals for the D.C.Circuit to challenge the EPA’s particulate matter non-attainmentdesignations.  Although the EPA hasattempted to 

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structureCAIR to resolve purported utility contributions to ozone and fine particulatenon-attainment, at this time, **Cinergy**cannot predict the effect of current or future non-attainment designations onits consolidated financial position or results of operations.

In July 2005, the EPAissued its final regional haze rules and implemented guidelines in response toa 2002 judicial ruling overturning key provisions of the original program.  The regional haze program is aimed at reducingcertain emissions impacting visibility in national parks and wildernessareas.  The EPA has announced that it canforesee no circumstances where the requirements of the regional haze rule wouldrequire utility controls beyond those required under CAIR.  The EPA also found that states participatingin the CAIR cap and trade program need not require electric generating units toadhere to best available retrofit technology requirements.  The states have until December 2007 tofinalize their SIPs addressing compliance with EPA regulations.  The states may choose to implement morestringent guidelines than promulgated by the EPA, and therefore, it is notpossible to predict whether the regional haze rule will have a material effecton **Cinergy’s**, **CG&E’s**,and **PSI’s** financial positions or results ofoperations.

*(ii)          Section 126 Petitions*

In March 2004, the stateof North Carolina filed a petition under Section 126 of the CAA in which italleges that sources in 13 upwind states including Ohio, Indiana, and Kentucky,significantly contribute to North Carolina’s non-attainment with certainambient air quality standards.  In August2005, the EPA issued a proposed response to the petition.  The EPA proposed to deny the ozone portion ofthe petition based upon a lack of contribution to air quality by the namedstates.  The EPA also proposed to denythe particulate matter portion of the petition based upon the CAIR FederalImplementation Plan (FIP), that would address the air quality concerns fromneighboring states.  On April 28, 2006,the EPA denied North Carolina’s petition based upon the final CAIR FIPdescribed above.  North Carolina hasfiled a legal challenge to the EPA’s denial.

*(iii)         Clean Water Act Rulemaking*

The EPA’s final CleanWater Act Section 316(b) rule became effective July 9, 2004.  The rule establishes aquatic protectionrequirements for existing facilities that withdraw 50 million gallons or moreof water per day from rivers, streams, lakes, reservoirs, estuaries, oceans, orother U.S. waters for cooling purposes. Six of 11 coal-fueled generating facilities in which **Cinergy** is either a whole or partial ownerare affected sources under the rule.  Therule requires a Comprehensive Demonstration Study (CDS) for each affectedfacility to provide information needed to determine necessary facility-specificmodifications and cost estimates for implementation.  These studies will be completed over the nextthree to five years.  Once compliancemeasures are determined and approved by regulators, a facility will typicallyhave five or more years to implement the measures.  Due to the wide range of measures potentiallyapplicable to a given facility, and since the final selection of compliancemeasures will be at least partially dependent upon the CDS information, **Cinergy** is not able to estimate its costfor complying with the rule at this time.

*(iv)         Clean Air Act Lawsuits*

In November 1999, and through subsequent amendments, theUnited States brought a lawsuit in the United States Federal District Court forthe Southern District of Indiana against **Cinergy**,**CG&E**, and **PSI** alleging various violations of theCAA.  Specifically, the lawsuit allegesthat **Cinergy**, **CG&E**, and **PSI** violated the CAA by not obtaining Prevention ofSignificant Deterioration (PSD), Non-Attainment New Source Review (NSR), andOhio and Indiana SIP permits for various projects at **Cinergy’s**, **CG&E’s**,and **PSI’s** owned and co-ownedgenerating stations.  Additionally, thesuit claims that **Cinergy**, **CG&E**, and **PSI** violated an Administrative Consent Order entered into in1998 between the EPA and **Cinergy**relating to alleged violations of Ohio’s SIP provisions governing particulatematter at Unit 1 at **CG&E’s**W.C. Beckjord Station.  The suit seeks(1) injunctive relief to require installation of pollution control technologyon various generating units at **CG&E’s**W.C. Beckjord and Miami Fort Stations, and **PSI’s**Cayuga, Gallagher, Wabash River, and Gibson Stations, and (2) civil penaltiesin amounts of up to $27,500 per day for each violation.  In addition, three Northeast states and twoenvironmental groups have intervened in the case.  In August 2005, the district court issued aruling regarding the emissions test that it will apply to **Cinergy**, **CG&E**,and **PSI** at the trial of thecase.  Contrary to **Cinergy’s**, **CG&E’s**, and **PSI’s**argument, the district court ruled that in determining whether a project wasprojected to increase annual emissions, it would not 

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hold hours of operation constant.  However, the district court subsequentlycertified the matter for interlocutory appeal to the Seventh Circuit Court ofAppeals, which has accepted the appeal. Oral arguments were held before the Seventh Circuit Court of Appeals inJune 2006.  In February 2006, thedistrict court ruled that in carrying its burden of proof, the defendant canlook to industry practice in proving a particular project was routine.  The district court has removed the trial fromthe calendar and will reset a trial date, if necessary, after the SeventhCircuit Court of Appeals rules. Notwithstanding the appeal, there are a number of other legal issuescurrently before the district court judge.

In March 2000, the United States also filed in the UnitedStates District Court for the Southern District of Ohio an amended complaint ina separate lawsuit alleging violations of the CAA relating to PSD, NSR, andOhio SIP requirements regarding various generating stations, including agenerating station operated by Columbus Southern Power Company (CSP) andjointly-owned by CSP, The Dayton Power and Light Company (DP&L), and **CG&E**. The EPA is seeking injunctive relief and civil penalties of up to$27,500 per day for each violation.  Thissuit is being defended by CSP.  In April2001, the United States District Court for the Southern District of Ohio inthat case ruled that the Government and the intervening plaintiff environmentalgroups cannot seek monetary damages for alleged violations that occurred priorto November 3, 1994; however, they are entitled to seek injunctive relief forsuch alleged violations.  Neither partyappealed that decision.  This matter washeard in trial in July 2005.  A decisionis pending.

In addition, **Cinergy**and **CG&E** have been informed byDP&L that in June 2000, the EPA issued a Notice of Violation (NOV) toDP&L for alleged violations of PSD, NSR, and Ohio SIP requirements at astation operated by DP&L and jointly-owned by DP&L, CSP, and **CG&E**. The NOV indicated the EPA may (1) issue an order requiring compliancewith the requirements of the Ohio SIP, or (2) bring a civil action seekinginjunctive relief and civil penalties of up to $27,500 per day for eachviolation.  In September 2004, MarilynWall and the Sierra Club brought a lawsuit against **CG&E**,DP&L and CSP for alleged violations of the CAA at this same generatingstation.  This case is currently indiscovery in front of the same judge who has the CSP case.

At this time, **Cinergy, CG&E**,and **PSI** are unable to predict whetherresolution of these matters would have a material effect on their financialposition or results of operations. **Cinergy, CG&E,** and **PSI**intend to vigorously defend against these allegations.

*(v)           Carbon Dioxide (CO*2) Lawsuit

In July 2004, the statesof Connecticut, New York, California, Iowa, New Jersey, Rhode Island, Vermont,Wisconsin, and the City of New York brought a lawsuit in the United StatesDistrict Court for the Southern District of New York against **Cinergy**, American Electric Power Company, Inc., American Electric PowerService Corporation, The Southern Company, Tennessee Valley Authority, and XcelEnergy Inc.  That same day, a similarlawsuit was filed in the United States District Court for the Southern Districtof New York against the same companies by Open Space Institute, Inc., OpenSpace Conservancy, Inc., and The Audubon Society of New Hampshire.  These lawsuits allege that the defendants’emissions of CO2 from the combustion of fossil fuels atelectric generating facilities contribute to global warming and amount to apublic nuisance.  The complaints alsoallege that the defendants could generate the same amount of electricity whileemitting significantly less CO2.  The plaintiffs are seeking an injunctionrequiring each defendant to cap its CO2 emissionsand then reduce them by a specified percentage each year for at least adecade.  In September 2005, the districtcourt granted the defendants’ motion to dismiss the lawsuit.  The plaintiffs have appealed this ruling tothe Second Circuit Court of Appeals. Oral argument was held before the Second Circuit Court of Appeals inJune 2006.  **Cinergy**is not able to predict whether resolution of thesematters would have a material effect on its financial position or results of operations.

*(vi)         Zimmer Generating Station (ZimmerStation) Lawsuit*

In November 2004, acitizen of the Village of Moscow, Ohio, the town adjacent to **CG&E’s** Zimmer Station, brought a purported class actionin the United States District Court for the Southern District of Ohio seekingmonetary damages and injunctive relief against **CG&E**for alleged violations of the CAA, the Ohio SIP, and Ohio laws against nuisanceand common law nuisance.  The plaintiffshave filed a number of additional notices of intent to sue and two lawsuitsraising claims similar to those in the original claim.  One lawsuit was dismissed on proceduralgrounds, and the remaining two have been consolidated.  The plaintiff filed a motion for class 

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certification, which isfully briefed and pending decision.  Atthis time, **CG&E** cannot predict whether the outcome of this matter will have a materialimpact on its financial position or results of operations.  **CG&E** intends to defend this lawsuit vigorouslyin court.

*(vii)        ManufacturedGas Plant (MGP) Sites*

Coaltar residues, related hydrocarbons, and various metals have been found in atleast 23 sites that **PSI** or itspredecessors previously owned and sold in a series of transactions withNorthern Indiana Public Service Company (NIPSCO) and Indiana Gas Company, Inc.(IGC).  The 23 sites are in the processof being studied and will be remediated, if necessary.  In 1998 NIPSCO, IGC, and **PSI** entered into Site Participation andCost Sharing Agreements to allocate liability and responsibilities amongthem.  Thus far, **PSI** has primary responsibility forinvestigating, monitoring, and, if necessary, remediating nine of thesesites.  In December 2003, **PSI** entered into a voluntary remediationplan with the state of Indiana, providing a formal framework for theinvestigation and cleanup of the nine sites. The Indiana Department of Environmental Management oversees investigationand cleanup of all of these sites.

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** and compensate **PSI** for its costs of investigating,preventing, mitigating, and remediating damage to property and paying claimsrelated to MGP sites; or (2) pay **PSI’s**cost of defense.  **PSI**settled, in principle, its claims with all but one of the insurance carriers inJanuary 2005 prior to commencement of the trial.  With respect to the lone insurance carrier, ajury returned a verdict against **PSI** in February2005.  **PSI**has appealed this decision.  At thistime, **PSI** cannot predict the outcome of thislitigation, including the outcome of the appeal.

**PSI**has accrued costs related to investigation, remediation, and groundwatermonitoring for those sites where such costs are probable and can be reasonablyestimated.  **PSI**will continue to investigate and remediate the sites as outlined in thevoluntary remediation plan.  Asadditional facts become known and investigation is completed, **PSI** will assess whether the likelihood of incurringadditional costs becomes probable.  Untilall investigation and remediation is complete, **PSI**is unable to determine the overall impact on its financial position or resultsof operations.

**CG&E**has performed site assessments on certain of its sites where MGP activities arebelieved to have occurred at some point in the past and have found no imminentrisk to the environment.  At this time, **CG&E** cannot predict whetherinvestigation and/or remediation will be required in the future at any of thesesites.

*(viii)       AsbestosClaims Litigation*

**PSI**and **CG&E**have been named as defendants or co-defendants in lawsuits related to asbestosat their electric generating stations. Currently, there are approximately 130 pending lawsuits (the majority ofwhich are **PSI** cases).  In these lawsuits, plaintiffs claim to havebeen exposed to asbestos-containing products in the course of their work asoutside contractors in the construction and maintenance of **PSI** and**CG&E** generating stations. The plaintiffs further claim that as the property owner of thegenerating stations,**PSI** and **CG&E** should be held liable for theirinjuries and illnesses based on an alleged duty to warn and protect them fromany asbestos exposure.  The impact on **PSI’s** and **CG&E’s**financial position or results of operations of these cases to date has not beenmaterial.

Of these lawsuits, onecase filed against **PSI** has beentried to verdict.  The jury returned averdict against **PSI** on anegligence claim and a verdict for **PSI**on punitive damages.  **PSI** appealed this decision up to theIndiana Supreme Court.  In October 2005,the Indiana Supreme Court upheld the jury’s verdict.  **PSI** paid thejudgment of approximately $630,000 in the fourth quarter of 2005.  In addition, **PSI** has settled over 150 other claims for amounts whichneither individually nor in the aggregate are material to **PSI’s** financial position or results ofoperations.  Based on estimates undervarying assumptions, concerning uncertainties, such as, among others:  (i) the number of contractors potentiallyexposed to asbestos during construction or maintenance of **PSI**generating plants; (ii) the possible incidence of various illnesses amongexposed workers, and (iii) the potential settlement costs without federal orother legislation that addresses asbestos tort actions, **PSI**estimates that the range of reasonably possible exposure in existing and futuresuits over the next 50 years could range from an immaterial amount to 

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approximately $60million, exclusive of costs to defend these cases.  This estimated range of exposure may changeas additional settlements occur and claims are made in Indiana and more caselaw is established.

**CG&E**hasbeen named in fewer than 10 cases and as a result****hasvirtually no settlement history for asbestos cases.  Thus, **CG&E**is not able to reasonably estimate the range of potential loss from current orfuture lawsuits.  However, potentialjudgments or settlements of existing or future claims could be material to **CG&E**.

*(ix)         Dunavan Waste Superfund Site*

In July and October 2005,**PSI** received notices from the EPA thatit has been identified as a de minimus potentially responsible party under theComprehensive Environmental Response, Compensation, and Liability Act at theDunavan Waste Oil Site in Oakwood, Vermilion County, Illinois.  At this time, **PSI**does not have any further information regarding the scope of potential liabilityassociated with this matter.

*(x)           Ontario, Canada Lawsuit*

**Cinergy**, **CG&E**, and **PSI** understandthat a class action lawsuit was filed in Superior Court in Ontario, Canadaagainst **Cinergy**, **CG&E**,and **PSI** and approximately 20 other utilityand power generation companies alleging various claims relating toenvironmental emissions from coal-fired power generation facilities in theUnited States and Canada and damages of approximately $50 billion, withcontinuing damages in the amount of approximately $4 billion annually.  **Cinergy**, **CG&E**, and **PSI** understandthat the lawsuit also claims entitlement to punitive and exemplary damages inthe amount of $1 billion.  **Cinergy**, **CG&E**, and **PSI** have not yet been served in this lawsuit; however, ifserved, **Cinergy**, **CG&E**,and **PSI** intend to defend this lawsuitvigorously in court.  At this time, **Cinergy**, **CG&E**, and **PSI** are not able to predict whether resolution of thismatter would have a material effect on **Cinergy’s**, **CG&E’s**, and **PSI’s** financialposition or results of operations.

*(xi)         Hurricane Katrina Lawsuit*

On April 19, 2006, **Cinergy** was named in the third amended complaint of apurported class action filed in the United States District Court for theSouthern District of Mississippi. Plaintiffs claim that **Cinergy**, alongwith numerous other utilities, oil companies, coal companies and chemicalcompanies, is liable for damages relating to losses suffered by victims ofHurricane Katrina.  Plaintiffs claim that**Cinergy’s**, and others’, greenhouse gasemissions contributed to the frequency and intensity of storms such asHurricane Katrina.  **Cinergy**has not been served with this lawsuit; however, if served **Cinergy**intends to defend this lawsuit vigorously in court.  At this time, **Cinergy**is not able to predict whether resolution of this matter would have a materialeffect on **Cinergy’s** financial position or resultsof operations.

***(b)***                                  Other

*(i)           Synthetic Fuel Production*

**Cinergy**produces synthetic fuel from two facilities that qualify for tax credits(through 2007) in accordance with Section 29/45K of the Internal Revenue Codeif certain requirements are satisfied.  These credits reduce **Cinergy’s**income tax liability and therefore **Cinergy’s**effective tax rate.  **Cinergy’s**sale of synthetic fuel has generated $343 million in tax credits throughDecember 31, 2005.  After reducing forthe possibility of phase-outs in 2006, the amount of additional creditsgenerated through June 30, 2006 is immaterial.  Section 29/45K provides for a phase-out of thecredit if the average price of crude oil during a calendar year exceeds aspecified threshold.  The phase-out isbased on a prescribed calculation and definition of crude oil prices.  Based on current crude oil prices, **Cinergy** believes that for 2006 and 2007 the amount of thetax credits will be reduced, perhaps significantly.  Oil prices are currently at a level where **Cinergy** has idled the plants, as the value of the creditsmay not exceed the net costs to produce the synthetic fuel.  During the first quarter of 2006, an agreementwas in place with the plant operator which would indemnify **Cinergy**in the event that tax credits are insufficient to support operatingexpenses.  This agreement did notcontinue in the second quarter.  **Cinergy’s** net book value of the plants at June 30, 2006 wasapproximately $24 million. Based upon the increase in crude oil pricessubsequent to June 30, 2006, it is possible that **Cinergy**may incur a future impairment of its net investment in the synthetic fuelplants.

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The Internal RevenueService (IRS) has completed the audit of **Cinergy**for the 2002, 2003, and 2004 tax years including the synfuel facility ownedduring that period.  That facilityrepresents $222 million of tax credits generated during that audit period.  The IRS has not proposed any adjustment thatwould disallow the credits claimed during that period.  Subsequent periods are still subject to audit. **Cinergy**believes that it operates in conformity with all the necessary requirements tobe allowed such credits under Section 29/45K.

*(ii)          FirstEnergy Lawsuit*

FirstEnergy has filed alawsuit in the Court of Common Pleas in Summit County, Ohio against **Cinergy** with respect to a transaction between **Cinergy** and a subsidiary of FirstEnergy, relating to a jointventure company, Avon Energy Partners Holdings (Avon).  In 1999, the FirstEnergy subsidiary acquired **Cinergy’s** share of Avon which it subsequently sold to athird party.  The original transactiondocuments included an indemnity by **Cinergy** withrespect to a certain investment owned by Avon. FirstEnergy claims that this indemnity was triggered by its sale of Avonto a third party, and is seeking to recover $15 million from **Cinergy**.  On April 28,2006, the court granted **Cinergy’s**motionfor summary judgment, thus ruling that **Cinergy** is notobligated to pay the $15 million sought by FirstEnergy.  FirstEnergy has appealed this decision.  At this time, **Cinergy**cannot predict the outcome of this matter.

*(iii)        *Other Litigation and Legal Proceedings

As part of their normalbusiness, **Cinergy**, **CG&E**,and **PSI** are party to various financialguarantees, performance guarantees, and other contractual commitments to extendguarantees of credit and other assistance to various subsidiaries, investees,and other third parties.  To varyingdegrees, these guarantees involve elements of performance and credit risk,which are not included on the Consolidated Balance Sheets.  The possibility of **Cinergy**,**CG&E**, and **PSI**having to honor their contingencies is largely dependent upon future operationsof various subsidiaries, investees, and other third parties, or the occurrenceof certain future events.  For furtherinformation, see Note 15.

In addition, **Cinergy**, **CG&E**, and **PSI** enter into various fixed-price, non-cancelablecommitments to purchase or sell power (tolling arrangements or power purchasecontracts), take-or-pay arrangements, transportation or throughput agreements,and other contracts that may or may not be recognized on the ConsolidatedBalance Sheets.  Some of thesearrangements may be recognized at market value on the Consolidated Balance Sheetsas trading contracts or qualifying hedge positions included in unrealized gainsor losses on MTM and hedging transactions.

**15.  Guarantees and Indemnifications**

In the ordinary course ofbusiness, **Cinergy**enters intovarious 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.

In many cases, themaximum potential amount of an outstanding guarantee is an express term, setforth in the guarantee agreement, representing the maximum potential obligationof **Cinergy**under that guarantee(excluding, at times, certain legal fees to which a guaranty beneficiary may beentitled).  In those cases where there isno maximum potential amount expressly set forth in the guarantee agreement, **Cinergy** calculates the maximum potential amount byconsidering the terms of the guaranteed transactions, to the extent such amountis estimable.

**Cinergy Corp.** has also providedperformance guarantees on behalf of certain unconsolidated subsidiaries andjoint ventures.  These guarantees supportperformance under various agreements and instruments (such as construction contracts,operation and 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 liability to be $113million under these guarantees as of June 30, 2006.  **CinergyCorp.** may also have recourse to third parties for claims required tobe paid under certain of these guarantees. The majority of these guarantees expire at the completion of theunderlying performance agreement, the majority of which expire from 2016 to2019.

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**Cinergy**hasentered into contracts that include indemnification provisions as a routinepart of its business activities. Examples of these****contractsinclude purchase and sale agreements and operating agreements.  In general, these provisions indemnify thecounterparty for matters such as breaches of representations and warranties andcovenants contained in the contract.  Insome cases, particularly with respect to purchase and sale agreements, thepotential liability for certain indemnification obligations is capped, in wholeor in part (generally at an aggregate amount not exceeding the sale price), andsubject to a deductible amount before****anypayments would become due.** **In other cases (such asindemnifications for willful misconduct of employees in a joint venture), themaximum potential liability is not estimable given that the magnitude of anyclaims under those indemnifications would be a function of the extent ofdamages actually incurred.  **Cinergy** has estimated the maximum potentialliability, where estimable, to be $137 million under these indemnificationprovisions.  The termination period forthe majority of matters provided by indemnification provisions in these typesof agreements generally ranges from 2006 to 2010.

**Cinergy**believes the likelihood that it****would be required to perform orotherwise incur any significant losses associated with any or all of theguarantees described in the preceding paragraphs is remote.

**16.  Related Party Transactions**

**Cinergy**,**CG&E**,and**PSI** engage in related partytransactions.  These transactions aregenerally performed at cost and in accordance with the applicable state andfederal commission regulations.  The ConsolidatedBalance Sheets of **Cinergy**,**CG&E**,****and**PSI** reflect amounts payable to and/or receivables fromrelated parties as Accounts payableand Receivables, respectively. Theamounts for **Cinergy** and **CG&E**,at June 30, 2006, were as follows:

|                  | ** ** | **June 30, 2006** | ** ** |
|------------------|------------|-----------------------------|------------|
| ** **       | ** ** | **(in millions)**      | ** ** |
| ** **       | ** ** | ** **                  | ** ** |
| **Cinergy**      |       |                        |       |
| Accounts payable | ** ** | **$**                       | **94**     | ** ** |
| Receivables      | ** ** | **—**                  | ** ** |
| **CG&E**     |       |                        |       |
| Accounts payable | ** ** | **$**                       | **143**    | ** ** |
| Receivables      | ** ** | **33**                      | ** ** |
| **PSI**          | ** ** | ** **                  | ** ** |
| Accounts payable | ** ** | **$**                       | **26**     | ** ** |
| Receivables      | ** ** | **3**                       | ** ** |

**Cinergy**, **CG&E**,and **PSI** are allocated their proportionateshare of corporate governance and other costs by a consolidated affiliate ofDuke Energy.  **CG&E**,**PSI**, and Duke Energy and itssubsidiaries are allocated their proportionate share of corporate governancecosts from a consolidated affiliate of **Cinergy**.

The revenues and expensesassociated with corporate governance and other service costs for **Cinergy** and **CG&E** forthe three months ended June 30, 2006, March 31, 2006 and June 30, 2005 and thesix months ended June 30, 2005 were as follows:

|                                                  | ** ** | **Successor(1)**  | ** ** | ** ** | ** ** | **Predecessor(1)** | ** ** |
|--------------------------------------------------|------------|-------------------|------------|------------|------------|--------------------|------------|
| ** **                                       | ** ** | **Three Months**  | ** ** | ** ** | ** ** | **Three Months**   | ** ** | **Three Months** | ** ** | **Six Months** | ** ** |
| ** **                                       | ** ** | **Ended**         | ** ** | ** ** | ** ** | **Ended**          | ** ** | **Ended** | ** ** | **Ended** | ** ** |
| ** **                                       | ** ** | **June 30, 2006** | ** ** | ** ** | ** ** | **March 31, 2006** | ** ** | **June 30, 2005** | ** ** | **June 30, 2005** | ** ** |
| ** **                                       | ** ** | ** **        | ** ** | ** ** | ** ** | **(in millions)**  | ** ** | ** ** | ** ** |
|                                             |       |              |       |       |       |               |       |   |   |   |   |
| **Cinergy**                                      | ** ** | ** **        | ** ** | ** ** | ** ** | ** **         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Corporate governance and other service revenues  |       | **$**             | **27**     |       |       |               | $          | — |   | $ | — |   | $ | — |   |
| Corporate governance and other service expenses  |       | **48**            |       |       |       | —             |       | — |   | — |   |
|                                             |       | ** **        |       |       |       |               |       |   |   |   |   |
| **CG&E**                                     | ** ** | ** **        | ** ** | ** ** | ** ** | ** **         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Corporate  governance and other service expenses |       | **$**             | **98**     |       |       |               | $          | 99 |   | $ | 82 |   | $ | 152 |   |

 

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(1)            See Note 1(b)for additional information on Predecessor and Successor reporting.

 

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The expenses associatedwith corporate governance and other service costs for **PSI**for the three and six months ended June 30, 2006 and 2005 were as follows:

|                                                  | ** ** | **Three Months**  | ** ** | **Three Months**  | ** ** | **Six Months**    | ** ** | **Six Months**    | ** ** |
|--------------------------------------------------|------------|-------------------|------------|-------------------|------------|-------------------|------------|-------------------|------------|
| ** **                                       | ** ** | **Ended**         | ** ** | **Ended**         | ** ** | **Ended**         | ** ** | **Ended**         | ** ** |
| ** **                                       | ** ** | **June 30, 2006** | ** ** | **June 30, 2005** | ** ** | **June 30, 2006** | ** ** | **June 30, 2005** | ** ** |
| ** **                                       | ** ** | **(in millions)** | ** ** |
| * *                                         | * *   | * *          | * *   | * *          | * *   | * *          | * *   | * *          | * *   |
| **PSI**                                          | ** ** | ** **        | ** ** | ** **        | ** ** | ** **        | ** ** | ** **        | ** ** |
| Corporate  governance and other service expenses |       | **$**             | **92**     |              | $          | 64                |       | **$**             | **147**    |   | $ | 121 |   |
|                                                  |            |                   |            |                   |            |                   |            |                   |            |  |  |  |  |

**17.  NewAccounting Standards**

The following newaccounting standards were adopted by **Cinergy** and itssubsidiaries subsequent to June 30, 2005, and the impacts of such adoptions, ifapplicable, have been presented in the accompanying Consolidated FinancialStatements:

*SFASNo. 153, “Exchanges of Nonmonetary Assets—an amendment of APB Opinion No. 29”(SFAS No. 153).* In December 2004, the FASB issued SFAS No. 153which amends APB Opinion No. 29, “*Accounting for NonmonetaryTransactions*,” by eliminating the exception to the fair-valueprinciple for exchanges of similar productive assets, which were accounted forunder APB Opinion No. 29 based on the book value of the asset surrendered withno gain or loss recognition. SFAS No. 153 also eliminates APB Opinion No. 29’sconcept of culmination of an earnings process. The amendment requires that an exchange of nonmonetary assets beaccounted for at fair value if the exchange has commercial substance and fairvalue is determinable within reasonable limits. Commercial substance is assessed by comparing the entity’s expected cashflows immediately before and after the exchange.  If the difference is significant, thetransaction is considered to have commercial substance and should be recognizedat fair value.  SFAS No. 153 waseffective for nonmonetary transactions occurring on or after July 1, 2005.  The adoption of SFAS No. 153 did not have amaterial impact on **Cinergy’s**consolidated results of operations, cash flows, or financial position.

*FASBInterpretation No. 47 “Accounting for Conditional Asset Retirement Obligations*”*(FIN 47).* In March 2005, the FASB issuedFIN 47, which clarifies the accounting for conditional asset retirementobligations as used in SFAS No. 143, “*Accounting for AssetRetirement Obligations,*” (SFAS No. 143).  A conditional asset retirement obligation isan unconditional legal obligation to perform an asset retirement activity inwhich the timing and/or method of settlement are conditional on a future eventthat may or may not be within the control of the entity.  Therefore, an entity is required to recognizea liability for the fair value of a conditional asset retirement obligation underSFAS No. 143 if the fair value of the liability can be reasonablyestimated.  The provisions of FIN 47 wereeffective for **Cinergy** and its subsidiaries as ofDecember 31, 2005.  In the first quarterof 2006, **Cinergy** and **CG&E**recognized a loss of approximately $3 million (net of tax) for the cumulativeeffect of this change in accounting principle. The effect of adoption for **Cinergy**, **CG&E**, and **PSI** includedbalance sheet reclassifications of approximately $35 million, $27 million, and$8 million, respectively, from Regulatory liabilities.  The increases in asset retirement obligationsfrom adopting FIN 47 were $51 million, $39 million, and $12 million for **Cinergy**, **CG&E**, and **PSI**, respectively.

*SFASNo. 123(R),**“Share-Based Payment.”*In December of 2004, the FASB issued SFAS No. 123(R), which replaces SFAS No. 123and supersedes APB Opinion No. 25. SFAS No. 123(R) requires all share-basedpayments to employees, including grants of employee stock options, to berecognized in the financial statements based on their fair values.  For **Cinergy**, timingfor implementation of SFAS No. 123(R) was January 1, 2006.  **Cinergy** isrequired to determine an appropriate expense for stock options and recordcompensation expense in the Consolidated Statements of Operations for stockoptions.  **Cinergy**implemented SFAS No. 123(R) using the modified prospective transitionmethod.  In 2003, **Cinergy**prospectively adopted accounting for its stock-based compensation plans usingthe fair value recognition provisions of SFAS No. 123, as amended by SFAS No.148, “*Accounting for Stock-BasedCompensation—Transition and Disclosure,*” for all employee awardsgranted or with terms modified on or after January 1, 2003.  Therefore, the impact of implementation ofSFAS No. 123(R) on stock options and remaining awards was not material.  See additional detail regarding **Cinergy’s** stock-based compensation plans in Note 3.

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**Cinergy**currently also has retirement eligible employees with outstanding share-basedpayment awards (unvested stock awards, stock based performance awards, andphantom stock awards).  Compensation costrelated to those awards was previously expensed over the stated vesting periodor until actual retirement occurred. Effective January 1, 2006, **Cinergy** isrequired to recognize compensation cost for new awards granted to employeesover the requisite service period, which generally begins on the date the awardis granted through the earlier of the date the award vests or the date theemployee becomes retirement eligible. Awards, including stock options, granted to employees that are alreadyretirement eligible will be deemed to have vested immediately upon issuance,and therefore, compensation cost for those awards will be recognized on thedate such awards are granted.

Most options grantedprior to May 8, 2005 were immediately vested upon consummation of the April 3,2006 merger with Duke Energy and resulted in additional purchase accountingadjustments of $59 million (See Note 2). Options granted after May 8, 2005 will continue to be expensed over theremaining portion of the three-year vesting period, unless granted toretirement eligible employees.  Theremaining options to be expensed under SFAS No. 123(R) are not anticipated tohave a material impact on **Cinergy’s**consolidated results of operations, cash flows, or financial position.  However, the impact to **Cinergy**in periods subsequent to adoption of SFAS No. 123(R) will be largely dependentupon the nature of any new share-based compensation awards issued to employees(See Note 3).

*StaffAccounting Bulletin (SAB) No. 107, “Share-Based Payment” (SAB 107).*On March 29, 2005, the SEC staff issued SAB 107 to express the views of thestaff regarding the interaction between SFAS No. 123(R) and certain SEC rulesand regulations and to provide the staff’s views regarding the valuation ofshare-based payment arrangements for public companies.  **Cinergy** adoptedSFAS No. 123(R) and SAB 107 effective January 1, 2006.

*FASBStaff Position (FSP) Nos. Financial Accounting Standards (FAS) 115-1 and 124-1,“The Meaning of Other-Than-Temporary Impairment and its Application to CertainInvestments”**(FSP Nos. FAS 115-1 and 124-1)*.  The FASB issued FSP Nos. FAS 115-1 and 124-1in November 2005, which was effective for **Cinergy** and itssubsidiaries beginning January 1, 2006. This FSP addresses the determination as to when an investment isconsidered impaired, whether that impairment is other than temporary, and themeasurement of an impairment loss.  ThisFSP also includes accounting considerations subsequent to the recognition of another-than-temporary impairment and requires certain disclosures aboutunrealized losses that have not been recognized as other-than-temporaryimpairments.  The guidance in this FSPamends SFAS No. 115, “*Accounting for CertainInvestments in Debt and Equity Securities*,” SFAS No. 124, “*Accounting for Certain Investments Held byNot-for-Profit Organizations*,” and APB Opinion No. 18, “*The Equity Method of Accounting for Investments inCommon Stock.*”  The adoptionof FSP Nos. FAS 115-1 and 124-1 did not have a material impact on **Cinergy’s** consolidated results of operations, cash flows, orfinancial position.

*FSP No.FAS 123(R)-4, “Classification of Options and Similar Instruments Issued asEmployee Compensation That Allow for Cash Settlement upon the Occurrence of aContingent Event,” (FSP No. FAS 123(R)-4)*. In February 2006, the FASB staff issued FSP No. FAS 123(R)-4 to addressthe classification of options and similar instruments issued as employeecompensation that allow for cash settlement upon the occurrence of a contingentevent.  The guidance amends SFAS No.123(R).  FSP No. FAS 123(R)-4 providesthat cash settlement features that can be exercised only upon the occurrence ofa contingent event that is outside the employee’s control does not requireclassifying the option or similar instrument as a liability until it becomesprobable that the event will occur.  FSPNo. FAS 123(R)-4 applies only to options or similar instruments issued as partof employee compensation arrangements. The guidance in FSP No. FAS 123(R)-4 was effective for **Cinergy** as of April 1, 2006. **Cinergy** adopted SFAS No. 123(R) as ofJanuary 1, 2006 (see Note 3(b)).  Theadoption of FSP No. FAS 123(R)-4 did not have a material impact on **Cinergy’s** consolidated results of operations, cash flows, orfinancial position.

The following newaccounting standards have been issued but have not yet been adopted by **Cinergy** and its subsidiaries as of June 30, 2006:

*SFASNo. 155, “Accounting for Certain Hybrid Financial Instruments—an amendment ofFASB**SFAS**No. 133 and 140” (SFAS No. 155). *In February 2006, the FASB issuedSFAS No. 155, which amends SFAS No. 133, *“Accounting for DerivativeInstruments and Hedging Activities”*and SFAS No. 140, *“Accounting for Transfers and Servicing of Financial Assets andExtinguishments of Liabilities,”*(SFAS No. 140).  SFAS No. 155 allows financial instrumentsthat have embedded derivatives to be accounted for at fair value atacquisition, at issuance, or when a previously recognized financial instrumentis subject to a remeasurement (new basis) event, on an instrument-by-

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instrument basis, incases in which a derivative would otherwise have to be bifurcated.  This Statement is effective for **Cinergy** for all financial instruments acquired, issued, orsubject to remeasurement after January 1, 2007, and for certain hybridfinancial instruments that have been bifurcated prior to the effective date,for which the effect is to be reported as a cumulative-effect adjustment tobeginning retained earnings.  **Cinergy** does not anticipate the adoption of SFAS No. 155will have any material impact on its consolidated results of operations, cashflows, or financial position.

*SFASNo. 156, “Accounting for Servicing of Financial Assets—an amendment of FASB**SFAS**No. 140” (SFAS No.156).*  In March 2006, the FASBissued SFAS No. 156, which amends SFAS No. 140.  SFAS No. 156 requiresrecognition of a servicing asset or liability when an entity enters intoarrangements to service financial instruments in certain situations.  Such servicing assets or servicing liabilitiesare required to be initially measured at fair value, if practicable.  SFAS No. 156 also allows an entity tosubsequently measure its servicing assets or servicing liabilities using eitheran amortization method or a fair value method. This Statement is effective for **Cinergy** and itssubsidiaries as of January 1, 2007, and must be applied prospectively, exceptthat where an entity elects to remeasure separately recognized existingarrangements and reclassify certain available-for-sale securities to tradingsecurities, any effects must be reported as a cumulative-effect adjustment toretained earnings.  **CG&E**retains servicing responsibilities for its role as collection agent forreceivables sold to Cinergy Receivables Company, LLC.  **Cinergy** iscurrently evaluating the impact of adopting SFAS No. 156 on its accountsreceivable sales program.  Currently, **Cinergy** is unable to predict whether the implementation ofthis accounting standard will have a material impact on its consolidatedresults of operations, cash flows, or financial position.

*FASB Interpretation No. 48, “Accountingfor Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109”(FIN 48)*   On July 13,2006, the FASB issued FIN 48, which interprets SFAS No. 109, *“Accounting for Income Taxes.” *FIN48 provides guidance for the recognition, measurement, classification, anddisclosure of the financial statement effects of a position taken or expectedto be taken in a tax return (“tax position”). The financial statement effects of a tax position must be recognizedwhen there is a likelihood of more than 50 percent that, based on technicalmerits, the position will be sustained upon examination and resolution of therelated appeals or litigation processes, if any.  A tax position that meets the recognitionthreshold must be measured initially and subsequently as the largest amount oftax benefit that is greater than 50 percent likely of being realized uponultimate settlement with a taxing authority. The Interpretation is effective for fiscal years beginning afterDecember 15, 2006.  **Cinergy**is currently evaluating the impact of adopting FIN 48, and cannot currentlyestimate the impact of FIN 48 on its consolidated results of operations, cashflows, or financial position.

*FSP No.FIN 46 (R)-6, “Determining the Variability to Be Considered In ApplyingInterpretation No. 46(R) (FSP No.-FIN 46(R)-6).”* In April 2006, the FASB staff issued FSP No.FIN 46 (R)-6 to address how to determine the variability to be considered inapplying FIN 46(R),*Consolidation ofVariable Interest Entities.* The variability that is considered in applyingFIN 46(R) affects the determination of whether the entity is a variableinterest entity (VIE), which interests are variable interests in the entity,and which party, if any, is the primary beneficiary of the VIE.  The variability affects the calculation ofexpected losses and expected residual returns. This guidance will be applied prospectively to all entities with which **Cinergy** first becomes involved or existing entities forwhich a reconsideration event occurs after July 1, 2006.  Given the prospective nature of thisguidance, **Cinergy** does not anticipate theadoption of FSP No. FIN 46 (R)-6 will have any material impact on itsconsolidated results of operations, cash flows, or financial position.  However, **Cinergy**continues to evaluate the ramifications to potential new arrangements alongwith any possible reconsideration events for existing arrangements.  In particular, the guidance is not clear howcertain types of power purchase or sale arrangements should be handled andwhether such arrangements create variability, absorb variability, or neutralizevariability.

***Emerging Issues Task Force (EITF) Issue No. 06-3,*****“*How Taxes Collected fromCustomers and Remitted to Governmental Authorities Should Be Presented in theIncome Statement (That Is, Gross versus Net Presentation) (Issue No. 06-3)*.”  In June 2006, the EITF reached a consensus onIssue No. 06-3 to address any tax assessed by a governmental authority that isdirectly imposed on a revenue-producing transaction between a seller and acustomer and may include, but are not limited to, sales, use, value added, andsome excise taxes.  For taxes within theIssue’s scope, the consensus requires that entities present such taxes oneither a gross (i.e., include in revenues and costs) or net (i.e., exclude fromrevenues) basis according to their accounting policies, which should bedisclosed.  If such taxes are reportedgross and are significant, entities should disclose the amounts of thosetaxes.  Disclosures may be made on anaggregate basis.  The consensus iseffective for**Cinergy**beginning January 1, 2007; however,**Cinergy****

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**andits subsidiaries have disclosed the impacts of certain excise taxes on theirrevenues.  (See Note 1(f)) **Cinergy**does not anticipate the adoption ofEITF Issue 06-3 will have any material impact on its consolidated results ofoperations.**

**18.          Income Tax Expense**

 

As of June 30, 2006, **Cinergy** had total provisions of approximately $58 million foruncertain tax positions, as compared to approximately $56 million as ofDecember 31, 2005, including interest. Management is not aware of any issues for open tax years that upon finalresolution are expected to have a material adverse effect on **Cinergy’s** consolidated results of operations, cash flows, orfinancial position.

The effective tax ratesfor **Cinergy** and **CG&E**for the three months ended June 30, 2006, March 31, 2006 and June 30, 2005, andsix months ended June 30, 2005 and the effective tax rates for **PSI** for three and six months ended June 30, 2006 and 2005are summarized in the following tables:

|              | ** ** | **Successor(1)**     | ** ** | ** ** | ** ** | **Predecessor(1)** | ** ** |
|--------------|------------|----------------------|------------|------------|------------|--------------------|------------|
| ** **   | ** ** | **Three Months**     | ** ** | ** ** | ** ** | **Three Months**   | ** ** | **Three Months** | ** ** | **Six Months** | ** ** |
| ** **   | ** ** | **Ended**            | ** ** | ** ** | ** ** | **Ended**          | ** ** | **Ended** | ** ** | **Ended** | ** ** |
| ** **   | ** ** | **June******30, 2006 | ** ** | ** ** | ** ** | **March 31, 2006** | ** ** | **June 30, 2005** | ** ** | **June 30, 2005** | ** ** |
|         |       |                 |       |       |       |               |       |   |   |   |   |
| **Cinergy**  | ** ** | **46.7**             | **%**      |       |       | 17.8               | %          | 25.1 | % | 21.5 | % |
| **CG&E** |       | **37.5**             |       |       |       | 36.5               |       | 21.8 |   | 34.6 |   |

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(1)    SeeNote 1(b) for additional information on Predecessor and Successor reporting.

 

|            | ** ** | **Three Months**  | ** ** | **Three Months**  | ** ** | **Six Months**    | ** ** | **Six Months**    | ** ** |
|------------|------------|-------------------|------------|-------------------|------------|-------------------|------------|-------------------|------------|
| ** ** | ** ** | **Ended**         | ** ** | **Ended**         | ** ** | **Ended**         | ** ** | **Ended**         | ** ** |
| ** ** | ** ** | **June 30, 2006** | ** ** | **June 30, 2005** | ** ** | **June 30, 2006** | ** ** | **June 30, 2005** | ** ** |
|       |       |              |       |              |       |              |       |              |       |
| **PSI**    | ** ** | **33.7**          | **%**      | 43.3              | %          | 37.9              | %          | 41.0              | %          |

 

The 2006 effective tax rate for **Cinergy**is expected to be approximately 40 percent. **Cinergy’s** higher effective tax rate forthe three months ended June 30, 2006 is caused by a deferred tax reconciliationadjustment recognized in the quarter which, when compared to full-year (insteadof quarter-only) income, will have an immaterial impact on **Cinergy’s**effective tax rate.

As a result of the DukeEnergy/**Cinergy** merger consummation, **Cinergy** and its subsidiaries entered into a new tax sharingagreement with Duke Energy, where the separate return method is used toallocate benefits to the subsidiaries whose investments or results ofoperations provide these tax benefits. This new agreement with Duke Energy supersedes the previous agreementbetween **Cinergy** and its subsidiaries.

**19.  Severance**

*(i)   Merger-RelatedObligations*

Several of **Cinergy’s**, **CG&E’s**, and**PSI’s** benefit plans contain “change-in-control”clauses that provide enhanced, and/or accelerated benefits to management levelemployees in the event of a qualifying transaction such as occurred with theconsummation of the merger with Duke Energy as discussed in Note 2.  These include benefits paid pursuant to theLTIP and certain payments under **Cinergy’s**Annual Incentive Plan.  Certain employeesare also entitled to additional severance and benefits in the event they areinvoluntarily terminated without “cause” or voluntarily terminate for “goodreason” (as such terms are defined in their employment agreements) inconnection with or following the merger.

On December 30, 2005, **Cinergy**entered into agreements with 28 employees toaccelerate the payment of a portion of the amounts discussed above, otherwiseexpected to be paid after December 31, 2005. Payments totaling $70 million were made in December pursuant to theseagreements.  The agreements amended theemployees’ employment agreements, and benefit plans in which they participate,to accelerate into 2005 the payment of certain 

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amounts that they havepreviously earned or are expected to earn after December 31, 2005.  Among other things, **Cinergy**prepaid performance shares under the LTIP and severance payments for certainindividuals.  In the event an employeewho received such amounts voluntarily terminated his or her employment prior tothe closing of the merger, the employee would have been obligated to repay allof the payments, and if the merger did not close on or prior to December 15,2006, the employee would have been obligated to repay half of the payments, toreflect his or her estimated tax liability upon receipt of the acceleratedpayments; in each case, less any amounts that the employee has already earnedthrough such date.  None of the 28employees invoked this payback provision.  By accelerating these payments, **Cinergy** mitigated taxes and related expenses that it wouldotherwise have incurred if it had waited until after 2005 to make thesepayments.

The majority of thesepayments were recorded as prepaid compensation in Current Assets - Other.  Approximately half of these payments wereaccounted for as a retention bonus and expensed over the period between January1, 2006 and the closing of the merger with Duke Energy.  The remainder, representing the half thatexecutives must repay if the merger was never consummated, remained in CurrentAssets - Other until the merger closed and were accounted for as part ofpurchase/push-down accounting.

In addition to paymentsmade in December, based on certain assumptions and using **Cinergy’s**,**CG&E’s**, and **PSI’s**current best estimates, **Cinergy’s**, **CG&E’s**, and **PSI’s** remainingcontractual obligations that were triggered upon merger consummation, includingseverance payments for those executives that have indicated their intention toterminate for “good reason”, were approximately $90 million ($42 million ofwhich is related to severance), and these amounts were accounted for in April2006 when the merger closed.  Thepayments will be paid in 2006 and, under certain circumstances, in subsequentyears.  These payments only includedamounts payable pursuant to existing benefit arrangements, employmentcontracts, and severance accepted by employees and contingent on the mergerclosing.  These payments do not includethe value of accelerated stock options and retirement benefits earned prior tothe merger.

Below is a table showingthe reconciliation of changes in the severance provision from April 1, 2006 toJune 30, 2006:

|                | ** ** | **Balance at  April 1, 2006** | ** ** | **Cash  Reductions** | ** ** | **Balance at  June 30, 2006** | ** ** |
|----------------|------------|-------------------------------|------------|----------------------|------------|-------------------------------|------------|
| ** **     | ** ** | **(in millions)**             | ** ** |
| * *       | * *   | * *                      | * *   | *** ***         | * *   | * *                      | * *   |
| **Cinergy**(1) | ** ** | $                             | 42         | ** **           | $          | (17                           | )          | **$** | **25** | ** ** |
| **CG&E**   | ** ** | —                        | ** ** | —               | ** ** | **—**                    | ** ** |
| **PSI**        | ** ** | 1                             | ** ** | —               | ** ** | **1**                         | ** ** |
|                |            |                               |            |                      |            |                               |            |  |  |  |

 

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| (1) |   | Of the $42 million recorded to severance during the  second quarter of 2006, $38 million was recorded in goodwill, $3 million was  charged to operating expenses, and $1 million was recorded in regulatory  assets. |
|-----|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

** **

**20.   SubsequentEvents**

For information on subsequent events related to debtand credit facilities, see Note 6 and for regulatory matters, see Notes 13(c)and 13(e).

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

 

The followingdiscussion should be read in conjunction with the accompanying financialstatements and related notes included elsewhere in this report and the combinedForm 10-K for the year ended December 31, 2005 (2005 10-K).  **Cinergy**, TheCincinnati Gas & Electric Company (**CG&E**), andPSI Energy, Inc. (**PSI**) havereclassified certain prior-year amounts in the financial statements of **Cinergy**, **CG&E**, and **PSI** to conform to current presentation (See Note 1(c) of the “Notes to Consolidated FinancialStatements” in “Item 1. Financial Statements” for further details).  The following discussions of results are notnecessarily indicative of the results to be expected in any future period.

### **CINERGY MERGER WITH DUKE ENERGY**

On April 3,2006, in accordance with their previously announced merger agreement, DukeEnergy****Corporation (Old Duke Energy) and **Cinergy Corp.** merged into wholly owned subsidiaries of DukeEnergy Holding Corp. (Duke Energy HC), resulting in Duke Energy HC becoming theparent entity.  In connection with theclosing of the merger transactions, Duke Energy HC changed its name to DukeEnergy Corporation (“New Duke Energy” or “Duke Energy”) and Old Duke Energyconverted into a limited liability company named Duke Power Company LLC.  As a result of the merger transactions, eachoutstanding share of **Cinergy** commonstock was converted into 1.56 shares of Duke Energy common stock, and eachshare of common stock of Old Duke Energy was converted into one share of DukeEnergy common stock, which resulted in the issuance of approximately1.2 billion shares of Duke Energy common stock.  Both Old Duke Energy and New Duke Energy are referredto as Duke Energy herein.

The merger hasbeen accounted for under the purchase method of accounting with Duke Energytreated as the acquirer for accounting purposes.  As a result, the assets and liabilities of **Cinergy** were recorded at their respective fair values as ofApril 3, 2006.  Except for an adjustmentrelated to pension and other postretirement benefit obligations, as mandated byStatement of Financial Accounting Standards (SFAS) No. 87, “*Employers’ Accounting for Pension*” and SFAS No. 106, “*Employers’ Accounting for Postretirement Benefits Other Than Pensions*,”the accompanying consolidated financial statements do not reflect any pro formaadjustments related to **Cinergy’s**, **CG&E’s**, and **PSI’s** regulatedoperations that are accounted for pursuant to SFAS No. 71, “*Accounting for the Effects of Certain Types of Regulation*,(SFAS No. 71)” which are comprised of **CG&E’s**regulated transmission and distribution, **PSI** andULH&P.  Under the rate setting andrecovery provisions currently in place for these regulated operations whichprovide revenues derived from cost, the fair values of the individual tangibleand intangible assets and liabilities are considered to approximate theircarrying values.

The fair values ofthe assets acquired and liabilities assumed are preliminary and are subject tochange as valuation analyses are finalized and remaining information on thefair values is received.  However, **Cinergy** does not currently anticipate any such changes tohave a material impact on their consolidated results of operations, cash flows,or financial position.

In connection withthe merger, Duke Energy issued 1.56 shares of Duke Energy common stock for eachoutstanding share of **Cinergy** commonstock, which resulted in the issuance of approximately 313 million shares ofDuke Energy common stock.  Based on themarket price of Duke Energy common stock during the period, including the twotrading days before, through the two trading days after, May 9, 2005, thedate Duke Energy and **Cinergy**announced the merger, the transaction is valued at approximately $9.1 billionand has resulted in preliminary goodwill for **Cinergy**and **CG&E** of approximately $4.3 billionand $2.2 billion, respectively.  Theamount of goodwill results from significant strategic and financial benefitsexpected to be realized by **Cinergy** and **CG&E** including:

·                  increasedfinancial strength and flexibility;

·                  stronger utilitybusiness platform;

·                  greater scaleand fuel diversity, as well as improved operational efficiencies for themerchant generation business;

·                  broadenedelectric distribution platform;

·                  improvedreliability and customer service through the sharing of best practices;

·                  increased scaleand scope of the electric and gas businesses with stand-alone strength;

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·                  complementarypositions in the Midwestern United States (Midwest);

·                  greater customerdiversity;

·                  combinedexpertise; and

·                  significant cost savings synergies.

As discussed inNote 1(b) of the “Notes toConsolidated Financial Statements” in “Item 1. Financial Statements”,purchase accounting impacts, including goodwill recognition, have been “pusheddown” to **Cinergy** and **CG&E**,resulting in the assets and liabilities of **Cinergy** and **CG&E** being recorded at their respective fair values asof April 3, 2006.

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### **2006 QUARTERLY RESULTS OF OPERATIONS –CINERGY**

#### **Basis of Presentation**

The Results ofOperations discussion for **Cinergy** ispresented in a reduced disclosure format in accordance with General InstructionH(2)(a) of Form 10-Q.

#### **Resultsof Operations and Variances**

#### **Summary of Results as of June 30 (inmillions)**

|                                                         | ** ** | **Three Months Ended** | ** ** |
|---------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                              | ** ** | **June 30,**                | ** ** |
| ** **                                              | ** ** | **Successor(1)**                 | ** ** | ** ** | ** ** | **Predecessor(1)** | ** ** | **Increase** | ** ** |
| ** **                                              | ** ** | **2006**                         | ** ** | ** ** | ** ** | **2005** | ** ** | **(Decrease)** | ** ** |
| Operating  revenues                                     |       | **$**                            | **1,308**  | ** ** |   |   | $ | 1,051 |   | $ | 257 |   |
| Operating  expenses                                     |       | **1,237**                        | ** ** |   |   | 966 |   | 271 |   |
| (Losses) Gains  on Sales of Other Assets and Other, net |       | **(5**                           | **)**      |   |   | 40 |   | (45 | ) |
| Operating income                                        |       | **66**                           | ** ** |   |   | 125 |   | (59 | ) |
| Equity in  earnings of unconsolidated affiliates        |       | **6**                            | ** ** |   |   | 13 |   | (7 | ) |
| Other income and  expenses, net                         |       | **23**                           | ** ** |   |   | 14 |   | 9 |   |
| Interest expense                                        |       | **82**                           | ** ** |   |   | 68 |   | 14 |   |
| Income tax  expense from continuing operations          |       | **6**                            | ** ** |   |   | 21 |   | (15 | ) |
| (Loss) income  from discontinued operations, net of tax |       | **(6**                           | **)**      |   |   | (12 | ) | 6 |   |
| Net income                                              |       | **$**                            | **1**      | ** ** |   |   | $ | 51 |   | $ | (50 | ) |

 

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(1)                                  See Note 1(b) of the “Notes to Consolidated Financial Statements” in “Item 1.Financial Statements” for additional information on Predecessor andSuccessor reporting.

 

#### **Net Income**

The 98 percentdecrease in **Cinergy’s** net income was primarilydue to the following factors:

##### ***Operating Revenues***

Increasedoperating revenues were primarily due to the following factors:

·                  Increased retailoperating revenues from **CG&E’s**Market-Based Standard Service Offer (MBSSO), primarily due to itsimplementation for residential customers in Ohio beginning in January 2006 andincreased revenues from non-residential customers related to the timing ofcollection of fuel and other costs;

·                  An increase infuel revenues at **PSI** driven by new ratesimplemented in second quarter 2006 to begin making up for the under-collectionof fuel costs from customers in 2005 and first quarter of 2006;

·                  An increase in **CG&E’s** retail distribution base rate implemented inJanuary 2006;

·                  The contributionby Duke Energy of its five Midwest generating plants to **CG&E**in the second quarter of 2006; and

·                  Mark-to-market (MTM) gains on **CG&E** generation power hedges.

Partiallyoffsetting these increases were the following factors:

·                  A decline insales of synthetic fuel due to the facilities being idle for most of the secondquarter of 2006;

·                  Milder weatherin 2006 as compared to 2005; and

·                  Temporary rate reductions associatedwith regulatory approvals of the Duke Energy merger.

##### ***Operating Expenses***

Increasedoperating expenses were primarily due to the following factors:

·                  Increased fuelcosts associated with the increases in **CG&E** retailrevenues discussed above;

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·                  An increase infuel costs at **PSI** driven by the under-collectionof fuel costs from customers in 2005 and first quarter of 2006;

·                  Purchaseaccounting adjustments and related amortization recorded in the second quarterof 2006;

·                  Operatingexpenses related to the contribution by Duke Energy of its five Midwestgenerating plants to **CG&E** in thesecond quarter of 2006; and

·                  MTM losses on **CG&E**generation fuel hedges.

Partiallyoffsetting these increases was a decrease in costs of fuel resold due to thesynthetic fuel facilities being idle for most of the second quarter of 2006.

##### ***(Losses) Gains onSales of Other Assets and Other, net***

The decrease in(Losses) Gains on Sales of Other Assets and Other, net is due to the impacts ofpurchase accounting resulting in emission allowances being reflected on thebalance sheet at their estimated fair values as of April 1, 2006.  Prior to the impacts of purchase accounting,these emission allowances had a lower carrying value, resulting in larger gainson sales.

##### ***Income Tax Expensefrom Continuing Operations***

The increase in **Cinergy’s** effective tax rate is primarily due to lowersynthetic fuel tax credits expected to be realized in 2006 as compared to 2005due to the high price of oil.

***DiscontinuedOperations, net of tax***

The (Loss) Income fromDiscontinued Operations, net of tax, for 2006 and 2005 is primarily related tothe marketing and trading operations, which were classified as discontinuedoperations in connection with the June 2006 announcement to sell CinergyMarketing & Trading, LP (Marketing & Trading), and Cinergy Canada,Inc., as well as associated contracts, to Fortis.

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#### **Basis of Presentation**

#### **Results of Operations and Variances**

#### **Summary of Results as of March 31 (inmillions)**

|                                                                    | ** ** | **Three Months Ended  March 31,** | ** ** |
|--------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                         | ** ** | **Predecessor**                                  | ** ** |
| ** **                                                         | ** ** | ** **                                       | ** ** | ** ** | ** ** | **Increase** | ** ** |
| ** **                                                         | ** ** | **2006**                                         | ** ** | **2005** | ** ** | **(Decrease)** | ** ** |
| ** **                                                         | ** ** | ** **                                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Operating  revenues                                                |       | **$**                                            | **1,576**  | ** ** | $ | 1,249 |   | $ | 327 |   |
| Operating  expenses                                                |       | **1,443**                                        | ** ** | 1,094 |   | 349 |   |
| Gains on Sales  of Other Assets and Other, net                     |       | **26**                                           | ** ** | 31 |   | (5 | ) |
| Operating income                                                   |       | **159**                                          | ** ** | 186 |   | (27 | ) |
| Equity in  earnings of unconsolidated affiliates                   |       | **4**                                            | ** ** | 5 |   | (1 | ) |
| Other income and  expenses, net                                    |       | **16**                                           | ** ** | 3 |   | 13 |   |
| Interest expense                                                   |       | **84**                                           | ** ** | 64 |   | 20 |   |
| Preferred  dividend requirement of subsidiaries                    |       | **—**                                       | ** ** | (1 | ) | 1 |   |
| Income tax  expense from continuing operations                     |       | **17**                                           | ** ** | 25 |   | (8 | ) |
| (Loss) income  from discontinued operations, net of tax            |       | **4**                                            | ** ** | 13 |   | (9 | ) |
| Cumulative  effect of a change in accounting principle, net of tax |       | **(3**                                           | **)**      | — |   | (3 | ) |
| Net income                                                         |       | **$**                                            | **79**     | ** ** | $ | 117 |   | $ | (38 | ) |

 

#### **Net Income**

The 32 percentdecrease in net income was primarily due to the following factors:

##### ***Operating Revenues***

Increasedoperating revenues were primarily due to the following factors:

·                  An increase inretail operating revenues from **CG&E’s**MBSSO, primarily due to its implementation for residential customers in Ohiobeginning in January 2006;

·                  Increasedrevenues from non-residential customers related to the timing of collection offuel, purchased power, and emission allowance costs;

·                  MTM gains on **CG&E** generation power hedges;

·                  An increase in **CG&E’s** retail distribution base rate implemented in January2006;

·                  Increasedrevenues at the synthetic fuel facilities, primarily related to a new facilitypurchased in the second quarter of 2005; and

·                  The timing of gas cost recovery.

Partiallyoffsetting these increases was a decrease due to milder weather in the firstquarter of 2006, as compared to 2005.

##### ***Operating Expenses***

Increasedoperating expenses were primarily due to the following factors:

·                  An increase incosts of fuel sold at the synthetic fuel facilities, primarily related to a newfacility purchased in the second quarter of 2005;

·                  Costs incurredin the first quarter of 2006 as a result of the merger with Duke Energy; and

·                  MTM losses on **CG&E** generation fuel hedges.

 

#####  

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#####  

##### ***Interest Expense***

The increase in Interest Expense is primarily due to interest on a taxcontingency and an increase in average long-term debt outstanding.

***DiscontinuedOperations, net of tax***

The (Loss) Income fromDiscontinued Operations, net of tax, for 2006 and 2005 is primarily related tothe marketing and trading operations, which were classified as discontinuedoperations in connection with the June 2006 announcement to sell Marketing& Trading, and Cinergy Canada, Inc., as well as associated contracts, toFortis.

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### **2006 QUARTERLY RESULTS OF OPERATIONS -CG&E**

#### **Basis of Presentation**

The Results ofOperations discussion for **CG&E** ispresented in a reduced disclosure format in accordance with General InstructionH(2)(a) of Form 10-Q.

#### **Results of Operations and Variances**

#### **Summary of Results as of June 30 (inmillions)**

|                                                         | ** ** | **Three Months Ended** | ** ** |
|---------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                              | ** ** | **June 30,**                | ** ** |
| ** **                                              | ** ** | **Successor(1)**                 | ** ** | ** ** | ** ** | **Predecessor(1)** | ** ** | **Increase** | ** ** |
| ** **                                              | ** ** | **2006**                         | ** ** | ** ** | ** ** | **2005** | ** ** | **(Decrease)** | ** ** |
| Operating  revenues                                     |       | **$**                            | **696**    | ** ** |   |   | $ | 550 |   | $ | 146 |   |
| Operating  expenses                                     |       | **650**                          | ** ** |   |   | 513 |   | 137 |   |
| (Losses) Gains  on Sales of Other Assets and Other, net |       | **(5**                           | **)**      |   |   | 39 |   | (44 | ) |
| Operating income                                        |       | **41**                           | ** ** |   |   | 76 |   | (35 | ) |
| Other income and  expenses, net                         |       | **7**                            | ** ** |   |   | 4 |   | 3 |   |
| Interest expense                                        |       | **28**                           | ** ** |   |   | 23 |   | 5 |   |
| Income tax  expense from continuing operations          |       | **7**                            | ** ** |   |   | 12 |   | (5 | ) |
| (Loss) income  from discontinued operations, net of tax |       | **(20**                          | **)**      |   |   | 9 |   | (29 | ) |
| Net income (loss)                                       |       | **$**                            | **(7**     | **)** |   |   | $ | 54 |   | $ | (61 | ) |

 

----

(1)                                  See Note 1(b) of the “Notes to ConsolidatedFinancial Statements” in “Item 1. Financial Statements” for additional information on Predecessorand Successor reporting.

 

#### **Net Income**

The 113 percent decreasein **CG&E’s** net income was primarily dueto the following factors:

##### ***Operating Revenues***

Increasedoperating revenues were primarily due to the following factors:

·                  Increased retailoperating revenues from the MBSSO, primarily due to its implementation forresidential customers in Ohio beginning in January 2006 and increased revenuesfrom non-residential customers related to the timing of collection of fuel andother costs;

·                  An increase inthe retail distribution base rate implemented in January 2006;

·                  The contributionby Duke Energy of its five Midwest generating plants in the second quarter of2006; and

·                  MTM gains on generation power hedges.

These increaseswere slightly offset by temporary rate reductions due to regulatory approvalsof the Duke Energy merger.

##### ***Operating Expenses***

Increasedoperating expenses were primarily due to the following factors:

·                  Increased fuelcosts associated with the increases in retail revenues discussed above;

·                  Purchaseaccounting adjustments and related amortization recorded in the second quarterof 2006;

·                  Operatingexpenses related to the contribution by Duke Energy of its five Midwestgenerating plants in the second quarter of 2006; and

·                  MTM losses ongeneration fuel hedges.

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##### ***(Losses) Gains onSales of Other Assets and Other, net***

The decrease in(Losses) Gains on Sales of Other Assets and Other, net is due to the impacts ofpurchase accounting resulting in emission allowances being reflected on thebalance sheet at their estimated fair values as of April 1, 2006.  Prior to the impacts of purchase accounting,these emission allowances had a lower carrying value, resulting in larger gainson sales.

##### ***DiscontinuedOperations, net of tax***

The (Loss) Incomefrom Discontinued Operations, net of tax, for 2006 and 2005 is primarilyrelated to the marketing and trading operations, which were classified asdiscontinued operations in connection with the June 2006 announcement to sell certainof **CG&E’s** trading contracts, and itsassociated contracts, to Fortis.

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#### **Basis of Presentation**

#### **Resultsof Operations and Variances**

#### **Summary of Results as of March 31 (inmillions)**

|                                                         | ** ** | **Three Months Ended** | ** ** |
|---------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                              | ** ** | **March 31,**               | ** ** |
| ** **                                              | ** ** | **Predecessor**                  | ** ** |
| ** **                                              | ** ** | ** **                       | ** ** | ** ** | ** ** | **Increase** | ** ** |
| ** **                                              | ** ** | **2006**                         | ** ** | **2005** | ** ** | **(Decrease)** | ** ** |
| Operating  revenues                                     |       | **$**                            | **963**    | ** ** | $ | 751 |   | $ | 212 |   |
| Operating  expenses                                     |       | **781**                          | ** ** | 649 |   | 132 |   |
| Gains (Losses)  on Sales of Other Assets and Other, net |       | **26**                           | ** ** | 31 |   | (5 | ) |
| Operating income                                        |       | **208**                          | ** ** | 133 |   | 75 |   |
| Other income and  expenses, net                         |       | **8**                            | ** ** | 4 |   | 4 |   |
| Interest expense                                        |       | **30**                           | ** ** | 23 |   | 7 |   |
| Income tax  expense from continuing operations          |       | **68**                           | ** ** | 47 |   | 21 |   |
| (Loss) Income from  discontinued operations, net of tax |       | **(2**                           | **)**      | 18 |   | (20 | ) |
| Net income                                              |       | **$**                            | **116**    | ** ** | $ | 85 |   | $ | 31 |   |

 

#### **Net Income**

The 36 percentincrease in net income was primarily due to the following factors:

##### ***Operating Revenues***

Increasedoperating revenues were primarily due to the following factors:

·                  An increase inretail operating revenues from the MBSSO, primarily due to its implementationfor residential customers in Ohio beginning in January 2006;

·                  Increasedrevenues from non-residential customers related to the timing of collection offuel, purchased power, and emission allowance costs;

·                  MTM gains ongeneration power hedges;

·                  An increase inthe average price received per megawatt hour (MWh), primarily due to the returnof certain retail customers to full electric service; and

·                  An increase in the retaildistribution base rate implemented in January 2006.

Partiallyoffsetting these increases was a decrease due to milder weather in the firstquarter of 2006, as compared to 2005.

##### ***Operating Expenses***

Increasedoperating expenses were primarily due to the following factors:

·                  MTM losses ongeneration fuel hedges; and

·                  An increase in Operation,maintenance, and other expenses associated with various increases in operatingexpenses, including significant merger related costs in the first quarter of2006.

##### ***DiscontinuedOperations, net of tax***

The (Loss) Incomefrom Discontinued Operations, net of tax, for 2006 and 2005 is primarilyrelated to the marketing and trading operations, which were classified asdiscontinued operations in connection with the June 2006 announcement to sell certainof **CG&E’s** trading contracts, and itsassociated contracts, to Fortis.

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### **2006 YEAR TO DATE RESULTS OF OPERATIONS - PSI**

#### **Basis of Presentation**

The Results ofOperations discussion for **PSI** ispresented in a reduced disclosure format in accordance with General InstructionH(2)(a) of Form 10-Q.

#### **Results of Operations and Variances**

#### **Summary of Results (in millions)**

|                                                | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------------|------------|--------------------------------|------------|
| ** **                                     | ** ** | **June 30,**              | ** ** |
| ** **                                     | ** ** | ** **                     | ** ** | ** ** | ** ** | **Increase** | ** ** |
| ** **                                     | ** ** | **2006**                       | ** ** | **2005** | ** ** | **(Decrease)** | ** ** |
| Operating  revenues                            |       | **$**                          | **1,036**  | ** ** | $ | 854 |   | $ | 182 |   |
| Operating  expenses                            |       | **943**                        | ** ** | 668 |   | 275 |   |
| Operating income                               |       | **93**                         | ** ** | 186 |   | (93 | ) |
| Other income and  expenses, net                |       | **22**                         | ** ** | 10 |   | 12 |   |
| Interest expense                               |       | **65**                         | ** ** | 52 |   | 13 |   |
| Income tax  expense from continuing operations |       | **19**                         | ** ** | 59 |   | (40 | ) |
| Net income                                     |       | **$**                          | **31**     | ** ** | $ | 85 |   | $ | (54 | ) |

 

#### **Net Income**

The 64 percentdecrease in **PSI’s** net income was primarily dueto the following factors:

##### ***Operating Revenues***

Increasedoperating revenues were primarily due to the following factors:

·                  An increase in fuel revenues drivenby new rates implemented in second quarter 2006 to begin making up for theunder-collection of fuel costs from customers in 2005 and first quarter of2006.

These increaseswere partially offset by the following:

·                  A decline inretail revenues due to milder weather in 2006 as compared to 2005; and

·                  Temporary rate reductions associatedwith regulatory approvals of the Duke Energy merger.

##### ***Operating Expenses***

Increasedoperating expenses were primarily due to the following factors:

·                  An increase infuel costs driven by as the under-collection of fuel costs from customers in2005 and first quarter of 2006;

·                  An increase inoperation, maintenance and other primarily due to the following factors:

·                  Scheduledmaintenance at certain facilities was accelerated in 2006 as a result of themilder weather; and

·                  Costsincurred in the first quarter of 2006 as a result of the merger with DukeEnergy.

##### ***Income Tax Expense***

The decrease inincome tax expense was primarily due to a decrease in Income from ContinuingOperations Before Income Taxes.

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## ** **

## **ITEM 4. CONTROLS AND PROCEDURES**

#### **Evaluationof Disclosure Controls and Procedures**

Disclosure controls and procedures are controls and other proceduresthat are designed to ensure that information required to be disclosed by **Cinergy**, The Cincinnati Gas & Electric Company (**CG&E**), and PSI Energy, Inc. (**PSI**)in the reports they file or submit under the Exchange Act is recorded,processed, summarized, and reported within the time periods specified by 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 **Cinergy,CG&E**, and **PSI** in thereports they file or submit under the Exchange Act is accumulated andcommunicated to management, including the chief executive officer and chieffinancial officer, as appropriate, to allow timely decisions regarding requireddisclosure.

 

Under the supervision and with the participation of management, includingthe chief executive officer and chief financial officer,  **Cinergy, CG&E**,and **PSI** have evaluated the effectiveness oftheir disclosure controls and procedures (as such term is defined in Rule13a-15(e) and 15d-15(e) under the Exchange Act) as of June 30, 2006, and, basedupon this evaluation, the chief executive officer and chief financial officerhave concluded that these controls and procedures are effective in providingreasonable assurance that information requiring disclosure is recorded, processed,summarized, and reported within the timeframe specified by the SEC’s rules andforms.

 

#### **Changes in Internal Control over FinancialReporting**

Under the supervision and with the participation of management,including the chief executive officer and chief financial officer,  **Cinergy, CG&E**,and **PSI** have evaluated changes in internalcontrol over financial reporting (as such term is defined in Rules 13a-15(f)and 15d-15(f) under the Exchange Act) that occurred during the fiscal quarterended June 30, 2006 and, other than the Duke Energy and **Cinergy**merger discussed below, found no change that has materially affected, or isreasonably likely to materially affect, internal control over financialreporting.

 

On April 3, 2006, the previously announced merger between Duke Energyand **Cinergy** was consummated.  Duke Energy is currently in the process ofintegrating **Cinergy’s** operations and will beconducting control reviews pursuant to Section 404 of the Sarbanes-Oxley Act of2002.  See Notes 1, 2, and 13 of the “Notesto Consolidated Financial Statements” in “Item 1. Financial Statements” foradditional information relating to the merger.

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##  

## **PART II. OTHER INFORMATION**

## **ITEM 1. LEGAL PROCEEDINGS**

### **CLEANAIR ACT (CAA) LAWSUIT**

In November 1999, and through subsequent amendments, theUnited States brought a lawsuit in the United States Federal District Court forthe Southern District of Indiana against **Cinergy**,**CG&E**, and **PSI** alleging various violations of theCAA.  Specifically, the lawsuit allegesthat **Cinergy**, **CG&E**, and **PSI** violated the CAA by not obtaining Prevention ofSignificant Deterioration (PSD), Non-Attainment New Source Review (NSR), andOhio and Indiana State Implementation Plan (SIP) permits for various projectsat **Cinergy’s**, **CG&E’s**, and **PSI’s** owned and co-owned generating stations.  Additionally, the suit claims that **Cinergy**, **CG&E**,and **PSI** violated an AdministrativeConsent Order entered into in 1998 between the Environmental Protection Agency(EPA) and **Cinergy** relating toalleged violations of Ohio’s SIP provisions governing particulate matter atUnit 1 at **CG&E’s** W.C. BeckjordStation.  The suit seeks (1) injunctiverelief to require installation of pollution control technology on variousgenerating units at **CG&E’s**W.C. Beckjord and Miami Fort Stations, and **PSI’s**Cayuga, Gallagher, Wabash River, and Gibson Stations, and (2) civil penaltiesin amounts of up to $27,500 per day for each violation.  In addition, three Northeast states and twoenvironmental groups have intervened in the case.  In August 2005, the district court issued aruling regarding the emissions test that it will apply to **Cinergy**, **CG&E**,and **PSI** at the trial of thecase.  Contrary to **Cinergy’s**, **CG&E’s**, and **PSI’s**argument, the district court ruled that in determining whether a project wasprojected to increase annual emissions, it would not hold hours of operationconstant.  However, the district courtsubsequently certified the matter for interlocutory appeal to the SeventhCircuit Court of Appeals, which has accepted the appeal.  Oral arguments were held before the SeventhCircuit Court of Appeals in June 2006. In February 2006, the district court ruled that in carrying its burdenof proof, the defendant can look to industry practice in proving a particular projectwas routine.  The district court hasremoved the trial from the calendar and will reset a trial date, if necessary,after the Seventh Circuit Court of Appeals rules.  Notwithstanding the appeal, there are anumber of other legal issues currently before the district court judge.

In March 2000, the United States also filed in the UnitedStates District Court for the Southern District of Ohio an amended complaint ina separate lawsuit alleging violations of the CAA relating to PSD, NSR, andOhio SIP requirements regarding various generating stations, including agenerating station operated by Columbus Southern Power Company (CSP) andjointly-owned by CSP, The Dayton Power and Light Company (DP&L), and **CG&E**. The EPA is seeking injunctive relief and civil penalties of up to$27,500 per day for each violation.  Thissuit is being defended by CSP.  In April2001, the United States District Court for the Southern District of Ohio inthat case ruled that the Government and the intervening plaintiff environmentalgroups cannot seek monetary damages for alleged violations that occurred priorto November 3, 1994; however, they are entitled to seek injunctive relief forsuch alleged violations.  Neither partyappealed that decision.  This matter washeard in trial in July 2005.  A decisionis pending.

In addition, **Cinergy**and **CG&E** have been informed byDP&L that in June 2000, the EPA issued a Notice of Violation (NOV) toDP&L for alleged violations of PSD, NSR, and Ohio SIP requirements at astation operated by DP&L and jointly-owned by DP&L, CSP, and **CG&E**. The NOV indicated the EPA may (1) issue an order requiring compliancewith the requirements of the Ohio SIP, or (2) bring a civil action seekinginjunctive relief and civil penalties of up to $27,500 per day for eachviolation.  In September 2004, MarilynWall and the Sierra Club brought a lawsuit against **CG&E**,DP&L and CSP for alleged violations of the CAA at this same generatingstation.  This case is currently indiscovery in front of the same judge who has the CSP case.

At this time, **Cinergy**, **CG&E**, and **PSI** are unableto predict whether resolution of these matters would have a material effect ontheir financial position or results of operations**.**** ****Cinergy**, **CG&E**,and **PSI** intend to vigorously defendagainst these allegations.

### **CARBONDIOXIDE (CO****2) LAWSUIT**

In July 2004, the statesof Connecticut, New York, California, Iowa, New Jersey, Rhode Island, Vermont,Wisconsin, and the City of New York brought a lawsuit in the United StatesDistrict Court for the Southern District of New York against **Cinergy**, American Electric Power Company, Inc., American Electric PowerService 

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Corporation, The SouthernCompany, Tennessee Valley Authority, and Xcel Energy Inc.  That same day, a similar lawsuit was filed inthe United States District Court for the Southern District of New York againstthe same companies by Open Space Institute, Inc., Open Space Conservancy, Inc.,and The Audubon Society of New Hampshire. These lawsuits allege that the defendants’ emissions of CO2 from the combustion of fossil fuels atelectric generating facilities contribute to global warming and amount to apublic nuisance.  The complaints alsoallege that the defendants could generate the same amount of electricity whileemitting significantly less CO2.  The plaintiffs are seeking an injunction requiringeach defendant to cap its CO2 emissionsand then reduce them by a specified percentage each year for at least adecade.  In September 2005, the districtcourt granted the defendants’ motion to dismiss the lawsuit.  The plaintiffs have appealed this ruling tothe Second Circuit Court of Appeals. Oral argument was held before the Second Circuit Court of Appeals inJune 2006.  **Cinergy**is not able to predict whether resolution of thesematters would have a material effect on its financial position or results of operations.

### **ZIMMERGENERATING STATION (ZIMMER STATION) LAWSUIT**

In November 2004, acitizen of the Village of Moscow, Ohio, the town adjacent to **CG&E’s** Zimmer Station, brought a purported class actionin the United States District Court for the Southern District of Ohio seekingmonetary damages and injunctive relief against **CG&E**for alleged violations of the CAA, the Ohio SIP, and Ohio laws against nuisanceand common law nuisance.  The plaintiffs have filed a number of additionalnotices of intent to sue and two lawsuits raising claims similar to those inthe original claim.  One lawsuit wasdismissed on procedural grounds, and the remaining two have beenconsolidated.  The plaintiff filed amotion for class certification, which is fully briefed and pendingdecision.  At this time, **CG&E** cannot predictwhether the outcome of this matter will have a material impact on itsfinancial position or results of operations. **CG&E** intends to defend this lawsuit vigorously in court.

### **MANUFACTUREDGAS PLANT (MGP) SITES**

Coaltar residues, related hydrocarbons, and various metals have been found in atleast 23 sites that **PSI** or itspredecessors previously owned and sold in a series of transactions withNorthern Indiana Public Service Company (NIPSCO) and Indiana Gas Company, Inc.(IGC).  The 23 sites are in the processof being studied and will be remediated, if necessary.  In 1998 NIPSCO, IGC, and **PSI** entered into Site Participation andCost Sharing Agreements to allocate liability and responsibilities among them.  Thus far, **PSI**has primary responsibility for investigating, monitoring, and, if necessary,remediating nine of these sites.  InDecember 2003, **PSI** entered into avoluntary remediation plan with the state of Indiana, providing a formalframework for the investigation and cleanup of the nine sites.  The Indiana Department of EnvironmentalManagement oversees investigation and cleanup of all of these sites.

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** and compensate **PSI** for its costs of investigating,preventing, mitigating, and remediating damage to property and paying claims relatedto MGP sites; or (2) pay **PSI’s**cost of defense.  **PSI**settled, in principle, its claims with all but one of the insurance carriers inJanuary 2005 prior to commencement of the trial.  With respect to the lone insurance carrier, ajury returned a verdict against **PSI** in February2005.  **PSI**has appealed this decision.  At thistime, **PSI** cannot predict the outcome of thislitigation, including the outcome of the appeal.

**PSI**has accrued costs related to investigation, remediation, and groundwatermonitoring for those sites where such costs are probable and can be reasonablyestimated.  **PSI**will continue to investigate and remediate the sites as outlined in thevoluntary remediation plan.  Asadditional facts become known and investigation is completed, **PSI** will assess whether the likelihood of incurringadditional costs becomes probable.  Untilall investigation and remediation is complete, **PSI**is unable to determine the overall impact on its financial position or resultsof operations.

**CG&E**has performed site assessments on certain of its sites where MGP activities arebelieved to have occurred at some point in the past and have found no imminentrisk to the environment.  At this time, **CG&E** cannot predict whetherinvestigation and/or remediation will be required in the future at any of thesesites.

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### **ASBESTOSCLAIMS LITIGATION**

**PSI**and **CG&E**have been named as defendants or co-defendants in lawsuits related to asbestosat their electric generating stations. Currently, there are approximately 130 pending lawsuits (the majority ofwhich are **PSI** cases).  In these lawsuits, plaintiffs claim to havebeen exposed to asbestos-containing products in the course of their work asoutside contractors in the construction and maintenance of **PSI** and**CG&E** generating stations.  The plaintiffs further claim that as theproperty owner of the generating stations,**PSI** and **CG&E** shouldbe held liable for their injuries and illnesses based on an alleged duty towarn and protect them from any asbestos exposure.  The impact on **PSI’s** and **CG&E’s**financial position or results of operations of these cases to date has not beenmaterial.

Of these lawsuits, onecase filed against **PSI** has beentried to verdict.  The jury returned averdict against **PSI** on anegligence claim and a verdict for **PSI**on punitive damages.  **PSI** appealed this decision up to theIndiana Supreme Court.  In October 2005,the Indiana Supreme Court upheld the jury’s verdict.  **PSI** paid thejudgment of approximately $630,000 in the fourth quarter of 2005.  In addition, **PSI** has settled over 150 other claims for amounts whichneither individually nor in the aggregate are material to **PSI’s** financial position or results ofoperations.  Based on estimates undervarying assumptions, concerning uncertainties, such as, among others:  (i) the number of contractors potentiallyexposed to asbestos during construction or maintenance of **PSI**generating plants; (ii) the possible incidence of various illnesses amongexposed workers, and (iii) the potential settlement costs without federal orother legislation that addresses asbestos tort actions, **PSI**estimates that the range of reasonably possible exposure in existing and futuresuits over the next 50 years could range from an immaterial amount toapproximately $60 million, exclusive of costs to defend these cases.  This estimated range of exposure may changeas additional settlements occur and claims are made in Indiana and more caselaw is established.

**CG&E**hasbeen named in fewer than 10 cases and as a result****hasvirtually no settlement history for asbestos cases.  Thus, **CG&E**is not able to reasonably estimate the range of potential loss from current orfuture lawsuits.  However, potentialjudgments or settlements of existing or future claims could be material to **CG&E**.

### **DUNAVANWASTE SUPERFUND SITE**

In July and October 2005,**PSI** received notices from the EPA thatit has been identified as a de minimus potentially responsible party under theComprehensive Environmental Response, Compensation, and Liability Act at theDunavan Waste Oil Site in Oakwood, Vermilion County, Illinois.  At this time, **PSI**does not have any further information regarding the scope of potentialliability associated with this matter.

### **ONTARIO,CANADA LAWSUIT**

**Cinergy**, **CG&E**, and **PSI** understandthat a class action lawsuit was filed in Superior Court in Ontario, Canadaagainst **Cinergy**, **CG&E**,and **PSI** and approximately 20 other utilityand power generation companies alleging various claims relating toenvironmental emissions from coal-fired power generation facilities in theUnited States and Canada and damages of approximately $50 billion, withcontinuing damages in the amount of approximately $4 billion annually.  **Cinergy**, **CG&E**, and **PSI** understandthat the lawsuit also claims entitlement to punitive and exemplary damages inthe amount of $1 billion.  **Cinergy**, **CG&E**, and **PSI** have not yet been served in this lawsuit; however, ifserved, **Cinergy**, **CG&E**,and **PSI** intend to defend this lawsuitvigorously in court.  At this time, **Cinergy**, **CG&E**, and **PSI** are not able to predict whether resolution of thismatter would have a material effect on **Cinergy’s**, **CG&E’s**, and **PSI’s** financialposition or results of operations.

### **HURRICANEKATRINA LAWSUIT**

On April 19, 2006, **Cinergy** was named in the third amended complaint of apurported class action filed in the United States District Court for theSouthern District of Mississippi. Plaintiffs claim that **Cinergy**, alongwith numerous other utilities, oil companies, coal companies and chemicalcompanies, is liable for damages relating to losses suffered by victims of HurricaneKatrina.  Plaintiffs claim that **Cinergy’s**, and others’, greenhouse gas emissions contributedto the frequency and intensity of storms such as Hurricane Katrina.  **Cinergy** has notbeen served with this lawsuit; however, if served **Cinergy**intends to defend this lawsuit vigorously in court.  At this time, **Cinergy**is not able to predict whether resolution of this matter would have a materialeffect on **Cinergy’s** financial position or resultsof operations.

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##  

## **ITEM 1A. RISK FACTORS**

In addition to the otherinformation set forth in this report, you should carefully consider the factorsdiscussed in Part I, “Item 1A. Risk Factors” in **Cinergy’s**,**CG&E’s**, and **PSI’s**Annual Report on Form 10-K for the year ended December 31, 2005, which couldmaterially affect **Cinergy’s**, **CG&E’s**, and **PSI’s**,financial condition or future results. The risks described in **Cinergy’s**, **CG&E’s**, and **PSI’s** AnnualReport on Form 10-K are not the only risks facing **Cinergy**,**CG&E**, and **PSI**.  Additional risks and uncertainties notcurrently known to **Cinergy**, **CG&E**, and **PSI** or that **Cinergy**, **CG&E**, and **PSI** currently deem to be immaterial also may materiallyadversely affect **Cinergy’s**, **CG&E’s**,and **PSI’s** financial condition and/oroperating results.

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##  

## **ITEM 6. EXHIBITS**

The documents listedbelow are being filed, or have previously been filed, on behalf of **Cinergy Corp.**, **CG&E**, and **PSI**and are incorporated herein by reference from the documents indicated and madea part hereof.  Exhibits not identifiedas previously filed are filed herewith:
| Exhibit  Designation | ** ** | **Registrant**                  | ** ** | **Nature of Exhibit**                                                                                                                                                                                                                              | ** ** | **Previously Filed as  Exhibit to:**             |
|----------------------|------------|---------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------|
|                 |       |                            |       |                                                                                                                                                                                                                                               |       |                                             |
| 10.1                 | ** ** | **Cinergy Corp.**               |       | Consulting Agreement, dated March 31, 2006, between  Michael J. Cyrus and **Cinergy Corp.**                                                                                                                                                        |       | **Cinergy Corp.** Form 8-K, filed  April 6, 2006 |
|                 | ** ** | ** **                      |       |                                                                                                                                                                                                                                               |       |                                             |
| 10.2                 | ** ** | **Cinergy Corp.**               |       | Summary of Amendment to Employment Agreement of  James E. Rogers, Michael J. Cyrus, Marc E. Manly, Lynn J. Good and James L.  Turner.                                                                                                              |       | **Cinergy Corp.** Form 8-K, filed  April 6, 2006 |
|                 | ** ** | ** **                      |       |                                                                                                                                                                                                                                               |       |                                             |
| 10.3                 | ** ** | **Cinergy Corp.**               |       | Agreement, dated March 31, 2006, between James E.  Rogers and **Cinergy Corp.**                                                                                                                                                                    |       | **Cinergy Corp.** Form 8-K, filed  April 6, 2006 |
|                 | ** ** | ** **                      |       |                                                                                                                                                                                                                                               |       |                                             |
| 10.4                 | ** ** | **Cinergy Corp.**               |       | Purchase and Sale Agreement by and among Cinergy  Capital & Trading, Inc., as Seller, and Fortis Bank, S.A./N.V.,  as Buyer, dated as of June 26, 2006.                                                                         |       | **Cinergy Corp.** Form 8-K, filed  June 30, 2006 |
|                 | ** ** | ** **                      |       |                                                                                                                                                                                                                                               |       |                                             |
| 10.5                 | ** ** | **Cinergy Corp. CG&E  PSI** |       | Amended and Restated Credit Agreement, dated as of  June 29, 2006, among **Cinergy Corp., CG&E,  PSI,** ULH&P, The Banks Listed Herein, Barclays Bank PLC, as  Administrative Agent, and JP Morgan Chase Bank, N.A., as Syndication Agent. |       |                                             |
|                 | ** ** | ** **                      |       |                                                                                                                                                                                                                                               |       |                                             |
| 10.6                 | ** ** | **CG&E**                    |       | Keepwell Agreement, dated April 10, 2006, between  Duke Capital LLC and **CG&E.**                                                                                                                                                              |       | **CG&E** Form 8-K, filed April  14, 2006     |
|                 | ** ** | ** **                      |       |                                                                                                                                                                                                                                               |       |                                             |
| 10.7                 |       | **PSI**                         |       | Tenth Supplemental Indenture, dated as of  June 9, 2006, between **PSI**, and the  Bank of New York Trust Company, N.A. (successor trustee to Fifth Third Bank),  as Trustee.                                                            |       | **PSI** Form 8-K, filed June 15,  2006           |
|                 | ** ** | ** **                      |       | ** **                                                                                                                                                                                                                                         |       |                                             |
| 18.1                 | ** ** | **PSI**                         |       | Letter regarding change in accounting principles.                                                                                                                                                                                                  |       |                                             |
|                 | ** ** | ** **                      |       |                                                                                                                                                                                                                                               |       |                                             |
| **Certificates**     | ** ** | ** **                      |       |                                                                                                                                                                                                                                               |       |                                             |
|                 | ** ** | ** **                      |       |                                                                                                                                                                                                                                               |       |                                             |
| 31.a                 | ** ** | **Cinergy Corp.**               |       | Certification by David L. Hauser pursuant to Rule  13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as adopted  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                              |       |                                             |
|                 | ** ** | ** **                      |       |                                                                                                                                                                                                                                               |       |                                             |
| 31.b                 | ** ** | **Cinergy Corp.**               |       | Certification by Steven K. Young pursuant to Rule  13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as adopted  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                              |       |                                             |
|                 | ** ** | ** **                      |       |                                                                                                                                                                                                                                               |       |                                             |
| 31.c                 | ** ** | **CG&E  PSI**               |       | Certification by James L. Turner pursuant to Rule  13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as adopted  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                              |       |                                             |
|                 | ** ** | ** **                      |       |                                                                                                                                                                                                                                               |       |                                             |
| 31.d                 | ** ** | **CG&E  PSI**               |       | Certification by Myron L. Caldwell pursuant to Rule  13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as adopted  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                            |       |                                             |
|                 | ** ** | ** **                      |       |                                                                                                                                                                                                                                               |       |                                             |
| 32.a                 | ** ** | **Cinergy Corp.**               |       | Certification by David L. Hauser pursuant to 18  U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002.                                                                                                       |       |                                             |
|                 | ** ** | ** **                      |       |                                                                                                                                                                                                                                               |       |                                             |
| 32.b                 | ** ** | **Cinergy. Corp.**              |       | Certification by Steven K. Young pursuant to 18  U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002.                                                                                                       |       |                                             |
|                 | ** ** | ** **                      |       |                                                                                                                                                                                                                                               |       |                                             |
| 32.c                 | ** ** | **CG&E  PSI**               |       | Certification by James L. Turner pursuant to 18  U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002.                                                                                                       |       |                                             |
|                 | ** ** | ** **                      |       |                                                                                                                                                                                                                                               |       |                                             |
| 32.d                 | ** ** | **CG&E  PSI**               |       | Certification by Myron L. Caldwell pursuant to 18  U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002.                                                                                                     |       |                                             |

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##  

## **SIGNATURES**

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,Cinergy Corp., The Cincinnati Gas & Electric Company, and PSI Energy, Inc.each has duly caused this report to be signed on its behalf by the undersigned,thereunto duly authorized.
|                   |                                      | CINERGY CORP.                 |              |
|------------------------|-------------------------------------------|-------------------------------|-------------------|
|                   |                                      | Registrants                   |              |
|                   |                                      |                          |              |
|                   |                                      |                          |              |
| Date: August 11,  2006 |                                      | /s/                           | David L. Hauser   |   |
|                   |                                      |                          | David L. Hauser   |   |
|                   |                                      | (duly authorized  officer     |              |
|                   |                                      | and                           |              |
|                   |                                      | principal executive  officer) |              |
|                   |                                      |                          |              |
|                   |                                      |                          |              |
| Date: August 11,  2006 |                                      | /s/                           | Steven K. Young   |   |
|                   |                                      |                          | Steven K. Young   |   |
|                   |                                      | (duly authorized  officer     |              |
|                   |                                      | and                           |              |
|                   |                                      | principal  financial officer) |              |
|                   |                                      |                          |              |
|                   |                                      |                          |              |
|                   | THE CINCINNATI GAS & ELECTRIC COMPANY |
|                   |                                      | PSI ENERGY, INC.              |              |
|                   |                                      | Registrants                   |              |
|                   |                                      |                          |              |
|                   |                                      |                          |              |
| Date: August 11,  2006 |                                      | /s/                           | Myron L. Caldwell |   |
|                   |                                      |                          | Myron L. Caldwell |   |
|                   |                                      | (duly authorized  officer     |              |
|                   |                                      | and                           |              |
|                   |                                      | principal  financial officer) |              |
|                   |                                      |                          |              |
|                   |                                      |                          |              |
| Date: August 11,  2006 |                                      | /s/                           | Dwight L. Jacobs  |   |
|                   |                                      |                          | Dwight L. Jacobs  |   |
|                   |                                      | (duly authorized  officer     |              |
|                   |                                      | and                           |              |
|                   |                                      | chief accounting  officer)    |              |

 

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