**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**W**ASHINGTON**, D.C. 20549**

 

**FORM 10-Q**

 

**(Mark One)**

** **

**ý****   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE SECURITIES EXCHANGE ACT OF 1934**

** **

For the quarterly periodended **March 31, 2005**

** **

**or**

** **

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

** **

For the transition periodfrom         to         

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

 

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.

Yes ý  No o

 

 

 

----

 

Indicate by check markwhether each registrant is an accelerated filer (as defined in Rule 12b-2 ofthe Act).

 

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

 

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

 

**The Union Light, Heat and PowerCompany** meets the conditions set forth in General InstructionH(1)(a) and (b) of Form 10-Q and is therefore filing its company specificinformation with the reduced disclosure format specified in General InstructionH(2) of Form 10-Q.

 

As of April 30, 2005,shares of common stock outstanding for each registrant were as listed:

 
| **Registrant**                                | ** ** | **Description**                                 | ** ** | **Shares**  |
|-----------------------------------------------|------------|-------------------------------------------------|------------|-------------|
|                                          |       |                                            |       |        |
| **Cinergy Corp.**                             |       | Par value $.01 per  share                       |       | 198,327,844 |
|                                          |       |                                            |       |        |
| **The Cincinnati Gas & Electric Company** |       | Par value $8.50 per  share                      |       | 89,663,086  |
|                                          |       |                                            |       |        |
| **PSI Energy, Inc.**                          |       | Without par value,  stated value $.01 per share |       | 53,913,701  |
|                                          |       |                                            |       |        |
| **The Union Light, Heat and Power Company**   |       | Par value $15.00 per  share                     |       | 585,333     |

 

 

2

----

 

**TABLE OF CONTENTS**

 
| **Item**Number | ** **                                                                                      | ** ** |
|----------------|-------------------------------------------------------------------------------------------------|------------|
|           | **PART I.  FINANCIAL INFORMATION**                                                         |       |
|           |                                                                                            |       |
| 1              | **Financial Statements**                                                                        |       |
|           | **Cinergy Corp.  and Subsidiary Companies**                                                |       |
|           | Condensed  Consolidated Statements of Income                                                    |       |
|           | Condensed  Consolidated Balance Sheets                                                          |       |
|           | Condensed  Consolidated Statements of Changes in Common Stock Equity                            |       |
|           | Condensed  Consolidated Statements of Cash Flows                                                |       |
|           | *** ***                                                                                    |       |
|           | **The  Cincinnati Gas & Electric Company and Subsidiary Companies**                         |       |
|           | Condensed  Consolidated Statements of Income and Comprehensive Income                           |       |
|           | Condensed  Consolidated Balance Sheets                                                          |       |
|           | Condensed  Consolidated Statements of Cash Flows                                                |       |
|           |                                                                                            |       |
|           | **PSI Energy,  Inc. and  Subsidiary Company**                                                   |       |
|           | Condensed  Consolidated Statements of Income and Comprehensive Income                           |       |
|           | Condensed  Consolidated Balance Sheets                                                          |       |
|           | Condensed  Consolidated Statements of Cash Flows                                                |       |
|           |                                                                                            |       |
|           | **The Union  Light, Heat and Power Company**                                                    |       |
|           | Condensed Statements of  Income                                                                 |       |
|           | Condensed Balance Sheets                                                                        |       |
|           | Condensed Statements  of Cash Flows                                                             |       |
|           |                                                                                            |       |
|           | **Notes to  Condensed Financial Statements**                                                    |       |
|           | ** **                                                                                      |       |
|           | **Cautionary  Statements Regarding Forward-Looking Information**                                |       |
|           |                                                                                            |       |
| 2              | **Management’s  Discussion and Analysis of Financial Condition and Results of Operations** |       |
|           | Recent Developments                                                                             |       |
|           | Executive Summary                                                                               |       |
|           | 2005 Quarterly Results  of Operations - Cinergy                                                 |       |
|           | 2005  Quarterly Results of Operations - CG&E                                                |       |
|           | 2005  Quarterly Results of Operations - PSI                                                     |       |
|           | 2005  Quarterly Results of Operations - ULH&P                                               |       |
|           | Liquidity and Capital  Resources                                                                |       |
|           | Future Expectations/Trends                                                                      |       |
|           | Market Risk Sensitive  Instruments                                                              |       |
|           | Accounting Matters                                                                              |       |
|           |                                                                                            |       |
| 3              | **Quantitative  and Qualitative Disclosures About Market Risk**                                 |       |
|           |                                                                                            |       |
| 4              | **Controls and  Procedures  **                                                        |       |
|           |                                                                                            |       |
|           | **PART II.  OTHER INFORMATION**                                                            |       |
|           | ** **                                                                                      |       |
| 1              | **Legal Proceedings**                                                                           |       |
|           | ** **                                                                                      |       |
| 2              | **Unregistered  Sales of Equity Securities and Use of Proceeds**                                |       |
|           | ** **                                                                                      |       |
| 4              | **Submission  of Matters to a Vote of Security Holders**                                        |       |
|           | ** **                                                                                      |       |
| 5              | **Other Information**                                                                           |       |
|           | ** **                                                                                      |       |
| 6              | **Exhibits **                                                                              |       |
|           |                                                                                            |       |
|           | **Signatures**                                                                                  |       |

 

3

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**CINERGY CORP.**

**ANDSUBSIDIARY COMPANIES**

 

4

----

 

**CINERGY CORP.**

**CONDENSED CONSOLIDATED STATEMENTSOF INCOME**

** **
| ** **                                                | ** ** | **Quarter Ended  March 31**                              | ** **  |
|-----------------------------------------------------------|------------|----------------------------------------------------------|-------------|
| ** **                                                | ** ** | **2005**                                                 | ** **  | 2004 | ** ** |
| ** **                                                | ** ** | *(in thousands, except per  share amounts)  (unaudited)* | ** **  |
| ** **                                                |       | ** **                                               |        |   |   |
| **Operating  Revenues**                                   |       | ** **                                               |        |   |   |
| Electric                                                  |       | **$**                                                    | **926,297** |   | $ | 858,436 |   |
| Gas                                                       |       | **313,096**                                              |        | 350,846 |   |
| Other                                                     |       | **104,856**                                              |        | 79,376 |   |
| **Total  Operating Revenues**                             |       | **1,344,249**                                            |        | 1,288,658 |   |
|                                                      |       | ** **                                               |        |   |   |
| **Operating  Expenses**                                   |       | ** **                                               |        |   |   |
| Fuel, emission  allowances, and purchased power           |       | **304,963**                                              |        | 293,890 |   |
| Gas purchased                                             |       | **208,600**                                              |        | 223,516 |   |
| Costs of fuel  resold                                     |       | **85,843**                                               |        | 57,462 |   |
| Operation and  maintenance                                |       | **331,708**                                              |        | 310,836 |   |
| Depreciation                                              |       | **126,486**                                              |        | 104,857 |   |
| Taxes other than  income taxes                            |       | **78,932**                                               |        | 82,247 |   |
| **Total  Operating Expenses**                             |       | **1,136,532**                                            |        | 1,072,808 |   |
|                                                      |       | ** **                                               |        |   |   |
| **Operating  Income**                                     |       | **207,717**                                              |        | 215,850 |   |
|                                                      |       | ** **                                               |        |   |   |
| **Equity  in Earnings of Unconsolidated Subsidiaries**    |       | **4,836**                                                |        | 2,748 |   |
| **Miscellaneous  Income (Expense) – Net**            |       | **2,340**                                                |        | (15,508 | ) |
| **Interest  Expense**                                     |       | **64,064**                                               |        | 67,395 |   |
| **Preferred  Dividend Requirements of Subsidiaries**      |       | **858**                                                  |        | 858 |   |
|                                                      |       | ** **                                               |        |   |   |
| **Income  Before Taxes**                                  |       | **149,971**                                              |        | 134,837 |   |
| ** **                                                |       | ** **                                               |        |   |   |
| **Income  Taxes**                                         |       | **32,615**                                               |        | 31,822 |   |
| ** **                                                |       | ** **                                               |        |   |   |
| **Net  Income**                                           |       | **$**                                                    | **117,356** |   | $ | 103,015 |   |
| ** **                                                |       | ** **                                               |        |   |   |
| **Average  Common Shares Outstanding – Basic**       |       | **195,647**                                              |        | 179,261 |   |
|                                                      |       | ** **                                               |        |   |   |
| **Earnings  Per Common Share – Basic****(Note 8)**   | ** ** | **$**                                                    | **0.60**    | ** ** | $ | 0.57 |   |
| ** **                                                | ** ** | ** **                                               | ** **  |   |   |
| **Average  Common Shares Outstanding – Diluted**     | ** ** | **196,712**                                              | ** **  | 181,926 |   |
| ** **                                                | ** ** | ** **                                               | ** **  |   |   |
| **Earnings  Per Common Share – Diluted****(Note 8)** | ** ** | **$**                                                    | **0.60**    | ** ** | $ | 0.57 |   |
| ** **                                                | ** ** | ** **                                               | ** **  |   |   |
| **Cash  Dividends Declared Per Common Share**             | ** ** | **$**                                                    | **0.48**    | ** ** | $ | 0.47 |   |

 

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

 

5

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**CINERGY CORP.**

**CONDENSED CONSOLIDATED BALANCESHEETS**

 

**ASSETS**

 
| ** **                                                                                                                          | ** ** | **March 31  2005**                    | ** **     | December  31  2004 | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|----------------|--------------------|------------|
| ** **                                                                                                                          | ** ** | *(dollars in thousands)  (unaudited)* | ** **     |
| * *                                                                                                                            | * *   | *** ***                          | * *       | * *           | * *   |
| **Current  Assets**                                                                                                                 |       | ** **                            |           |               |       |
| Cash and cash  equivalents                                                                                                          |       | **$**                                 | **124,108**    |               | $          | 164,541 |   |
| Notes  receivable, current                                                                                                          |       | **126,984**                           |           | 214,513            |       |
| Accounts  receivable less accumulated provision for doubtful accounts of $5,000 at  March 31, 2005, and $5,514 at December 31, 2004 |       | **985,262**                           |           | 1,061,140          |       |
| Fuel, emission  allowances, and supplies                                                                                            |       | **390,064**                           |           | 444,750            |       |
| Energy risk  management current assets                                                                                              |       | **450,770**                           |           | 381,146            |       |
| Prepayments and  other                                                                                                              |       | **234,303**                           |           | 174,624            |       |
| **Total  Current Assets**                                                                                                           |       | **2,311,491**                         |           | 2,440,714          |       |
|                                                                                                                                |       | ** **                            |           |               |       |
| **Property,  Plant, and Equipment – at Cost**                                                                                  |       | ** **                            |           |               |       |
| Utility plant in  service                                                                                                           |       | **10,136,415**                        |           | 10,076,468         |       |
| Construction  work in progress                                                                                                      |       | **429,817**                           |           | 333,687            |       |
| **Total  Utility Plant**                                                                                                            |       | **10,566,232**                        |           | 10,410,155         |       |
| Non-regulated property,  plant, and equipment                                                                                       |       | **4,734,719**                         |           | 4,700,009          |       |
| Accumulated  depreciation                                                                                                           |       | **5,257,604**                         |           | 5,180,699          |       |
| **Net  Property, Plant, and Equipment**                                                                                             |       | **10,043,347**                        |           | 9,929,465          |       |
|                                                                                                                                |       | ** **                            |           |               |       |
| **Other  Assets**                                                                                                                   |       | ** **                            |           |               |       |
| Regulatory  assets                                                                                                                  |       | **1,016,347**                         |           | 1,030,333          |       |
| Investments in  unconsolidated subsidiaries                                                                                         |       | **495,195**                           |           | 513,675            |       |
| Energy risk  management non-current assets                                                                                          |       | **239,028**                           |           | 138,787            |       |
| Notes  receivable, non-current                                                                                                      |       | **188,391**                           |           | 193,857            |       |
| Other  investments                                                                                                                  |       | **123,654**                           |           | 125,367            |       |
| Restricted funds  held in trust                                                                                                     |       | **341,126**                           |           | 358,006            |       |
| Goodwill and  other intangible assets                                                                                               |       | **154,293**                           |           | 132,752            |       |
| Other                                                                                                                               |       | **118,260**                           |           | 119,361            |       |
| **Total  Other Assets**                                                                                                             |       | **2,676,294**                         |           | 2,612,138          |       |
|                                                                                                                                |       | ** **                            |           |               |       |
| **Total  Assets**                                                                                                                   |       | **$**                                 | **15,031,132** |               | $          | 14,982,317 |   |

 

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

 

6

----

 

**CINERGY CORP.**

**CONDENSED CONSOLIDATED BALANCESHEETS**

 

**LIABILITIESAND SHAREHOLDERS’ EQUITY**

 
| ** **                                                                                                                                                                                                                                                      | ** ** | **March 31  2005**                    | ** **     | December  31  2004 | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|----------------|--------------------|------------|
| ** **                                                                                                                                                                                                                                                      | ** ** | *(dollars in thousands)  (unaudited)* | ** **     |
| * *                                                                                                                                                                                                                                                        | * *   | * *                              | * *       | * *           | * *   |
| **Current  Liabilities**                                                                                                                                                                                                                                        |       | ** **                            | ** **     |               |       |
| Accounts payable                                                                                                                                                                                                                                                |       | **$**                                 | **1,272,124**  | ** **         | $          | 1,348,576 |   |
| Accrued taxes                                                                                                                                                                                                                                                   |       | **251,493**                           | ** **     | 216,804            |       |
| Accrued interest                                                                                                                                                                                                                                                |       | **61,000**                            | ** **     | 54,473             |       |
| Notes payable  and other short-term obligations (Note 3)                                                                                                                                                                                                        |       | **449,844**                           | ** **     | 958,910            |       |
| Long-term debt  due within one year                                                                                                                                                                                                                             |       | **222,748**                           | ** **     | 219,967            |       |
| Energy risk  management current liabilities                                                                                                                                                                                                                     |       | **427,161**                           | ** **     | 310,741            |       |
| Other                                                                                                                                                                                                                                                           |       | **129,366**                           | ** **     | 171,188            |       |
| **Total  Current Liabilities**                                                                                                                                                                                                                                  |       | **2,813,736**                         | ** **     | 3,280,659          |       |
|                                                                                                                                                                                                                                                            |       | ** **                            | ** **     |               |       |
| **Non-Current  Liabilities**                                                                                                                                                                                                                                    |       | ** **                            | ** **     |               |       |
| Long-term debt                                                                                                                                                                                                                                                  |       | **4,240,579**                         | ** **     | 4,227,741          |       |
| Deferred income  taxes                                                                                                                                                                                                                                          |       | **1,574,111**                         | ** **     | 1,597,120          |       |
| Unamortized  investment tax credits                                                                                                                                                                                                                             |       | **97,524**                            | ** **     | 99,723             |       |
| Accrued pension  and other postretirement benefit costs                                                                                                                                                                                                         |       | **710,788**                           | ** **     | 688,277            |       |
| Regulatory  liabilities                                                                                                                                                                                                                                         |       | **563,873**                           | ** **     | 557,419            |       |
| Energy risk  management non-current liabilities                                                                                                                                                                                                                 |       | **247,127**                           | ** **     | 127,340            |       |
| Other                                                                                                                                                                                                                                                           |       | **224,599**                           | ** **     | 225,298            |       |
| **Total  Non-Current Liabilities**                                                                                                                                                                                                                              |       | **7,658,601**                         | ** **     | 7,522,918          |       |
|                                                                                                                                                                                                                                                            |       | ** **                            | ** **     |               |       |
| **Commitments  and Contingencies**                                                                                                                                                                                                                              |       | ** **                            | ** **     |               |       |
| ** **                                                                                                                                                                                                                                                      |       | ** **                            | ** **     |               |       |
| **Total  Liabilities**                                                                                                                                                                                                                                          |       | **10,472,337**                        | ** **     | 10,803,577         |       |
|                                                                                                                                                                                                                                                            |       | ** **                            | ** **     |               |       |
| **Cumulative  Preferred Stock of Subsidiaries**                                                                                                                                                                                                                 |       | ** **                            | ** **     |               |       |
| Not subject to  mandatory redemption                                                                                                                                                                                                                            |       | **62,818**                            | ** **     | 62,818             |       |
|                                                                                                                                                                                                                                                            |       | ** **                            | ** **     |               |       |
| **Common  Stock Equity**                                                                                                                                                                                                                                        |       | ** **                            | ** **     |               |       |
| Common stock -  $.01 par value; authorized shares – 600,000,000; issued shares – 198,128,516  at March 31, 2005, and 187,653,506 at December 31, 2004; outstanding shares –  197,989,654 at March 31, 2005, and 187,524,229 at December 31, 2004 |       | **1,981**                             | ** **     | 1,877              |       |
| Paid-in capital                                                                                                                                                                                                                                                 |       | **2,919,758**                         | ** **     | 2,559,715          |       |
| Retained  earnings                                                                                                                                                                                                                                              |       | **1,638,704**                         | ** **     | 1,613,340          |       |
| Treasury shares  at cost – 138,862 shares at March 31, 2005, and 129,277 shares at December  31, 2004                                                                                                                                                      |       | **(4,635**                            | **)**          | (4,336             | )          |
| Accumulated  other comprehensive loss                                                                                                                                                                                                                           |       | **(59,831**                           | **)**          | (54,674            | )          |
| **Total  Common Stock Equity**                                                                                                                                                                                                                                  |       | **4,495,977**                         | ** **     | 4,115,922          |       |
|                                                                                                                                                                                                                                                            |       | ** **                            | ** **     |               |       |
| **Total  Liabilities and Shareholders’ Equity**                                                                                                                                                                                                            |       | **$**                                 | **15,031,132** | ** **         | $          | 14,982,317 |   |
|                                                                                                                                                                                                                                                                 |            |                                       |                |                    |            |  |  |  |

 

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

 

7

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**CINERGY CORP.**

**CONDENSED CONSOLIDATED STATEMENTSOF CHANGES IN COMMON STOCK EQUITY**

 
| ** **                                                      | ** ** | **Common  Stock**                                  | ** ** | **Paid-in  Capital** | ** ** | **Retained  Earnings** | ** ** | **Treasury  Stock** | ** **    | **Accumulated  Other  Comprehensive  Income (Loss)** | ** ** | **Total  Common  Stock  Equity** | ** ** |
|-----------------------------------------------------------------|------------|----------------------------------------------------|------------|----------------------|------------|------------------------|------------|---------------------|---------------|------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                      | ** ** | *(dollars in thousands, except per share amounts)* | ** ** |
| ** **                                                      | ** ** | *(unaudited)*                                      | ** ** |
| * *                                                        | * *   | * *                                           | * *   | * *             | * *   | * *               | * *   | * *            | * *      | * *                                             | * *   | * *                         | * *   |
| **Quarter  Ended March 31, 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** | ** ** |
| **Comprehensive  income:**                                      | ** ** | ** **                                         | ** ** | ** **           | ** ** | ** **             | ** ** | ** **          | ** **    | ** **                                           | ** ** | ** **                       | ** ** |
| **Net  income**                                                 | ** ** | ** **                                         | ** ** | ** **           | ** ** | **117,356**            | ** ** | ** **          | ** **    | ** **                                           | ** ** | **117,356**                      | ** ** |
| **Other  comprehensive income, net of tax effect of $2,431**    | ** ** | ** **                                         | ** ** | ** **           | ** ** | ** **             | ** ** | ** **          | ** **    | ** **                                           | ** ** | ** **                       | ** ** |
| **Foreign  currency translation adjustment**                    | ** ** | ** **                                         | ** ** | ** **           | ** ** | ** **             | ** ** | ** **          | ** **    | **(5,838**                                           | **)**      | **(5,838**                       | **)**      |
| **Unrealized  loss on investment trusts**                       | ** ** | ** **                                         | ** ** | ** **           | ** ** | ** **             | ** ** | ** **          | ** **    | **(1,175**                                           | **)**      | **(1,175**                       | **)**      |
| **Cash  flow hedges**                                           | ** ** | ** **                                         | ** ** | ** **           | ** ** | ** **             | ** ** | ** **          | ** **    | **1,856**                                            | ** ** | **1,856**                        | ** ** |
| **Total  comprehensive income**                                 | ** ** | ** **                                         | ** ** | ** **           | ** ** | ** **             | ** ** | ** **          | ** **    | ** **                                           | ** ** | **112,199**                      | ** ** |
| ** **                                                      | ** ** | ** **                                         | ** ** | ** **           | ** ** | ** **             | ** ** | ** **          | ** **    | ** **                                           | ** ** | ** **                       | ** ** |
| **Issuance  of common stock – net (10,475,010 shares)**    | ** ** | **104**                                            | ** ** | **353,753**          | ** ** | ** **             | ** ** | ** **          | ** **    | ** **                                           | ** ** | **353,857**                      | ** ** |
| **Treasury  shares purchased (9,585 shares)**                   | ** ** | ** **                                         | ** ** | ** **           | ** ** | ** **             | ** ** | **(299**            | **)**         | ** **                                           | ** ** | **(299**                         | **)**      |
| **Dividends  on common stock ($0.48 per share)**                | ** ** | ** **                                         | ** ** | ** **           | ** ** | **(91,879**            | **)**      | ** **          | ** **    | ** **                                           | ** ** | **(91,879**                      | **)**      |
| **Other**                                                       | ** ** | ** **                                         | ** ** | **6,290**            | ** ** | **(113**               | **)**      | ** **          | ** **    | ** **                                           | ** ** | **6,177**                        | ** ** |
| ** **                                                      | ** ** | ** **                                         | ** ** | ** **           | ** ** | ** **             | ** ** | ** **          | ** **    | ** **                                           | ** ** | ** **                       | ** ** |
| **Ending  balance at March 31, 2005 (197,989,654 shares)**      | ** ** | **$**                                              | **1,981**  | ** **           | **$**      | **2,919,758**          | ** ** | **$**               | **1,638,704** | ** **                                           | **$**      | **(4,635**                       | **)**      | **$** | **(59,831** | **)** | **$** | **4,495,977** | ** ** |
| ** **                                                      | ** ** | ** **                                         | ** ** | ** **           | ** ** | ** **             | ** ** | ** **          | ** **    | ** **                                           | ** ** | ** **                       | ** ** |
| Quarter Ended  March 31, 2004                                   |       |                                               |       |                 |       |                   |       |                |          |                                                 |       |                             |       |
|                                                            |       |                                               |       |                 |       |                   |       |                |          |                                                 |       |                             |       |
| Balance at  January 1, 2004 (178,336,854 shares)                |       | $                                                  | 1,784      |                 | $          | 2,195,985              |       | $                   | 1,551,003     |                                                 | $          | (3,255                           | )          | $ | (44,835 | ) | $ | 3,700,682 |   |
| Comprehensive  income:                                          |       |                                               |       |                 |       |                   |       |                |          |                                                 |       |                             |       |
| Net income                                                      |       |                                               |       |                 |       | 103,015                |       |                |          |                                                 |       | 103,015                          |       |
| Other  comprehensive income (loss), net of tax effect of $(914) |       |                                               |       |                 |       |                   |       |                |          |                                                 |       |                             |       |
| Foreign currency  translation adjustment                        |       |                                               |       |                 |       |                   |       |                |          | 986                                                  |       | 986                              |       |
| Unrealized gain  on investment trusts                           |       |                                               |       |                 |       |                   |       |                |          | 755                                                  |       | 755                              |       |
| Cash flow hedges                                                |       |                                               |       |                 |       |                   |       |                |          | (275                                                 | )          | (275                             | )          |
| Total  comprehensive income                                     |       |                                               |       |                 |       |                   |       |                |          |                                                 |       | 104,481                          |       |
|                                                            |       |                                               |       |                 |       |                   |       |                |          |                                                 |       |                             |       |
| Issuance of  common stock – net (1,226,916 shares)         |       | 13                                                 |       | 21,082               |       |                   |       |                |          |                                                 |       | 21,095                           |       |
| Treasury shares  purchased (18,853 shares)                      |       |                                               |       |                 |       |                   |       | (607                | )             |                                                 |       | (607                             | )          |
| Dividends on  common stock ($0.47 per share)                    |       |                                               |       |                 |       | (83,987                | )          |                |          |                                                 |       | (83,987                          | )          |
| Other                                                           |       |                                               |       | 3,681                |       | (36                    | )          |                |          |                                                 |       | 3,645                            |       |
|                                                            |       |                                               |       |                 |       |                   |       |                |          |                                                 |       |                             |       |
| Ending balance  at March 31, 2004 (179,544,917 shares)          |       | $                                                  | 1,797      |                 | $          | 2,220,748              |       | $                   | 1,569,995     |                                                 | $          | (3,862                           | )          | $ | (43,369 | ) | $ | 3,745,309 |   |

 

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

 

8

----

 

**CINERGY CORP.**

**CONDENSED CONSOLIDATED STATEMENTSOF CASH FLOWS**

 
| ** **                                                                            | ** ** | **Quarter Ended  March 31** | ** **  |
|---------------------------------------------------------------------------------------|------------|-----------------------------|-------------|
| ** **                                                                            | ** ** | **2005**                    | ** **  | 2004 | ** ** |
| ** **                                                                            | ** ** | *(dollars in thousands)*    | ** **  |
| ** **                                                                            | ** ** | *(unaudited)*               | ** **  |
| ** **                                                                            |       |                        |        |   |   |
| **Cash  Flows from Operations**                                                       |       |                        |        |   |   |
| Operating  Activities                                                                 |       |                        |        |   |   |
| Net income                                                                            |       | **$**                       | **117,356** | ** ** | $ | 103,015 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities:    |       | ** **                  | ** **  |   |   |
| Depreciation                                                                          |       | **126,486**                 | ** **  | 104,857 |   |
| Loss on  impairment or disposal of subsidiaries and investments, net                  |       | **6,818**                   | ** **  | 22,766 |   |
| Change in net  position of energy risk management activities                          |       | **66,342**                  | ** **  | (7,030 | ) |
| Deferred income  taxes and investment tax credits – net                          |       | **(20,258**                 | **)**       | 11,627 |   |
| Equity in  earnings of unconsolidated subsidiaries                                    |       | **(4,836**                  | **)**       | (2,748 | ) |
| Allowance for  equity funds used during construction                                  |       | **(1,987**                  | **)**       | (254 | ) |
| Regulatory  asset/liability deferrals                                                 |       | **(23,520**                 | **)**       | 7,351 |   |
| Regulatory  assets amortization                                                       |       | **34,426**                  | ** **  | 25,367 |   |
| Accrued pension  and other postretirement benefit costs                               |       | **22,511**                  | ** **  | 19,082 |   |
| Cost of removal                                                                       |       | **(5,475**                  | **)**       | (3,805 | ) |
| Changes in  current assets and current liabilities:                                   |       | ** **                  | ** **  |   |   |
| Accounts and  notes receivable                                                        |       | **159,607**                 | ** **  | 27,156 |   |
| Fuel, emission  allowances, and supplies                                              |       | **51,082**                  | ** **  | 82,044 |   |
| Prepayments                                                                           |       | **(65,218**                 | **)**       | (35,336 | ) |
| Accounts payable                                                                      |       | **(75,935**                 | **)**       | 123,620 |   |
| Accrued taxes  and interest                                                           |       | **41,216**                  | ** **  | 10,047 |   |
| Other assets                                                                          |       | **(17,543**                 | **)**       | (9,609 | ) |
| Other  liabilities                                                                    |       | **(32,954**                 | **)**       | 4,555 |   |
|                                                                                  |       | ** **                  | ** **  |   |   |
| **Net  cash provided by operating activities**                                        |       | **378,118**                 | ** **  | 482,705 |   |
|                                                                                  |       | ** **                  | ** **  |   |   |
| Financing  Activities                                                                 |       | ** **                  | ** **  |   |   |
| Change in  short-term debt                                                            |       | **(509,066**                | **)**       | (114,318 | ) |
| Issuance of  long-term debt                                                           |       | **4,165**                   | ** **  | — |   |
| Redemption of  long-term debt                                                         |       | **(3,516**                  | **)**       | (114,652 | ) |
| Issuance of  common stock                                                             |       | **353,857**                 | ** **  | 21,095 |   |
| Dividends on  common stock                                                            |       | **(91,879**                 | **)**       | (83,987 | ) |
|                                                                                  |       | ** **                  | ** **  |   |   |
| **Net  cash used in financing activities**                                            |       | **(246,439**                | **)**       | (291,862 | ) |
|                                                                                  |       | ** **                  | ** **  |   |   |
| Investing  Activities                                                                 |       | ** **                  | ** **  |   |   |
| Construction  expenditures (less allowance for equity funds used during construction) |       | **(242,511**                | **)**       | (145,748 | ) |
| Proceeds from  notes receivable                                                       |       | **4,852**                   | ** **  | 4,238 |   |
| Withdrawal of  restricted cash held in trust                                          |       | **35,631**                  | ** **  | — |   |
| Acquisitions and  other investments                                                   |       | **(2,155**                  | **)**       | (14,317 | ) |
| Proceeds from  distributions by investments and sale of investments and subsidiaries  |       | **32,071**                  | ** **  | 14,405 |   |
|                                                                                  |       | ** **                  | ** **  |   |   |
| **Net  cash used in investing activities**                                            |       | **(172,112**                | **)**       | (141,422 | ) |
|                                                                                  |       | ** **                  | ** **  |   |   |
| **Net increase (decrease) in cash  and cash equivalents**                             |       | **(40,433**                 | **)**       | 49,421 |   |
| **Cash and cash equivalents at  beginning of period**                                 |       | **164,541**                 | ** **  | 169,120 |   |
| **Cash and cash equivalents at  end of period**                                       |       | **$**                       | **124,108** | ** ** | $ | 218,541 |   |
|                                                                                  |       | ** **                  | ** **  |   |   |
| **Supplemental  Disclosure of Cash Flow Information**                                 |       | ** **                  | ** **  |   |   |
| Cash paid during  the period for:                                                     |       | ** **                  | ** **  |   |   |
| Interest (net of  amount capitalized)                                                 |       | **$**                       | **60,902**  | ** ** | $ | 68,397 |   |
| Income taxes                                                                          |       | **$**                       | **7,671**   | ** ** | $ | 7,057 |   |

 

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

 

9

----

 

**THE CINCINNATI GAS & ELECTRICCOMPANY**

**ANDSUBSIDIARY COMPANIES**

 

10

----

 

**THE CINCINNATI GAS & ELECTRICCOMPANY**

**CONDENSED CONSOLIDATED STATEMENTSOF INCOME AND COMPREHENSIVE INCOME**

 
| ** **                                         | ** ** | **Quarter Ended  March 31** | ** **  |
|----------------------------------------------------|------------|-----------------------------|-------------|
| ** **                                         | ** ** | **2005**                    | ** **  | 2004 | ** ** |
| ** **                                         | ** ** | *(dollars in thousands)*    | ** **  |
| ** **                                         | ** ** | *(unaudited)*               | ** **  |
| ** **                                         |       |                        |        |   |   |
| **Operating  Revenues**                            |       |                        |        |   |   |
| Electric                                           |       | **$**                       | **464,331** | ** ** | $ | 417,915 |   |
| Gas                                                |       | **306,354**                 | ** **  | 327,652 |   |
| Other                                              |       | **52,671**                  | ** **  | 19,692 |   |
| **Total  Operating Revenues**                      |       | **823,356**                 | ** **  | 765,259 |   |
|                                               |       | ** **                  | ** **  |   |   |
| **Operating  Expenses**                            |       | ** **                  | ** **  |   |   |
| Fuel, emission  allowances, and purchased power    |       | **145,702**                 | ** **  | 121,658 |   |
| Gas purchased                                      |       | **207,782**                 | ** **  | 223,517 |   |
| Costs of fuel  resold                              |       | **40,986**                  | ** **  | 17,746 |   |
| Operation and  maintenance                         |       | **162,147**                 | ** **  | 149,763 |   |
| Depreciation                                       |       | **45,165**                  | ** **  | 44,386 |   |
| Taxes other than  income taxes                     |       | **59,434**                  | ** **  | 64,195 |   |
| **Total  Operating Expenses**                      |       | **661,216**                 | ** **  | 621,265 |   |
|                                               |       | ** **                  | ** **  |   |   |
| **Operating  Income**                              |       | **162,140**                 | ** **  | 143,994 |   |
|                                               |       | ** **                  | ** **  |   |   |
| **Miscellaneous  Income – Net**               |       | **3,523**                   | ** **  | 2,854 |   |
| **Interest  Expense**                              |       | **22,950**                  | ** **  | 22,436 |   |
|                                               |       | ** **                  | ** **  |   |   |
| **Income  Before Taxes**                           |       | **142,713**                 | ** **  | 124,412 |   |
|                                               |       | ** **                  | ** **  |   |   |
| **Income  Taxes**                                  |       | **58,047**                  | ** **  | 46,957 |   |
|                                               |       | ** **                  | ** **  |   |   |
| **Net  Income**                                    |       | **$**                       | **84,666**  | ** ** | $ | 77,455 |   |
|                                               |       | ** **                  | ** **  |   |   |
| **Preferred  Dividend Requirement**                |       | **211**                     | ** **  | 211 |   |
|                                               |       | ** **                  | ** **  |   |   |
| **Net  Income Applicable to Common Stock**         |       | **$**                       | **84,455**  | ** ** | $ | 77,244 |   |
|                                               |       | ** **                  | ** **  |   |   |
| **Net  Income**                                    |       | **$**                       | **84,666**  | ** ** | $ | 77,455 |   |
|                                               |       | ** **                  | ** **  |   |   |
| **Other  Comprehensive Income (Loss), Net of Tax** |       | **1,718**                   | ** **  | (324 | ) |
|                                               |       | ** **                  | ** **  |   |   |
| **Comprehensive  Income**                          |       | **$**                       | **86,384**  | ** ** | $ | 77,131 |   |

 

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

 

11

----

 

**THE CINCINNATI GAS & ELECTRICCOMPANY**

**CONDENSED CONSOLIDATED BALANCESHEETS**

 

**ASSETS**

 
| ** **                                                            | ** ** | **March 31  2005**       | ** **    | December  31  2004 | ** ** |
|-----------------------------------------------------------------------|------------|--------------------------|---------------|--------------------|------------|
| ** **                                                            | ** ** | *(dollars in thousands)* | ** **    |
| ** **                                                            | ** ** | *(unaudited)*            | ** **    |
| ** **                                                            |       |                     |          |               |       |
| **Current  Assets**                                                   |       |                     |          |               |       |
| Cash and cash  equivalents                                            |       | **$**                    | **9,320**     | ** **         | $          | 4,154 |   |
| Notes receivable  from affiliated companies                           |       | **69,763**               | ** **    | 121,559            |       |
| Accounts  receivable less accumulated provision for doubtful accounts |       | **191,060**              | ** **    | 145,105            |       |
| Accounts receivable  from affiliated companies                        |       | **24,766**               | ** **    | 30,916             |       |
| Fuel, emission  allowances, and supplies                              |       | **185,600**              | ** **    | 199,769            |       |
| Energy risk  management current assets                                |       | **243,590**              | ** **    | 148,866            |       |
| Prepayments and  other                                                |       | **79,341**               | ** **    | 54,650             |       |
| **Total  Current Assets**                                             |       | **803,440**              | ** **    | 705,019            |       |
|                                                                  |       | ** **               | ** **    |               |       |
| **Property,  Plant, and Equipment — at Cost**                    |       | ** **               | ** **    |               |       |
| Utility plant in  service                                             |       | ** **               | ** **    |               |       |
| Electric                                                              |       | **2,265,310**            | ** **    | 2,249,352          |       |
| Gas                                                                   |       | **1,193,511**            | ** **    | 1,179,764          |       |
| Common                                                                |       | **250,344**              | ** **    | 249,576            |       |
| **Total  Utility Plant In Service**                                   |       | **3,709,165**            | ** **    | 3,678,692          |       |
| Construction  work in progress                                        |       | **63,868**               | ** **    | 45,762             |       |
| **Total  Utility Plant**                                              |       | **3,773,033**            | ** **    | 3,724,454          |       |
| Non-regulated  property, plant, and equipment                         |       | **3,700,646**            | ** **    | 3,660,226          |       |
| Accumulated  depreciation                                             |       | **2,727,925**            | ** **    | 2,694,708          |       |
| **Net  Property, Plant, and Equipment**                               |       | **4,745,754**            | ** **    | 4,689,972          |       |
|                                                                  |       | ** **               | ** **    |               |       |
| **Other  Assets**                                                     |       | ** **               | ** **    |               |       |
| Regulatory  assets                                                    |       | **594,400**              | ** **    | 609,550            |       |
| Energy risk  management non-current assets                            |       | **108,105**              | ** **    | 47,276             |       |
| Restricted funds  held in trust                                       |       | **86,331**               | ** **    | 93,671             |       |
| Other                                                                 |       | **90,853**               | ** **    | 86,871             |       |
| **Total  Other Assets**                                               |       | **879,689**              | ** **    | 837,368            |       |
|                                                                  |       | ** **               | ** **    |               |       |
| **Total  Assets**                                                     |       | **$**                    | **6,428,883** | ** **         | $          | 6,232,359 |   |

 

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

 

12

----

 

**THE CINCINNATI GAS & ELECTRICCOMPANY**

**CONDENSED CONSOLIDATED BALANCESHEETS**

 

**LIABILITIES AND SHAREHOLDERS’EQUITY**

 
| ** **                                                                                                                                                 | ** ** | **March 31  2005**       | ** **    | December  31  2004 | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|---------------|--------------------|------------|
| ** **                                                                                                                                                 | ** ** | *(dollars in thousands)* | ** **    |
| ** **                                                                                                                                                 | ** ** | *(unaudited)*            | ** **    |
| ** **                                                                                                                                                 |       |                     |          |               |       |
| **Current  Liabilities**                                                                                                                                   |       |                     |          |               |       |
| Accounts payable                                                                                                                                           |       | **$**                    | **381,745**   | ** **         | $          | 332,316 |   |
| Accounts payable  to affiliated companies                                                                                                                  |       | **44,892**               | ** **    | 85,127             |       |
| Accrued taxes                                                                                                                                              |       | **197,415**              | ** **    | 149,010            |       |
| Accrued interest                                                                                                                                           |       | **23,066**               | ** **    | 19,408             |       |
| Notes payable  and other short-term obligations (Note 3)                                                                                                   |       | **112,100**              | ** **    | 112,100            |       |
| Notes payable to  affiliated companies (Note 3)                                                                                                            |       | **79,603**               | ** **    | 180,116            |       |
| Long-term debt  due within one year                                                                                                                        |       | **150,000**              | ** **    | 150,000            |       |
| Energy risk  management current liabilities                                                                                                                |       | **232,128**              | ** **    | 120,204            |       |
| Other                                                                                                                                                      |       | **32,459**               | ** **    | 33,712             |       |
| **Total  Current Liabilities**                                                                                                                             |       | **1,253,408**            | ** **    | 1,181,993          |       |
|                                                                                                                                                       |       | ** **               | ** **    |               |       |
| **Non-Current  Liabilities**                                                                                                                               |       | ** **               | ** **    |               |       |
| Long-term debt                                                                                                                                             |       | **1,443,984**            | ** **    | 1,443,668          |       |
| Deferred income  taxes                                                                                                                                     |       | **1,091,348**            | ** **    | 1,090,897          |       |
| Unamortized  investment tax credits                                                                                                                        |       | **71,666**               | ** **    | 73,120             |       |
| Accrued pension  and other postretirement benefit costs                                                                                                    |       | **233,804**              | ** **    | 228,058            |       |
| Regulatory  liabilities                                                                                                                                    |       | **178,096**              | ** **    | 164,846            |       |
| Energy risk  management non-current liabilities                                                                                                            |       | **103,682**              | ** **    | 40,184             |       |
| Other                                                                                                                                                      |       | **65,820**               | ** **    | 70,395             |       |
| **Total  Non-Current Liabilities**                                                                                                                         |       | **3,188,400**            | ** **    | 3,111,168          |       |
|                                                                                                                                                       |       | ** **               | ** **    |               |       |
| **Commitments  and Contingencies**                                                                                                                         |       | ** **               | ** **    |               |       |
|                                                                                                                                                       |       | ** **               | ** **    |               |       |
| **Total  Liabilities**                                                                                                                                     |       | **4,441,808**            | ** **    | 4,293,161          |       |
|                                                                                                                                                       |       | ** **               | ** **    |               |       |
| **Cumulative  Preferred Stock**                                                                                                                            |       | ** **               | ** **    |               |       |
| Not subject to  mandatory redemption                                                                                                                       |       | **20,485**               | ** **    | 20,485             |       |
|                                                                                                                                                       |       | ** **               | ** **    |               |       |
| **Common  Stock Equity**                                                                                                                                   |       | ** **               | ** **    |               |       |
| Common stock –  $8.50 par value; authorized shares – 120,000,000; outstanding shares –  89,663,086 at March 31, 2005, and December 31, 2004 |       | **762,136**              | ** **    | 762,136            |       |
| Paid-in capital                                                                                                                                            |       | **584,176**              | ** **    | 584,176            |       |
| Retained  earnings                                                                                                                                         |       | **656,391**              | ** **    | 610,232            |       |
| Accumulated  other comprehensive loss                                                                                                                      |       | **(36,113**              | **)**         | (37,831            | )          |
| **Total  Common Stock Equity**                                                                                                                             |       | **1,966,590**            | ** **    | 1,918,713          |       |
|                                                                                                                                                       |       | ** **               | ** **    |               |       |
| **Total  Liabilities and Shareholders’ Equity**                                                                                                       |       | **$**                    | **6,428,883** | ** **         | $          | 6,232,359 |   |

 

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

 

13

----

 

**THE CINCINNATI GAS & ELECTRICCOMPANY**

**CONDENSED CONSOLIDATED STATEMENTSOF CASH FLOWS**

 
| ** **                                                                            | ** ** | **Quarter Ended  March 31** | ** ** |
|---------------------------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                                            | ** ** | **2005**                    | ** ** | 2004 | ** ** |
| ** **                                                                            | ** ** | *(dollars in thousands)*    | ** ** |
| ** **                                                                            | ** ** | *(unaudited)*               | ** ** |
| ** **                                                                            |       |                        | ** ** |   |   |
| **Operating  Activities**                                                             |       |                        | ** ** |   |   |
| Net income                                                                            |       | **$**                       | **84,666** | ** ** | $ | 77,455 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities:    |       | ** **                  | ** ** |   |   |
| Depreciation                                                                          |       | **45,165**                  | ** ** | 44,386 |   |
| Deferred income  taxes and investment tax credits – net                          |       | **(13,253**                 | **)**      | (2,863 | ) |
| Change in net  position of energy risk management activities                          |       | **19,869**                  | ** ** | (18,356 | ) |
| Allowance for  equity funds used during construction                                  |       | **(130**                    | **)**      | (245 | ) |
| Regulatory  asset/liability deferrals                                                 |       | **4,944**                   | ** ** | 19,282 |   |
| Regulatory  assets amortization                                                       |       | **23,313**                  | ** ** | 14,636 |   |
| Accrued pension  and other postretirement benefit costs                               |       | **5,746**                   | ** ** | 4,324 |   |
| Cost of removal                                                                       |       | **(1,294**                  | **)**      | (1,736 | ) |
| Changes in  current assets and current liabilities:                                   |       | ** **                  | ** ** |   |   |
| Accounts and  notes receivable                                                        |       | **14,775**                  | ** ** | 107,163 |   |
| Fuel, emission  allowances, and supplies                                              |       | **9,480**                   | ** ** | 19,293 |   |
| Prepayments                                                                           |       | **(24,688**                 | **)**      | (2,748 | ) |
| Accounts payable                                                                      |       | **8,983**                   | ** ** | (74,720 | ) |
| Accrued taxes  and interest                                                           |       | **52,063**                  | ** ** | 31,812 |   |
| Other assets                                                                          |       | **429**                     | ** ** | 4,579 |   |
| Other  liabilities                                                                    |       | **7,346**                   | ** ** | 10,156 |   |
|                                                                                  |       | ** **                  | ** ** |   |   |
| **Net  cash provided by operating activities**                                        |       | **237,414**                 | ** ** | 232,418 |   |
|                                                                                  |       | ** **                  | ** ** |   |   |
| **Financing  Activities**                                                             |       | ** **                  | ** ** |   |   |
| Change in  short-term debt, including net affiliate notes                             |       | **(103,297**                | **)**      | 9,357 |   |
| Redemption of  long-term debt                                                         |       | **—**                  | ** ** | (110,000 | ) |
| Dividends on  preferred stock                                                         |       | **—**                  | ** ** | (51 | ) |
| Dividends on  common stock                                                            |       | **(38,296**                 | **)**      | (54,926 | ) |
|                                                                                  |       | ** **                  | ** ** |   |   |
| **Net  cash used in financing activities**                                            |       | **(141,593**                | **)**      | (155,620 | ) |
|                                                                                  |       | ** **                  | ** ** |   |   |
| **Investing  Activities**                                                             |       | ** **                  | ** ** |   |   |
| Construction  expenditures (less allowance for equity funds used during construction) |       | **(98,580**                 | **)**      | (69,857 | ) |
| Withdrawal of  restricted funds held in trust                                         |       | **7,822**                   | ** ** | — |   |
| Other  investments                                                                    |       | **103**                     | ** ** | (2 | ) |
|                                                                                  |       | ** **                  | ** ** |   |   |
| **Net  cash used in investing activities**                                            |       | **(90,655**                 | **)**      | (69,859 | ) |
|                                                                                  |       | ** **                  | ** ** |   |   |
| **Net  increase in cash and cash equivalents**                                        |       | **5,166**                   | ** ** | 6,939 |   |
| ** **                                                                            |       | ** **                  | ** ** |   |   |
| **Cash  and cash equivalents at beginning of period**                                 |       | **4,154**                   | ** ** | 15,842 |   |
| ** **                                                                            |       | ** **                  | ** ** |   |   |
| **Cash  and cash equivalents at end of period**                                       |       | **$**                       | **9,320**  | ** ** | $ | 22,781 |   |
|                                                                                  |       | ** **                  | ** ** |   |   |
| **Supplemental  Disclosure of Cash Flow Information**                                 |       | ** **                  | ** ** |   |   |
| Cash paid during  the period for:                                                     |       | ** **                  | ** ** |   |   |
| Interest (net of  amount capitalized)                                                 |       | **$**                       | **20,187** | ** ** | $ | 21,341 |   |
| Income taxes                                                                          |       | **$**                       | **8,891**  | ** ** | $ | 3,447 |   |

 

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

 

14

----

 

**PSI ENERGY, INC.**

**ANDSUBSIDIARY COMPANY**

 

15

----

 

**PSI ENERGY, INC.**

**CONDENSED CONSOLIDATED STATEMENTSOF INCOME AND COMPREHENSIVE INCOME**

 
| ** **                                         | ** ** | **Quarter Ended  March 31** | ** **  |
|----------------------------------------------------|------------|-----------------------------|-------------|
| ** **                                         | ** ** | **2005**                    | ** **  | 2004 | ** ** |
| ** **                                         | ** ** | *(dollars in thousands)*    | ** **  |
| ** **                                         | ** ** | *(unaudited)*               | ** **  |
| ** **                                         |       |                        |        |   |   |
| **Operating  Revenues**                            |       |                        |        |   |   |
| Electric                                           |       | **$**                       | **425,408** | ** ** | $ | 416,279 |   |
|                                               |       | ** **                  | ** **  |   |   |
| **Operating  Expenses**                            |       | ** **                  | ** **  |   |   |
| Fuel, emission  allowances, and purchased power    |       | **132,036**                 | ** **  | 154,906 |   |
| Operation and  maintenance                         |       | **120,570**                 | ** **  | 108,801 |   |
| Depreciation                                       |       | **66,847**                  | ** **  | 48,831 |   |
| Taxes other than  income taxes                     |       | **15,661**                  | ** **  | 16,412 |   |
| **Total  Operating Expenses**                      |       | **335,114**                 | ** **  | 328,950 |   |
|                                               |       | ** **                  | ** **  |   |   |
| **Operating  Income**                              |       | **90,294**                  | ** **  | 87,329 |   |
| ** **                                         |       | ** **                  | ** **  |   |   |
| **Miscellaneous  Income – Net**               |       | **3,377**                   | ** **  | 547 |   |
| **Interest  Expense**                              |       | **24,765**                  | ** **  | 19,924 |   |
| ** **                                         |       | ** **                  | ** **  |   |   |
| **Income  Before Taxes**                           |       | **68,906**                  | ** **  | 67,952 |   |
| ** **                                         |       | ** **                  | ** **  |   |   |
| **Income  Taxes**                                  |       | **26,561**                  | ** **  | 27,146 |   |
| ** **                                         |       | ** **                  | ** **  |   |   |
| **Net  Income**                                    |       | **$**                       | **42,345**  | ** ** | $ | 40,806 |   |
| ** **                                         |       | ** **                  | ** **  |   |   |
| **Preferred  Dividend Requirement**                |       | **647**                     | ** **  | 647 |   |
| ** **                                         |       | ** **                  | ** **  |   |   |
| **Net  Income Applicable to Common Stock**         |       | **$**                       | **41,698**  | ** ** | $ | 40,159 |   |
| ** **                                         |       | ** **                  | ** **  |   |   |
| **Net  Income**                                    |       | **$**                       | **42,345**  | ** ** | $ | 40,806 |   |
| ** **                                         |       | ** **                  | ** **  |   |   |
| **Other  Comprehensive Income (Loss), Net of Tax** |       | **(1,195**                  | **)**       | 484 |   |
| ** **                                         |       | ** **                  | ** **  |   |   |
| **Comprehensive  Income**                          |       | **$**                       | **41,150**  | ** ** | $ | 41,290 |   |

 

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

 

16

----

 

**PSI ENERGY, INC.**

**CONDENSED CONSOLIDATED BALANCESHEETS**

 

**ASSETS**

 
| ** **                                                            | ** ** | **March 31  2005**       | ** **    | December  31  2004 | ** ** |
|-----------------------------------------------------------------------|------------|--------------------------|---------------|--------------------|------------|
| ** **                                                            | ** ** | *(dollars in thousands)* | ** **    |
| ** **                                                            | ** ** | *(unaudited)*            | ** **    |
| ** **                                                            |       |                     |          |               |       |
| **Current  Assets**                                                   |       |                     |          |               |       |
| Cash and cash  equivalents                                            |       | **$**                    | **3,154**     | ** **         | $          | 10,794 |   |
| Restricted  deposits                                                  |       | **23,327**               | ** **    | 22,063             |       |
| Notes receivable  from affiliated companies                           |       | **39,395**               | ** **    | 72,958             |       |
| Accounts  receivable less accumulated provision for doubtful accounts |       | **16,434**               | ** **    | 31,177             |       |
| Accounts  receivable from affiliated companies                        |       | **4,641**                | ** **    | 437                |       |
| Fuel, emission  allowances, and supplies                              |       | **112,086**              | ** **    | 108,793            |       |
| Prepayments and  other                                                |       | **8,994**                | ** **    | 11,804             |       |
| **Total  Current Assets**                                             |       | **208,031**              | ** **    | 258,026            |       |
|                                                                  |       | ** **               | ** **    |               |       |
| **Property,  Plant, and Equipment – at Cost**                    |       | ** **               | ** **    |               |       |
| Utility plant in  service                                             |       | **6,427,250**            | ** **    | 6,397,776          |       |
| Construction  work in progress                                        |       | **365,949**              | ** **    | 287,925            |       |
| **Total  Utility Plant**                                              |       | **6,793,199**            | ** **    | 6,685,701          |       |
| Accumulated  depreciation                                             |       | **2,326,838**            | ** **    | 2,284,932          |       |
| **Net  Property, Plant, and Equipment**                               |       | **4,466,361**            | ** **    | 4,400,769          |       |
|                                                                  |       | ** **               | ** **    |               |       |
| **Other  Assets**                                                     |       | ** **               | ** **    |               |       |
| Regulatory  assets                                                    |       | **421,947**              | ** **    | 420,783            |       |
| Other  investments                                                    |       | **71,520**               | ** **    | 73,396             |       |
| Restricted funds  held in trust                                       |       | **240,137**              | ** **    | 264,335            |       |
| Other                                                                 |       | **35,880**               | ** **    | 32,587             |       |
| **Total  Other Assets**                                               |       | **769,484**              | ** **    | 791,101            |       |
|                                                                  |       | ** **               | ** **    |               |       |
| **Total  Assets**                                                     |       | **$**                    | **5,443,876** | ** **         | $          | 5,449,896 |   |

 

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

 

17

----

 

**PSI ENERGY, INC.**

**CONDENSED CONSOLIDATED BALANCESHEETS**

 

**LIABILITIESAND SHAREHOLDERS’ EQUITY**

 
| ** **                                                                                                                                                                     | ** ** | **March 31  2005**       | ** **    | December  31  2004 | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|---------------|--------------------|------------|
| ** **                                                                                                                                                                     | ** ** | *(dollars in thousands)* | ** **    |
| ** **                                                                                                                                                                     | ** ** | *(unaudited)*            | ** **    |
| ** **                                                                                                                                                                     |       |                     |          |               |       |
| **Current  Liabilities**                                                                                                                                                       |       |                     |          |               |       |
| Accounts payable                                                                                                                                                               |       | **$**                    | **39,099**    | ** **         | $          | 65,151 |   |
| Accounts payable  to affiliated companies                                                                                                                                      |       | **23,218**               | ** **    | 38,292             |       |
| Accrued taxes                                                                                                                                                                  |       | **88,295**               | ** **    | 65,871             |       |
| Accrued interest                                                                                                                                                               |       | **25,380**               | ** **    | 27,532             |       |
| Notes payable  and other short-term obligations (Note 3)                                                                                                                       |       | **135,500**              | ** **    | 135,500            |       |
| Notes payable to  affiliated companies (Note 3)                                                                                                                                |       | **144,374**              | ** **    | 130,580            |       |
| Long-term debt  due within one year                                                                                                                                            |       | **51,166**               | ** **    | 50,000             |       |
| Other                                                                                                                                                                          |       | **31,507**               | ** **    | 33,326             |       |
| **Total  Current Liabilities**                                                                                                                                                 |       | **538,539**              | ** **    | 546,252            |       |
|                                                                                                                                                                           |       | ** **               | ** **    |               |       |
| **Non-Current  Liabilities**                                                                                                                                                   |       | ** **               | ** **    |               |       |
| Long-term debt                                                                                                                                                                 |       | **1,823,204**            | ** **    | 1,824,219          |       |
| Deferred income  taxes                                                                                                                                                         |       | **653,174**              | ** **    | 638,061            |       |
| Unamortized  investment tax credits                                                                                                                                            |       | **25,858**               | ** **    | 26,603             |       |
| Accrued pension  and other postretirement benefit costs                                                                                                                        |       | **216,070**              | ** **    | 209,992            |       |
| Regulatory  liabilities                                                                                                                                                        |       | **385,777**              | ** **    | 392,573            |       |
| Other                                                                                                                                                                          |       | **89,073**               | ** **    | 88,665             |       |
| **Total  Non-Current Liabilities**                                                                                                                                             |       | **3,193,156**            | ** **    | 3,180,113          |       |
|                                                                                                                                                                           |       | ** **               | ** **    |               |       |
| **Commitments  and Contingencies**                                                                                                                                             |       | ** **               | ** **    |               |       |
| ** **                                                                                                                                                                     |       | ** **               | ** **    |               |       |
| **Total  Liabilities**                                                                                                                                                         |       | **3,731,695**            | ** **    | 3,726,365          |       |
| ** **                                                                                                                                                                     |       | ** **               | ** **    |               |       |
| **Cumulative  Preferred Stock**                                                                                                                                                |       | ** **               | ** **    |               |       |
| Not subject to  mandatory redemption                                                                                                                                           |       | **42,333**               | ** **    | 42,333             |       |
|                                                                                                                                                                           |       | ** **               | ** **    |               |       |
| **Common  Stock Equity**                                                                                                                                                       |       | ** **               | ** **    |               |       |
| Common stock –  without par value; $.01 stated value; authorized shares – 60,000,000;  outstanding shares – 53,913,701 at March 31, 2005, and December 31, 2004 |       | **539**                  | ** **    | 539                |       |
| Paid-in capital                                                                                                                                                                |       | **626,019**              | ** **    | 626,019            |       |
| Retained  earnings                                                                                                                                                             |       | **1,068,462**            | ** **    | 1,078,617          |       |
| Accumulated  other comprehensive loss                                                                                                                                          |       | **(25,172**              | **)**         | (23,977            | )          |
| **Total  Common Stock Equity**                                                                                                                                                 |       | **1,669,848**            | ** **    | 1,681,198          |       |
|                                                                                                                                                                           |       | ** **               | ** **    |               |       |
| **Total  Liabilities and Shareholders’ Equity**                                                                                                                           |       | **$**                    | **5,443,876** | ** **         | $          | 5,449,896 |   |

 

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

 

18

----

 

**PSI ENERGY, INC.**

**CONDENSED CONSOLIDATED STATEMENTSOF CASH FLOWS**

 
| ** **                                                                            | ** ** | **Quarter Ended  March 31** | ** ** |
|---------------------------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                                            | ** ** | **2005**                    | ** ** | 2004 | ** ** |
| ** **                                                                            | ** ** | *(dollars in thousands)*    | ** ** |
| ** **                                                                            | ** ** | *(unaudited)*               | ** ** |
| ** **                                                                            |       |                        |       |   |   |
| **Operating  Activities**                                                             |       |                        |       |   |   |
| Net income                                                                            |       | **$**                       | **42,345** | ** ** | $ | 40,806 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities:    |       | ** **                  | ** ** |   |   |
| Depreciation                                                                          |       | **66,847**                  | ** ** | 48,831 |   |
| Deferred income  taxes and investment tax credits – net                          |       | **10,158**                  | ** ** | 20,656 |   |
| Allowance for  equity funds used during construction                                  |       | **(1,857**                  | **)**      | (9 | ) |
| Regulatory  asset/liability deferrals                                                 |       | **(28,464**                 | **)**      | (11,931 | ) |
| Regulatory  assets amortization                                                       |       | **11,113**                  | ** ** | 10,731 |   |
| Accrued pension  and other postretirement benefit costs                               |       | **6,078**                   | ** ** | 5,190 |   |
| Cost of removal                                                                       |       | **(4,181**                  | **)**      | (2,069 | ) |
| Changes in  current assets and current liabilities:                                   |       | ** **                  | ** ** |   |   |
| Accounts and  notes receivable                                                        |       | **44,102**                  | ** ** | 15,044 |   |
| Fuel, emission  allowances, and supplies                                              |       | **(1,931**                  | **)**      | 23,147 |   |
| Prepayments                                                                           |       | **1,929**                   | ** ** | 1,170 |   |
| Accounts payable                                                                      |       | **(41,126**                 | **)**      | (52,915 | ) |
| Accrued taxes and  interest                                                           |       | **20,272**                  | ** ** | 12,570 |   |
| Other assets                                                                          |       | **(7,378**                  | **)**      | (1,194 | ) |
| Other  liabilities                                                                    |       | **1,809**                   | ** ** | 1,009 |   |
|                                                                                  |       | ** **                  | ** ** |   |   |
| **Net  cash provided by operating activities**                                        |       | **119,716**                 | ** ** | 111,036 |   |
|                                                                                  |       | ** **                  | ** ** |   |   |
| **Financing  Activities**                                                             |       | ** **                  | ** ** |   |   |
| Change in  short-term debt, including net affiliate notes                             |       | **13,794**                  | ** ** | (5,757 | ) |
| Dividends on  preferred stock                                                         |       | **(647**                    | **)**      | (647 | ) |
| Dividends on  common stock                                                            |       | **(51,853**                 | **)**      | (28,957 | ) |
|                                                                                  |       | ** **                  | ** ** |   |   |
| **Net  cash used in financing activities**                                            |       | **(38,706**                 | **)**      | (35,361 | ) |
|                                                                                  |       | ** **                  | ** ** |   |   |
| **Investing  Activities**                                                             |       | ** **                  | ** ** |   |   |
| Construction  expenditures (less allowance for equity funds used during construction) |       | **(113,801**                | **)**      | (64,500 | ) |
| Withdrawal of  restricted funds held in trust                                         |       | **25,276**                  | ** ** | — |   |
| Other  investments                                                                    |       | **(125**                    | **)**      | (944 | ) |
|                                                                                  |       | ** **                  | ** ** |   |   |
| **Net  cash used in investing activities**                                            |       | **(88,650**                 | **)**      | (65,444 | ) |
|                                                                                  |       | ** **                  | ** ** |   |   |
| **Net  increase (decrease) in cash and cash equivalents**                             |       | **(7,640**                  | **)**      | 10,231 |   |
| ** **                                                                            |       | ** **                  | ** ** |   |   |
| **Cash  and cash equivalents at beginning of period**                                 |       | **10,794**                  | ** ** | 6,565 |   |
| ** **                                                                            |       | ** **                  | ** ** |   |   |
| **Cash  and cash equivalents at end of period**                                       |       | **$**                       | **3,154**  | ** ** | $ | 16,796 |   |
|                                                                                  |       | ** **                  | ** ** |   |   |
| **Supplemental  Disclosure of Cash Flow Information**                                 |       | ** **                  | ** ** |   |   |
| Cash paid during  the period for:                                                     |       | ** **                  | ** ** |   |   |
| Interest (net of  amount capitalized)                                                 |       | **$**                       | **29,435** | ** ** | $ | 24,743 |   |
| Income taxes                                                                          |       | **$**                       | **9,850**  | ** ** | $ | 3,132 |   |

 

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

 

19

----

 

**THEUNION LIGHT, HEATAND POWER COMPANY**

 

20

----

 

**THEUNION LIGHT, HEAT AND POWER COMPANY**

**CONDENSED STATEMENTS OFINCOME**

 
| ** **                                            | ** ** | **Quarter Ended  March 31** | ** ** |
|-------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                            | ** ** | **2005**                    | ** ** | 2004 | ** ** |
| ** **                                            | ** ** | *(dollars in thousands)*    | ** ** |
| ** **                                            | ** ** | *(unaudited)*               | ** ** |
| **Operating  Revenues**                               |       |                        |       |   |   |
| Electric                                              |       | **$**                       | **54,584** | ** ** | $ | 56,215 |   |
| Gas                                                   |       | **57,775**                  | ** ** | 58,139 |   |
| **Total  Operating Revenues**                         |       | **112,359**                 | ** ** | 114,354 |   |
|                                                  |       | ** **                  | ** ** |   |   |
| **Operating  Expenses**                               |       | ** **                  | ** ** |   |   |
| Electricity  purchased from parent company for resale |       | **39,501**                  | ** ** | 39,453 |   |
| Gas purchased                                         |       | **40,199**                  | ** ** | 40,833 |   |
| Operation and  maintenance                            |       | **15,715**                  | ** ** | 13,760 |   |
| Depreciation                                          |       | **5,109**                   | ** ** | 4,925 |   |
| Taxes other than  income taxes                        |       | **1,485**                   | ** ** | 1,438 |   |
| **Total  Operating Expenses**                         |       | **102,009**                 | ** ** | 100,409 |   |
|                                                  |       | ** **                  | ** ** |   |   |
| **Operating  Income**                                 |       | **10,350**                  | ** ** | 13,945 |   |
|                                                  |       | ** **                  | ** ** |   |   |
| **Miscellaneous  Income – Net**                  |       | **852**                     | ** ** | 499 |   |
| **Interest  Expense**                                 |       | **1,745**                   | ** ** | 1,227 |   |
| ** **                                            |       | ** **                  | ** ** |   |   |
| **Income  Before Taxes**                              |       | **9,457**                   | ** ** | 13,217 |   |
| ** **                                            |       | ** **                  | ** ** |   |   |
| **Income  Taxes**                                     |       | **3,262**                   | ** ** | 5,329 |   |
| ** **                                            |       | ** **                  | ** ** |   |   |
| **Net  Income**                                       |       | **$**                       | **6,195**  | ** ** | $ | 7,888 |   |

 

**Theaccompanying notes as they relate to The Union Light, Heat and Power Companyare an integral part of these condensed financial statements.**

 

21

----

 

**THEUNION LIGHT, HEAT AND POWER COMPANY**

**CONDENSED BALANCE SHEETS**

 

**ASSETS**

 
| ** **                                                            | ** ** | **March 31  2005**       | ** **  | December  31  2004 | ** ** |
|-----------------------------------------------------------------------|------------|--------------------------|-------------|--------------------|------------|
| ** **                                                            | ** ** | *(dollars in thousands)* | ** **  |
| ** **                                                            | ** ** | *(unaudited)*            | ** **  |
| * *                                                              | * *   | * *                 | * *    | * *           | * *   |
| **Current  Assets**                                                   | ** ** | ** **               | ** **  | ** **         | ** ** |
| Cash and cash  equivalents                                            |       | **$**                    | **9,307**   | ** **         | $          | 4,197 |   |
| Notes receivable  from affiliated companies                           |       | **15,280**               | ** **  | 20,675             |       |
| Accounts  receivable less accumulated provision for doubtful accounts |       | **949**                  | ** **  | 1,451              |       |
| Accounts  receivable from affiliated companies                        |       | **612**                  | ** **  | 5,671              |       |
| Inventory and  supplies                                               |       | **4,051**                | ** **  | 8,500              |       |
| Prepayments and  other                                                |       | **143**                  | ** **  | 285                |       |
| **Total  Current Assets**                                             |       | **30,342**               | ** **  | 40,779             |       |
|                                                                  |       | ** **               | ** **  |               |       |
| **Property,  Plant, and Equipment – at Cost**                    | ** ** | ** **               | ** **  | ** **         | ** ** |
| Utility plant in  service                                             |       | ** **               | ** **  |               |       |
| Electric                                                              |       | **286,595**              | ** **  | 285,828            |       |
| Gas                                                                   |       | **259,986**              | ** **  | 256,667            |       |
| Common                                                                |       | **42,257**               | ** **  | 42,176             |       |
| **Total  Utility Plant In Service**                                   |       | **588,838**              | ** **  | 584,671            |       |
| Construction  work in progress                                        |       | **10,853**               | ** **  | 6,070              |       |
| **Total  Utility Plant**                                              |       | **599,691**              | ** **  | 590,741            |       |
| Accumulated  depreciation                                             |       | **180,096**              | ** **  | 176,726            |       |
| **Net  Property, Plant, and Equipment**                               |       | **419,595**              | ** **  | 414,015            |       |
|                                                                  |       | ** **               | ** **  |               |       |
| **Other  Assets**                                                     | ** ** | ** **               | ** **  | ** **         | ** ** |
| Regulatory  assets                                                    |       | **7,421**                | ** **  | 10,070             |       |
| Other                                                                 |       | **2,741**                | ** **  | 2,801              |       |
| **Total  Other Assets**                                               |       | **10,162**               | ** **  | 12,871             |       |
|                                                                  |       | ** **               | ** **  |               |       |
| **Total  Assets**                                                     |       | **$**                    | **460,099** | ** **         | $          | 467,665 |   |

 

**The accompanying notesas they relate to The Union Light, Heat and Power Company are an integral partof these condensed financial statements.**

 

22

----

 

**THEUNION LIGHT, HEAT AND POWER COMPANY**

**CONDENSEDBALANCE SHEETS**

 

**LIABILITIESAND SHAREHOLDER’S EQUITY**

 
| ** **                                                                                                                                             | ** ** | **March 31  2005**       | ** **  | December  31  2004 | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|-------------|--------------------|------------|
| ** **                                                                                                                                             | ** ** | *(dollars in thousands)* | ** **  |
| ** **                                                                                                                                             | ** ** | *(unaudited)*            | ** **  |
| **Current  Liabilities**                                                                                                                               |       |                     |        |               |       |
| Accounts payable                                                                                                                                       |       | **$**                    | **12,575**  | ** **         | $          | 16,028 |   |
| Accounts payable  to affiliated companies                                                                                                              |       | **19,705**               | ** **  | 22,236             |       |
| Accrued taxes                                                                                                                                          |       | **3,571**                | ** **  | —             |       |
| Accrued interest                                                                                                                                       |       | **1,580**                | ** **  | 1,370              |       |
| Notes payable to  affiliated companies (Note 3)                                                                                                        |       | **—**               | ** **  | 11,246             |       |
| Other                                                                                                                                                  |       | **6,642**                | ** **  | 7,009              |       |
| **Total  Current Liabilities**                                                                                                                         |       | **44,073**               | ** **  | 57,889             |       |
|                                                                                                                                                   |       | ** **               | ** **  |               |       |
| **Non-Current  Liabilities**                                                                                                                           |       | ** **               | ** **  |               |       |
| Long-term debt                                                                                                                                         |       | **94,357**               | ** **  | 94,340             |       |
| Deferred income  taxes                                                                                                                                 |       | **56,380**               | ** **  | 58,422             |       |
| Unamortized  investment tax credits                                                                                                                    |       | **2,584**                | ** **  | 2,626              |       |
| Accrued pension  and other postretirement benefit costs                                                                                                |       | **18,314**               | ** **  | 17,762             |       |
| Regulatory  liabilities                                                                                                                                |       | **32,190**               | ** **  | 29,979             |       |
| Other                                                                                                                                                  |       | **13,495**               | ** **  | 14,136             |       |
| **Total  Non-Current Liabilities**                                                                                                                     |       | **217,320**              | ** **  | 217,265            |       |
|                                                                                                                                                   |       | ** **               | ** **  |               |       |
| **Commitments  and Contingencies**                                                                                                                     |       | ** **               | ** **  |               |       |
|                                                                                                                                                   |       | ** **               | ** **  |               |       |
| **Total  Liabilities**                                                                                                                                 |       | **261,393**              | ** **  | 275,154            |       |
|                                                                                                                                                   |       | ** **               | ** **  |               |       |
| **Common  Stock Equity**                                                                                                                               |       | ** **               | ** **  |               |       |
| Common stock –  $15.00 par value; authorized shares – 1,000,000; outstanding shares – 585,333  at March 31, 2005, and December 31, 2004 |       | **8,780**                | ** **  | 8,780              |       |
| Paid-in capital                                                                                                                                        |       | **23,455**               | ** **  | 23,455             |       |
| Retained  earnings                                                                                                                                     |       | **167,757**              | ** **  | 161,562            |       |
| Accumulated  other comprehensive loss                                                                                                                  |       | **(1,286**               | **)**       | (1,286             | )          |
| **Total  Common Stock Equity**                                                                                                                         |       | **198,706**              | ** **  | 192,511            |       |
|                                                                                                                                                   |       | ** **               | ** **  |               |       |
| **Total  Liabilities and Shareholder’s Equity**                                                                                                   |       | **$**                    | **460,099** | ** **         | $          | 467,665 |   |

 

**The accompanying notesas they relate to The Union Light, Heat and Power Company are an integral partof these condensed financial statements.**

 

23

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**THEUNION LIGHT, HEAT AND POWER COMPANY**

**CONDENSED STATEMENTS OF CASHFLOWS**

 
| ** **                                                                            | ** ** | **Quarter Ended  March 31** | ** ** |
|---------------------------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                                            | ** ** | **2005**                    | ** ** | 2004 | ** ** |
| ** **                                                                            | ** ** | *(dollars in thousands)*    | ** ** |
| ** **                                                                            | ** ** | *(unaudited)*               | ** ** |
| **Operating  Activities**                                                             |       |                        |       |   |   |
| Net income                                                                            |       | **$**                       | **6,195**  | ** ** | $ | 7,888 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities:    |       | ** **                  | ** ** |   |   |
| Depreciation                                                                          |       | **5,109**                   | ** ** | 4,925 |   |
| Deferred income  taxes and investment tax credits – net                          |       | **(397**                    | **)**      | (1,258 | ) |
| Allowance for  equity funds used during construction                                  |       | **(116**                    | **)**      | 14 |   |
| Regulatory  asset/liability deferrals                                                 |       | **1,143**                   | ** ** | 3,466 |   |
| Regulatory  assets amortization                                                       |       | **1,419**                   | ** ** | 192 |   |
| Accrued pension  and other postretirement benefit costs                               |       | **552**                     | ** ** | 505 |   |
| Cost of removal                                                                       |       | **(229**                    | **)**      | (414 | ) |
| Changes in  current assets and current liabilities:                                   |       | ** **                  | ** ** |   |   |
| Accounts and  notes receivable                                                        |       | **15,305**                  | ** ** | 15,231 |   |
| Inventory and  supplies                                                               |       | **4,449**                   | ** ** | 3,052 |   |
| Prepayments                                                                           |       | **142**                     | ** ** | 139 |   |
| Accounts payable                                                                      |       | **(5,984**                  | **)**      | (3,122 | ) |
| Accrued taxes  and interest                                                           |       | **4,352**                   | ** ** | 7,390 |   |
| Other assets                                                                          |       | **1,614**                   | ** ** | 18 |   |
| Other liabilities                                                                     |       | **(3,265**                  | **)**      | (408 | ) |
|                                                                                  |       | ** **                  | ** ** |   |   |
| **Net  cash provided by operating activities**                                        |       | **30,289**                  | ** ** | 37,618 |   |
|                                                                                  |       | ** **                  | ** ** |   |   |
| **Financing  Activities**                                                             |       | ** **                  | ** ** |   |   |
| Change in  short-term debt, including net affiliate notes                             |       | **(15,595**                 | **)**      | (24,037 | ) |
|                                                                                  |       | ** **                  | ** ** |   |   |
| **Net  cash used in financing activities**                                            |       | **(15,595**                 | **)**      | (24,037 | ) |
|                                                                                  |       | ** **                  | ** ** |   |   |
| **Investing  Activities**                                                             |       | ** **                  | ** ** |   |   |
| Construction  expenditures (less allowance for equity funds used during construction) |       | **(9,584**                  | **)**      | (7,460 | ) |
|                                                                                  |       | ** **                  | ** ** |   |   |
| **Net  cash used in investing activities**                                            |       | **(9,584**                  | **)**      | (7,460 | ) |
| ** **                                                                            |       | ** **                  | ** ** |   |   |
| **Net  increase in cash and cash equivalents**                                        |       | **5,110**                   | ** ** | 6,121 |   |
| ** **                                                                            |       | ** **                  | ** ** |   |   |
| **Cash  and cash equivalents at beginning of period**                                 |       | **4,197**                   | ** ** | 1,899 |   |
|                                                                                  |       | ** **                  | ** ** |   |   |
| **Cash  and cash equivalents at end of period**                                       |       | **$**                       | **9,307**  | ** ** | $ | 8,020 |   |
|                                                                                  |       | ** **                  | ** ** |   |   |
| **Supplemental  Disclosure of Cash Flow Information**                                 |       | ** **                  | ** ** |   |   |
| Cash paid during  the period for:                                                     |       | ** **                  | ** ** |   |   |
| Interest (net of  amount capitalized)                                                 |       | **$**                       | **1,455**  | ** ** | $ | 1,480 |   |
| Income taxes                                                                          |       | **$**                       | **—** | ** ** | $ | 3 |   |

 

**The accompanying notesas they relate to The Union Light, Heat and Power Company are an integral partof these condensed financial statements.**

 

24

----

 

**INDEX**

** **

**NOTESTO CONDENSED FINANCIAL STATEMENTS**

 
| **Note**   | ** ** | ** **                                      | ** ** |
|------------|------------|-------------------------------------------------|------------|
| **Number** | ** ** | ** **                                      | ** ** |
| ** ** | ** ** | ** **                                      | ** ** |
| 1          |       | Summary of  Significant Accounting Policies     |       |
|       |       |                                            |       |
| 2          |       | Common Stock                                    |       |
|       |       |                                            |       |
| 3          |       | Notes  Payable and Other Short-term Obligations |       |
|       |       |                                            |       |
| 4          |       | Energy Trading Credit Risk                      |       |
|       |       |                                            |       |
| 5          |       | Pension and  Other Postretirement Benefits      |       |
|       |       |                                            |       |
| 6          |       | Commitments and  Contingencies                  |       |
|       |       |                                            |       |
| 7          |       | Financial  Information by Business Segment      |       |
|       |       |                                            |       |
| 8          |       | Earnings Per Common Share  (EPS)                |       |
|       |       |                                            |       |
| 9          |       | Transfer of Generating  Assets                  |       |
|       |       |                                            |       |
| 10         |       | Subsequent Events                               |       |

 

25

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### **NOTES TO CONDENSED FINANCIALSTATEMENTS**

 

In this report **Cinergy** (which includes **Cinergy Corp.** and all of our regulated andnon-regulated subsidiaries) is, at times, referred to in the first person as “we”,“our”, or “us”.  In addition, whendiscussing **Cinergy’s** financialinformation, it necessarily includes the results of The Cincinnati Gas &Electric Company (**CG&E**), PSIEnergy, 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.**     Summary of SignificantAccounting Policies

 

***(a)***           Presentation

 

Our Condensed FinancialStatements reflect all adjustments (which include normal, recurringadjustments) necessary in the opinion of the registrants for a fairpresentation of the interim results. These results are not necessarily indicative of results for a fullyear.  These statements should be read inconjunction with the Financial Statements and the notes thereto included in theregistrants’ combined Form 10-K for the year ended December 31, 2004 (200410-K).  Certain amounts in the 2004Condensed Financial Statements have been reclassified to conform to the 2005presentation.

 

Management makesestimates and assumptions when preparing financial statements under generallyaccepted accounting principles.  Keyestimates and judgments include:

 

•      Valuing derivativecontracts used in our energy marketing and trading activities;

•      Evaluating theregulatory recoverability of various costs;

•      Providingreserves for contingencies, including legal, environmental, and income taxes;and

•      Evaluatingvarious non-regulated fixed assets and investments for impairment.

 

These estimates andjudgments are discussed more fully in “Critical Accounting Estimates” in our2004 10-K.  Actual results could differ,as these estimates and assumptions involve judgment about future events orperformance.

 

***(b)***           Revenue Recognition

 

*(i)*           UtilityRevenues

 

**CG&E**,**PSI**, and **ULH&P** (collectively, our utilityoperating companies) record *OperatingRevenues* for electric and gas service when delivered tocustomers.  Customers are billedthroughout the month as both gas and electric meters are read.  We recognize revenues for retail energy salesthat have not yet been billed, but where gas or electricity has beenconsumed.  This is termed “unbilledrevenues” and is a widely recognized and accepted practice for utilities.  In making our estimates of unbilled revenues,we use systems that consider various factors, including weather, in ourcalculation of retail customer consumption at the end of each month.  Given the use of these systems and the factthat customers are billed monthly, we believe it is unlikely that materiallydifferent results will occur in future periods when these amounts aresubsequently billed.

 

Unbilled revenues for **Cinergy**, **CG&E**,**PSI**, and **ULH&P** as of March 31, 2005 and 2004,were as follows:

 

| ** **                   | ** ** | **2005**        | ** ** | 2004       | ** ** |
|------------------------------|------------|-----------------|------------|------------|------------|
| ** **                   | ** ** | *(in millions)* | ** ** |
| ** **                   | ** ** |            | ** ** |
| **Cinergy**                  |       | **$**           | **143**    | ** ** | $          | 133 |   |
| **CG&E**and subsidiaries |       | **86**          | ** ** | 80         |       |
| **PSI**                      |       | **57**          | ** ** | 53         |       |
| **ULH&P**                |       | **15**          | ** ** | 14         |       |
|                              |            |                 |            |            |            |  |  |

 

26

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*(ii)*          EnergyMarketing and Trading Revenues

 

We market and tradeelectricity, natural gas, and other energy-related products.  Many of the contracts associated with theseproducts qualify as derivatives in accordance with Statement of FinancialAccounting Standards No. 133, *Accounting forDerivative Instruments and Hedging Activities*.  We designate derivative transactions aseither trading or non-trading at the time they are originated in accordancewith Emerging Issues Task Force Issue 02-3, *IssuesInvolved in Accounting for Derivative Contracts Held for Trading Purposes andContracts Involved in Energy Trading and Risk Management Activities*.  Trading contracts are reported on a net basisand non-trading contracts are reported on a gross basis.  Net reporting requires presentation ofrealized and unrealized gains and losses on trading derivatives on a net basisin *Operating Revenues*.  Gross reporting requires presentation ofsales contracts in *Operating Revenues*and purchase contracts in *Fuel, emissionallowances, and purchased power* expense or *Gas purchased* expense.

 

*(iii)*         OtherOperating Revenues

 

**Cinergy** and **CG&E** recognize revenue from coal origination, whichrepresents contract structuring and marketing of physical coal.  These revenues are included in *Other Operating Revenues* on the Condensed ConsolidatedStatements of Income.  *Other Operating Revenues* for **Cinergy**also includes sales of synthetic fuel.

 

***(c)***           Derivatives

 

**Cinergy**designates derivatives as fair value hedges for certain volumes of our naturalgas held in storage.  Under thisaccounting election, changes in the fair value of both the derivative as wellas the hedged item (the specified gas held in storage) are included in *Gas Operating Revenues*in **Cinergy’s**Condensed Consolidated Statements of Income. We assess the effectiveness of the derivatives in offsetting the changein fair value of the gas held in storage on a quarterly basis.  Selected information on **Cinergy’s**hedge accounting activities for the quarters ended March 31, 2005 and 2004 wereas follows:

 
| ** **                                                                                                            | ** ** | **2005**        | ** ** | 2004       | ** ** |
|-----------------------------------------------------------------------------------------------------------------------|------------|-----------------|------------|------------|------------|
| ** **                                                                                                            | ** ** | *(in millions)* | ** ** |
| * *                                                                                                              | * *   | * *        | * *   | * *   | * *   |
| Portion of gain  (loss) on hedging instruments determined to be ineffective                                           |       | **$**           | **(4**     | **)**      | $          | 4 |   |
| Portion of gain  on hedging instruments related to changes in time value excluded from  assessment of ineffectiveness |       | **4**           | ** ** | 2          |       |
| Total included in *Gas  operating revenues*                                                                           |       | **$**           | **—** | ** ** | $          | 6 |   |

 

***(d)***           Accounting Changes

* *

*(i)*           Asset RetirementObligations

 

In March 2005, theFinancial Accounting Standards Board (FASB) issued Interpretation No. 47, *Accounting for Conditional Asset RetirementObligations* (Interpretation 47), an interpretation of Statement ofFinancial Accounting Standards No. 143, *Accounting for AssetRetirement Obligations*(Statement 143).  Statement 143 requires recognition of legalobligations associated with the retirement or removal of long-lived assets atthe time the obligations are incurred.  Interpretation 47 clarifies that a conditionalasset retirement obligation (which occurs when the timing and/or method ofsettlement are conditional on a future event that may or may not be within thecontrol of the entity) is a legal obligation within the scope of Statement 143.  As such, the fair value of a conditionalasset retirement obligation must be recognized as a liability when incurred ifthe liability’s fair value can be reasonably estimated.  Interpretation 47 also clarifies whensufficient information exists to reasonably estimate the fair value of an assetretirement obligation.

 

**Cinergy** willadopt Interpretation 47 on December 31, 2005. Upon adoption of Interpretation 47 **Cinergy** willrecognize the impact, if any, of additional liabilities for conditional assetretirement obligations as a cumulative effect of a change in accountingprinciple.  We have begun evaluating theimpact of adopting this new interpretation 

 

27

----

 

and are currently unableto predict whether the implementation of this accounting standard will bematerial to our financial position or results of operations.

 

*(ii)*          Share-BasedPayment

 

In December 2004, theFASB issued a replacement of Statement of Financial Accounting Standards No.123, *Accounting for Stock-Based Compensation* (Statement123), *Statement of Financial Accounting Standards No. 123(revised 2004), Share-Based Payment* (Statement 123R).  This standard will require accounting for allstock-based compensation arrangements under the fair value method in additionto other provisions.

 

In 2003, we prospectivelyadopted accounting for our stock-based compensation plans using the fair valuerecognition provisions of Statement 123, as amended by Statement of FinancialAccounting Standards No. 148, *Accounting for Stock-BasedCompensation-Transition and Disclosure* (Statement 148), for allemployee awards granted or with terms modified on or after January 1,2003.  Therefore, the impact ofimplementation of Statement 123R on stock options within our stock-basedcompensation plans is not expected to be material.  Statement 123R contains certain provisionsthat will modify the accounting for various stock-based compensation plansother than stock options.  We are in theprocess of evaluating the impact of this new standard on these plans.  **Cinergy** willadopt Statement 123R on January 1, 2006.

 

*(iii)*         IncomeTaxes

 

In October 2004, theAmerican Jobs Creation Act (AJCA) was signed into law.  The AJCA includes a one-time deduction of 85percent of certain foreign earnings that are repatriated, as defined in theAJCA.  **Cinergy**has not fully completed itsevaluation of the effects of the AJCA on its foreign investment strategy.  However,based on the evaluation to date, it does not appear that the effects of theprovision will have a material impact on our financial position or results ofoperations.

 

**2.**     Common Stock

 

As discussed in the 200410-K, in January and February 2005, **Cinergy****Corp.** issued a total of 9.2 million shares of common stockpursuant to certain stock purchase contracts that were issued as a component ofcombined securities in December 2001. Net proceeds from the transaction of $316 million were used to reduceshort-term debt.

 

**Cinergy**issues new **Cinergy Corp.** commonstock shares to satisfy obligations under certain of its employee stock plansand the Cinergy Corp. Direct Stock Purchase and Dividend ReinvestmentPlan.  During the first quarter of 2005, **Cinergy** issued 1.3 million shares underthese plans.

 

28

----

 

**3.**     Notes Payable and OtherShort-term Obligations

** **

**Cinergy Corp.’s**short-term borrowings consist primarily of unsecured revolving lines ofcredit and the sale of commercial paper. **Cinergy Corp.’s** $2 billionrevolving credit facilities and $1.5 billion commercial paper program alsosupport the short-term borrowing needs of **CG&E**,**PSI**, and **ULH&P**. In addition, **Cinergy Corp.**,**CG&E**, and **PSI** maintain uncommitted lines ofcredit.  These facilities are not firm sourcesof capital but rather informal agreements to lend money, subject toavailability, with pricing determined at the time of advance.  The following table summarizes our *Notes payable and other short-term obligations* and *Notes payable to affiliated companies*:

 
| ** **                   | ** ** | **March 31, 2005**      | ** **   | December  31, 2004 | ** **   |
|------------------------------|------------|-------------------------|--------------|--------------------|--------------|
| ** **                   | ** ** | ** **              | ** **   | ** **         | ** **   | **Weighted** | ** ** |   |   |   |   | Weighted | ** ** |
| ** **                   | ** ** | **Established**         | ** **   | ** **         | ** **   | **Average** | ** ** | Established |   |   |   | Average | ** ** |
| ** **                   | ** ** | **Lines**               | ** **   | **Outstanding**    | ** **   | **Rate** | ** ** | Lines |   | Outstanding |   | Rate | ** ** |
| ** **                   | ** ** | *(dollars in millions)* | ** **   |
| * *                     | * *   | *** ***            | *** *** | *** ***       | *** *** | *** *** | *** *** | * * | * * | * * | * * | * * | * * |
| **Cinergy**                  |       | ** **              | ** **   | ** **         | ** **   | ** ** | ** ** |   |   |   |   |   |   |
| **Cinergy  Corp.**           |       | ** **              | ** **   | ** **         | ** **   | ** ** | ** ** |   |   |   |   |   |   |
| Revolving  lines(1)          |       | **$**                   | **2,000**    | ** **         | **$**        | **—** | ** ** | **—** | **%** | $ | 2,000 |   | $ | — |   | — | % |
| Uncommitted  lines           |       | **40**                  | ** **   | **—**         | ** **   | **—** | ** ** | 40 |   | — |   | — |   |
| Commercial  paper(2)         |       | ** **              | ** **   | **155**            | ** **   | **2.88** | ** ** |   |   | 676 |   | 2.45 |   |
|                         |       | ** **              | ** **   | ** **         | ** **   | ** ** | ** ** |   |   |   |   |   |   |
| Utility  operating companies |       | ** **              | ** **   | ** **         | ** **   | ** ** | ** ** |   |   |   |   |   |   |
| Uncommitted  lines           |       | **75**                  | ** **   | **—**         | ** **   | **—** | ** ** | 75 |   | — |   | — |   |
| Pollution  control notes     |       | ** **              | ** **   | **248**            | ** **   | **2.70** | ** ** |   |   | 248 |   | 2.43 |   |
|                         |       | ** **              | ** **   | ** **         | ** **   | ** ** | ** ** |   |   |   |   |   |   |
| Non-regulated  subsidiaries  |       | ** **              | ** **   | ** **         | ** **   | ** ** | ** ** |   |   |   |   |   |   |
| Revolving  lines(3)          |       | **162**                 | ** **   | **20**             | ** **   | **3.52** | ** ** | 158 |   | 8 |   | 5.67 |   |
| Short-term debt              |       | ** **              | ** **   | **2**              | ** **   | **4.50** | ** ** |   |   | 2 |   | 4.50 |   |
| Pollution  control notes     |       | ** **              | ** **   | **25**             | ** **   | **2.66** | ** ** |   |   | 25 |   | 2.30 |   |
|                         |       | ** **              | ** **   | ** **         | ** **   | ** ** | ** ** |   |   |   |   |   |   |
| **Cinergy  Total**           |       | ** **              | ** **   | **$**              | **450**      | ** ** | **2.81** | **%** | ** ** |   | $ | 959 |   | 2.47 | % |
|                         |       | ** **              | ** **   | ** **         | ** **   | ** ** | ** ** |   |   |   |   |   |   |
| **CG&E**and subsidiaries |       | ** **              | ** **   | ** **         | ** **   | ** ** | ** ** |   |   |   |   |   |   |
| Uncommitted  lines           |       | **$**                   | **15**       | ** **         | **$**        | **—** | ** ** | **—** | **%** | $ | 15 |   | — |   | — | % |
| Pollution  control notes     |       | ** **              | ** **   | **112**            | ** **   | **2.64** | ** ** |   |   | 112 |   | 2.34 |   |
| Money pool                   |       | ** **              | ** **   | **80**             | ** **   | **2.86** | ** ** |   |   | 180 |   | 2.38 |   |
|                         |       | ** **              | ** **   | ** **         | ** **   | ** ** | ** ** |   |   |   |   |   |   |
| **CG&E  Total**          |       | ** **              | ** **   | **$**              | **192**      | ** ** | **2.73** | **%** | ** ** |   | $ | 292 |   | 2.36 | % |
|                         |       | ** **              | ** **   | ** **         | ** **   | ** ** | ** ** |   |   |   |   |   |   |
| **PSI**                      |       | ** **              | ** **   | ** **         | ** **   | ** ** | ** ** |   |   |   |   |   |   |
| Uncommitted  lines           |       | **$**                   | **60**       | ** **         | **$**        | **—** | ** ** | **—** | **%** | $ | 60 |   | $ | — |   | — | % |
| Pollution  control notes     |       | ** **              | ** **   | **136**            | ** **   | **2.76** | ** ** |   |   | 136 |   | 2.49 |   |
| Money pool                   |       | ** **              | ** **   | **144**            | ** **   | **2.86** | ** ** |   |   | 130 |   | 2.38 |   |
|                         |       | ** **              | ** **   | ** **         | ** **   | ** ** | ** ** |   |   |   |   |   |   |
| **PSI  Total**               |       | ** **              | ** **   | **$**              | **280**      | ** ** | **2.81** | **%** | ** ** |   | $ | 266 |   | 2.44 | % |
|                         |       | ** **              | ** **   | ** **         | ** **   | ** ** | ** ** |   |   |   |   |   |   |
| **ULH&P**                |       | ** **              | ** **   | ** **         | ** **   | ** ** | ** ** |   |   |   |   |   |   |
| Money pool                   |       | ** **              | ** **   | **$**              | **—**   | ** ** | **—** | **%** | ** ** |   | $ | 11 |   | 2.38 | % |
|                         |       | ** **              | ** **   | ** **         | ** **   | ** ** | ** ** |   |   |   |   |   |   |
| **ULH&P  Total**         |       | ** **              | ** **   | **$**              | **—**   | ** ** | **—** | **%** | ** ** |   | $ | 11 |   | 2.38 | % |

 

----

(1)           Consists of athree-year $1 billion facility and a five-year $1 billion facility.  The three-year facility was entered into inApril 2004 and matures in April 2007. The five-year facility was entered into in December 2004, matures inDecember 2009, and contains $500 million sublimits each for **CG&E** and **PSI**.

(2)           **CinergyCorp.’s** commercial paper program limit is $1.5 billion.  The commercial paper program is supported by **Cinergy Corp.’s** revolving lines of credit.

(3)           Of the $162million, $150 million relates to a three-year senior revolving credit facilitythat Cinergy Canada, Inc. entered into in December 2004 and matures in December2007.

 

29

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At March 31, 2005, **Cinergy Corp.** had $1.8 billion remaining unused andavailable capacity relating to its $2 billion revolving credit facilities.  These revolving credit facilities include thefollowing:

 

| **Credit Facility**          | ** ** | **Expiration** | ** ** | **Established  Lines** | ** ** | **Outstanding  and  Committed** | ** ** | **Unused and  Available** | ** ** |
|------------------------------|------------|----------------|------------|------------------------|------------|---------------------------------|------------|---------------------------|------------|
| ** **                   | ** ** | ** **     | ** ** | *(in millions)*        | ** ** |
| * *                     | * *   | * *       | * *   | * *               | * *   | * *                        | * *   | * *                  | * *   |
| Five-year senior  revolving  |       | December 2009  |       |                   |       |                            |       |                      |       |
| Direct borrowing             |       |           |       |                   |       | $                               | —     |                      |       |   |
| Commercial paper  support    |       |           |       |                   |       | —                          |       |                      |       |
|                         |       |           |       |                   |       |                            |       |                      |       |
| Total five-year  facility(1) |       |           |       | $                      | 1,000      |                            | —     |                      | $          | 1,000 |   |
|                         |       |           |       |                   |       |                            |       |                      |       |
| Three-year  senior revolving |       | April 2007     |       |                   |       |                            |       |                      |       |
| Direct borrowing             |       |           |       |                   |       | —                          |       |                      |       |
| Commercial paper  support    |       |           |       |                   |       | 155                             |       |                      |       |
| Letter of credit  support    |       |           |       |                   |       | 12                              |       |                      |       |
|                         |       |           |       |                   |       |                            |       |                      |       |
| Total three-year  facility   |       |           |       | 1,000                  |       | 167                             |       | 833                       |       |
|                         |       |           |       |                   |       |                            |       |                      |       |
| Total Credit  Facilities     |       |           |       | $                      | 2,000      |                            | $          | 167                       |       | $ | 1,833 |   |

 

----

(1)**           CG&E**and**PSI**each have $500 million borrowingsublimits on this facility.

 

In our credit facilities,**Cinergy Corp.** has covenanted tomaintain:

 

•      a consolidatednet worth of $2 billion; and

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

 

As part of **CG&E’s** $500 million sublimit under the $1 billionfive-year credit facility, **CG&E** hascovenanted to maintain:

 

•      a consolidatednet worth of $1 billion; and

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

 

As part of **PSI’s** $500 million sublimit under the $1 billion five-yearcredit facility, **PSI** has covenanted to maintain:

 

•      a consolidatednet worth of $900 million; and

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

 

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

 

•      bankruptcy;

•      defaults in thepayment of other indebtedness; and

•      judgmentsagainst the company that are not paid or insured.

 

The latter two events,however, are subject to dollar-based materiality thresholds.  As of March 31, 2005, **Cinergy**,**CG&E**, and **PSI**are in compliance with all of their debt covenants.

 

**4.**     Energy Trading Credit Risk

 

**Cinergy’s**extension of credit for energy marketing and trading is governed by a CorporateCredit Policy.  Written guidelinesapproved by **Cinergy’s** Risk PolicyCommittee document the management approval levels for credit limits, evaluationof creditworthiness, and credit risk mitigation procedures.  Exposures to credit risks are monitored dailyby the Corporate Credit Risk function, which is independent of all trading operations.  As of March 31, 2005, 93 percent of thecredit exposure, net of credit collateral, related to energy trading andmarketing activity was with 

 

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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 isused; otherwise, **Cinergy’s**internal rating of the counterparty is used. The remaining seven percent represents credit exposure of $57 millionwith counterparties rated non-investment grade.

 

As of March 31, 2005, **CG&E** had a concentration of tradingcredit exposure of $37 million with two counterparties accounting for greaterthan ten percent of **CG&E’s**total trading credit exposure.  Thesecounterparties are 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.

 

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

 

**5.**     Pension and OtherPostretirement Benefits

 

As discussed in the 200410-K, **Cinergy Corp.** sponsors bothpension and other postretirement benefits plans.  Our qualified defined benefit pension planscover substantially all United States employees meeting certain minimum age andservice requirements.  Funding for thequalified defined benefit pension plans is based on actuarially determinedcontributions, the maximum of which is generally the amount deductible forincome tax purposes and the minimum being that required by the EmployeeRetirement Income Security Act of 1974, as amended.  The pension plans’ assets consist ofinvestments in equity and debt securities. In addition, we sponsor non-qualified pension plans that cover officers,certain other key employees, and non-employee directors.  We provide certain health care and lifeinsurance benefits to retired United States employees and their eligibledependents.  These benefits are subjectto minimum age and service requirements. The health care benefits include medical, dental, and prescription drugcoverage and are subject to certain limitations, such as deductibles andco-payments.

 

Based on preliminaryestimates, we expect 2005 contributions of $102 million for qualified pensionbenefits, which is an increase from the $72 million disclosed in the 200410-K.  This $30 million increase isprimarily the result of a change in the retirement age assumption whichincreased the near-term funding estimates. Actual contributions for the first quarter of 2005 were zero.

 

Our benefit plans’ costsfor the quarters ended March 31, 2005 and 2004, included the followingcomponents:

 
| ** **                                     | ** ** | **Qualified  Pension Benefits** | ** ** | **Non-Qualified  Pension Benefits** | ** ** | **Other Postretirement  Benefits** | ** ** |
|------------------------------------------------|------------|---------------------------------|------------|-------------------------------------|------------|------------------------------------|------------|
| **Quarter Ended March 31**                     | ** ** | **2005**                        | ** ** | 2004                                | ** ** | **2005**                           | ** ** | 2004 | ** ** | **2005** | ** ** | 2004 | ** ** |
| ** **                                     | ** ** | *(in millions)*                 | ** ** |
| * *                                       | * *   | * *                        | * *   | * *                            | * *   | * *                           | * *   | * * | * * | * * | * * | * * | * * |
| Service cost                                   |       | **$**                           | **9.6**    | ** **                          | $          | 8.8                                |       | **$** | **1.4** | ** ** | $ | 1.2 |   | **$** | **1.6** | ** ** | $ | 1.4 |   |
| Interest cost                                  |       | **24.1**                        | ** ** | 22.1                                |       | **1.8**                            | ** ** | 1.7 |   | **5.7** | ** ** | 6.0 |   |
| Expected return  on plans’ assets         |       | **(22.0**                       | **)**      | (20.1                               | )          | **—**                         | ** ** | — |   | **—** | ** ** | — |   |
| Amortization of  transition (asset) obligation |       | **—**                      | ** ** | (0.1                                | )          | **—**                         | ** ** | — |   | **0.1** | ** ** | 0.8 |   |
| Amortization of  prior service cost            |       | **1.1**                         | ** ** | 1.1                                 |       | **0.5**                            | ** ** | 0.5 |   | **(0.1** | **)** | — |   |
| Recognized  actuarial loss                     |       | **1.9**                         | ** ** | 0.5                                 |       | **0.6**                            | ** ** | 0.7 |   | **2.7** | ** ** | 2.1 |   |
| Net periodic  benefit cost                     |       | **$**                           | **14.7**   | ** **                          | $          | 12.3                               |       | **$** | **4.3** | ** ** | $ | 4.1 |   | **$** | **10.0** | ** ** | $ | 10.3 |   |

 

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The net periodic benefitcosts by registrant for the quarters ended March 31, 2005 and 2004, were asfollows:

 
| ** **                   | ** ** | **Qualified  Pension Benefits** | ** ** | **Non-Qualified  Pension Benefits** | ** ** | **Other Postretirement  Benefits** | ** ** |
|------------------------------|------------|---------------------------------|------------|-------------------------------------|------------|------------------------------------|------------|
| **Quarter Ended March 31**   | ** ** | **2005**                        | ** ** | 2004                                | ** ** | **2005**                           | ** ** | 2004 | ** ** | **2005** | ** ** | 2004 | ** ** |
| ** **                   | ** ** | *(in millions)*                 | ** ** |
| * *                     | * *   | * *                        | * *   | * *                            | * *   | * *                           | * *   | * * | * * | * * | * * | * * | * * |
| **Cinergy**(1)               |       | **$**                           | **14.7**   | ** **                          | $          | 12.3                               |       | **$** | **4.3** | ** ** | $ | 4.1 |   | **$** | **10.0** | ** ** | $ | 10.3 |   |
| **CG&E**and subsidiaries |       | **4.4**                         | ** ** | 3.7                                 |       | **0.2**                            | ** ** | 0.2 |   | **2.6** | ** ** | 2.6 |   |
| **PSI**                      |       | **3.8**                         | ** ** | 3.2                                 |       | **0.2**                            | ** ** | 0.2 |   | **4.9** | ** ** | 5.3 |   |
| **ULH&P**                |       | **0.4**                         | ** ** | 0.4                                 |       | **—**                         | ** ** | — |   | **0.3** | ** ** | 0.2 |   |
|                              |            |                                 |            |                                     |            |                                    |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

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

 

**6.**     Commitments and Contingencies

*** ***

***(a)***           Environmental

* *

*(i)*           EmissionReduction Rulemakings

 

In October 1998, the EnvironmentalProtection Agency (EPA) finalized its ozone transport rule, also known as thenitrogen oxides (NOX) State Implementation Plan (SIP) Call, whichaddresses wind-blown ozone and ozone precursors that impact air quality indownwind states.  The EPA’s final rule,which applies to 22 states in the eastern United States including the threestates in which our electric utilities operate, required states to developrules to reduce NOX emissions from utility and industrialsources.  In a related matter, inresponse to petitions filed by several states alleging air quality impacts fromupwind sources located in other states, the EPA issued a rule pursuant toSection 126 of the Clean Air Act (CAA) that required reductions similar tothose required under the NOX SIP Call.  Various states and industry groups challengedthe final rules in the Court of Appeals for the District of Columbia Circuit,but the court upheld the key provisions of the rules.

 

The EPA has proposedwithdrawal of the Section 126 rule in states with approved rules under thefinal NOX SIP Call, which includes Indiana, Kentucky, and Ohio**. **All three stateshave adopted a cap and trade program as the mechanism to achieve the requiredreductions.  **Cinergy**, **CG&E**, and **PSI** have installed selective catalyticreduction units (SCR) and other pollution controls and implemented certaincombustion turbine improvements at various generating stations to comply withthe NOX SIP Call.  **Cinergy** also utilizes the NOXemission allowance market to buy or sell NOX emission allowances asappropriate.  We currently estimate thatwe will incur capital costs of approximately $12 million in addition to $788 millionalready incurred to comply with this program.

 

InMarch 2005, the EPA issued the Clean Air Interstate Rule (CAIR), formerly theInterstate Air Quality Rule, which would require states to revise their SIP bySeptember 2006 to address alleged contributions to downwind non-attainment withthe revised National Ambient Air Quality Standards for ozone and fine particulatematter.  The rule established atwo-phase, regional cap and trade program for sulfur dioxide (SO2)and NOX, affecting 28 states, including Ohio,Indiana, and Kentucky, and requires SO2 and NOX emissionsto be cut 70 percent and 65 percent, respectively, by 2015.  At the same time, the EPA issued the CleanAir Mercury Rule (CAMR) which requires reductions in mercury emissions fromcoal-fired power plants.  The finalregulation also adopts a two-phase cap and trade approach that requires mercuryreductions of 70 percent by 2018.  Underboth CAIR and CAMR, companies have flexible compliance options includinginstallation of pollution controls on large plants where such controls areparticularly efficient and utilization of emission allowances for smaller plantswhere controls are not cost effective. Numerous states and environmental organizations have challenged certainEPA regulatory determinations contending that CAMR does not require enoughreductions.  At this time we cannotpredict the outcome of this matter.

 

Overthe 2005-2009 time period, we expect to spend approximately $1.8 billion toreduce mercury, SO2, and NOX emissions.  These estimates include $1.7 billion in coststo comply with CAIR and CAMR.  Theseestimates also include estimated costs to comply at plants that we own but donot operate and could change when taking into consideration compliance plans ofco-owners or operators involved. Moreover, as market conditions change, additional compliance options maybecome available and our plans will be adjusted accordingly.  Approximately 60 

 

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percentof these estimated environmental costs would be incurred at **PSI’s** coal-fired plants, for which recoverywould be pursued in accordance with regulatory statutes governing environmentalcost recovery.  See (b)(*i*) for more details.  **CG&E** wouldreceive partial recovery of depreciation and financing costs related toenvironmental compliance projects for 2005-2008 through its recently approvedrate stabilization plan (RSP).  See (b)(*ii*) for more details.

 

InJune 2004, the EPA made final state non-attainment area designations toimplement the revised ozone standard.  InJanuary 2005, the EPA made final state non-attainment area designations toimplement the new fine particulate standard. Several counties in which we operate have been designated as being innon-attainment with the new ozone standard and/or fine particulatestandard.  States with counties that aredesignated as being in non-attainment with the new ozone and/or fineparticulate standards are required to develop a plan of compliance by June 2007and April 2008, respectively.  Industrialsources in or near those counties are potentially subject to requirements forinstallation of additional pollution controls. In March 2005, various states, local governments, environmental groups,and industry groups, including some of which **Cinergy**is a member, filed petitions for review in the United States Court of Appealsfor the D.C. Circuit to challenge the EPA’s particulate matter non-attainmentdesignations.  Although the EPA hasattempted to structure CAIR to resolve purported utility contributions to ozoneand fine particulate non-attainment, at this time, **Cinergy** cannot predict the effect of current or futurenon-attainment designations on its financial position or results of operations.

 

*(ii)*          Section126 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.  Dependingon the EPA’s final disposition of the pending petition and its proposaldiscussed previously, **Cinergy’s**generating stations could become subject to requirements for additional SO2and NOX emissions reductions. We expect a decision from the EPA on this matter by August 2005.  It is unclear at this time whether anyadditional reductions would be necessary beyond those required under the CAA.

 

*(iii)*         CleanAir Act 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 we violated the CAA by not obtaining Prevention of SignificantDeterioration (PSD), Non-Attainment New Source Review (NSR), and Ohio andIndiana SIP permits for various projects at our owned and co-owned generatingstations.  Additionally, the suit claimsthat we violated an Administrative Consent Order entered into in 1998 betweenthe 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.  The case is currently in discovery, and the UnitedStates Federal District Court for the Southern District of Indiana has set thecase for trial by jury commencing in February 2006.

 

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 isscheduled for trial commencing June 2005.

 

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 

 

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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.

 

We are unable to predict whether resolution of thesematters would have a material effect on our financial position or results ofoperations.  We intend tovigorously defend against these allegations.

 

*(iv)*         CarbonDioxide (CO2) 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 at electricgenerating facilities contribute to global warming and amount to a publicnuisance.  The complaints also allegethat the defendants could generate the same amount of electricity whileemitting significantly less CO2. The plaintiffs are seeking an injunction requiring each defendant to capits CO2 emissions and then reduce them by a specified percentageeach year for at least a decade.  **Cinergy** intends to defend these lawsuitsvigorously in court and filed motions to dismiss with the other defendants inSeptember 2004.  We are not able topredict whether resolution of these matters would have a material effect on ourfinancial position or results of operations.

 

*(v)*   SelectiveCatalytic Reduction Units at Gibson Station

 

In May 2004, SCRs andother pollution control equipment became operational at Units 4 and 5 of **PSI’s** Gibson Station in accordance withcompliance deadlines under the NOX SIP Call.  In June and July 2004, Gibson Stationtemporarily shut down the equipment on these units due to a concern that portionsof the plume from those units’ stacks appeared to break apart and descend toground level, at certain times, under certain weather conditions.  As a result, and, working with the City ofMt. Carmel, Illinois, Illinois EPA, Indiana Department of EnvironmentalManagement (IDEM), EPA, and the State of Illinois, we developed a protocolregarding the use of the SCRs while we explored alternatives to address thisissue.  After the protocol was finalized,the Illinois Attorney General brought an action in Wabash County Circuit Courtagainst **PSI** seeking a preliminary injunction toenforce the protocol.  In August 2004,the court granted that preliminary injunction. **PSI** is appealing that decision to theFifth District Appellate Court, but we cannot predict the ultimate outcome ofthat appeal or of the underlying action by the Illinois Attorney General.

 

In April 2005, wecompleted the installation of a permanent control system to address thisissue.  The new control system willsupport all five Gibson generating units. We will seek recovery of any related capital as well as increasedemission allowance expenditures through the regulatory process.  Wedo not believe costs related to resolving this matter will have a materialimpact on our financial position or results of operations.

 

*(vi)*         ZimmerStation Lawsuit

 

InNovember 2004, a citizen of the Village of Moscow, Ohio, the town adjacent to **CG&E****’****s** Zimmer Station, brought a purported classaction in the United States District Court for the Southern District of Ohioseeking monetary damages and injunctive relief against **CG&E**for alleged violations of the CAA, the Ohio SIP, Ohio laws against nuisance andcommon law nuisance.  **CG&E** fileda motion to dismiss the lawsuit on primarily procedural grounds and we intendto defend against these claims vigorously.  The plaintiffs have filed anumber of additional notices of intent to sue and a second lawsuit raisingclaims similar to those in the original claim. At this time, we cannot predict whether the outcome of this matter willhave a material impact on our financial position or results of operations.

 

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*(vii)*        ManufacturedGas Plant (MGP) Sites

 

Coal tar residues,related hydrocarbons, and various metals have been found in at least 22 sitesthat **PSI** or its predecessorspreviously owned and sold in a series of transactions with Northern IndianaPublic Service Company (NIPSCO) and Indiana Gas Company, Inc. (IGC).  The 22 sites are in the process of beingstudied and will be remediated, if necessary. In 1998 NIPSCO, IGC, and **PSI**entered into Site Participation and Cost Sharing Agreements to allocateliability and responsibilities between them. The IDEM oversees investigation and cleanup of all of these sites.  Thus far, **PSI**has primary responsibility for investigating, monitoring and, if necessary,remediating nine of these sites.  InDecember 2003, **PSI** entered into avoluntary remediation plan with the state of Indiana, providing a formalframework for the investigation and cleanup of the sites.

 

In April 1998, **PSI** filed suit in Hendricks County in thestate of Indiana against its general liability insurance carriers.  **PSI**sought a declaratory judgment to obligate its insurance carriers to (1) defendMGP claims against **PSI** andcompensate **PSI** for its costs ofinvestigating, preventing, mitigating, and remediating damage to property andpaying claims related to MGP sites; or (2) pay **PSI’s** cost of defense.  **PSI** settled, in principle, its claims with all but one ofthe insurance carriers in January 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 thepresent time, **PSI** cannot predict the outcome ofthis litigation, 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.  We will continue toinvestigate and remediate the sites as outlined in the voluntary remediationplan.  As additional facts become knownand investigation is completed, we will assess whether the likelihood ofincurring additional costs becomes probable. Until all investigation and remediation is complete, we are unable todetermine the overall impact on our financial position or results ofoperations.

 

**CG&E**and **ULH&P** have performed siteassessments on certain of their sites where we believe MGP activities haveoccurred at some point in the past and have found no imminent risk to theenvironment.  At the present time, **CG&E** and **ULH&P** cannot predict whether investigation and/orremediation will be required in the future at any of these sites.

 

*(viii)*       AsbestosClaims Litigation

** **

**CG&E**and **PSI** have been named asdefendants or co-defendants in lawsuits related to asbestos at their electricgenerating stations.  Currently, thereare approximately 120 pending lawsuits. In these lawsuits, plaintiffs claim to have been exposed toasbestos-containing products in the course of their work at the **CG&E** and **PSI** generating stations. The plaintiffs further claim that as the property owner of thegenerating stations,**CG&E** and **PSI** should be held liable for theirinjuries and illnesses based on an alleged duty to warn and protect them fromany asbestos exposure.  A majority of thelawsuits to date have been brought against **PSI**.  The impact on **CG&E’s** and **PSI’s**financial position or results of operations of these cases to date has not beenmaterial.

 

Of these lawsuits, onecase filed against **PSI** has beentried to verdict.  The jury returned averdict against **PSI** in the amountof approximately $500,000 on a negligence claim and a verdict for **PSI** on punitive damages.  **PSI**received an adverse ruling in its initial appeal of the negligence claimverdict, but the Indiana Supreme Court accepted the transfer of the case andheard oral argument in June 2004.  Inaddition, **PSI** has settled a numberof other lawsuits for amounts, which neither individually nor in the aggregate,are material to **PSI’s** financialposition or results of operations.

 

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

 

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***(b)***           Regulatory

* *

*(i)*           PSIEnvironmental Compliance Case

 

In November 2004,******PSI**filed a compliance plan case with the IndianaUtility Regulatory Commission (IURC) seeking approval of**PSI’s**plan for complying with SO2, NOX, and mercury emissionreduction requirements discussion previously in (a)(*i*),including approval of cost recovery and an overall rate of return of eightpercent related to certain projects.  **PSI** requested approval to recover the financing,depreciation, and operating and maintenance costs, among others, related to$1.08 billion in capital projects designed to reduce emissions of SO2,NOX, and mercury at **PSI’s** coal-burninggenerating stations.  An evidentiaryhearing is scheduled for May 2005 and a final IURC Order is expected in thethird quarter of 2005.

 

*(ii)*          CG&EElectric Rate Filings

** **

**CG&E** made multiple rate filings in 2003 with the Public UtilitiesCommission of Ohio (PUCO) seeking approval of **CG&E’s**methodology for establishing market-based rates for generation service at theend of the market development (frozen rate) period and to recover investmentsmade in the transmission and distribution system.  The PUCO requested in these proceedings that **CG&E** propose a RSP to mitigate thepotential for significant rate increases when the market development periodcomes to an end.  In January 2004, **CG&E**filed its proposed RSP.  In May 2004, **CG&E**enteredinto a settlement agreement with many of the parties to these proceedingsrequesting that the PUCO approve a modified version of the RSP.  In September 2004, the PUCO issued an orderseeking to modify several key provisions of this settlement and as a result ofthese modifications, **CG&E**fileda petition for rehearing in October 2004. The PUCO approved a modified version of the plan in November 2004, themajor features of which are as follows:

 

•      **Provider of Last Resort (POLR) Charge:**  **CG&E** begancollecting a POLR charge from non-residential customers effective January 1,2005, and will begin to collect a POLR charge from residential customerseffective January 1, 2006.  The POLRcharge includes several discrete charges, the most significant being anannually adjusted component (AAC) intended to provide cost recovery primarilyfor environmental compliance expenditures; an infrastructure maintenance fundcharge (IMF) intended toprovide compensation to **CG&E** forcommitting its physical capacity to meet its POLR obligation; and********a system reliability tracker (SRT) intended toprovide cost recovery for capacity purchases, purchased power, reservecapacity, and related market costs for purchases to meet capacity needs.  We anticipate the collection of the AAC andIMF will result in an approximate $36 million increase in revenues in 2005 andan additional $50 million in 2006.  TheSRT will be billed based on dollar-for-dollar costs incurred.  A portion of these charges are avoidable bycertain customers who switch to an alternative generation supplier.  Therefore, these estimates are subject tochange, depending on the level of switching that occurs in future periods.  In 2007 and 2008, **CG&E**could seek additional increases in the AAC component of the POLR based on **CG&E’s** actual net costs for the specified expenditures.

•      **Generation Rates and Fuel Recovery: **A new rate has been established for generation service afterthe market development period ends.  Inaddition, a fuel cost recovery mechanism that is adjusted quarterly has beenestablished to recover costs for fuel, emission allowances, and certainpurchased power costs, that exceed the amount originally included in the ratesfrozen in the **CG&E** transitionplan.  These new rates were applied tonon-residential customers beginning January 1, 2005 and will be applied toresidential customers beginning January 1, 2006.

•      **Generation Rate Reduction: **Theexisting five percent generation rate reduction required by statute forresidential customers implemented under **CG&E’s** 2000plan will end on December 31, 2005.

•      **Transmission Cost Recovery: **Transmissioncost recovery mechanisms were established beginning January 1, 2005 fornon-residential customers and will be established beginning January 1, 2006 forresidential customers.  The transmissioncost recovery mechanisms are designed to permit **CG&E**to recover Midwest Independent Transmission System Operator, Inc. charges, allFederal Energy Regulatory Commission (FERC) approved transmission costs, andall congestion costs allocable to retail ratepayers that are provided serviceby **CG&E**.

 

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•      **Distribution Cost Recovery: CG&E** will have the ability to defer certaincapital-related distribution costs from July 1, 2004 through December 31, 2005with recovery from non-residential customers to be provided through a riderbeginning January 1, 2006 through December 31, 2010.

 

**CG&E** had also filed an electric distribution base rate case for residentialand non-residential customers to be effective January 1, 2005.  Under the terms of the RSP describedpreviously, **CG&E** withdrew thisbase rate case and, in February 2005, **CG&E** fileda new distribution base rate case with rates to become effective January 1,2006.  The requested amount of theincrease is $78 million.

 

InMarch 2005, the Ohio Consumers’ Counsel asked the Ohio Supreme Court tooverturn the RSP.  We expect the court todecide the case before January 1, 2006; however, at this time we cannot predictthe outcome of this matter.

 

*(iii)*         ULH&PGas Rate Case

 

In 2002, the Kentucky Public Service Commission (KPSC)approved **ULH&P’s** gas base ratecase requesting, among other things, recovery of costs associated with anaccelerated gas main replacement program of up to $112 million over tenyears.  The costs would be recoveredthrough a tracking mechanism for an initial three year period, with thepossibility of renewal up to ten years.  To date, we have capitalized $31 million incosts associated with the accelerated gas main replacement program.** **Thetracking mechanism allows **ULH&P**to recover depreciation costs and rate of return annually over the life of thedeferred assets.  Through March 31, 2005,**ULH&P** has recovered $6.3million under this tracking mechanism. The Kentucky Attorney General has appealed to the Franklin Circuit Courtthe KPSC’s approval of the tracking mechanism and the new tracking mechanismrates.  At the present time, **ULH&P** cannot predict the timing oroutcome of this litigation.

 

In February 2005, **ULH&P**filed a gas base rate case with the KPSC.**  ULH&P** is requesting approvalto continue the tracking mechanism in addition to its request for a $14 millionincrease in base rates, which is a seven percent increase in current retail gasrates.  **ULH&P**expects that the KPSC will issue its decision by the fourth quarter of 2005.

 

*(iv)*         GasDistribution Plant

 

In June 2003, the PUCOapproved an amended settlement agreement between **CG&E** and the PUCO Staff in a gas distribution safety casearising out of a gas leak at a service head-adapter (SHA) style riser on **CG&E’s** distribution system.  The amended settlement agreement required **CG&E** to expend a minimum of $700,000 toreplace SHA risers by December 31, 2003, and to file a comprehensive planaddressing all SHA risers on its distribution system.  **CG&E** fileda comprehensive plan with the PUCO in December 2004 providing for replacementof approximately 5,000 risers in 2005 with continued monitoringthereafter.  **CG&E**estimates the replacement cost of these risers will not be material.  In April 2005, the PUCO issued an orderclosing this case.  The PUCO issued aseparate order opening a statewide investigation into riser leaks in gaspipeline systems throughout Ohio.  Atthis time, **Cinergy** and**CG&E**cannotpredict the outcome of this matter.

 

***(c)***           Other

* *

*(i)*           EnergyMarket Investigations

 

In August 2003, **Cinergy**, along with Cinergy Marketing &Trading, LP (Marketing & Trading) and 37 other companies, were named asdefendants in civil litigation filed as a purported class action on behalf ofall persons who purchased and/or sold New York Mercantile Exchange natural gasfutures and options contracts between January 1, 2000, and December 31,2002.  The complaint alleges thatimproper price reporting caused damages to the class.  Two similar lawsuits have subsequently beenfiled, and these three lawsuits have been consolidated for pretrialpurposes.  The plaintiffs filed aconsolidated class action complaint in January 2004.  **Cinergy’s**motion to dismiss was granted in September 2004 leaving only Marketing &Trading in the lawsuit.  We believe thisaction against Marketing & Trading is without merit and intend to defendthis lawsuit vigorously.

 

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**Cinergy**continuesto provide various Assistant United States Attorneys with information withrespect to their investigations into energy market practices.  We understand that we are neither a targetnor are we under investigation by the Department of Justice in relation to anyof these communications.

 

At this time, we do notbelieve the outcome of these investigations and litigation will have a materialimpact on **Cinergy’s** financialposition or results of operations.

 

*(ii)*          SyntheticFuel Production

 

In July 2002, Cinergy Capital& Trading, Inc. acquired a coal-based synthetic fuel productionfacility.  The synthetic fuel produced atthis facility qualifies for tax credits (through 2007) in accordance with IRCSection 29 if certain requirements are satisfied.  The three key requirements are that (a) thesynthetic fuel differs significantly in chemical composition from the coal usedto produce such synthetic fuel, (b) the fuel produced is sold to an unrelatedentity and (c) the fuel was produced from a facility that was placed in servicebefore July 1, 1998.  In addition to theexisting plant, we have recently purchased an additional synthetic fuel plant.

 

During the third quarter of 2004, several unrelatedentities announced that the IRS had challenged or threatened to challenge theplaced in service dates of some of the entities’ synthetic fuel plants.  A successful IRS challenge could result indisallowance of all credits previously claimed for fuel produced by the subjectplants.  **Cinergy’s**sale of synthetic fuel has generated $244 million in tax credits through March31, 2005.  The IRS is currently auditing **Cinergy** for the 2002 and 2003 tax years.  It is reasonable to anticipate that the IRSwill evaluate the various key requirements for claiming our Section 29 creditsrelated to synthetic fuel.  **Cinergy** received a private letter rulingfrom the IRS in connection with the acquisition of the facility thatspecifically addressed the significant chemical change requirement.  Additionally, although not addressed in theletter ruling, we believe that our facility’s in service date meets the Section29 requirements.

 

IRC Section 29 alsoprovides for a phase-out of the credit based on the average price of crude oilduring a calendar year.  The phase-out isbased on a prescribed calculation and definition of crude oil prices.  We believe that crude oil prices would needto average approximately $60 per barrel from May through December 2005 for anycredits to be phased out for 2005.  Thecredits would be entirely phased out if crude oil prices were to averageapproximately $80 per barrel during that same time period.  Based on recent forecasts of crude oil pricesfor the remainder of 2005, we do not currently expect a negative impact on ourability to recognize the projected benefit of Section 29 credits in 2005.

 

Under currently enactedlaw, the credit under IRC Section 29 will cease to be available for syntheticfuel sold after December 31, 2007.

 

*(iii)*         Guarantees

 

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 accomplish theirintended 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, wecalculate the maximum potential amount by considering the terms of theguaranteed transactions, to the extent such amount is estimable.

 

**Cinergy**hadguaranteed borrowings by individuals under the Director, Officer, and Key EmployeeStock Purchase Program.  Under theseguarantees, **Cinergy**would havebeen obligated to pay the debt’s principal and any related interest in theevent of an unexcused breach of a guaranteed payment obligation by certaindirectors, officers, and key employees.  Thisprogram terminated pursuant to its terms during the first quarter of 2005 andas of March 31, 2005, all borrowings had been repaid by the participants.

 

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**CinergyCorp.** has also provided performance guarantees on behalf ofcertain unconsolidated subsidiaries and joint ventures.  These guarantees support performance undervarious agreements and instruments (such as construction contracts, operationsand 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 $52 millionunder these guarantees as of March 31, 2005. **Cinergy Corp.** may also haverecourse to third parties for claims required to be paid under certain of theseguarantees.  The majority of theseguarantees expire at the completion of the underlying performance agreement,the majority of which expire from 2016 to 2019.

 

**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 $128 million under these indemnificationprovisions.  The termination period forthe majority of matters provided by indemnification provisions in these typesof agreements generally ranges from 2005 to 2009.

 

We believe the likelihoodthat **Cinergy**would be required toperform or otherwise incur any significant losses associated with any or all ofthe guarantees described in the preceding paragraphs is remote.

 

**7.**     Financial Information byBusiness Segment

 

As discussed in the 200410-K, we conduct operations through our subsidiaries, and manage through thefollowing three reportable segments:

 

•      RegulatedBusiness Unit (Regulated);

•      CommercialBusiness Unit (Commercial); and

•      PowerTechnology and Infrastructure Services Business Unit (Power Technology andInfrastructure).

 

Regulated consists of **PSI’s** regulated generation and transmissionand distribution operations, and **CG&E**andits subsidiaries’ regulated electric and gas transmission and distribution systems.  Regulated plans, constructs, operates, andmaintains **Cinergy’s** transmissionand distribution systems and delivers gas and electric energy toconsumers.  Regulated also earns revenuesfrom wholesale customers primarily by these customers transmitting electricpower 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.

 

Commercial manages ourwholesale generation and energy marketing and trading activities.  Commercial also performs energy riskmanagement activities, provides customized energy solutions and is responsiblefor all of our international operations.

 

Power Technology andInfrastructure primarily manages Cinergy Ventures, LLC (Ventures), **Cinergy’s** venture capital subsidiary.  Ventures identifies, invests in, andintegrates new energy technologies into **Cinergy’s**existing businesses, focused primarily on operational efficiencies and cleanenergy technologies.  In addition, PowerTechnology and Infrastructure manages our investments in other energyinfrastructure and telecommunication service providers.

 

Following are thefinancial results by business unit. Certain prior year amounts have been reclassified to conform to thecurrent presentation.

 

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Financial results bybusiness unit for the quarters ended March 31, 2005, and March 31, 2004, are asindicated below.

 
| ** **                        | ** ** | **Cinergy Business Units** | ** ** | ** **     | ** ** | ** **                               | ** ** |
|-----------------------------------|------------|----------------------------|------------|----------------|------------|------------------------------------------|------------|
| ** **                        | ** ** | **Regulated**              | ** ** | **Commercial** | ** ** | **Power Technology  and Infrastructure** | ** ** | **Total** | ** ** | **Reconciling  Eliminations**(1) | ** ** | **Consolidated** | ** ** |
| ** **                        | ** ** | *(in millions)*            | ** ** |
| * *                          | * *   | * *                   | * *   | * *       | * *   | * *                                 | * *   | * * | * * | * * | * * | * * | * * |
| **Quarter  ended March 31, 2005** | ** ** | ** **                 | ** ** | ** **     | ** ** | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                        | ** ** | ** **                 | ** ** | ** **     | ** ** | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Operating  revenues**           | ** ** | ** **                 | ** ** | ** **     | ** ** | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **External  customers**           | ** ** | **$**                      | **912**    | ** **     | **$**      | **432**                                  | ** ** | **$** | **—** | ** ** | **$** | **1,344** | ** ** | **$** | **—** | ** ** | **$** | **1,344** | ** ** |
| **Intersegment  revenues**        | ** ** | **12**                     | ** ** | **45**         | ** ** | **—**                               | ** ** | **57** | ** ** | **(57** | **)** | **—** | ** ** |
| ** **                        | ** ** | ** **                 | ** ** | ** **     | ** ** | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   |
| **Gross  margins**                | ** ** | ** **                 | ** ** | ** **     | ** ** | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   |
| **Electric**                      | ** ** | **442**                    | ** ** | **179**        | ** ** | **—**                               | ** ** | **621** | ** ** | **—** | ** ** | **621** | (3) |
| **Gas**                           | ** ** | **98**                     | ** ** | **6**          | ** ** | **—**                               | ** ** | **104** | ** ** | **—** | ** ** | **104** | (4) |
| ** **                        | ** ** | ** **                 | ** ** | ** **     | ** ** | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Segment  profit (loss)**(2)     | ** ** | **76**                     | ** ** | **45**         | ** ** | **(4**                                   | **)**      | **117** | ** ** | **—** | ** ** | **117** | ** ** |
| ** **                        | ** ** | ** **                 | ** ** | ** **     | ** ** | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Quarter ended  March 31, 2004     | ** ** | ** **                 | ** ** | ** **     | ** ** | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                        | ** ** | ** **                 | ** ** | ** **     | ** ** | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Operating  revenues               |       |                       |       |           |       |                                     |       |   |   |   |   |   |   |
| External  customers               |       | $                          | 913        |           | $          | 376                                      |       | $ | — |   | $ | 1,289 |   | $ | — |   | $ | 1,289 |   |
| Intersegment  revenues            |       | 24                         |       | 50             |       | —                                   |       | 74 |   | (74 | ) | — |   |
|                              |       |                       |       |           |       |                                     |       |   |   |   |   |   |   |
| Gross margins                     |       |                       |       |           |       |                                     |       |   |   |   |   |   |   |
| Electric                          |       | 406                        |       | 159            |       | —                                   |       | 565 |   | — |   | 565 | (3) |
| Gas                               |       | 104                        |       | 23             |       | —                                   |       | 127 |   | — |   | 127 | (4) |
|                              |       |                       |       |           |       |                                     |       |   |   |   |   |   |   |
| Segment profit  (loss)(2)         |       | 81                         |       | 45             |       | (23                                      | )          | 103 |   | — |   | 103 |   |

 

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(1)           The ReconcilingEliminations category eliminates the intersegment revenues of Commercial andRegulated.

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

(3)           Electric grossmargin is calculated as *Electric operatingrevenues* less *Fuel, emissionallowances, and purchased power* expense from the CondensedConsolidated Statements of Income.

(4)           Gas gross marginis calculated as *Gas operating revenues*less *Gas purchased* expense fromthe Condensed Consolidated Statements of Income.

 

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Total segment assets at March 31, 2005, and December 31, 2004, are asindicated below:

 
| ** **                                  | ** ** | **Cinergy Business Units** | ** ** | ** **     | ** ** | ** **                              | ** ** |
|---------------------------------------------|------------|----------------------------|------------|----------------|------------|-----------------------------------------|------------|
| ** **                                  | ** ** | **Regulated**              | ** ** | **Commercial** | ** ** | **Power Technology and Infrastructure** | ** ** | **Total** | ** ** | **All  Other**(1) | ** ** | **Consolidated** | ** ** |
| * *                                    | * *   | *(in  millions)*           | * *   |
| * *                                    | * *   | * *                   | * *   | * *       | * *   | * *                                | * *   | * * | * * | * * | * * | * * | * * |
| **Total  segment assets at March 31, 2005** | ** ** | **$**                      | **8,973**  | ** **     | **$**      | **5,853**                               | ** ** | **$** | **127** | ** ** | **$** | **14,953** | ** ** | **$** | **78** | ** ** | **$** | **15,031** | ** ** |
| Total segment assets at December 31, 2004   |       | $                          | 9,774      |           | $          | 4,992                                   |       | $ | 136 |   | $ | 14,902 |   | $ | 80 |   | $ | 14,982 |   |

 

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(1)           The All Other category representsmiscellaneous corporate items which are not allocated to business units forpurposes of segment performance measurement.

 

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**8.     Earnings Per Common Share**(EPS)

 

A reconciliation of EPS – basic to EPS – diluted is presented below forthe quarters ended March 31, 2005 and 2004:

 
| ** **                              | ** ** | **Income**                                 | ** **  | **Shares** | ** **  | **EPS**    | ** ** |
|-----------------------------------------|------------|--------------------------------------------|-------------|------------|-------------|------------|------------|
|                                    |       | *(in thousands, except per share amounts)* |        |
| **Quarter  Ended March 31, 2005**       | ** ** | ** **                                 | ** **  | ** ** | ** **  | ** ** | ** ** |
| **EPS –  basic:**                  | ** ** | **$**                                      | **117,356** | ** ** | **195,647** | ** ** | **$**      | **0.60** | ** ** |
| ** **                              | ** ** | ** **                                 | ** **  | ** ** | ** **  | ** ** | ** ** |
| **Effect  of dilutive securities:**     | ** ** | ** **                                 | ** **  | ** ** | ** **  | ** ** | ** ** |
| **Common  stock options**               | ** ** | ** **                                 | ** **  | **627**    | ** **  | ** ** | ** ** |
| **Directors’  compensation plans** | ** ** | ** **                                 | ** **  | **148**    | ** **  | ** ** | ** ** |
| **Stock  purchase contracts**           | ** ** | ** **                                 | ** **  | **290**    | ** **  | ** ** | ** ** |
| ** **                              | ** ** | ** **                                 | ** **  | ** ** | ** **  | ** ** | ** ** |
| **EPS –  diluted:**                | ** ** | **$**                                      | **117,356** | ** ** | **196,712** | ** ** | **$**      | **0.60** | ** ** |
| ** **                              | ** ** | ** **                                 | ** **  | ** ** | ** **  | ** ** | ** ** |
| Quarter Ended March 31, 2004            |       |                                       |        |       |        |       |       |
| EPS – basic:                       |       | $                                          | 103,015     |       | 179,261     |       | $          | 0.57 |   |
|                                    |       |                                       |        |       |        |       |       |
| Effect of dilutive securities:          |       |                                       |        |       |        |       |       |
| Common stock options                    |       |                                       |        | 835        |        |       |       |
| Directors’ compensation plans      |       |                                       |        | 148        |        |       |       |
| Contingently issuable common stock      |       |                                       |        | 574        |        |       |       |
| Stock purchase contracts                |       |                                       |        | 1,108      |        |       |       |
|                                    |       |                                       |        |       |        |       |       |
| EPS – diluted:                     |       | $                                          | 103,015     |       | 181,926     |       | $          | 0.57 |   |

 

Options to purchase shares of common stock are excluded from thecalculation of EPS – diluted, if they are considered to be anti-dilutive.  Share amounts of 1.5 million and 0.9 millionwere excluded from the EPS – diluted calculation for the quarters ended March31, 2005 and 2004, respectively.

 

Also excluded from the EPS – diluted calculation for the quarter endedMarch 31, 2004 are 9.7 million shares, issuable pursuant to the stock purchase contracts issued by **Cinergy Corp.** in December 2001 associatedwith the preferred trust securities transaction.  As discussed in the 2004 10-K, in January andFebruary 2005, **Cinergy Corp.** issued a total of9.2 million shares of common stock associated with these preferred stocksecurities.

 

**9.     Transfer of Generating Assets**

 

The KPSC has conditionally approved and theFERC has approved **ULH&P’s**plannedacquisition of **CG&E’s** 68.9percent ownership interest in the East Bend Station, located in Boone County,Kentucky, the Woodsdale Station, located in Butler County, Ohio, and onegenerating unit at the four-unit Miami Fort Station located in Hamilton County,Ohio.  **ULH&P**is currently seeking approval of the transaction from the Securities andExchange Commission (SEC), wherein the Ohio Consumers’ Counsel has intervenedin opposition.  The transfer, which willbe at net book value, will not affect current electric rates for **ULH&P’s** customers, as power will beprovided under the same terms as under the current wholesale power contractwith **CG&E** through December 31,2006.  Assuming receipt of SEC approval,we would anticipate the transfer to take place in the third quarter of 2005.

 

**10.  Subsequent Events**

 

**Merger Agreement**

 

On May 8, 2005, Duke Energy Corporation (Duke) agreed to acquire alloutstanding shares of Cinergy  where eachshare of Cinergy stock is exchanged for 1.56 shares of Duke stock.  The transaction is expected to close inapproximately 12 months, however that timing is contingent on variousregulatory approvals that could take longer to obtain.   A discussion of the details of thisagreement follows.

 

Duke, Cinergy Corp., Deer Holding Corp., a Delaware corporation(“Holdco”), Deer Acquisition Corp., a North Carolina corporation (“Merger SubA”), and Cougar Acquisition Corp., a Delaware corporation (“Merger Sub B”),entered into an Agreement and Plan of Merger (together with the exhibitsthereto, the “Merger Agreement”).  Eachof Holdco, Merger Sub A and Merger Sub B are newly-formed, wholly-owned director indirect subsidiaries of Duke, and Merger Sub A and Merger Sub B are directwholly-owned subsidiaries of Holdco.

 

The Merger Agreement provides that Merger Sub A will merge with andinto Duke (the “Duke Merger”) and each share of Duke common stock will becancelled and converted into the right to receive one share of Holdco commonstock.  In the Duke Merger, Duke will bethe surviving corporation and continue as a wholly-owned subsidiary of Holdcoand the former shareholders of Duke will be shareholders of Holdco.  As a result of the Duke Merger, Duke willshift into a holding company structure wherein Duke will become a wholly-owneddirect subsidiary Holdco.

 

Following the Duke Merger, Duke (as a subsidiary of Holdco) may convertto a limited liability company (the “Duke Conversion”) and be renamed “DukePower LLC.”  If the Duke Conversionoccurs, Duke Power LLC will be a limited liability company whose membership orother equity interests will be held by Holdco. Following the Duke Conversion,Duke Power LLC will initiate one or more restructuring transactions asdescribed in the Merger Agreement, including the distribution of certainsubsidiaries of Duke Power LLC to Holdco.

 

Following the latest of the consummation of the Duke Merger and any ofthe restructuring transactions, Merger Sub B will merge with and into Cinergy(the “Cinergy Merger” and, together with the Duke Merger, the “Mergers”) andeach share of Cinergy common stock will be cancelled and converted into theright to receive 1.56 shares of Holdco common stock.  In the Cinergy Merger, Cinergy will be thesurviving corporation and will continue as a wholly-owned subsidiary of Holdcoand the former shareholders of Cinergy will be shareholders of Holdco.

 

All outstanding options at the effective time of the Mergers, whethervested or unvested, will be converted into options to acquire shares of Holdcocommon stock.  Each outstanding option toacquire one share of Duke common stock will be converted into an option to acquireone share of Holdco common stock at the same exercise price. Each outstandingoption to acquire one share of Cinergy common stock will be converted into anoption to acquire 1.56 shares of Holdco common stock at an equitably adjustedexercise price.  The options to acquireHoldco common stock will be issued subject to the same terms and conditions aswere applicable under the Duke or Cinergy option plan pursuant to which eachoption was initially issued.

 

In connection with the signing of the Merger Agreement, Duke announcedthat it would suspend the voluntary portion of its share repurchase programpending further assessment.

 

The Merger Agreement provides that following the effective time of theMergers, Holdco will have a fifteen member board of directors, which willinclude ten directors named by Duke and five directors named by Cinergy.  Paul M. Anderson, Chairman and ChiefExecutive Officer of Duke, will be the Chairman of the Board of Directors ofHoldco, with certain additional responsibilities for analyzing potentialstrategic alternatives regarding the separation of the gas and electricbusinesses.  James E. Rogers, Chairman,President and Chief Executive Officer of Cinergy, will be the President andChief Executive Officer of Holdco.

 

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Duke and Cinergy have each made customary representations, warrantiesand covenants in the Merger Agreement, including, among others, covenants toconduct their businesses in the ordinary course between the execution of theMerger Agreement and the consummation of the Mergers and covenants not toengage in certain kinds of transactions during that period.  During such period, Cinergy will not increaseits regular quarterly cash dividend without the prior written consent of Dukeand Duke may increase its regularly quarterly cash dividend up to $0.31 pershare without the prior written consent of Cinergy.  In addition, Duke and Cinergy have madecertain additional customary covenants, including, among others, covenants,subject to certain exceptions, (A) to cause a stockholder meeting to be held toconsider approval of the Mergers and the other transactions contemplated by theMerger Agreement, (B) not to solicit proposals relating to alternative businesscombination transactions, and (C) not to enter into discussions concerning, orprovide confidential information in connection with, alternative businesscombination transactions.

 

Consummation of the Mergers is subject to customary conditions,including, among others, (i) approval of the stockholders of each of Duke andCinergy, (ii) absence of any material adverse effect, (iii) expiration ortermination of the applicable Hart-Scott-Rodino Act waiting period, (iv)absence of any order or injunction prohibiting the consummation of the Mergers,(v) the registration statement of Holdco filed on Form S-4 shall have becomeeffective, (vi) shares of  Holdco commonstock shall have been approved for listing on the New York Stock Exchange,(vii) subject to certain exceptions, the accuracy of representations andwarranties with respect to Duke’s and Cinergy’s business, as applicable, (viii)receipt of customary tax opinions, and (ix) receipt of all required statutoryapprovals from, among others, the Federal Energy Regulatory Commission, theSecurities and Exchange Commission under the Public Utility Holding Company Actof 1935, the Nuclear Regulatory Commission, the Federal CommunicationsCommission, and state public service and utility commissions.

 

The Merger Agreement contains certain termination rights for both Duke andCinergy, and further provides that, upon termination of the Merger Agreementunder specified circumstances, a party would be required to pay the otherparty’s fees and expenses in an amount not to exceed $35 million or atermination fee of $300 million in the case of a fee payable by Cinergy to Dukeor a termination fee of $500 million in the case of a fee payable by Duke toCinergy.  The termination fee is payableby Cinergy under specified circumstances, including (i) if Cinergy enters intoa definitive agreement with respect to certain business combinations (otherthan the Merger Agreement), or (ii) if Duke terminates the Merger Agreementfollowing a withdrawal by Cinergy’s Board of Directors of its recommendation ofthe Merger Agreement and the Mergers under certain circumstances.  The termination fee is payable by Duke underspecified circumstances, including (i) if Duke enters into a definitiveagreement with respect to certain business combinations (other than the MergerAgreement), or (ii) if Cinergy terminates the Merger Agreement following awithdrawal by Duke’s Board of Directors of its recommendation of the MergerAgreement and the Mergers under certain circumstances.

 

**Wheatland Generating Facility Acquisition**

 

On May 6, 2005, **PSI** and **CG&E** signed a definitive agreement with subsidiaries ofAllegheny Energy, Inc. to acquire the 512-megawatt Wheatland generatingfacility for approximately $100 million. The Wheatland facility, located in Knox County, Indiana, has fournatural gas-fired simple cycle combustion turbines and is directly connected tothe **Cinergy** transmission system.  Its output will be used to bolster thereserve margins on the **PSI** and/or **CG&E** systems. Under the transaction agreement, **PSI** and **CG&E** may each take a share of ownership of the plant oreither one may acquire the entire ownership interest, with the ownershipstructure to be determined shortly before closing.  The transaction is subject to receipt ofrequired regulatory approvals and other customary conditions.  **Cinergy** expectsto close the acquisition in the fourth quarter of 2005.

 

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

 

### **CAUTIONARYSTATEMENTS REGARDING FORWARD-LOOKING INFORMATION**

 

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

 

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

 

•                  Factors affecting operations, suchas:

 

(1)          unanticipatedweather conditions;

(2)          unscheduledgeneration outages;

(3)          unusualmaintenance or repairs;

(4)          unanticipatedchanges in costs, including costs of coal and emission allowances;

(5)          environmentalincidents; and

(6)          electrictransmission or gas pipeline system constraints.

 

•                  Legislative and regulatoryinitiatives and legal developments.

 

•                  Additional competition in electric orgas markets and continued industry consolidation.

 

•                  Financial or regulatory accountingprinciples including costs of compliance with existing and future environmentalrequirements.

 

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

 

•                  The performance of projectsundertaken by our non-regulated businesses and the success of efforts to investin and develop new opportunities.

 

•                  Availability of, or cost of, capital.

 

•                  Employee workforce factors.

 

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

 

•                  Costs and effects of legal andadministrative proceedings, settlements, investigations, and claims.

 

## **We undertake no obligation to update the information contained herein.**

 

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

 

In this report, **Cinergy**(which includes **Cinergy Corp.** andall of its regulated and non-regulated subsidiaries) is, at times, referred toin the first person as “we”, “our”, or “us”.

 

The following discussion should be read in conjunction with theaccompanying financial statements and related notes included elsewhere in thisreport and the combined Form 10-K for the year ended December 31, 2004 (200410-K).  We have reclassified certainprior-year amounts in the financial statements of **Cinergy**,The Cincinnati Gas & Electric Company (**CG&E**), PSIEnergy, Inc. (**PSI**), and The Union Light, Heatand Power Company (**ULH&P**) toconform to current presentation.  Thefollowing discussions of results are not necessarily indicative of the resultsto be expected in any future period.

 

**RECENTDEVELOPMENTS**

 

**Merger Agreement**

 

On May 8, 2005, Duke Energy Corporation, a North Carolina corporation(“Duke”), Cinergy Corp., a Delaware corporation (“Cinergy”), Deer HoldingCorp., a Delaware corporation (“Holdco”), Deer Acquisition Corp., a NorthCarolina corporation (“Merger Sub A”), and Cougar Acquisition Corp., a Delawarecorporation (“Merger Sub B”), entered into an Agreement and Plan of Merger(together with the exhibits thereto, the “Merger Agreement”).  Each of Holdco, Merger Sub A and Merger Sub Bare newly-formed, wholly-owned direct or indirect subsidiaries of Duke, andMerger Sub A and Merger Sub B are direct wholly-owned subsidiaries of Holdco.

 

On May 9, 2005, Duke and Cinergy issued a joint press releaseannouncing the execution of the Merger Agreement.  A copy of such press release was filed asExhibit 99.1 in Cinergy’s 8-K dated May 10, 2005.

 

The Merger Agreement provides that Merger Sub A will merge with andinto Duke (the “Duke Merger”) and each share of Duke common stock will becancelled and converted into the right to receive one share of Holdco commonstock.  In the Duke Merger, Duke will bethe surviving corporation and continue as a wholly-owned subsidiary of Holdcoand the former shareholders of Duke will be shareholders of Holdco.  As a result of the Duke Merger, Duke willshift into a holding company structure wherein Duke will become a wholly-owneddirect subsidiary Holdco.

 

Following the Duke Merger, Duke (as a subsidiary of Holdco) may convertto a limited liability company (the “Duke Conversion”) and be renamed “DukePower LLC.”  If the Duke Conversionoccurs, Duke Power LLC will be a limited liability company whose membership orother equity interests will be held by Holdco. Following the Duke Conversion,Duke Power LLC will initiate one or more restructuring transactions asdescribed in the Merger Agreement, including the distribution of certainsubsidiaries of Duke Power LLC to Holdco.

 

Following the latest of the consummation of the Duke Merger and any ofthe restructuring transactions, Merger Sub B will merge with and into Cinergy(the “Cinergy Merger” and, together with the Duke Merger, the “Mergers”) andeach share of Cinergy common stock will be cancelled and converted into theright to receive 1.56 shares of Holdco common stock.  In the Cinergy Merger, Cinergy will be thesurviving corporation and will continue as a wholly-owned subsidiary of Holdcoand the former shareholders of Cinergy will be shareholders of Holdco.

 

All outstanding options at the effective time of the Mergers, whethervested or unvested, will be converted into options to acquire shares of Holdcocommon stock.  Each outstanding option toacquire one share of Duke common stock will be converted into an option toacquire one share of Holdco common stock at the same exercise price. Each outstandingoption to acquire one share of Cinergy common stock will be converted into anoption to acquire 1.56 shares of Holdco common stock at an equitably adjustedexercise price.  The options to acquireHoldco common stock will be issued subject to the same terms and conditions aswere applicable under the Duke or Cinergy option plan pursuant to which eachoption was initially issued.

 

In connection with the signing of the Merger Agreement, Duke announcedthat it would suspend the voluntary portion of its share repurchase programpending further assessment.

 

The Merger Agreement provides that following the effective time of theMergers, Holdco will have a fifteen member board of directors, which willinclude ten directors named by Duke and five directors named by Cinergy.  Paul M. Anderson, Chairman and ChiefExecutive Officer of Duke, will be the Chairman of the Board of Directors ofHoldco, with certain additional responsibilities for analyzing potentialstrategic alternatives regarding the separation of the gas and electricbusinesses.  James E. Rogers, Chairman,President and Chief Executive Officer of Cinergy, will be the President andChief Executive Officer of Holdco.

 

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Duke and Cinergy have each made customary representations, warrantiesand covenants in the Merger Agreement, including, among others, covenants toconduct their businesses in the ordinary course between the execution of theMerger Agreement and the consummation of the Mergers and covenants not toengage in certain kinds of transactions during that period.  During such period, Cinergy will not increaseits regular quarterly cash dividend without the prior written consent of Dukeand Duke may increase its regularly quarterly cash dividend up to $0.31 pershare without the prior written consent of Cinergy.  In addition, Duke and Cinergy have madecertain additional customary covenants, including, among others, covenants,subject to certain exceptions, (A) to cause a stockholder meeting to be held toconsider approval of the Mergers and the other transactions contemplated by theMerger Agreement, (B) not to solicit proposals relating to alternative businesscombination transactions, and (C) not to enter into discussions concerning, orprovide confidential information in connection with, alternative businesscombination transactions.

 

Consummation of the Mergers is subject to customary conditions,including, among others, (i) approval of the stockholders of each of Duke andCinergy, (ii) absence of any material adverse effect, (iii) expiration ortermination of the applicable Hart-Scott-Rodino Act waiting period, (iv)absence of any order or injunction prohibiting the consummation of the Mergers,(v) the registration statement of Holdco filed on Form S-4 shall have becomeeffective, (vi) shares of  Holdco commonstock shall have been approved for listing on the New York Stock Exchange,(vii) subject to certain exceptions, the accuracy of representations andwarranties with respect to Duke’s and Cinergy’s business, as applicable, (viii)receipt of customary tax opinions, and (ix) receipt of all required statutoryapprovals from, among others, the Federal Energy Regulatory Commission, theSecurities and Exchange Commission under the Public Utility Holding Company Actof 1935, the Nuclear Regulatory Commission, the Federal CommunicationsCommission, and state public service and utility commissions.

 

The Merger Agreement contains certain termination rights for both Dukeand Cinergy, and further provides that, upon termination of the MergerAgreement under specified circumstances, a party would be required to pay theother party’s fees and expenses in an amount not to exceed $35 million or atermination fee of $300 million in the case of a fee payable by Cinergy to Dukeor a termination fee of $500 million in the case of a fee payable by Duke toCinergy.  The termination fee is payableby Cinergy under specified circumstances, including (i) if Cinergy enters into adefinitive agreement with respect to certain business combinations (other thanthe Merger Agreement), or (ii) if Duke terminates the Merger Agreementfollowing a withdrawal by Cinergy’s Board of Directors of its recommendation ofthe Merger Agreement and the Mergers under certain circumstances.  The termination fee is payable by Duke underspecified circumstances, including (i) if Duke enters into a definitiveagreement with respect to certain business combinations (other than the MergerAgreement), or (ii) if Cinergy terminates the Merger Agreement following awithdrawal by Duke’s Board of Directors of its recommendation of the MergerAgreement and the Mergers under certain circumstances.

 

The foregoing description of the Merger Agreement does not purport tobe complete and is qualified in its entirety by reference to the MergerAgreement, which was filed as Exhibit 2.1 in Cinergy’s 8-K dated May 10, 2005.

 

**Employment Arrangements and Agreement**

 

At the effective time of the Mergers, Paul M. Anderson shall beChairman of the Board of Directors of Holdco. In addition to the duties of the Chairman of the Board of Directors ofHoldco set forth in the Holdco By-laws, Mr. Anderson shall have managementresponsibilities for analyzing potential strategic alternatives regarding theseparation of Duke’s gas and electric businesses.

 

At the effective time of the Mergers, James E. Rogers shall becomePresident and Chief Executive Officer of Holdco.  Duke, Cinergy, Holdco and Mr. Rogers haveexecuted a term sheet (the “Rogers Employment Agreement Term Sheet”)pursuant to which the parties agree to amend the existing employment agreementfor Mr. Rogers in certain respects to reflect the Merger Agreement and the 

 

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transactions contemplated thereby (as so amended, the “RogersEmployment Agreement”).  The RogersEmployment Agreement will be assumed by Holdco effective upon the completion ofthe Mergers.  The Rogers EmploymentAgreement provides for a three-year term of employment commencing uponcompletion of the Mergers, which shall renew automatically for subsequentone-year periods thereafter if neither Mr. Rogers nor Holdco gives notice priorto or as of a specified date.

 

The Rogers Employment Agreement provides that the parties willnegotiate in good faith to restructure the current compensation arrangementsfor Mr. Rogers to provide that he shall be paid substantially in the form ofequity compensation by which the current Duke Chief Executive Officer ispresently compensated, in any event on terms no less favorable than Mr. Rogers’existing compensation arrangements.

 

If Mr. Rogers’ employment is involuntarily terminated without cause, orMr. Rogers terminates with “good reason” on or prior to the second anniversaryof the completion of the Mergers, or within two years following a change incontrol of Holdco, then he will receive an amount no less than the economicvalue to which he would otherwise be entitled under his existing employmentagreement had he terminated employment under such circumstances immediatelyfollowing the completion of the Mergers. If such termination of employment occurs at any time following thesecond anniversary of the completion of the Mergers (other than within twoyears following a change in control of Holdco), then he will receive an amountno less than the economic value to which he would otherwise be entitled underhis existing employment agreement had he terminated employment immediatelyprior to the occurrence of a change in control of Cinergy (and, in either case,such economic value shall be determined without regard to the form of histhen-restructured compensation arrangements). The required relocation of Mr. Rogers to Charlotte, North Carolina willnot constitute a “good reason” trigger under the Rogers Employment Agreement.

 

Effective upon the completion of the Merger, Cinergy will waive thelimitation on Mr. Rogers’ ability to sell, while still employed, certain sharesof stock of Cinergy acquired upon the exercise of Cinergy stock options,provided that Mr. Rogers will be subject to any future Duke/Holdco stockownership guidelines.

 

A copy of the Rogers Employment Agreement Term Sheet was filed asExhibit 10.1 in Cinergy’s 8-K dated May 10, 2005.

 

In connection with the signing of the Merger Agreement, Cinergy enteredinto amendments to the employment agreements of certain of its named executiveofficers (each an “Amendment to Employment Agreement”), including eachof Messrs. Cyrus, Manly and Turner pursuant to which each of the executives hasagreed to waive his right to resign for good reason and collect severancebenefits solely as a result of being required to relocate to Charlotte, NorthCarolina or, for some executives, Houston, Texas in connection with theMergers.  In addition, the good reasondefinitions were amended to eliminate the executives’ right to resign for goodreason and collect severance due to changes to the executives’ title and to adda right to resign for good reason and collect severance pay in the event thatMr. Rogers fails to continue to serve as Chief Executive Officer of Holdco(other than as a result of his death, disability, termination for cause or hisvoluntary resignation without good reason).

 

A form of the Amendment to Employment Agreement was filed as Exhibit 10.2in Cinergy’s 8-K dated May 10, 2005.

 

### **EXECUTIVE SUMMARY**

 

In Management’s Discussion and Analysis of Financial Condition andResults of Operations (MD&A), we explain our general operating environment,as well as our results of operations, liquidity, capital resources, future expectations/trends,market risk sensitive instruments, and accounting matters.  Specifically, we discuss the following:

 

•                  factors affecting current and future operations;

•                  why results changed from period to period;

•                  potential sources of cash for future capital expenditures; and

•                  how these items affect our overall financial condition.

 

**Organization**

 

**Cinergy Corp.**, aDelaware corporation organized in 1993, owns all outstanding common stock of **CG&E** and **PSI**, both of which are public utilities.  As a result of this ownership, we areconsidered a utility holding company. Because we are a holding company with material utility subsidiariesoperating in multiple states, we are registered with and are subject toregulation by the Securities and Exchange Commission (SEC) under the PublicUtility Holding Company Act of 1935, as amended (PUHCA).  Our other principal subsidiaries are CinergyServices, Inc. (Services) and Cinergy Investments, Inc. (Investments).

 

**CG&E**, an Ohiocorporation organized in 1837, is a combination electric and gas public utilitycompany that provides service in the southwestern portion of Ohio and, through **ULH&P**, in nearby areas of Kentucky.  **CG&E**is responsible for the majority of our power marketing and tradingactivity.  **CG&E’s** principal subsidiary, **ULH&P**, a Kentucky corporation organized in 1901, provideselectric and gas service in northern Kentucky.

 

**PSI**, an Indianacorporation organized in 1942, is a vertically integrated and regulatedelectric utility that provides service in north central, central, and southernIndiana.

 

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The following table presents further information related to theoperations of our domestic utility companies **CG&E**,**PSI**, and **ULH&P**(our utility operating companies):

 
|                          | **Principal  Line(s) of Business** |
|-------------------------------|------------------------------------|
| ** **                    |                               |   |   |
| **CG&E** and subsidiaries |                               | • | Generation, transmission, distribution, and sale of electricity  |
| ** **                    |                               | • | Sale and/or transportation of natural gas  |
| ** **                    |                               | • | Electric commodity marketing and trading operations |
|                          |                               |   |
| **PSI**                       |                               | • | Generation, transmission,  distribution, and sale of electricity |
|                          |                               |   |   |
| **ULH&P**(1)              |                               | • | Transmission,  distribution, and sale of electricity |
| ** **                    |                               | • | Sale and  transportation of natural gas |
|                               |                                    |  |  |  |

 

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(1)                                  See Note 9 of the “Notes to CondensedFinancial Statements” in “Item 1. Financial Statements” for further discussionof the possible transfer of generation assets.

 

Services is a service company that provides our subsidiaries with avariety of centralized administrative, management, and support services.  Investments holds most of our non-regulated,energy-related businesses and investments, including natural gas marketing andtrading operations (which are primarily conducted through Cinergy Marketing& Trading, LP, one of its subsidiaries).

 

#### **Financial Highlights**

 

Net income for **Cinergy** forthe quarters ended March 31, 2005, and 2004 was as follows:

 
| ** ** | ** ** | **Cinergy**     | ** ** |
|------------|------------|-----------------|------------|
| ** ** | ** ** | **2005**        | ** ** | 2004 | ** ** | Change | ** ** | % Change | ** ** |
| * *   | * *   | *(in millions)* | * *   |
| * *   | * *   | ** **      | * *   | * * | * * | * * | * * | * * | * * |
| Net income |       | **$**           | **117**    |   | $ | 103 |   | $ | 14 |   | 14 | % |
|            |            |                 |            |  |  |  |  |  |  |  |  |  |

 

The increase in net income wasprimarily due to the following factors:

 

•                  Increases in rate tariff adjustments resulting from the**PSI** base retail electric rate case increase in May 2004 andthe implementation of **CG&E’s** ratestabilization plan (RSP) in January 2005;

•                  An increase in gross margins on power marketing, trading, and originationcontracts; and

•                  Impairment charges recognized in the first quarter of 2004 related to atechnology investment in our Power Technology and Infrastructure ServicesBusiness Unit (Power Technology and Infrastructure).

 

These increases were partially offset by the following factors:

 

•                  Lower Commercial Business Unit (Commercial) gas gross margins resultingfrom losses on forward gas contracts; and

•                  A decrease in electric gross margins relating to certain activities inour asset optimization business.  Thisdecrease was comprised of losses on forward power contracts partially offset byincreases in margins from the sale of emission allowances.

 

For further information, see “2005 Quarterly Results of Operations – **Cinergy**”.

 

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#### **Forward-looking Challenges and Risks**

 

##### ***Environmental Challenges***

** **

**Cinergy** faces many uncertainties with regardto future environmental legislation and the impact of this legislation on ourgenerating assets and our decisions to construct new assets.  In March 2005, the Environmental ProtectionAgency (EPA) finalized two rulemakings that will require significant reductionsin sulfur dioxide (SO2), nitrogen oxides (NOX), andmercury emissions from power plants. However, various states and environmental groups have challenged certainEPA regulatory determinations contending that the new mercury rule does notrequire enough reductions.  Additionally,multi-emissions reductions legislation is still being discussed in the Senate,although the outcome of these discussions is still highly uncertain at thistime.  Presently, greenhouse gas (GHG)emissions, which principally consist of carbon dioxide (CO2), arenot regulated, and while several legislative proposals have been introduced inCongress to reduce utility GHG emissions, none have been passed.  Nevertheless, we anticipate a mandatoryprogram to reduce GHG emissions will exist in the future.  In 2004, **Cinergy’s**utility operating companies began an environmental construction program to reduceoverall plant emissions that is estimated to cost approximately $1.8 billionover the next five years.  We believethat our construction program optimally balances these uncertainties andprovides a level of emission reduction that will be required and/or economicalto **Cinergy** under a variety of possibleregulatory outcomes.  See “EnvironmentalIssues” in “Liquidity and Capital Resources” for further information.

 

##### ***Midwest Independent Transmission System Operator, Inc.(Midwest ISO) Energy Markets***

 

Effective April 1, 2005 the Midwest ISO began operating under theEnergy Markets Tariff (sometimes referred to as a Locational Marginal Pricing(LMP) market or MISO Day 2 market).  Theimplementation of an LMP market introduces new scheduling requirements, new productsfor mitigating transmission congestion risks, and new pricing points for thepurchase and sale of power.  We have beenoperating under the Energy Markets Tariff throughout April and continue to workwith the Midwest ISO to monitor the implementation of the new market.  See “Midwest ISO Energy Markets” in “FutureExpectations/Trends” for further details regarding these new markets.

 

##### ***Rising Coal and Emission Allowance Prices***

 

The prices of coal and SO2 emission allowances increased dramaticallyin 2004, as compared to 2003, and have continued to increase in 2005.  Contributing to the increases in coal and SO2prices have been (1) increases in demand for electricity, (2) environmentalregulation, and (3) decreases in the number of suppliers of coal from prioryears.  **CG&E’s**RSP allows for recovery of fuel and emission allowance expenses effectiveJanuary 1, 2005 for retail non-residential customers in Ohio.  As part of the RSP, we will begin recoveringthese costs from residential customers in Ohio effective January 1, 2006.  We continue to recover these costs from **PSI** retail customers through previously established raterecovery mechanisms.  To the extent thatthese increased fuel and SO2 prices are not offset by regulatory recovery orincreases in the market price of power for wholesale transactions, they willnegatively impact ongoing earnings.  Theimpact of these price increases on earnings in 2005 is discussed in more detailin “2005 Quarterly Results of Operations”.

 

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### **2005 QUARTERLYRESULTS OF OPERATIONS** – CINERGY

 

Given the dynamics of our business, which include regulatory revenueswith directly offsetting expenses and commodity trading operations for whichresults are primarily reported on a net basis, we have concluded that adiscussion of our results on a gross margin basis is most appropriate.  Electric gross margins represent electricoperating revenues less the related direct costs of fuel, emission allowances,and purchased power.  Gas gross marginsrepresent gas operating revenues less the related direct cost of gaspurchased.  Within each of these areas,we will discuss the key drivers of our results. Gross margins for **Cinergy**for theRegulated Business Unit (Regulated) and Commercial for the quarters ended March31, 2005, and 2004 were as follows:

 
| ** **               | ** ** | **Cinergy**      | ** ** |
|--------------------------|------------|------------------|------------|
| ** **               | ** ** | **Regulated**    | ** ** | **Commercial** | ** ** |
| ** **               | ** ** | **2005**         | ** ** | 2004 | ** ** | Change | ** ** | % Change | ** ** | **2005** | ** ** | 2004 | ** ** | Change | ** ** | % Change | ** ** |
| * *                 | * *   | *(in  millions)* | * *   |
| Electric gross margin(1) |       | **$442**         |       | $406 |   | $36 |   | 9 | % |   | **$179** |   | $159 |   | $20 |   | 13 | % |
| Gas gross margin(2)      |       | **98**           |       | 104 |   | (6 | ) | (6 | ) |   | **6** |   | 23 |   | (17 | ) | (74 | ) |

 

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(1)                                  Electric gross margin is calculated as *Electric operating revenues*less *Fuel,emission allowances, and purchased power* expense from the CondensedConsolidated Statements of Income.

(2)                                  Gas gross margin is calculated as *Gas operating revenues* less *Gaspurchased* expense from the Condensed Consolidated Statements ofIncome.

 

Cooling degree days and heating degree days are metrics commonly usedin the utility industry as a measure of the impact weather has on results ofoperations.  Cooling degree days andheating degree days in **Cinergy’s**service territory for the quarters ended March 31, 2005, and 2004 were asfollows:

 
| ** **                | ** ** | **Cinergy** | ** ** |
|---------------------------|------------|-------------|------------|
| ** **                | ** ** | **2005**    | ** ** | 2004 | ** ** | Change | ** ** | % Change | ** ** |
|                      |       |        |       |   |   |   |   |   |   |
| Cooling degree days(1)    |       | —      |       | 1 |   | (1 | ) | (100) | % |
| Heating degree days(2)(3) |       | **2,081**   |       | 2,210 |   | (129 | ) | (6) |   |

 

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(1)                                  Cooling degree daysare the differences between the average temperature for each day and 65degrees, assuming the average temperature is greater than 65 degrees.

(2)                                  Heating degree daysare the differences between the average temperature for each day and 59degrees, assuming the average temperature is less than 59 degrees.

(3)                                  Beginning in January2005, we modified our heating degree days base temperature from 65 degrees to59 degrees to more accurately reflect current consumer behavior.  Prior year amounts have been updated toreflect this change.

 

 

#### **Regulated**

 

##### ***Gross Margins***

 

The nine percent increase in Regulated’s electric gross margins wasattributable to a $43 million increase resulting primarily from a higher pricereceived per megawatt hour (MWh) due to **PSI’s**baseretail electric rate increase in May 2004. Partially offsetting this increase was a decline of $6 million in **PSI**rate tariff adjustments primarily associated withconstruction work in progress tracking mechanisms.

 

The six percent decrease in Regulated’s gas gross margins was primarilydue to milder weather during the first quarter of 2005, as compared to 2004,and a decline in non-weather related demand. As noted in the previous table, heating degree days were down sixpercent in **Cinergy’s** service territory.

 

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#### **Commercial**

##### *** ***

##### ***Gross Margins***

 

The 13 percent increase in Commercial’s electric gross margins wasprimarily due to the following factors:

 

•                  A $12 million increase in rate tariff adjustments resulting from theimplementation of **CG&E’s** RSPin January 2005;

•                  A $12 million increase in gross margins on power marketing, trading,and origination contracts attributable to favorable market price movements inthe first quarter of 2005; and

•                  A $4 million increase due to growth in non-weather related demand andthe return of certain **CG&E** retailcustomers to full electric service.

 

These increases were partially offset by:

 

•                  A $14 million increase in **CG&E’s**average price of fuel without a matching increase in the price of power chargedto residential and non-retail customers; and

•                  A $4 million decrease in margins resulting from certain transactionsoccurring in our asset optimization business. We actively manage our non-regulated generation portfolio through a mixof real-time and forward sales of power and the corresponding purchase of fuel(primarily coal) and emission allowances.  When power is sold forward,we typically purchase the fuel and emission allowances required to produce thepower, thereby locking in our eventual margin at the time of delivery. The market values of these commodities change independently over time. Attimes, the value of the fuel and emission allowances becomes more valuable thanthe output of electricity.  In these instances, we will purchase forwardpower to be used to deliver against forward power sales, and in turn sell thefuel and/or emission allowances.  The combination of these transactionsyields better economic returns than simply producing the power with theinventory of fuel and emission allowances.

 

The fuel and emissionallowance transactions typically follow the accrual method of accounting.However, generally accepted accounting principles (GAAP) requires that certainforward sales of power (those classified as derivatives) use the mark-to-market(MTM) method of accounting.  This differing accounting treatment forthe various components of the generation portfolio can lead to volatilityin reported results.  Our gross margins reflect $24 million ofunrealized losses in 2005 and $11 million of unrealized gains in 2004(representing a $35 million change quarter on quarter) as a result of forwardpower sales and the use of MTM accounting.  Increases in the marketvalue of any offsetting fuel and emission allowances purchases are notrecognized under the accrual method of accounting until sold.

 

During 2005, werecognized margins of $31 million more than the comparable period in 2004 as aresult of selling emission allowances which were no longer needed to meet ourforward power sales commitments.  Thisgain reflects unprecedented increases in prices of SO2 emissionallowances throughout much of 2004 and into early 2005.  Based on projected generation, we havesufficient fuel and emission allowances to meet our forward power salescommitments over the next several years, and we will continue to evaluate andoptimize our generation resources so as to make decisions that produce the besteconomic returns for these assets.

 

Commercial’s gas gross margins under GAAP decreased 74 percent for thequarter ended March 31, 2005, as compared to 2004.  Margins for the gas marketing and tradingbusiness decreased, in part, due to timing differences in revenue recognitionbetween physical storage activities and the associated derivative contractsthat hedge the physical storage.  Our gasmarketing and trading business regularly hedges its price exposure of naturalgas held in storage by selling derivative contracts for winter monthdelivery.  The majority of the gas heldin storage is designated as being hedged under Statement of FinancialAccounting Standards No. 133’s, *Accounting for DerivativeInstruments and Hedging Activities*, fair value hedge accountingmodel, which allows the gas to be accounted for at its fair value (based onspot prices).  Under GAAP, the derivativecontracts hedging the gas are accounted for at fair value (based on forwardwinter prices).  Conversely, the agreementswith pipelines to store this natural gas until the winter periods are notderivatives and are not adjusted for changes in fair value (see footnote 1

 

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in the following table). Significant increases in natural gas prices during the first quarter of2005, especially prices for 2006 winter months, resulted in an unrealized losson the derivative contracts that is included in current earnings.

 

For a more complete understanding of our gas marketing and tradingresults, we have prepared the following table, which reconciles the gas marginsunder GAAP, the impact of adjusting these margins for the fair value ofpipeline agreements and certain gas held in storage, and the resulting adjustedgas gross margins:

 
| ** **                                                  | ** ** | **2005**         | ** ** | 2004     | ** ** | Change   | ** ** |
|-------------------------------------------------------------|------------|------------------|------------|----------|------------|----------|------------|
| * *                                                    | * *   | *(in  millions)* | * *   |
| * *                                                    | * *   | * *         | * *   | * * | * *   | * * | * *   |
| Gas margins, as reported (GAAP)                             |       | **$**            | **6**      |     | $          | 23       |       | $ | (17 | ) |
|                                                        |       | ** **       |       |     |       |     |       |
| Fair value adjustments not recognized under  GAAP  (1) | ** ** | **12**           | (2)        | (4       | )          | 16       |       |
|                                                        |       | ** **       |       |     |       |     |       |
| Adjusted gas gross margins                                  |       | **$**            | **18**     |     | $          | 19       |       | $ | (1 | ) |

 

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(1)                                  Relates to fair value of storageagreements.  The value of a storageagreement is the ability to store and optimize gas between periods of lowerprices (typically summer) and periods of higher prices (typically winter).  A large component of the fair value istherefore the differences between winter prices and spot prices.  As this spread gets wider, the value of astorage agreement increases.

(2)                                  The magnitude of the adjustment in 2005is driven by forward price increases in the winter months of 2006 that aresignificantly larger than spot price increases, which caused a recognized losson the derivative sales offset by an unrecognized gain on the related storageagreements.  

 

Adjusted gas gross margins represent a more economic view of thebusiness with all elements of the business reflected at fair value.  Adjusted gas gross margins remainedrelatively flat for the quarter ended March 31, 2005, as compared to 2004.

 

##### ***Other Operating Revenues and Costs of Fuel Resold***

 

The increase in *Other Operating Revenues*was primarily due to the following factors:

 

•                  A $26 millionincrease in Commercial’s revenues from coal origination resulting fromincreases in coal prices and the number of coal origination contracts.  Coal origination includes contract structuringand marketing of physical coal.

•                  An $11 millionincrease in Commercial’s revenues from the sale of synthetic fuel.

 

*Costs of fuel resold* includes Commercial’scosts of coal origination activities and the production of synthetic fuel.  These costs have increased in 2005, which isconsistent with the increases in the associated revenues as previouslydiscussed.

 

The following explanations correspond with the line items on theCondensed Consolidated Statements of Income for **Cinergy**.  However, onlythe line items that varied significantly from prior periods are discussed.

 

#### **Other Operating Expenses**

 
| ** **                    | ** **   | **Cinergy**     | ** **   |
|-------------------------------|--------------|-----------------|--------------|
| ** **                    | ** **   | **2005**        | ** **   | 2004 | ** ** | Change | ** ** | % Change | ** ** |
| *** ***                  | *** *** | *(in millions)* | *** *** |
| * *                      | * *     | * *        | * *     | * * | * * | * * | * * | * * | * * |
| Operation and maintenance     | ** **   | **$**           | **332**      |   | $ | 311 |   | $ | 21 |   | 7 | % |
| Depreciation                  |         | **126**         |         | 105 |   | 21 |   | 20 |   |
| Taxes other than income taxes |         | **79**          |         | 82 |   | (3 | ) | (4 | ) |
|                               |              |                 |              |  |  |  |  |  |  |  |  |  |

 

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##### ***Operation and Maintenance***

 

The seven percent increase in *Operation and Maintenance*expense was primarily due to the following factors:

 

•                  Increasedregulatory asset amortization of $8 million related to **CG&E’s**Regulatory Transition Charge (RTC);

•                  A $4 millionincrease in operation expenses for non-regulated service subsidiaries,including those that started operations, or became fully consolidated, during2004 or 2005; and

•                  Maintenanceexpenses, primarily generation related, were higher by $4 million, partiallydue to planned outages at various **PSI** generatingstations.

 

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

 

The 20 percent increase in *Depreciation*expense was primarily due to a) higher depreciation rates, as aresult of changes in useful lives of production assets and an increased ratefor cost of removal, b) recovery of deferred depreciation costs, and c) theaddition of depreciable plant for pollution control equipment, all of which arerecovered from ratepayers.

 

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

 

The increase in *Miscellaneous Income(Expense) – Net* was primarily due to a $27 million impairment chargerecognized in the first quarter of 2004 related to a technology investment inPower Technology and Infrastructure.

 

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### **2005 QUARTERLYRESULTS OF OPERATIONS - CG**&E

#### ** **

#### **Summary of Results**

 

Net income for **CG&E**for the quarters ended March 31, 2005, and 2004 was as follows:

 
| ** **   | ** **   | **CG&E**and subsidiaries | ** **   |
|--------------|--------------|------------------------------|--------------|
| ** **   | ** **   | **2005**                     | ** **   | 2004 | ** ** | Change | ** ** | % Change | ** ** |
| *** *** | *** *** | *(in millions)*              | *** *** |
| * *     | * *     | * *                     | * *     | * * | * * | * * | * * | * * | * * |
| Net income   |         | **$**                        | **85**       |   | $ | 77 |   | $ | 8 |   | 10 | % |
|              |              |                              |              |  |  |  |  |  |  |  |  |  |

 

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

 

•                  Increases inrate tariff adjustments resulting from the implementation of **CG&E’s** RSP;

•                  An increase ingross margins on power marketing, trading, and origination contracts; and

•                  An increase dueto growth in non-weather related demand and the return of certain retailcustomers to full electric service.

 

These increases were partially offset by:

 

•                  A decrease inelectric gross margins relating to certain activities in our asset optimizationbusiness.  This decrease was comprised oflosses on forward power contracts partially offset by increases in margins fromthe sale of emission allowances; and

•                  Higheroperating costs.

 

#### **Gross Margins**

 

Gross margins for **CG&E** forthe quarters ended March 31, 2005, and 2004 were as follows:

 
| ** **               | ** **   | **CG&E**and subsidiaries | ** **   |
|--------------------------|--------------|------------------------------|--------------|
| ** **               | ** **   | **2005**                     | ** **   | 2004 | ** ** | Change | ** ** | % Change | ** ** |
| *** ***             | *** *** | *(in millions)*              | *** *** |
| * *                 | * *     | * *                     | * *     | * * | * * | * * | * * | * * | * * |
| Electric gross margin(1) |         | **$**                        | **319**      |   | $ | 296 |   | $ | 23 |   | 8 | % |
| Gas gross margin(2)      |         | **99**                       |         | 104 |   | (5 | ) | (5 | ) |
|                          |              |                              |              |  |  |  |  |  |  |  |  |  |

 

----

(1)                                  Electric gross margin is calculated as *Electric operating revenues*less *Fuel,emission allowances, and purchased power* expense from the CondensedConsolidated Statements of Income.

(2)                                  Gas gross margin is calculated as *Gas operating revenues* less *Gaspurchased* expense from the Condensed Consolidated Statements ofIncome.

 

54

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Cooling degree days and heating degree days in **CG&E’s** service territory for thequarters ended March 31, 2005, and 2004 were as follows:

 
| ** **                | ** ** | **CG&E**and  subsidiaries | ** ** |
|---------------------------|------------|-------------------------------|------------|
| ** **                | ** ** | **2005**                      | ** ** | 2004 | ** ** | Change | ** ** | % Change | ** ** |
|                      |       |                          |       |   |   |   |   |   |   |
| Cooling degree days(1)    |       | **—**                    |       | **—** |   | **—** |   | **—** | % |
| Heating degree days(2)(3) |       | **1,989**                     |       | 2,143 |   | (154 | ) | (7 | ) |

 

----

(1)                                  Cooling degree days are the differencesbetween the average temperature for each day and 65 degrees, assuming theaverage temperature is greater than 65 degrees.

(2)                                  Heating degree days are the differencesbetween the average temperature for each day and 59 degrees, assuming theaverage temperature is less than 59 degrees.

(3)                                  Beginning in January 2005, we modifiedour heating degree days base temperature from 65 degrees to 59 degrees to moreaccurately reflect current consumer behavior. Prior year amounts have been updated to reflect this change.

 

##### ***Electric Gross Margins***

 

The eight percent increase in **CG&E’s**electric gross margins was primarily due to the following factors:

 

•                  A $12 millionincrease in rate tariff adjustments resulting from the implementation of **CG&E’s** RSP in January 2005;

•                  A $9 millionincrease in gross margins on power marketing, trading, and originationcontracts attributable to favorable market price movements in the first quarterof 2005; and

•                  A $7 millionincrease due to growth in non-weather related demand and the return of certainretail customers to full electric service.

 

These increases were partially offset by:

 

•                  A $14 millionincrease in the average price of fuel without a matching increase in the priceof power charged to residential and non-retail customers; and

•                  A $4 milliondecrease in margins resulting from certain transactions occurring in our assetoptimization business.  We activelymanage our non-regulated generation portfolio through a mix of real-time andforward sales of power and the corresponding purchase of fuel (primarilycoal) and emission allowances.  When power is sold forward, wetypically purchase the fuel and emission allowances required to produce thepower, thereby locking in our eventual margin at the time of delivery. The market values of these commodities change independently over time. Attimes, the value of the fuel and emission allowances becomes more valuable thanthe output of electricity.  In these instances, we will purchase forwardpower to be used to deliver against forward power sales, and in turn sell thefuel and/or emission allowances.  The combination of these transactionsyields better economic returns than simply producing the power with the inventoryof fuel and emission allowances.

 

The fuel and emissionallowance transactions typically follow the accrual method of accounting.However, GAAP requires that certain forward sales of power (those classified asderivatives) use the MTM method of accounting.  This differingaccounting treatment for the various components of the generation portfolio canlead to volatility in reported results.  Our gross margins reflect $24million of unrealized losses in 2005 and $11 million of unrealized gains in2004 (representing a $35 million change quarter on quarter) as a result offorward power sales and the use of MTM accounting.  Increases in themarket value of any offsetting fuel and emission allowances purchases are notrecognized under the accrual method of accounting until sold.

 

During 2005, werecognized margins of $31 million more than the comparable period in 2004 as aresult of selling emission allowances which were no longer needed to meet ourforward power sales commitments.  Thisgain reflects unprecedented increases in prices of SO2 emissionallowances throughout much of 2004 and into early 2005.  Based on projected generation, we havesufficient fuel and emission allowances to meet our forward power salescommitments over the next several years, and we will continue to

 

55

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evaluate and optimize ourgeneration resources so as to make decisions that produce the best economicreturns for these assets.

 

##### ***Gas Gross Margins***

 

The five percent decrease in **CG&E’s** gasgross margins was primarily due to milder weather during the first quarter of2005, as compared to 2004, and a decline in non-weather related demand.  As noted in the previous table, heatingdegree days were down seven percent in **CG&E’s**service territory.

 

#### **Other Operating Revenues and Costs of Fuel Resold**

 

The increase in *Other Operating Revenues*was due to a $33 million increase in revenues from coal origination resultingfrom increases in coal prices and the number of coal originationcontracts.  This increase includes $11million of sales to non-regulated affiliates.

 

*Costs of fuel resold* represents the costs ofcoal origination activities.  These costshave increased in 2005, which is consistent with the increase in the associatedrevenues as previously discussed.

 

The following explanations correspond with the line items on theCondensed Consolidated Statements of Income for **CG&E**.  However, onlythe line items that varied significantly from prior periods are discussed.

 

#### **Other Operating Expenses**

 
| ** **                    | ** **   | **CG&E**and subsidiaries | ** **   |
|-------------------------------|--------------|------------------------------|--------------|
| ** **                    | ** **   | **2005**                     | ** **   | 2004 | ** ** | Change | ** ** | % Change | ** ** |
| *** ***                  | *** *** | *(in millions)*              | *** *** |
| * *                      | * *     | *** ***                 | * *     | * * | * * | * * | * * | * * | * * |
| Operation and maintenance     |         | **$**                        | **162**      |   | $ | 150 |   | $ | 12 |   | 8 | % |
| Depreciation                  |         | **45**                       |         | 44 |   | 1 |   | 2 |   |
| Taxes other than income taxes |         | **59**                       |         | 64 |   | (5 | ) | (8 | ) |
|                               |              |                              |              |  |  |  |  |  |  |  |  |  |

 

##### ***Operation and Maintenance***

 

The eight percent increase in *Operation and Maintenance*expense was primarily due to increased regulatory asset amortization of $8million related to **CG&E’s** RTC.

 

##### ***Taxes Other than Income Taxes***

 

The eight percent decrease in *Taxes other than incometaxes* was primarily due to the deferral of property taxes through **CG&E’s** RSP and the decrease in the estimated propertytax rate.

 

#### **Income Taxes**

### ** **

### **CG&E’s** effectiveincome tax rate increased for the first quarter of 2005, as compared to 2004.  The increase was primarily a result of theresolution of certain tax matters and a decrease in the Ohio Coal Credit from$3 to $1 per ton.

 

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### **2005 QUARTERLYRESULTS OF OPERATIONS - PSI**

 

#### **Summary of Results**

 

Net income for **PSI** for thequarters ended March 31, 2005, and 2004 was as follows:

 
| ** **   | ** **   | **PSI**         | ** **   |
|--------------|--------------|-----------------|--------------|
| ** **   | ** **   | **2005**        | ** **   | 2004 | ** ** | Change | ** ** | % Change | ** ** |
| *** *** | *** *** | *(in millions)* | *** *** |
| * *     | * *     | * *        | * *     | * * | * * | * * | * * | * * | * * |
| Net income   |         | **$**           | **42**       |   | $ | 41 |   | $ | 1 |   | 2 | % |
|              |              |                 |              |  |  |  |  |  |  |  |  |  |

 

Net income for **PSI** wasrelatively flat for the first quarter of 2005, as compared to 2004.  The **PSI** base retailelectric rate case in May 2004 was partially offset by increases in operationand maintenance expenses.

 

#### **Electric Gross Margins**

 

Gross margins for **PSI**for thequarters ended March 31, 2005, and 2004 were as follows:

 
| ** **               | ** **   | **PSI**         | ** **   |
|--------------------------|--------------|-----------------|--------------|
| ** **               | ** **   | **2005**        | ** **   | 2004 | ** ** | Change | ** ** | % Change | ** ** |
| *** ***             | *** *** | *(in millions)* | *** *** |
| * *                 | * *     | * *        | * *     | * * | * * | * * | * * | * * | * * |
| Electric gross margin(1) |         | **$**           | **293**      |   | $ | 261 |   | $ | 32 |   | 12 | % |
|                          |              |                 |              |  |  |  |  |  |  |  |  |  |

 

----

(1)                                  Electric gross margin is calculated as *Electric operating revenues*less *Fuel,emission allowances, and purchased power* expense from the CondensedConsolidated Statements of Income.

 

Cooling degree days and heating degree days in **PSI’s** service territory for the quartersended March 31, 2005, and 2004 were as follows:

 
| ** **                 | ** ** | **PSI**    | ** ** |
|----------------------------|------------|------------|------------|
| ** **                 | ** ** | **2005**   | ** ** | 2004 | ** ** | Change | ** ** | % Change | ** ** |
|                       |       |       |       |   |   |   |   |   |   |
| Cooling degree days(1)     |       | **—** |       | 2 |   | (2 | ) | (100 | )% |
| Heating  degree days(2)(3) |       | **2,172**  |       | 2,277 |   | (105 | ) | (5 | ) |

 

----

(1)                                  Cooling degree days are the differencesbetween the average temperature for each day and 65 degrees, assuming theaverage temperature is greater than 65 degrees.

(2)                                  Heating degree days are the differencesbetween the average temperature for each day and 59 degrees, assuming theaverage temperature is less than 59 degrees.

(3)                                  Beginning in January 2005, we modifiedour heating degree days base temperature from 65 degrees to 59 degrees to moreaccurately reflect current consumer behavior. Prior year amounts have been updated to reflect this change.

 

The change in degree days did not have a material effect on electricgross margins for the period.

 

The 12 percent increase in **PSI’s** electricgross margins was attributable to a $43 million increase resulting primarilyfrom a higher price received per MWh due to **PSI’s**baseretail electric rate increase in May 2004. Partially offsetting this increase was a decline of $6 million in ratetariff adjustments primarily associated with construction work in progresstracking mechanisms.

 

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The following explanations correspond with the line items on theCondensed Consolidated Statements of Income for **PSI**.  However, only theline items that varied significantly from prior periods are discussed.

 

#### **Other Operating Expenses**

 
| ** **                    | ** **   | **PSI**         | ** **   |
|-------------------------------|--------------|-----------------|--------------|
| ** **                    | ** **   | **2005**        | ** **   | 2004 | ** ** | Change | ** ** | % Change | ** ** |
| *** ***                  | *** *** | *(in millions)* | *** *** |
| * *                      | * *     | * *        | * *     | * * | * * | * * | * * | * * | * * |
| Operation and maintenance     |         | **$**           | **121**      |   | $ | 109 |   | $ | 12 |   | 11 | % |
| Depreciation                  |         | **67**          |         | 49 |   | 18 |   | 37 |   |
| Taxes other than income taxes |         | **16**          |         | 16 |   | — |   | — |   |
|                               |              |                 |              |  |  |  |  |  |  |  |  |  |

 

##### ***Operation and Maintenance***

 

The 11 percent increase in *Operation and Maintenance*expense was primarily due to the following factors:

 

•                  Maintenanceexpenses, primarily generation and distribution related, were higher by $5million, partially due to planned outages at various generating stations; and

•                  Increasedexpenses of $2 million related to amortization of deferred merger costs, whichwere approved for recovery through **PSI’s** baseretail electric rate case.

 

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

 

The 37 percent increase in *Depreciation*expense was primarily due to a) higher depreciation rates, as aresult of changes in useful lives of production assets and an increased ratefor cost of removal, b) recovery of deferred depreciation costs, and c) theaddition of depreciable plant for pollution control equipment, all of which arerecovered from ratepayers.

 

#### **Interest Expense**

 

The 24 percent increase in *Interest Expense*was primarily due to an increase in average long-term debt outstanding.  This expense was partially offset by interestincome received on restricted deposits obtained through these incrementalborrowings, which is recorded in *Miscellaneous Income – Net*,associated with the additional long-term debt outstanding.

 

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### **2005 QUARTERLYRESULTS OF OPERATIONS - ULH**&P

#### ** **

#### **Summary of Results**

 

Electric and gas gross margins and net income for **ULH&P** for the quarters ended March 31,2005 and 2004, were as follows:

 
| ** **                | ** **   | **ULH&P**   | ** **   |
|---------------------------|--------------|-----------------|--------------|
| ** **                | ** **   | **2005**        | ** **   | 2004 | ** ** | Change | ** ** | % Change | ** ** |
| *** ***              | *** *** | *(in millions)* | *** *** |
| * *                  | * *     | * *        | * *     | * * | * * | * * | * * | * * | * * |
| Electric  gross margin(1) |         | **$**           | **15**       |   | $ | 17 |   | $ | (2 | ) | (12 | )% |
| Gas gross margin(2)       |         | **18**          |         | 17 |   | 1 |   | 6 |   |
| Net income                |         | **6**           |         | 8 |   | (2 | ) | (25 | ) |
|                           |              |                 |              |  |  |  |  |  |  |  |  |  |

 

----

(1)                                  Electric gross margin is calculated as *Electric operating revenues*less *Electricitypurchased from parent company for resale* expense from the CondensedStatements of Income.

(2)                                  Gas gross margin is calculated as *Gas operating revenues* less *Gaspurchased* expense from the Condensed Statements of Income.

 

The 12 percent decrease in electric gross margins was due, in part, tomilder weather during the first quarter of 2005.  The six percent increase in gas gross marginswas primarily due to an increase in rate tariff adjustments associated with thegas main replacement program and the demand-side management program, whichencourages efficient customer gas usage. Partially offsetting this increase was a decline resulting from milderweather during the first quarter of 2005.

 

### **The 25 percent decrease in net income for the quarter was primarily dueto the decreased electric gross margins as previously discussed.  Also contributing to the decrease were highercosts associated with transmission and the demand-side management program.  Partially offsetting this decrease was adecline in income taxes primarily as a result of a reduction of the Kentuckycorporate income tax rate from 8.25 percent to seven percent.  The rate is scheduled to decrease to sixpercent effective January 1, 2007.**

 

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### **LIQUIDITY ANDCAPITAL RESOURCES**

#### ** **

#### **Capital Requirements**

##### *** ***

##### ***Environmental Issues***

* *

*Environmental Protection Agency Regulations*

 

In March 2005, the EPA issued the Clean AirInterstate Rule (CAIR), formerly the Interstate Air Quality Rule, which wouldrequire states to revise their State Implementation Plan (SIP) by September2006 to address alleged contributions to downwind non-attainment with therevised National Ambient Air Quality Standards for ozone and fine particulatematter.  The rule established atwo-phase, regional cap and trade program for SO2 and NOX, affecting 28 states, including Ohio,Indiana, and Kentucky, and requires SO2 and NOX emissionsto be cut 70 percent and 65 percent, respectively, by 2015.  At the same time, the EPA issued the Clean AirMercury Rule (CAMR) which requires reductions in mercury emissions fromcoal-fired power plants.  The finalregulation also adopts a two-phase cap and trade approach that requires mercuryreductions of 70 percent by 2018.  Underboth CAIR and CAMR, companies have flexible compliance options includinginstallation of pollution controls on large plants where such controls areparticularly efficient and utilization of emission allowances for smallerplants where controls are not cost effective. Numerous states and environmental organizations have challenged certainEPA regulatory determinations contending that CAMR does not require enoughreductions.  At this time we cannotpredict the outcome of this matter.

 

Over the 2005-2009 time period, we expect tospend approximately $1.8 billion to reduce mercury, SO2, and NOXemissions.  These estimates include $1.7billion in costs to comply with CAIR and CAMR. These estimates also include estimated costs to comply at plants that weown but do not operate and could change when taking into considerationcompliance plans of co-owners or operators involved.  Moreover, as market conditions change,additional compliance options may become available and our plans will be adjustedaccordingly.  Approximately 60 percent ofthese estimated environmental costs would be incurred at **PSI’s** coal-fired plants, for which recoverywould be pursued in accordance with regulatory statutes governing environmentalcost recovery.  See Note 6(b)(*i*) of the “Notes toCondensed Financial Statements” in “Item 1. Financial Statements” for more details.  **CG&E** wouldreceive partial recovery of depreciation and financing costs related toenvironmental compliance projects for 2005-2008 through its recently approvedRSP.  See Note 6(b)(*ii*) of the “Notes to CondensedFinancial Statements” in “Item 1. Financial Statements” for more details.

 

In June 2004, the EPA made final statenon-attainment area designations to implement the revised ozone standard.  In January 2005, the EPA made final statenon-attainment area designations to implement the new fine particulatestandard.  Several counties in which weoperate 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 United States Court of Appeals forthe D.C. Circuit to challenge the EPA’s particulate matter non-attainmentdesignations.  Although the EPA hasattempted to structure CAIR to resolve purported utility contributions to ozoneand fine particulate non-attainment, at this time, **Cinergy** cannot predict the effect of current or futurenon-attainment designations on its financial position or results of operations.

 

In May 2004, the EPA issued proposedrevisions to its regional haze rules and implementing guidelines in response toa 2002 judicial ruling overturning key provisions of the original program.  The regional haze program isaimed at reducing certain emissions impacting visibility in national parks andwilderness areas.  Although the EPA hasannounced that it can foresee no circumstances where the requirements of theregional haze rule would require utility controls beyond those required underCAIR, the EPA has deferred making a final determination until finalizingadditional guidelines under the regional haze program.  The final rule is expected in June 2005.  In light of the EPA’s ongoing rulemakingefforts and the fact that the states have yet to announce how they willimplement the

 

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final rule, at this time it is not possible to predict whether theregional haze rule will have a material effect on our financial position orresults of operations.

 

*Clear**Skies Legislation*

 

President Bushhas proposed environmental legislation that would combine a series of Clean AirAct (CAA) requirements, including the recent mercury, SO2,and NOX reduction regulations for coal-fired power plants with alegislative solution that includes trading and specific emissions reductionsand timelines to meet those reductions. The President’s “Clear Skies Initiative” would seek an overall 70percent reduction in emissions from power plants over a phased-in reductionschedule beginning in 2010 and continuing through 2018.  When the Clear Skies Initiative was stalledin Congress, the EPA finalized the CAIR and CAMR regulations to accomplishClear Skies’ goals within the existing framework of the CAA.  Clear Skies has been reintroduced in theSenate in 2005, but its prospects for passage are uncertain in the current session.  At this time we cannot predict whether thisor any multi-emissions bill will be passed.

 

*Energy Bill*

 

Acomprehensive energy policy bill, which included the repeal of the PUHCA; taxincentives for gas and electric distribution lines, combined heat and power andrenewable energy projects, and pollution control equipment; and a businesscarry forward credit for Internal Revenue Code Section 29 (IRC Section 29)investments, passed in the House in April 2005. The Senate is still considering an Energy package.  It is not possible to predict when or if afinal bill will pass in 2005.

 

*Environmental Lawsuits*

 

We are currently involved in the following lawsuits which are discussedin more detail in Note 6(a) of the “Notes to Condensed Financial Statements” in“Item 1. Financial Statements”.  Anunfavorable outcome of any of these lawsuits could have a material impact onour liquidity and capital resources.

 

•                  CAA Lawsuit

•                  CO2Lawsuit

•                  SelectiveCatalytic Reduction Units at Gibson Station

•                  Zimmer StationLawsuit

•                  ManufacturedGas Plant Sites

•                  Asbestos ClaimsLitigation

 

##### ***Pension and Other Postretirement Benefits***

** **

**Cinergy** maintainsqualified defined benefit pension plans covering substantially all UnitedStates employees meeting certain minimum age and service requirements.  Plan assets consist of investments in equityand debt securities.  Funding for thequalified defined 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 (ERISA).  Althoughmitigated by strong performance in 2003 and 2004, ongoing retiree payments andthe decline in market value of the investment portfolio in 2002 reduced theassets held in trust to satisfy plan obligations.  Additionally, continuing low long-terminterest rates have increased the liability for funding purposes.  As a result of these events, our near termfunding targets have increased substantially. **Cinergy** has adopted afive-year plan to reduce, or eliminate, the unfunded pension obligationinitially measured as of January 1, 2003. This unfunded obligation will be recalculated as of January 1 of eachyear in the five-year plan.  Because thisunfunded obligation is the difference between the liability determinedactuarially on an ERISA basis and the market value of plan assets as of January1, 2003, the liability determined by this calculation is different than thepension liability calculated for accounting purposes reported on **Cinergy’s** Condensed Consolidated BalanceSheets.

 

**Cinergy’s** minimumrequired contributions in calendar year 2004 totaled $16 million.  Actual contributions in 2004 were $117million, reflecting additional discretionary contributions of $101 millionunder the aforementioned five-

 

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year plan.  Due to thesignificant 2004 and previous calendar year contributions, **Cinergy’s** minimum required contributions incalendar year 2005 are expected to be zero. Should **Cinergy** continuefunding under the five-year plan, discretionary contributions are expected tobe $102 million in 2005, which is an increase from the $72 million disclosed inthe 2004 10-K.  This $30 million increaseis primarily the result of a change in the retirement age assumption whichincreased the near-term funding estimates. Actual contributions for the first quarter of 2005 were zero.  **Cinergy**may consider making discretionary contributions in 2006 and future periods;however, at this time, we are unable to determine the amount of thosecontributions.  Estimated contributionsfluctuate based on changes in market performance of plan assets and actuarialassumptions.  Absent the occurrence ofinterim events that could materially impact these targets, we will update ourexpected target contributions annually as the actuarial funding valuations arecompleted and make decisions about future contributions at that time.

 

##### ***Other Investing Activities***

 

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

 

•                  ExemptWholesale Generators (EWG) and Foreign Utility Companies (FUCO)

 

An EWG is anentity, certified by the Federal Energy Regulatory Commission (FERC), devotedexclusively to owning and/or operating, and selling power from one or moreelectric generating facilities.  An EWGwhose generating facilities are located in the United States is limited tomaking only wholesale sales of electricity. An entity claiming status as an EWG must provide notification thereof tothe SEC under the PUHCA.

 

A FUCO is acompany all of whose utility assets and operations are located outside theUnited States and which are used for the generation, transmission, or distributionof electric energy for sale at retail or wholesale, or the distribution of gasat retail.  A FUCO may not derive anyincome, directly or indirectly, from the generation, transmission, ordistribution of electric energy for sale or the distribution of gas at retailwithin the United States.  An entityclaiming status as a FUCO must provide notification thereof to the SEC underthe PUHCA.

 

**Cinergy**has been granted SEC authority under the PUHCA to invest (including by way ofguarantees) an aggregate amount in EWGs and FUCOs equal to the sum of (1) ouraverage consolidated retained earnings from time to time plus (2) $2 billionthrough June 30, 2005.  As of March 31,2005, we had invested or committed to invest $0.7 billion in EWGs and FUCOs,leaving available investment capacity under the order of $2.8 billion.  In February 2005, **Cinergy**filed an application with the SEC under the PUHCA requesting an extension ofthis authority through December 31, 2008. At this time, we are unable to predict whether the SEC will approve thisrequest.

 

•                  QualifyingFacilities and Energy-Related Non-utility Entities

 

SEC regulationsunder the PUHCA permit **Cinergy** andother registered holding companies to invest and/or guarantee an amount equalto 15 percent of consolidated capitalization (consolidated capitalization isthe sum of *Notes payable and othershort-term obligations*, *Long-termdebt* (including amounts due within one year), Cumulative**Preferred Stock of Subsidiaries, and total Common Stock Equity) in domesticqualifying cogeneration and small power production plants (qualifyingfacilities) and certain other domestic energy-related non-utilityentities.  At March 31, 2005, we hadinvested and/or guaranteed $1.0****billionof the $1.4 billion available.  In August2004, **Cinergy** filed an application with theSEC requesting authority under the PUHCA to increase its investment and/orguarantee authority by $2 billion above the current authorized amount.  At this time, we are unable to predictwhether the SEC will approve this request.

 

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•                  Energy-RelatedAssets

 

**Cinergy**has been granted SEC authority under the PUHCA to invest up to $1 billion innon-utility Energy-Related Assets within the United States, Canada, andMexico.  Energy-Related Assets includenatural gas exploration, development, production, gathering, processing,storage and transportation facilities and equipment, liquid oil reserves andstorage facilities, and associated assets, facilities and equipment, but wouldexclude any assets, facilities, or equipment that would cause the owner oroperator thereof to be deemed a public utility company.  As of March 31, 2005, we did not have anyinvestments in these Energy-Related Assets.

 

•                  InfrastructureServices Companies

 

**Cinergy**has been granted SEC authority under the PUHCA to invest up to $500 millionthrough June 30, 2005 in companies that derive or will derive substantially allof their operating revenues from the sale of Infrastructure Services including:

 

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

•                  Installation and maintenance ofnatural gas pipelines, water and sewer pipelines, and underground and overheadtelecommunications networks; and

•                  Installation and servicing of meterreading devices and related communications networks, including fiber opticcable.

 

At March 31, 2005,we had invested $30 million in Infrastructure Services companies.  In February 2005, **Cinergy**filed an application with the SEC under PUHCA requesting authority to invest upto $100 million in Infrastructure Services companies through December 31, 2008,which is a $400 million reduction in **Cinergy’s**current authority.  At this time, we areunable to predict whether the SEC will approve this request.

 

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

 

We are subject to an SEC order under the PUHCA, which limits theamounts **Cinergy Corp.** can haveoutstanding under guarantees at any one time to $2 billion.  As of March 31, 2005, we had $759 millionoutstanding under the guarantees issued, of which 96 percent representsguarantees of obligations reflected on **Cinergy’s**Condensed Consolidated Balance Sheets. The amount outstanding represents **CinergyCorp.’s** guarantees of liabilities and commitments of itsconsolidated subsidiaries, unconsolidated subsidiaries, and jointventures.  In February 2005, **Cinergy** filed an application with the SEC under the PUHCArequesting authority to have an aggregate amount of guarantees outstanding atany point in time not to exceed $3 billion. At this time, we are unable to predict whether the SEC will approve thisrequest.

 

See Note 6(c)(*iii*) of the“Notes to Condensed Financial Statements” in “Item 1. Financial Statements” fora discussion of guarantees in accordance with Financial Accounting StandardsBoard Interpretation No. 45, *Guarantor’sAccounting and Disclosure Requirements for Guarantees, Including IndirectGuarantees of Indebtedness of Others* (Interpretation 45).  Interpretation 45 requires disclosure ofmaximum potential liabilities for guarantees issued on behalf of unconsolidatedsubsidiaries and joint ventures and under indemnification clauses in variouscontracts.  The Interpretation 45disclosure differs from the PUHCA restrictions in that it requires acalculation of maximum potential liability, rather than actual amountsoutstanding; it excludes guarantees issued on behalf of consolidatedsubsidiaries; and it includes potential liabilities under indemnificationclauses.

 

##### ***Marketing & Trading Liquidity Risks***

** **

**Cinergy**has certaincontracts in place, primarily with trading counterparties, that require theissuance of collateral in the event our debt ratings are downgraded belowinvestment grade.  Based upon our March31, 2005 trading portfolio, if such an event were to occur, **Cinergy** would be required to issue up to$381 million in collateral related to its gas and power trading operations, ofwhich $154 million is related to **CG&E**.

 

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#### **Capital Resources**

** **

**Cinergy**, **CG&E**, **PSI**, and **ULH&P** meettheir current and future capital requirements through a combination of fundingsources including, but not limited to, internally generated cash flows,tax-exempt bond issuances, capital lease and operating lease structures, thesecuritization of certain asset classes, short-term bank borrowings, issuanceof commercial paper, and issuances of long-term debt and equity.  Funding decisions are based on marketconditions, market access, relative pricing information, borrowing duration andcurrent versus forecasted cash needs.  **Cinergy**, **CG&E**, **PSI**, and **ULH&P** arecommitted to maintaining balance sheet health, responsibly managingcapitalization, and maintaining adequate credit ratings.  **Cinergy**, **CG&E**, **PSI**, and **ULH&P** believe that they have adequate financialresources to meet their future needs.

 

##### ***Sale of Accounts Receivable***

** **

**CG&E**, **PSI**, and **ULH&P**have an agreement with Cinergy Receivables Company, LLC (Cinergy Receivables),an affiliate, to sell, on a revolving basis, nearly all of the retail accountsreceivable and related collections of **CG&E**,**PSI**, and **ULH&P**. Cinergy Receivables funds its purchases with borrowings from commercialpaper conduits that obtain a security interest in the receivables.  This program accelerates the collection ofcash for **CG&E**, **PSI**, and **ULH&P**related to these retail receivables.  **Cinergy Corp.** does not consolidate CinergyReceivables because it meets the requirements to be accounted for as aqualifying special purpose entity (SPE). A decline in the long-term senior unsecured credit ratings of **CG&E**, **PSI**,and **ULH&P** below investmentgrade would result in the termination of the sale program and discontinuance offuture sales of receivables.

 

64

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

 

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

 
| ** **                   | ** ** | **Short-term Regulatory Authority  March 31, 2005** | ** ** |
|------------------------------|------------|-----------------------------------------------------|------------|
| ** **                   | ** ** | *(in millions)*                                     | ** ** |
| ** **                   | ** ** | Authority                                           | ** ** | Outstanding | ** ** |
|                         |       |                                                |       |   |   |
| **Cinergy Corp.**            |       | $                                                   | 5,000      | (1) | $ | 155 |   |
| **CG&E**and subsidiaries |       | 665                                                 | (2)        | 80 |   |
| **PSI**                      |       | 600                                                 |       | 144 |   |
| **ULH&P**                |       | 65                                                  | (2)        | — |   |
|                              |            |                                                     |            |  |  |  |  |

 

----

(1)                                  **CinergyCorp.**, under the PUHCA, has approval to increase totalcapitalization (excluding retained earnings and accumulated other comprehensiveincome (loss)), which may be any combination of debt and equity securities, by$5 billion.  Outside this requirement, **Cinergy Corp.**is not subject to specific regulatory debt authorizations.

(2)                                  In December2004, **Cinergy**and **ULH&P**requested approval from the SEC for an increase in **ULH&P****’**s****authority from $65 million to $150 million to coincide with the completion ofits pending transaction with **CG&E**in which **ULH&P**will acquire interests in three of **CG&E****’**s****electric generating stations.  At thistime, we are unable to predict whether the SEC will approve this request.

 

For the purposes ofquantifying regulatory authority, short-term debt includes revolving creditline borrowings, uncommitted credit line borrowings, intercompany money poolobligations, and commercial paper.

 

65

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**Cinergy Corp.’s**short-term borrowings consist primarily of unsecured revolving lines ofcredit and the sale of commercial paper. **Cinergy Corp.’s** $2 billionrevolving credit facilities and $1.5 billion commercial paper program alsosupport the short-term borrowing needs of **CG&E**,**PSI**, and **ULH&P**. In addition, **Cinergy Corp.**,**CG&E**, and **PSI** maintain uncommitted lines ofcredit.  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 our *Notes payable and other short-term obligations* and *Notes payable to affiliated companies*:

 
| ** **                   | ** ** | **Short-term Borrowings  March 31, 2005** | ** ** |
|------------------------------|------------|-------------------------------------------|------------|
| ** **                   | ** ** | Established  Lines                        |       | Outstanding |   | Unused |   | Standby  Liquidity(1) |   | Available  Revolving  Lines of  Credit | ** ** |
| ** **                   | ** ** | *(in millions)*                           | ** ** |
| * *                     | * *   | * *                                  | * *   | * * | * * | * * | * * | * * | * * | * * | * * |
| **Cinergy**                  |       |                                      |       |   |   |   |   |   |   |   |   |
| **Cinergy Corp.**            |       |                                      |       |   |   |   |   |   |   |   |   |
| Revolving  lines(2)          |       | $                                         | 2,000      |   | $ | — |   | $ | 2,000 |   | $ | 167 |   | $ | 1,833 |   |
| Uncommitted  lines           |       | 40                                        |       | — |   | 40 |   |   |   |   |   |
| Commercial  paper(3)         |       |                                      |       | 155 |   |   |   |   |   |   |   |
|                         |       |                                      |       |   |   |   |   |   |   |   |   |
| Utility  operating companies |       |                                      |       |   |   |   |   |   |   |   |   |
| Uncommitted  lines           |       | 75                                        |       | — |   | 75 |   |   |   |   |   |
| Pollution  control notes     |       |                                      |       | 248 |   |   |   |   |   |   |   |
|                         |       |                                      |       |   |   |   |   |   |   |   |   |
| Non-regulated  subsidiaries  |       |                                      |       |   |   |   |   |   |   |   |   |
| Revolving  lines(4)          |       | 162                                       |       | 20 |   | 142 |   | — |   | 142 |   |
| Short-term  debt             |       |                                      |       | 2 |   |   |   |   |   |   |   |
| Pollution  control notes     |       |                                      |       | 25 |   |   |   |   |   |   |   |
|                         |       |                                      |       |   |   |   |   |   |   |   |   |
| **Cinergy Total**            |       |                                      |       | $ | 450 |   |   |   |   |   | $ | 1,975 |   |
|                         |       |                                      |       |   |   |   |   |   |   |   |   |
| **CG&E**and subsidiaries |       |                                      |       |   |   |   |   |   |   |   |   |
| Uncommitted  lines           |       | $                                         | 15         |   | $ | — |   | $ | 15 |   |   |   |   |   |
| Pollution  control notes     |       |                                      |       | 112 |   |   |   |   |   |   |   |
| Money  pool                  |       |                                      |       | 80 |   |   |   |   |   |   |   |
|                         |       |                                      |       |   |   |   |   |   |   |   |   |
| **CG&E Total**           |       |                                      |       | $ | 192 |   |   |   |   |   |   |   |
|                         |       |                                      |       |   |   |   |   |   |   |   |   |
| **PSI**                      |       |                                      |       |   |   |   |   |   |   |   |   |
| Uncommitted  lines           |       | $                                         | 60         |   | $ | — |   | $ | 60 |   |   |   |   |   |
| Pollution  control notes     |       |                                      |       | 136 |   |   |   |   |   |   |   |
| Money  pool                  |       |                                      |       | 144 |   |   |   |   |   |   |   |
|                         |       |                                      |       |   |   |   |   |   |   |   |   |
| **PSI Total**                |       |                                      |       | $ | 280 |   |   |   |   |   |   |   |
|                         |       |                                      |       |   |   |   |   |   |   |   |   |
| **ULH&P**                |       |                                      |       |   |   |   |   |   |   |   |   |
| Money  pool                  |       |                                      |       | $ | — |   |   |   |   |   |   |   |
|                         |       |                                      |       |   |   |   |   |   |   |   |   |
| **ULH&P Total**          |       |                                      |       | $ | — |   |   |   |   |   |   |   |
|                              |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

(1)                                  Standbyliquidity is reserved against the revolving lines of credit to support thecommercial paper program and outstanding letters of credit (currently $155million and $12 million, respectively).

(2)                                  Consists of athree-year $1 billion facility and a five-year $1 billion facility.  The three-year facility was entered into inApril 2004 and matures in April 2007. The five-year facility was entered into in December 2004, matures inDecember 2009, and contains $500 million sublimits each for **CG&E**and **PSI**.

(3)                                  **CinergyCorp.’s** commercial paper program limit is $1.5 billion.  The commercial paper program is supported by **Cinergy Corp.’s**revolving lines of credit.

(4)                                  Of the $162million, $150 million relates to a three-year senior revolving credit facilitythat Cinergy Canada, Inc. entered into in December 2004 and matures in December2007.

 

66

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At March 31, 2005, **Cinergy Corp.** had $1.8 billion remaining unused andavailable capacity relating to its $2 billion revolving credit facilities.  These revolving credit facilities include thefollowing:

 
| **Credit Facility**          | ** ** | **Expiration**  | ** ** | **Established  Lines** | ** ** | **Outstanding  and  Committed** | ** ** | **Unused and  Available** | ** ** |
|------------------------------|------------|-----------------|------------|------------------------|------------|---------------------------------|------------|---------------------------|------------|
| ** **                   | ** ** | *(in millions)* | ** ** |
| * *                     | * *   | * *        | * *   | * *               | * *   | * *                        | * *   | * *                  | * *   |
| Five-year  senior revolving  |       | December 2009   |       |                   |       |                            |       |                      |       |
| Direct  borrowing            |       |            |       |                   |       | $                               | —     |                      |       |   |
| Commercial  paper support    |       |            |       |                   |       | —                          |       |                      |       |
|                         |       |            |       |                   |       |                            |       |                      |       |
| Total  five-year facility(1) |       |            |       | $                      | 1,000      |                            | —     |                      | $          | 1,000 |   |
|                         |       |            |       |                   |       |                            |       |                      |       |
| Three-year  senior revolving |       | April 2007      |       |                   |       |                            |       |                      |       |
| Direct  borrowing            |       |            |       |                   |       | —                          |       |                      |       |
| Commercial  paper support    |       |            |       |                   |       | 155                             |       |                      |       |
| Letter  of credit support    |       |            |       |                   |       | 12                              |       |                      |       |
|                         |       |            |       |                   |       |                            |       |                      |       |
| Total  three-year facility   |       |            |       | 1,000                  |       | 167                             |       | 833                       |       |
|                         |       |            |       |                   |       |                            |       |                      |       |
| Total  Credit Facilities     |       |            |       | $                      | 2,000      |                            | $          | 167                       |       | $ | 1,833 |   |

 

----

(1)  **CG&E**and**PSI**each have $500 million borrowing sublimits on thisfacility.

 

In our credit facilities,**Cinergy Corp.** has covenanted tomaintain:

 

•                  a consolidated net worth of $2billion; and

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

 

As part of **CG&E’s** $500 million sublimit under the $1 billionfive-year credit facility, **CG&E** hascovenanted to maintain:

 

•                  a consolidated net worth of $1billion; and

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

 

As part of **PSI’s** $500 million sublimit under the $1 billion five-yearcredit facility, **PSI** has covenanted to maintain:

 

•                  a consolidated net worth of $900million; and

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

 

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

 

•                  bankruptcy;

•                  defaults in the payment of otherindebtedness; and

•                  judgments against the company thatare not paid or insured.

 

The latter two events,however, are subject to dollar-based materiality thresholds.  As of March 31, 2005, **Cinergy**,**CG&E**, and **PSI**are in compliance with all of their debt covenants.

 

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

 

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

 

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A current summary of ourlong-term debt authorizations at March 31, 2005, was as follows:

 
| ** **                                    | ** ** | **Authorized**  | ** ** | **Used** | ** ** | **Available** | ** ** |
|-----------------------------------------------|------------|-----------------|------------|----------|------------|---------------|------------|
| ** **                                    | ** ** | *(in millions)* | ** ** |
| * *                                      | * *   | * *        | * *   | * * | * *   | * *      | * *   |
| **Cinergy Corp.**                             |       |            |       |     |       |          |       |
| PUHCA  total capitalization(1)(2)             |       | $               | 5,000      |     | $          | 1,596         |       | $ | 3,404 |   |
|                                          |       |            |       |     |       |          |       |
| **CG&E**and subsidiaries(3)               |       |            |       |     |       |          |       |
| State  Public Utility Commissions             |       | $               | 575        |     | $          | —        |       | $ | 575 |   |
| State  Public Utility Commission - Tax-Exempt |       | 250             |       | 94       |       | 156           |       |
|                                          |       |            |       |     |       |          |       |
| **PSI**                                       |       |            |       |     |       |          |       |
| State  Public Utility Commission              |       | $               | 500        |     | $          | —        |       | $ | 500 |   |
| State  Public Utility Commission - Tax-Exempt |       | 250             |       | 209      |       | 41            |       |
|                                          |       |            |       |     |       |          |       |
| **ULH&P**                                 |       |            |       |     |       |          |       |
| State  Public Utility Commission(4)           |       | $               | 75         |     | $          | —        |       | $ | 75 |   |

 

----

(1)                                  **CinergyCorp.**, under the PUHCA, has approval to increase totalcapitalization (excluding retained earnings and accumulated other comprehensiveincome (loss)), which may be any combination of debt and equity securities, by$5 billion.  Outside this requirement, **Cinergy Corp.**is not subject to specific regulatory debt authorizations.

(2)                                  In February2005, **Cinergy** filedan application with the SEC under the PUHCA to issue an additional $5 billionin any combination of debt and equity securities from time to time throughDecember 31, 2008.  At this time, we areunable to predict whether the SEC will approve this request.

(3)                                  Includes amountsfor **ULH&P**.

(4)                                  In April 2005,the Kentucky Public Service Commission (KPSC) granted **ULH&P**financing authority to issue and sell up to $500 million principal amountof secured and unsecured debt; enter into inter-company promissory notesup to an aggregate principal amount of $200 million; and borrow up to a maximumof $200 million aggregate principal amount of tax-exempt debt through December31, 2006.

 

**CinergyCorp.** has an effective shelf registration statement with theSEC relating to the issuance of up to $750 million in any combination of commonstock, preferred stock, stock purchase contracts or unsecured debt securities,of which $323 million remains available for issuance.  **CG&E**has an effective shelf registration statement with the SEC relating to theissuance of up to $800 million in any combination of unsecured debt securities,first mortgage bonds, or preferred stock, all of which remains available forissuance.  **PSI** has an effective shelf registration statement with the SECrelating to the issuance of up to $800 million in any combination of unsecureddebt securities, first mortgage bonds, or preferred stock, all of which remainsavailable for issuance.  **ULH&P** has an effective shelf registration statement withthe SEC for the issuance of up to $75 million in unsecured debt securities, $35million of which remains available for issuance.  **ULH&P** alsohas an effective shelf registration statement with the SEC relating to theissuance of up to $40 million in first mortgage bonds, of which $20 millionremains available for issuance.

 

##### ***Off-BalanceSheet Arrangements***

 

As discussed in the 200410-K, **Cinergy** uses off-balance sheetarrangements from time to time to facilitate financing of variousprojects.  **Cinergy’s**primary off-balance sheet arrangement involves the sale of accounts receivableto a qualifying SPE.

 

In 2001, **Cinergy Corp.** issued $316 million notionalamount of combined securities, a component of which was stock purchasecontracts.  These contracts obligated theholder to purchase common shares of **CinergyCorp.** stock by February 2005. Since the stock purchase contracts were detachable and classified inequity, the change in their fair value was not recorded in equity or earningsand therefore the stock purchase contracts were considered off-balance sheetarrangements.  In January and February2005, the stock purchase contracts were settled, resulting in the issuance ofcommon stock that is recorded on **Cinergy’s** CondensedConsolidated Balance Sheets as Common Stock Equity.

 

68

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##### ***SecuritiesRatings***

 

As of March 31, 2005, themajor credit rating agencies rated our securities as follows:

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

 

----

(1)           Fitch Ratings (Fitch)

(2)           Moody’s InvestorsService (Moody’s)

(3)           Standard & Poor’sRatings Services (S&P)

 

The highest investment grade credit rating for Fitch is AAA, Moody’s isAaa1, and S&P is AAA.

The lowest investment grade credit rating for Fitch is BBB-, Moody’s isBaa3, and S&P is BBB-.

 

On May 10, 2005 S&Pplaced its ratings of **Cinergy Corp.**andits subsidiaries, on CreditWatch with negative implications. Moody's and Fitchhave both affirmed their existing ratings. This action is in response to theannouncement of the merger of Duke and **Cinergy** and theuncertainty around the final details of the transaction. See “RecentDevelopments” for further discussion of the transaction.

 

A security rating is nota recommendation to buy, sell, or hold securities.  These securities ratings may be revised orwithdrawn at any time, and each rating should be evaluated independently of anyother rating.

 

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

 

As discussed in the 200410-K, in January and February 2005, **Cinergy****Corp.** issued a total of 9.2 million shares of common stockpursuant to certain stock purchase contracts that were issued as a component ofcombined securities in December 2001. Net proceeds from the transaction of $316 million were used to reduceshort-term debt.

 

**Cinergy**issues new **Cinergy Corp.** commonstock shares to satisfy obligations under certain of its employee stock plansand the Cinergy Corp. Direct Stock Purchase and Dividend ReinvestmentPlan.  During the first quarter of 2005, **Cinergy** issued 1.3 million shares underthese plans.

 

69

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### **FUTURE EXPECTATIONS/TRENDS**

 

In the “FutureExpectations/Trends” section, we discuss developments in the electric and gasindustry and other matters.  Each ofthese discussions will address the current status and potential future impacton our financial position or results of operations.

 

#### **Electric Industry**

##### *** ***

##### ***RegulatoryOutlook***

* *

*Kentucky*

 

TheKPSC has conditionally approved and the FERC has approved **ULH&P’s**planned acquisition of **CG&E’s** 68.9 percent ownership interestin the East Bend Station, located in Boone County, Kentucky, the WoodsdaleStation, located in Butler County, Ohio, and one generating unit at thefour-unit Miami Fort Station located in Hamilton County, Ohio.  **ULH&P** iscurrently seeking approval of the transaction from the Securities and ExchangeCommission (SEC), wherein the Ohio Consumers’ Counsel has intervened inopposition.  The transfer, which will beat net book value, will not affect current electric rates for **ULH&P’s** customers, as power will beprovided under the same terms as under the current wholesale power contractwith **CG&E** through December 31,2006.  Assuming receipt of SEC approval,we would anticipate the transfer to take place in the third quarter of 2005.

 

##### ***FERC andMidwest ISO***

##### * *

##### ***Midwest ISO Energy Markets***

 

The Midwest ISO is aregional transmission organization established in 1998 as a non-profitorganization which maintains functional control over the combined transmissionsystems of its members, including **Cinergy**.  In March 2004, the Midwest ISO filed with theFERC proposed changes to its existing transmission tariff to add terms andconditions to implement a centralized economic dispatch platform supported by aDay-Ahead and Real-Time Energy Market design, including LMP and FinancialTransmission Rights (FTRs) (Energy Markets Tariff).  The FERC has issued orders that, among otherthings, conditionally approve the start-up of the Energy Markets Tariff whichoccurred April 1, 2005.  The FERC issued ordersin response to requests for rehearing on certain matters in the FERC’s originalorders.  **Cinergy**intends to appeal the FERC orders to a federal appeals court.

 

Specifically, the EnergyMarkets Tariff manages system reliability through the use of a market-basedcongestion management system and includes a centralized dispatch platform, theintent of which is to dispatch the most economic resources to meet loadrequirements reliably and efficiently in the Midwest ISO region, which covers alarge portion of 15 midwestern states and one Canadian province.  The Energy Markets Tariff uses LMP (i.e., theenergy price for the next MW may vary throughout the Midwest ISO market basedon transmission congestion and energy losses), and the allocation or auction ofFTRs, which are instruments that hedge against congestion costs occurring inthe Day-Ahead market.  The Energy MarketsTariff also includes market monitoring and mitigation measures as well as aresource adequacy proposal, that proposes both an interim solution forparticipants providing and having access to adequate generation resources and aproposal to develop a long-term solution to resource adequacy concerns.  The Midwest ISO performs a day-ahead unitcommitment and dispatch forecast for all resources in its market and alsoperforms the real-time resource dispatch for resources under its control on afive minute basis.  The **Cinergy** utility operating companies will seek to recovercosts that they incur related to the Energy Markets Tariff.  We have been operating under the EnergyMarkets Tariff throughout April.  Wecontinue to work with the Midwest ISO to monitor the implementation of the newmarket and at this time we do not believe it will have a material impact on ourresults of operations or financial position.

 

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

 

Presently, GHG emissions, which principally consist ofCO2, are not regulated, and while several legislative proposals havebeen introduced in Congress to reduce utility GHG emissions, none have beenpassed.  Nevertheless, 

 

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we anticipate a mandatory program to reduce GHGemissions will exist in the future.  Weexpect that any regulation of GHGs will impose costs on **Cinergy. **Dependingon the details, any GHG regulation could mean:

 

•                  Increased capital expendituresassociated with investments to improve plant efficiency or install CO2emission reduction technology (to the extent that such technology exists) orconstruction of alternatives to coal generation;

•                  Increased operating and maintenanceexpense;

•                  Our older, more expensive generatingstations may operate fewer hours each year because the addition of CO2costs could cause their generation to be less economic; and

•                  Increased expenses associated withthe purchase of CO2 emission allowances, should such an emissionallowances market be created.

 

We would plan to seek recovery of the costs associatedwith a GHG program in rate regulated states where cost recovery is permitted.

 

In September 2003, **Cinergy**announced a voluntary GHG management commitment to reduce its GHG emissionsduring the period from 2010 through 2012 by five percent below our 2000 level,maintaining those levels through 2012.  **Cinergy** expects to spend $21 millionbetween 2004 and 2010 on projects to reduce or offset its GHG emissions.  **Cinergy**is committed to supporting the President’s voluntary initiative, addressingshareholder interest in the issue, and building internal expertise in GHGmanagement and GHG markets.  Ourvoluntary commitment includes the following:

 

•                  Measuring and inventorying company-relatedsources of GHG emissions;

•                  Identifying and pursuingcost-effective GHG emission reduction and offsetting activities;

•                  Funding research of more efficientand alternative electric generating technologies;

•                  Funding research to better understandthe causes and consequences of climate change;

•                  Encouraging a global discussion ofthe issues and how best to manage them; and

•                  Participating in discussions to helpshape the policy debate.

 

**Cinergy** is alsostudying the feasibility of constructing a commercial integrated coalgasification combined cycle (IGCC) generating station.  The IGCC plant would be expected to run moreefficiently than traditionally constructed coal-fired generation and would thuscontribute fewer CO2 tons per megawatt of electricity produced.

 

#### **Other Matters**

 

##### ***Synthetic FuelProduction***

 

In July 2002, CinergyCapital & Trading, Inc. acquired a coal-based synthetic fuel productionfacility.  The synthetic fuel produced atthis facility qualifies for tax credits (through 2007) in accordance with IRCSection 29 if certain requirements are satisfied.  The three key requirements are that (a) thesynthetic fuel differs significantly in chemical composition from the coal usedto produce such synthetic fuel, (b) the fuel produced is sold to an unrelatedentity and (c) the fuel was produced from a facility that was placed in servicebefore July 1, 1998.  In addition to theexisting plant, we have recently purchased an additional synthetic fuel plant.

 

During the third quarter of 2004, several unrelatedentities announced that the IRS had challenged or threatened to challenge theplaced in service dates of some of the entities’ synthetic fuel plants.  A successful IRS challenge could result indisallowance of all credits previously claimed for fuel produced by the subjectplants.  **Cinergy’s**sale of synthetic fuel has generated $244 million in tax credits through March31, 2005.  The IRS is currently auditing **Cinergy** for the 2002 and 2003 tax years.  It is reasonable to anticipate that the IRSwill evaluate the various key requirements for claiming our Section 29 creditsrelated to synthetic fuel.  **Cinergy** received a private letter rulingfrom the IRS in connection with the acquisition of the facility thatspecifically addressed the significant chemical change requirement.  Additionally, although not addressed in theletter ruling, we believe that our facility’s in service date meets the Section29 requirements.

 

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IRC Section 29 alsoprovides for a phase-out of the credit based on the average price of crude oilduring a calendar year.  The phase-out isbased on a prescribed calculation and definition of crude oil prices.  We believe that crude oil prices would needto average approximately $60 per barrel from May through December 2005 for anycredits to be phased out for 2005.  Thecredits would be entirely phased out if crude oil prices were to averageapproximately $80 per barrel during that same time period.  Based on recent forecasts of crude oil pricesfor the remainder of 2005, we do not currently expect a negative impact on ourability to recognize the projected benefit of Section 29 credits in 2005.

 

Under currently enactedlaw, the credit under IRC Section 29 will cease to be available for syntheticfuel sold after December 31, 2007.

 

##### ***Ohio Taxes***

 

The Governor of Ohio hasproposed sweeping changes to Ohio’s tax law which, as currently proposed, wouldphase out the Ohio corporate franchise tax. The franchise tax would be replacedby a “Commercial Activity Tax”. If approved as currently proposed, thesechanges could impact **Cinergy’s** and **CG&E’s** net deferred tax liabilities. The proposed lawis still under consideration by the Ohio legislature and, as aresult, the ultimate financial impact on **Cinergy**and **CG&E** is uncertain.

 

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### **MARKET RISK SENSITIVE INSTRUMENTS**

#### ** **

#### **Energy Commodities Sensitivity**

 

The transactionsassociated with Commercial’s energy marketing and trading activities andsubstantial investment in generation assets give rise to various risks,including price risk.  Price riskrepresents the potential risk of loss from adverse changes in the market priceof electricity or other energy commodities. As Commercial continues to develop its energy marketing and tradingbusiness, its exposure to movements in the price of electricity and otherenergy commodities may become greater. As a result, we may be subject to increased future earnings volatility.

 

As discussed in the 200410-K, Commercial’s energy marketing and trading activities principally consistof Marketing & Trading’s natural gas marketing and trading operations and **CG&E’s** power marketing and tradingoperations.

 

##### ***Changes inFair Value***

 

The changes in fair valueof the energy risk management assets and liabilities for **Cinergy** and **CG&E** for the quarters ended March 31, 2005 and 2004 arepresented in the table below.

 
| ** **                                                      | ** ** | **Change in Fair Value** | ** ** |
|-----------------------------------------------------------------|------------|--------------------------|------------|
| ** **                                                      | ** ** | **March 31, 2005**       | ** ** | March 31, 2004 | ** ** |
| ** **                                                      | ** ** | **Cinergy**(1)           | ** ** | **CG&E** | ** ** | **Cinergy**(1) | ** ** | **CG&E** | ** ** |
| ** **                                                      | ** ** | *(in millions)*          | ** ** |
| * *                                                        | * *   | * *                 | * *   | * * | * * | * * | * * | * * | * * |
| Fair  value of contracts outstanding at the beginning of period |       | **$**                    | **82**     | ** ** | **$** | **36** | ** ** | $ | 41 |   | $ | 20 |   |
|                                                            |       | ** **               | ** ** | ** ** | ** ** |   |   |   |   |
| Other  changes in fair value(2)                                 |       | **(1**                   | **)**      | **2** | ** ** | 49 |   | 28 |   |
|                                                            |       | ** **               | ** ** | ** ** | ** ** |   |   |   |   |
| Option  premiums paid/(received)                                |       | **13**                   | ** ** | **6** | ** ** | 6 |   | 1 |   |
|                                                            |       | ** **               | ** ** | ** ** | ** ** |   |   |   |   |
| Contracts  settled                                              |       | **(78**                  | **)**      | **(28** | **)** | (48 | ) | (10 | ) |
|                                                            |       | ** **               | ** ** | ** ** | ** ** |   |   |   |   |
| Fair  value of contracts outstanding at end of period           |       | **$**                    | **16**     | ** ** | **$** | **16** | ** ** | $ | 48 |   | $ | 39 |   |

 

----

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

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

 

The following are thebalances at March 31, 2005 and 2004 of our energy risk management assets andliabilities:

 
| ** **                                        | ** ** | **March 31, 2005** | ** ** | March 31, 2004 | ** ** |
|---------------------------------------------------|------------|--------------------|------------|----------------|------------|
| ** **                                        | ** ** | **Cinergy**(1)     | ** ** | **CG&E**   | ** ** | **Cinergy**(1) | ** ** | **CG&E** | ** ** |
| ** **                                        | ** ** | *(in millions)*    | ** ** |
| * *                                          | * *   | * *           | * *   | * *       | * *   | * * | * * | * * | * * |
| Energy  risk management assets - current          |       | **$**              | **451**    | ** **     | **$**      | **244** | ** ** | $ | 352 |   | $ | 122 |   |
| Energy  risk management assets - non-current      |       | **239**            | ** ** | **108**        | ** ** | 114 |   | 49 |   |
|                                              |       | ** **         | ** ** | ** **     | ** ** |   |   |   |   |
| Energy  risk management liabilities - current     |       | **(427**           | **)**      | **(232**       | **)**      | (330 | ) | (108 | ) |
| Energy  risk management liabilities - non-current |       | **(247**           | **)**      | **(104**       | **)**      | (88 | ) | (24 | ) |
|                                              |       | ** **         | ** ** | ** **     | ** ** |   |   |   |   |
|                                              |       | **$**              | **16**     | ** **     | **$**      | **16** | ** ** | $ | 48 |   | $ | 39 |   |

 

----

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

 

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The following tablepresents the expected maturity of the energy risk management assets andliabilities as of March 31, 2005 for **Cinergy**and **CG&E**:

 
| ** **                                             | ** **   | **Fair Value of Contracts at March 31, 2005** | ** **   |
|--------------------------------------------------------|--------------|-----------------------------------------------|--------------|
| ** **                                             | ** **   | **Maturing**                                  | ** **   | ** ** | ** ** |
| ** **                                             | ** **   | **Within 12**                                 | ** **   | **12-36** | ** ** | **36-60** | ** ** | ** ** | ** ** | **Total** | ** ** |
| **Source  of Fair Value**(1)                           | ** **   | **months**                                    | ** **   | **months** | ** ** | **months** | ** ** | **Thereafter** | ** ** | **Fair Value** | ** ** |
| *** ***                                           | *** *** | *(in millions)*                               | *** *** |
| **Cinergy**(2)                                         |         |                                          |         |   |   |   |   |   |   |   |   |
| Prices  actively quoted                                |         | $                                             | 3            |   | $ | (2 | ) | $ | — |   | $ | — |   | $ | 1 |   |
|                                                   |         |                                          |         |   |   |   |   |   |   |   |   |
| Prices  based on models and other valuation methods(3) |         | 21                                            |         | (6 | ) | 2 |   | (2 | ) | 15 |   |
|                                                   |         |                                          |         |   |   |   |   |   |   |   |   |
| Total                                                  |         | $                                             | 24           |   | $ | (8 | ) | $ | 2 |   | $ | (2 | ) | $ | 16 |   |
|                                                   |         |                                          |         |   |   |   |   |   |   |   |   |
| **CG&E**                                           |         |                                          |         |   |   |   |   |   |   |   |   |
| Prices  actively quoted                                |         | $                                             | 8            |   | $ | 7 |   | $ | — |   | $ | — |   | $ | 15 |   |
|                                                   |         |                                          |         |   |   |   |   |   |   |   |   |
| Prices  based on models and other valuation methods(3) |         | 3                                             |         | (5 | ) | 3 |   | — |   | 1 |   |
|                                                   |         |                                          |         |   |   |   |   |   |   |   |   |
| Total                                                  |         | $                                             | 11           |   | $ | 2 |   | $ | 3 |   | $ | — |   | $ | 16 |   |

 

----

(1)           While liquidity varies by tradingregions, active quotes are generally available for two years for standardelectricity transactions and three years for standard gas transactions.  Non-standard transactions are classifiedbased on the extent, if any, of modeling used in determining fair value.  Long-term transactions can have portions inboth categories depending on the length.

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

(3)           A substantial portion of these amountsinclude option values.

 

##### ***GenerationPortfolio Risks***

** **

**Cinergy**optimizes the value of its non-regulated portfolio.  The portfolio includes generation assets(power and capacity), fuel, and emission allowances and we manage all of thesecomponents as a portfolio.  We use modelsthat forecast future generation output, fuel requirements, and emissionallowance requirements based on forward power, fuel and emission allowancemarkets.  The component pieces of theportfolio are bought and sold based on this model in order to manage theeconomic value of the portfolio.  Withthe issuance of Statement of Financial Accounting Standards No. 149, *Amendment of Statement 133 on Derivative Instruments and HedgingActivities* (Statement 149), most forward power transactions frommanagement of the portfolio are accounted for at fair value. The othercomponent pieces of the portfolio are typically not subject to Statement 149and are accounted for using the accrual method, where changes in fair value arenot recognized.  As a result, we aresubject to earnings volatility via MTM gains or losses from changes in thevalue of the contracts accounted for using fair value.  A hypothetical $1.00 per MWh increase ordecrease consistently applied to all forward power prices would have resultedin an increase or decrease in fair value of these contracts of approximately$4.5 million as of March 31, 2005.  See “2005Quarterly Results of Operations” for further discussion of the impact oncurrent quarter results.

 

##### ***Energy TradingCredit Risk***

 

**Cinergy’s**extension of credit for energy marketing and trading is governed by a CorporateCredit Policy.  Written guidelinesapproved by **Cinergy’s** Risk Policy Committeedocument the management approval levels for credit limits, evaluation ofcreditworthiness, and credit risk mitigation procedures.  **Cinergy**analyzes net credit exposure and establishes credit reserves based on thecounterparties’ credit rating, payment history, and length of the outstandingobligation.  Exposures to credit risksare monitored daily by the Corporate Credit Risk function, which is independentof all trading operations.  Energycommodity prices can be extremely volatile and the market can, at times, lackliquidity.  Because of these issues,credit risk for energy commodities is generally greater than with othercommodity trading.

 

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The following tablesprovide information regarding **Cinergy’s**and **CG&E’s** exposure on energytrading contracts as of March 31, 2005. The tables include accounts receivable and energy risk managementassets, which are net of accounts payable and energy risk managementliabilities with the same counterparties when we have the right of offset.  The credit collateral shown in the followingtables includes cash and letters of credit.

 

**Cinergy**(1)

 
| ** **                             | ** **   | ** **                   | ** **   | ** **             | ** ** | ** **       | ** ** | ** **              | ** ** | **Number of**            | ** ** | ** **                        | ** ** |
|----------------------------------------|--------------|------------------------------|--------------|------------------------|------------|------------------|------------|-------------------------|------------|--------------------------|------------|-----------------------------------|------------|
| ** **                             | ** **   | ** **                   | ** **   | ** **             | ** ** | ** **       | ** ** | ** **              | ** ** | **Counterparties**       | ** ** | **Net Exposure of**               | ** ** |
| ** **                             | ** **   | **Total Exposure**           | ** **   | ** **             | ** ** | ** **       | ** ** | **Percentage  of**      | ** ** | **Greater than  10% of** | ** ** | **Counterparties  Greater than**  | ** ** |
| **Rating**                             | ** **   | **Before Credit Collateral** | ** **   | **Credit  Collateral** | ** ** | **Net Exposure** | ** ** | **Total  Net Exposure** | ** ** | **Total Net  Exposure**  | ** ** | **10% of Total Net  Exposure**(4) | ** ** |
| *** ***                           | *** *** | *(in millions)*              | *** *** |
| * *                               | * *     | * *                     | * *     | * *               | * *   | * *         | * *   | * *                | * *   | * *                 | * *   | * *                          | * *   |
| Investment  Grade(2)                   |         | $                            | 784          |                   | $          | 147              |       | $                       | 637        |                     | 81         | %                                 | —     |   | $ | — |   |
| Internally  Rated-Investment Grade(3)  |         | 129                          |         | 33                     |       | 96               |       | 12                      |       | —                   |       | —                            |       |
| Non-Investment  Grade                  |         | 62                           |         | 34                     |       | 28               |       | 3                       |       | —                   |       | —                            |       |
| Internally  Rated-Non-Investment Grade |         | 75                           |         | 46                     |       | 29               |       | 4                       |       | —                   |       | —                            |       |
|                                   |         |                         |         |                   |       |             |       |                    |       |                     |       |                              |       |
| Total                                  |         | $                            | 1,050        |                   | $          | 260              |       | $                       | 790        |                     | 100        | %                                 | —     |   | $ | — |   |

 

----

(1)           Includes amounts related tonon-registrants.

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

(3)           Counterparties include a variety ofentities, including investor-owned utilities, privately held companies, citiesand municipalities.  **Cinergy**assigns internal credit ratings to all counterparties within our credit riskportfolio, applying fundamental analytical tools.  Included in this analysis is a review of (butnot limited to) counterparty financial statements with consideration given tooff-balance sheet obligations and assets, specific business environment, accessto capital, and indicators from debt and equity capital markets.

(4)           Exposures, positive or negative, withcounterparties that are related to one another are not aggregated when no rightof offset exists and as a result, credit is extended and evaluated on aseparate basis.

 

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**CG&E**

 
| ** **                             | ** **   | ** **                    | ** **   | ** **             | ** ** | ** **       | ** ** | ** **              | ** ** | **Number of**            | ** ** | ** **                        | ** ** |
|----------------------------------------|--------------|-------------------------------|--------------|------------------------|------------|------------------|------------|-------------------------|------------|--------------------------|------------|-----------------------------------|------------|
| ** **                             | ** **   | ** **                    | ** **   | ** **             | ** ** | ** **       | ** ** | ** **              | ** ** | **Counterparties**       | ** ** | **Net Exposure of**               | ** ** |
| ** **                             | ** **   | **Total Exposure**            | ** **   | ** **             | ** ** | ** **       | ** ** | **Percentage  of**      | ** ** | **Greater than  10% of** | ** ** | **Counterparties  Greater than**  | ** ** |
| **Rating**                             | ** **   | **Before Credit  Collateral** | ** **   | **Credit  Collateral** | ** ** | **Net Exposure** | ** ** | **Total  Net Exposure** | ** ** | **Total Net  Exposure**  | ** ** | **10% of Total  Net Exposure**(3) | ** ** |
| *** ***                           | *** *** | *(in millions)*               | *** *** |
| * *                               | * *     | * *                      | * *     | * *               | * *   | * *         | * *   | * *                | * *   | * *                 | * *   | * *                          | * *   |
| Investment  Grade(1)                   |         | $                             | 200          |                   | $          | 49               |       | $                       | 151        |                     | 94         | %                                 | 2          |   | $ | 37 |   |
| Internally  Rated-Investment Grade(2)  |         | 4                             |         | 1                      |       | 3                |       | 2                       |       | —                   |       | —                            |       |
| Non-Investment  Grade                  |         | 27                            |         | 26                     |       | 1                |       | 1                       |       | —                   |       | —                            |       |
| Internally  Rated-Non-Investment Grade |         | 5                             |         | —                 |       | 5                |       | 3                       |       | —                   |       | —                            |       |
|                                   |         |                          |         |                   |       |             |       |                    |       |                     |       |                              |       |
| Total                                  |         | $                             | 236          |                   | $          | 76               |       | $                       | 160        |                     | 100        | %                                 | 2          |   | $ | 37 |   |

 

----

(1)                                  Includescounterparties rated Investment Grade or the counterparties’ obligations areguaranteed or secured by an Investment Grade entity.

(2)                                  Counterpartiesinclude various cities and municipalities.

(3)                                  Exposures,positive or negative, with counterparties that are related to one another arenot aggregated when no right of offset exists and as a result, credit isextended and evaluated on a separate basis.

 

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### **ACCOUNTING MATTERS**

#### ** **

#### **Critical AccountingEstimates**

 

Preparation of financialstatements and related disclosures in compliance with GAAP requires the use ofassumptions and estimates regarding future events, including the likelihood ofsuccess of particular investments or initiatives, estimates of future prices orrates, legal and regulatory challenges, and anticipated recovery of costs.  Therefore, the possibility exists for materiallydifferent reported amounts under different conditions or assumptions.  We consider an accounting estimate to becritical if:  1) the accounting estimaterequires us to make assumptions about matters that were reasonably uncertain atthe time the accounting estimate was made, and 2) changes in the estimate arereasonably likely to occur from period to period.

 

**Cinergy’s**2004 10-K includes a discussion of accounting policies that are critical to thepresentation of **Cinergy’s**financial position and results of operations. These include:

 

•      Fair Value Accounting for Energy Marketingand Trading;

•      Regulatory Accounting;

•      Income Taxes;

•      Contingencies;

•      Impairment of Long-Lived Assets; and

•      Impairment of Unconsolidated Investments.

 

#### **Accounting Changes**

*** ***

***Asset RetirementObligations***

 

In March 2005, theFinancial Accounting Standards Board (FASB) issued Interpretation No. 47, *Accounting for Conditional Asset RetirementObligations* (Interpretation 47), an interpretation of Statement ofFinancial Accounting Standards No. 143, *Accounting for AssetRetirement Obligations*(Statement 143).  Statement 143 requires recognition of legalobligations associated with the retirement or removal of long-lived assets atthe time the obligations are incurred. Interpretation 47 clarifies that a conditional asset retirementobligation (which occurs when the timing and/or method of settlement areconditional on a future event that may or may not be within the control of theentity) is a legal obligation within the scope of Statement 143.  As such, the fair value of a conditionalasset retirement obligation must be recognized as a liability when incurred ifthe liability’s fair value can be reasonably estimated.  Interpretation 47 also clarifies whensufficient information exists to reasonably estimate the fair value of an assetretirement obligation.

 

**Cinergy** willadopt Interpretation 47 on December 31, 2005. Upon adoption of Interpretation 47 **Cinergy** willrecognize the impact, if any, of additional liabilities for conditional assetretirement obligations as a cumulative effect of a change in accountingprinciple.  We have begun evaluating theimpact of adopting this new interpretation and are currently unable to predictwhether the implementation of this accounting standard will be material to ourfinancial position or results of operations.

 

##### ***Share-BasedPayment***

 

In December 2004, theFASB issued a replacement of Statement of Financial Accounting Standards No.123, *Accounting for Stock-Based Compensation*(Statement 123), *Statement of Financial Accounting StandardsNo. 123 (revised 2004), Share-Based Payment* (Statement 123R).  This standard will require accounting for allstock-based compensation arrangements under the fair value method in additionto other provisions.

 

In 2003, we prospectivelyadopted accounting for our stock-based compensation plans using the fair valuerecognition provisions of Statement 123, as amended by Statement of FinancialAccounting Standards No. 148, *Accounting for Stock-BasedCompensation-Transition and Disclosure* (Statement 148), for allemployee awards granted or with terms modified on or after January 1,2003.  Therefore, the impact ofimplementation of Statement 123R on stock options within our stock-basedcompensation plans is not expected to be material.  Statement 123R

 

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contains certainprovisions that will modify the accounting for various stock-based compensationplans other than stock options.  We arein the process of evaluating the impact of this new standard on theseplans.  **Cinergy**will adopt Statement 123R on January 1, 2006.

 

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

 

In October 2004, theAmerican Jobs Creation Act (AJCA) was signed into law.  The AJCA includes a one-time deduction of 85percent of certain foreign earnings that are repatriated, as defined in theAJCA.  **Cinergy**has not fully completed itsevaluation of the effects of the AJCA on its foreign investment strategy.  However,based on the evaluation to date, it does not appear that the effects of the provisionwill have a material impact on our financial position or results of operations.

 

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## **ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

This information isprovided in, and incorporated by reference from, the “Market Risk SensitiveInstruments” section in “Item 2. Management’s Discussion and Analysis ofFinancial Condition and Results of Operations”.

 

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

 

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

 

Under the supervision and with the participation ofour management, including our chief executive officer and chief financialofficer, we have evaluated the effectiveness of our disclosure controls andprocedures as of March 31, 2005, and, based upon this evaluation, our chiefexecutive officer and chief financial officer have concluded that thesecontrols and procedures are effective in providing reasonable assurance thatinformation requiring disclosure is recorded, processed, summarized, andreported within the timeframe specified by the SEC’s rules and forms.

 

Under the supervision andwith the participation of our management, including our chief executive officerand chief financial officer, we have evaluated any change in our internalcontrol over financial reporting (as such term is defined in Rules 13a-15(f)and 15d-15(f) under the Exchange Act) during the fiscal quarter ended March 31,2005 and found no change that has materially affected, or is reasonably likelyto materially affect, our internal control over financial reporting.

 

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## **PART II. OTHER INFORMATION**

 

## **ITEM 1.  LEGALPROCEEDINGS**

 

### **CLEAN AIR 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 we violated the CAA by not obtaining Prevention of SignificantDeterioration (PSD), Non-Attainment New Source Review (NSR), and Ohio andIndiana State Implementation Plan (SIP) permits for various projects at ourowned and co-owned generating stations. Additionally, the suit claims that we violated an Administrative ConsentOrder entered into in 1998 between the Environmental Protection Agency (EPA)and **Cinergy** relating to allegedviolations of Ohio’s SIP provisions governing particulate matter at Unit 1 at **CG&E’s** W.C. Beckjord Station.  The suit seeks (1) injunctive relief torequire installation of pollution control technology on various generatingunits at **CG&E’s** W.C. Beckjordand 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.  The case is currently in discovery, and theUnited States Federal District Court for the Southern District of Indiana hasset the case for trial by jury commencing in February 2006.

 

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 for suchalleged violations.  Neither partyappealed that decision.  This matter isscheduled for trial commencing June 2005.

 

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 generating station.

 

We are unable to predict whether resolution of thesematters would have a material effect on our financial position or results ofoperations.  We intend tovigorously defend against these allegations.

 

### **CARBON DIOXIDE (CO2) 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 at electricgenerating facilities contribute to global warming and amount to a publicnuisance.  The complaints also allegethat the defendants could generate the same amount of electricity whileemitting significantly less CO2. The plaintiffs are seeking an injunction requiring each defendant to capits CO2 emissions and then reduce them by a specified percentageeach year for at least a decade.  **Cinergy** intends to defend these lawsuitsvigorously in court

 

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and filed motions todismiss with the other defendants in September 2004.  We are not able to predict whether resolutionof these matters would have a material effect on our financial position orresults of operations.

 

### **SELECTIVE CATALYTICREDUCTION UNITS (SCR) AT GIBSON STATION**

 

In May 2004, SCRs andother pollution control equipment became operational at Units 4 and 5 of **PSI’s** Gibson Station in accordance withcompliance deadlines under the nitrogen oxide SIP Call.  In June and July 2004, Gibson Stationtemporarily shut down the equipment on these units due to a concern thatportions of the plume from those units’ stacks appeared to break apart anddescend to ground level, at certain times, under certain weatherconditions.  As a result, and, workingwith the City of Mt. Carmel, Illinois, Illinois EPA, Indiana Department ofEnvironmental Management (IDEM), EPA, and the State of Illinois, we developed aprotocol regarding the use of the SCRs while we explored alternatives toaddress this issue.  After the protocolwas finalized, the Illinois Attorney General brought an action in Wabash CountyCircuit Court against **PSI** seeking apreliminary injunction to enforce the protocol. In August 2004, the court granted that preliminary injunction.  **PSI** isappealing that decision to the Fifth District Appellate Court, but we cannotpredict the ultimate outcome of that appeal or of the underlying action by theIllinois Attorney General.

 

In April 2005, wecompleted the installation of a permanent control system to address thisissue.  The new control system willsupport all five Gibson generating units. We will seek recovery of any related capital as well as increasedemission allowance expenditures through the regulatory process.  Wedo not believe costs related to resolving this matter will have a materialimpact on our financial position or results of operations.

 

### **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, Ohio laws against nuisance andcommon law nuisance.  **CG&E** fileda motion to dismiss the lawsuit on primarily procedural grounds and we intendto defend against these claims vigorously.  The plaintiffs have filed anumber of additional notices of intent to sue and a second lawsuit raisingclaims similar to those in the original claim. At this time, we cannot predict whether the outcome of this matter willhave a material impact on our financial position or results of operations.

 

### **MANUFACTURED GAS PLANT (MGP) SITES**

 

Coal tar residues,related hydrocarbons, and various metals have been found in at least 22 sitesthat **PSI** or its predecessorspreviously owned and sold in a series of transactions with Northern IndianaPublic Service Company (NIPSCO) and Indiana Gas Company, Inc. (IGC).  The 22 sites are in the process of beingstudied and will be remediated, if necessary. In 1998 NIPSCO, IGC, and **PSI**entered into Site Participation and Cost Sharing Agreements to allocateliability and responsibilities between them. The IDEM oversees investigation and cleanup of all of these sites.  Thus far, **PSI**has primary responsibility for investigating, monitoring and, if necessary,remediating nine of these sites.  InDecember 2003, **PSI** entered into avoluntary remediation plan with the state of Indiana, providing a formalframework for the investigation and cleanup of the sites.

 

In April 1998, **PSI** filed suit in Hendricks County in thestate of Indiana against its general liability insurance carriers.  **PSI**sought a declaratory judgment to obligate its insurance carriers to (1) defendMGP claims against **PSI** andcompensate **PSI** for its costs ofinvestigating, preventing, mitigating, and remediating damage to property andpaying claims related to MGP sites; or (2) pay **PSI’s** cost of defense.  **PSI** settled, in principle, its claims with all but one ofthe insurance carriers in January 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 thepresent time, **PSI** cannot predict the outcome ofthis litigation, 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.  We will continue toinvestigate and remediate the sites as outlined in the voluntary remediationplan.  As additional facts become knownand investigation is completed, we

 

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will assess whether thelikelihood of incurring additional costs becomes probable.  Until all investigation and remediation iscomplete, we are unable to determine the overall impact on our financialposition or results of operations.

 

**CG&E**and **ULH&P** have performed siteassessments on certain of their sites where we believe MGP activities haveoccurred at some point in the past and have found no imminent risk to theenvironment.  At the present time, **CG&E** and **ULH&P** cannot predict whether investigation and/orremediation will be required in the future at any of these sites.

 

### **ASBESTOS CLAIMS LITIGATION**

 

**CG&E**and **PSI** have been named asdefendants or co-defendants in lawsuits related to asbestos at their electricgenerating stations.  Currently, thereare approximately 120 pending lawsuits.  Inthese lawsuits, plaintiffs claim to have been exposed to asbestos-containingproducts in the course of their work at the **CG&E**and **PSI** generating stations.  The plaintiffs further claim that as theproperty owner of the generating stations,**CG&E** and **PSI** shouldbe held liable for their injuries and illnesses based on an alleged duty towarn and protect them from any asbestos exposure.  A majority of the lawsuits to date have beenbrought against **PSI**.  The impact on **CG&E’s** and **PSI’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** in the amountof approximately $500,000 on a negligence claim and a verdict for **PSI** on punitive damages.  **PSI**received an adverse ruling in its initial appeal of the negligence claimverdict, but the Indiana Supreme Court accepted the transfer of the case andheard oral argument in June 2004.  Inaddition, **PSI** has settled a numberof other lawsuits for amounts, which neither individually nor in the aggregate,are material to **PSI’s** financialposition or results of operations.

 

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

 

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### **ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES ANDUSE OF PROCEEDS**

 

The number of shares (orunits) provided in the table below represent shares purchased by the plantrustee on behalf of the 401(k) Excess Plan.

 
| **Period**                     | ** ** | **(a) Total Number of  Shares (or Units)  Purchased** | ** ** | **(b) Average Price  Paid per Share (or  Unit)** | ** ** | **(c) Total Number of  Shares (or Units)  Purchased as Part of  Publicly Announced  Plans or Programs** | ** ** | **(d) Maximum Number  (or Approximate  Dollar Value) of  Shares (or Units) that  May Yet Be  Purchased Under the  Plans or Programs** | ** ** |
|--------------------------------|------------|-------------------------------------------------------|------------|--------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------|------------|
|                           |       |                                                  |       |                                             |       |                                                                                                    |       |                                                                                                                                  |       |
| January  1 – January 31   |       | —                                                |       | $                                                | —     |                                                                                                    | —     |                                                                                                                                  | —     |   |
| February  1 – February 28 |       | 1,507                                                 |       | $                                                | 41.44      |                                                                                                    | —     |                                                                                                                                  | —     |   |
| March  1 – March 31       |       | 8,395                                                 |       | $                                                | 39.79      |                                                                                                    | —     |                                                                                                                                  | —     |   |

 

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

 

The annual meeting ofshareholders of **Cinergy Corp.**, washeld on May 5, 2005, in Covington, Kentucky.

 

At the meeting,shareholders ratified the selection of Deloitte and Touche, the members ofDeloitte Touche Tohmatsu and their respective affiliates, as the Company’sindependent auditors and elected three Class II directors to the board of **Cinergy Corp.** to serve for three-year termsending in 2008, as set forth below:

 
| **Directors**     | ** ** | **Votes For** | ** ** | **Votes Withheld** | ** ** |
|-------------------|------------|---------------|------------|--------------------|------------|
|              |       |          |       |               |       |
| **Class II**      |       |          |       |               |       |
| Thomas  E. Petry  |       | 174,474,563   |       | 2,845,620          |       |
| Mary  L. Schapiro |       | 174,442,147   |       | 2,878,036          |       |
| Philip  R. Sharp  |       | 174,375,726   |       | 2,944,457          |       |

 

In lieu of the annualmeeting of shareholders of The Cincinnati Gas & Electric Company (**CG&E**), a resolution was duly adoptedvia unanimous written consent of **CinergyCorp.**, **CG&E’s** soleshareholder, effective May 3, 2005 electing the following members to the Boardof Directors for one-year terms expiring in 2006:

 

•      Michael J. Cyrus

•      James E. Rogers

•      James L. Turner

 

The annual meeting ofshareholders of PSI Energy, Inc. (**PSI**)was held on May 5, 2005, in Covington, Kentucky.  Proxies were not solicited for the annualmeeting.  **Cinergy Corp.** owns all of the 53,913,701 outstanding shares,representing a like number of votes, of the common stock of **PSI**. By unanimous vote, the following members to the Board of Directors wereelected at the annual meeting for one-year terms expiring in 2006:

 

•      Michael G. Browning

•      Kay E. Pashos

•      James E. Rogers

 

None of the 650,989outstanding shares, representing 423,331 votes, of the preferred stock of **PSI**, were present or voted at the annualmeeting.

 

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**ITEM 5. OTHER INFORMATION**

 

On May 6, 2005, **PSI** and **CG&E** signed a definitive agreement with subsidiaries ofAllegheny Energy, Inc. to acquire the 512-megawatt Wheatland generatingfacility for approximately $100 million. The Wheatland facility, located in Knox County, Indiana, has fournatural gas-fired simple cycle combustion turbines and is directly connected tothe **Cinergy** transmission system.  Its output will be used to bolster thereserve margins on the **PSI** and/or **CG&E** systems. Under the transaction agreement, **PSI** and **CG&E** may each take a share of ownership of the plant oreither one may acquire the entire ownership interest, with the ownershipstructure to be determined shortly before closing.  The transaction is subject to receipt ofrequired regulatory approvals and other customary conditions.  **Cinergy** expectsto close the acquisition in the fourth quarter of 2005.

 

William J. Grealis, Executive Vice President of Cinergy Corp., hasretired from the Company effective June 1, 2005.

 

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## **ITEM 6.  EXHIBITS**

 

The documents listedbelow are being furnished or filed on behalf of **Cinergy Corp.**, The Cincinnati Gas & Electric Company (**CG&E**), PSI Energy, Inc. (**PSI**), and The Union Light, Heat and PowerCompany (**ULH&P**).  Exhibits not identified as previouslyfurnished or filed are furnished or filed herewith:

 
| **Exhibit  Designation** | ** ** | **Registrant**                              | ** ** | **Nature  of Exhibit**                                                                                                                                                                    | ** ** | **Previously  Filed as  Exhibit to:** |
|--------------------------|------------|---------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|
|                     |       |                                        |       |                                                                                                                                                                                      |       |                                  |
| **Additional Exhibits**  | ** ** | ** **                                  | ** ** | ** **                                                                                                                                                                                | ** ** | ** **                            |
|                     |       |                                        |       |                                                                                                                                                                                      |       |                                  |
| 10-ffff                  | ** ** | **Cinergy Corp.**                           | ** ** | Retirement and Consulting Agreement and Waiver and Release of  Liability, dated May 4, 2005, between **Cinergy  Corp.** and William J. Grealis                                            | ** ** | ** **                            |
| **Certificates**         |       |                                        |       |                                                                                                                                                                                      |       |                                  |
|                     |       |                                        |       |                                                                                                                                                                                      |       |                                  |
| **31-a**                 | ** ** | **Cinergy  Corp. CG&E  PSI  ULH&P** | ** ** | **Certification by James E. Rogers  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. CG&E  PSI  ULH&P** | ** ** | **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.** | ** ** | ** **                            |
| ** **               | ** ** | ** **                                  | ** ** | ** **                                                                                                                                                                                | ** ** | ** **                            |
| **32-a**                 | ** ** | **Cinergy  Corp. CG&E  PSI  ULH&P** | ** ** | **Certification by James E. Rogers  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. CG&E  PSI  ULH&P**  |       | 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.                                              |       |                                  |

 

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## **SIGNATURES**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, each of the Registrantshas duly caused this report to be signed on its behalf by the undersignedthereunto duly authorized.

 

CINERGY CORP.

THE CINCINNATI GAS& ELECTRIC COMPANY

PSI ENERGY, INC.

THE UNION LIGHT,HEAT AND POWER COMPANY

Registrants

 

 
| Date: May 10, 2005 | /s/                            | Lynn J. Good |   |
|--------------------|--------------------------------|--------------|--------|
|               |                           | Lynn J. Good |   |
|               | (duly authorized  officer      |         |
|               | and                            |         |
|               | principal  accounting officer) |         |

 

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