**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-Q**

 

**(MarkOne)**

**ý**                                 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934

 

**For the quarterly period ended March 31, 2004**

 

**or**

 

**o**                                 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934

 

**For the transition period from            to           **

 

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

 

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Indicate by check mark whetherthe registrants (1) have filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months(or for such shorter period that the registrants were required to file suchreports), and (2) have been subject to such filing requirements for the past 90days.

Yes ý  No o

 

----

 

Indicate by check mark whethereach registrant is an accelerated filer (as defined in Rule 12b-2 of the 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-Q isseparately 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 asto information relating to the other registrants.

 

**TheUnion Light, Heat and Power Company** meets theconditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and istherefore filing its company specific information with the reduced disclosureformat specified in General Instruction H(2) of Form 10-Q.

 

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As of April 30, 2004, shares ofcommon stock outstanding for each registrant were as listed:

 

| **Registrant**                            |   | **Description**                                |   | **Shares**  |
|-------------------------------------------|--------|------------------------------------------------|--------|-------------|
|                                      |   |                                           |   |        |
| Cinergy Corp.                             |   | Par value $.01 per share                       |   | 179,900,405 |
|                                      |   |                                           |   |        |
| The Cincinnati Gas & Electric Company |   | Par value $8.50 per share                      |   | 89,663,086  |
|                                      |   |                                           |   |        |
| PSI Energy, Inc.                          |   | Without par value, stated value $.01 per share |   | 53,913,701  |
|                                      |   |                                           |   |        |
| The Union Light, Heat and Power Company   |   | Par value $15.00 per share                     |   | 585,333     |

 

----

 

 

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**TABLE OF CONTENTS**

 
| **Item  Number**                       |                                                                                            |   |
|----------------------------------------|-------------------------------------------------------------------------------------------------|--------|
| **PART I  FINANCIAL INFORMATION** |
|                                   |                                                                                            |   |
| 1                                      | **Financial Statements**                                                                        |   |
|                                   | *Cinergy Corp.*                                                                                 |   |
|                                   | Condensed Consolidated Statements of Income                                                     |   |
|                                   | Condensed Consolidated Balance Sheets                                                           |   |
|                                   | Condensed Consolidated Statements of  Changes in Common Stock Equity                            |   |
|                                   | Condensed Consolidated Statements of Cash  Flows                                                |   |
|                                   |                                                                                            |   |
|                                   | *The Cincinnati Gas & Electric Company*                                                     |   |
|                                   | Condensed Consolidated Statements of Income  and Comprehensive Income                           |   |
|                                   | Condensed Consolidated Balance Sheets                                                           |   |
|                                   | Condensed Consolidated Statements of Cash  Flows                                                |   |
|                                   |                                                                                            |   |
|                                   | *PSI Energy, Inc.*                                                                              |   |
|                                   | Condensed Consolidated Statements of Income  and Comprehensive Income                           |   |
|                                   | Condensed Consolidated Balance Sheets                                                           |   |
|                                   | Condensed Consolidated Statements of Cash Flows                                                 |   |
|                                   |                                                                                            |   |
|                                   | *The Union Light, Heat and Power Company*                                                       |   |
|                                   | Condensed Statements of Income                                                                  |   |
|                                   | Condensed Balance Sheets                                                                        |   |
|                                   | Condensed Statements of Cash Flows                                                              |   |
|                                   |                                                                                            |   |
|                                   | **Notes to Condensed Financial Statements**                                                     |   |
|                                   |                                                                                            |   |
|                                   | **Cautionary Statements Regarding  Forward-Looking Information**                                |   |
|                                   |                                                                                            |   |
| 2                                      | **Management’s Discussion and Analysis of  Financial Condition and Results of Operations** |   |
|                                   | Introduction                                                                                    |   |
|                                   | Organization                                                                                    |   |
|                                   | Liquidity and Capital Resources                                                                 |   |
|                                   | 2004 Quarterly Results of Operations -  Historical                                              |   |
|                                   | Results of Operations - Future                                                                  |   |
|                                   |                                                                                            |   |
| 3                                      | **Quantitative and Qualitative Disclosures  About Market Risk**                                 |   |
|                                   |                                                                                            |   |
| 4                                      | **Controls and Procedures**                                                                     |   |
|                                   |                                                                                            |   |
| **PART II  OTHER INFORMATION**    |
|                                   |                                                                                            |   |
| 1                                      | **Legal Proceedings**                                                                           |   |
|                                   |                                                                                            |   |
| 2                                      | **Changes in Securities, Use of Proceeds and  Issuer Purchases of Equity Securities**           |   |
|                                   |                                                                                            |   |
| 4                                      | **Submission of Matters to a Vote of Security  Holders**                                        |   |
|                                   |                                                                                            |   |
| 6                                      | **Exhibits and Reports on Form 8-K**                                                            |   |
|                                   |                                                                                            |   |
|                                   | **Signatures**                                                                                  |   |

 

3

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**CINERGY CORP.**

**AND SUBSIDIARY COMPANIES**

** **

**4**

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**CINERGY CORP.**

**CONDENSED CONSOLIDATED STATEMENTS OF INCOME**

** **
|                                                                                             |   | **Quarter  Ended  March 31**                                         |        |
|--------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------|-------------|
|                                                                                             |   | **2004**                                                             |        | **2003** |   |
|                                                                                             |   | **(dollars  in thousands, except   per share amounts)  (unaudited)** |        |
| **Operating Revenues**                                                                           |   |                                                                 |        |   |   |
| Electric                                                                                         |   | **$**                                                                | **878,128** | ** ** | $ | 823,059 |   |
| Gas                                                                                              |   | **350,846**                                                          | ** **  | 398,913 |   |
| Other                                                                                            |   | **59,684**                                                           | ** **  | 45,986 |   |
| **Total Operating Revenues**                                                                     |   | **1,288,658**                                                        | ** **  | 1,267,958 |   |
|                                                                                             |   |                                                                 | ** **  |   |   |
| **Operating Expenses**                                                                           |   |                                                                 | ** **  |   |   |
| Fuel and purchased power                                                                         |   | **286,914**                                                          | ** **  | 269,866 |   |
| Gas purchased                                                                                    |   | **223,516**                                                          | ** **  | 235,995 |   |
| Operation and maintenance                                                                        |   | **375,274**                                                          | ** **  | 328,055 |   |
| Depreciation                                                                                     |   | **104,857**                                                          | ** **  | 100,605 |   |
| Taxes other than income taxes                                                                    |   | **82,247**                                                           | ** **  | 77,749 |   |
| **Total Operating Expenses**                                                                     |   | **1,072,808**                                                        | ** **  | 1,012,270 |   |
|                                                                                             |   |                                                                 | ** **  |   |   |
| **Operating Income**                                                                             |   | **215,850**                                                          | ** **  | 255,688 |   |
|                                                                                             |   |                                                                 | ** **  |   |   |
| **Equity in Earnings of Unconsolidated  Subsidiaries**                                           |   | **2,748**                                                            | ** **  | 592 |   |
| **Miscellaneous (Expense) Income – Net**  (Note 8)                                          |   | **(15,508**                                                          | **)**       | 7,492 |   |
| **Interest Expense**                                                                             |   | **67,395**                                                           | ** **  | 59,169 |   |
| **Preferred Dividend Requirement of  Subsidiary Trust**                                          |   | **—**                                                           | ** **  | 5,970 |   |
| **Preferred Dividend Requirements of  Subsidiaries**                                             |   | **858**                                                              | ** **  | 858 |   |
|                                                                                             |   |                                                                 | ** **  |   |   |
| **Income Before Taxes**                                                                          |   | **134,837**                                                          | ** **  | 197,775 |   |
|                                                                                             |   |                                                                 | ** **  |   |   |
| **Income Taxes**                                                                                 |   | **31,822**                                                           | ** **  | 57,982 |   |
|                                                                                             |   |                                                                 | ** **  |   |   |
| **Income Before Discontinued Operations and  Cumulative**                                        |   |                                                                 | ** **  |   |   |
| **Effect of Changes in Accounting Principles**                                                   |   | **103,015**                                                          | ** **  | 139,793 |   |
|                                                                                             |   |                                                                 | ** **  |   |   |
| Discontinued operations, net of tax (Note  8)                                                    |   | **—**                                                           | ** **  | (170 | ) |
| Cumulative effect of changes in accounting  principles, net of tax (Note 1(e)(*ii*))             |   | **—**                                                           | ** **  | 26,462 |   |
| **Net Income**                                                                                   |   | **$**                                                                | **103,015** | ** ** | $ | 166,085 |   |
|                                                                                             |   |                                                                 | ** **  |   |   |
| **Average Common Shares Outstanding**                                                            |   | **179,261**                                                          | ** **  | 173,387 |   |
|                                                                                             |   |                                                                 | ** **  |   | ** ** |
| **Earnings Per Common Share**(Note  10)                                                          |   |                                                                 | ** **  |   |   |
| Income before discontinued operations and  cumulative effect of changes in accounting principles |   | **$**                                                                | **0.57**    | ** ** | $ | 0.81 |   |
| Discontinued operations, net of tax                                                              |   | **—**                                                           | ** **  | — |   |
| Cumulative effect of changes in accounting  principles, net of tax                               |   | **—**                                                           | ** **  | 0.15 |   |
| Net income                                                                                       |   | **$**                                                                | **0.57**    | ** ** | $ | 0.96 |   |
|                                                                                             |   |                                                                 | ** **  |   |   |
| **Earnings Per Common Share - Assuming  Dilution** (Note 10)                                     |   |                                                                 | ** **  |   |   |
| Income before discontinued operations and  cumulative effect of changes in accounting principles |   | **$**                                                                | **0.57**    | ** ** | $ | 0.80 |   |
| Discontinued operations, net of tax                                                              |   | **—**                                                           | ** **  | — |   |
| Cumulative effect of changes in accounting  principles, net of tax                               |   | **—**                                                           | ** **  | 0.15 |   |
| Net income                                                                                       |   | **$**                                                                | **0.57**    | ** ** | $ | 0.95 |   |
|                                                                                             |   |                                                                 | ** **  |   |   |
| **Dividends Declared Per Common Share**                                                          |   | **$**                                                                | **0.47**    | ** ** | $ | 0.46 |   |

 

**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 BALANCE SHEETS**

 
|                                                                                                                                 |   | **March 312004**                         |           | **December  31  2003** |     |
|--------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------|----------------|------------------------|----------|
|                                                                                                                                 |   | **(dollars  in thousands)  (unaudited)** |           |
|                                                                                                                                 |   |                                     |           |                   |     |
| **ASSETS**                                                                                                                           |   |                                     | * *       |                   | * * |
|                                                                                                                                 |   |                                     |           |                   |     |
| **Current Assets**                                                                                                                   |   |                                     |           |                   |     |
| Cash and cash equivalents                                                                                                            |   | **$**                                    | **218,541**    | ** **             | $        | 169,120 |   |
| Restricted deposits                                                                                                                  |   | **94,659**                               | ** **     | 92,813                 |     |
| Notes receivable, current                                                                                                            |   | **74,916**                               | ** **     | 189,854                |     |
| Accounts receivable less accumulated  provision for doubtful accounts of $ 7,853 at March 31, 2004, and $7,884 at  December 31, 2003 |   | **1,162,871**                            | ** **     | 1,074,518              |     |
| Fuel, emission allowances, and supplies                                                                                              |   | **275,372**                              | ** **     | 357,625                |     |
| Energy risk management current assets                                                                                                |   | **352,235**                              | ** **     | 305,058                |     |
| Prepayments and other                                                                                                                |   | **88,022**                               | ** **     | 53,609                 |     |
| **Total Current Assets**                                                                                                             |   | **2,266,616**                            | ** **     | 2,242,597              |     |
|                                                                                                                                 |   |                                     | ** **     |                   |     |
| **Property, Plant, and Equipment - at Cost**                                                                                         |   |                                     | ** **     |                   |     |
| Utility plant in service                                                                                                             |   | **9,835,661**                            | ** **     | 9,732,123              |     |
| Construction work in progress                                                                                                        |   | **279,782**                              | ** **     | 275,459                |     |
| **Total Utility Plant**                                                                                                              |   | **10,115,443**                           | ** **     | 10,007,582             |     |
| Non-regulated property, plant, and  equipment                                                                                        |   | **4,561,449**                            | ** **     | 4,527,943              |     |
| Accumulated depreciation                                                                                                             |   | **4,994,540**                            | ** **     | 4,908,019              |     |
| **Net Property, Plant, and Equipment**                                                                                               |   | **9,682,352**                            | ** **     | 9,627,506              |     |
|                                                                                                                                 |   |                                     | ** **     |                   |     |
| **Other Assets**                                                                                                                     |   |                                     | ** **     |                   |     |
| Regulatory assets                                                                                                                    |   | **1,006,879**                            | ** **     | 1,012,151              |     |
| Investments in unconsolidated subsidiaries                                                                                           |   | **489,482**                              | ** **     | 494,520                |     |
| Energy risk management non-current assets                                                                                            |   | **113,921**                              | ** **     | 97,334                 |     |
| Notes receivable, non-current                                                                                                        |   | **209,001**                              | ** **     | 213,853                |     |
| Other investments                                                                                                                    |   | **161,624**                              | ** **     | 184,044                |     |
| Goodwill and other intangible assets                                                                                                 |   | **53,041**                               | ** **     | 45,349                 |     |
| Other                                                                                                                                |   | **197,351**                              | ** **     | 197,351                |     |
| **Total Other Assets**                                                                                                               |   | **2,231,299**                            | ** **     | 2,244,602              |     |
|                                                                                                                                 |   |                                     | ** **     |                   |     |
| **Assets of Discontinued Operations**(Note  8)                                                                                       |   | **4,343**                                | ** **     | 4,501                  |     |
|                                                                                                                                 |   |                                     | ** **     |                   |     |
| **Total Assets**                                                                                                                     |   | **$**                                    | **14,184,610** | ** **             | $        | 14,119,206 |   |

 

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

 

6

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**CINERGY CORP.CONDENSED CONSOLIDATED BALANCE SHEETS**

 
|                                                                                                                                                                               |   | **March 31  2004**                       |           | **December  31  2003** |     |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------|----------------|------------------------|----------|
|                                                                                                                                                                               |   | **(dollars  in thousands)  (unaudited)** |           |
|                                                                                                                                                                               |   |                                     |           |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                                                                                      |   |                                     | * *       |                   | * * |
|                                                                                                                                                                               |   |                                     |           |                   |     |
| **Current Liabilities**                                                                                                                                                            |   |                                     |           |                   |     |
| Accounts payable                                                                                                                                                                   |   | **$**                                    | **1,364,327**  | ** **             | $        | 1,240,423 |   |
| Accrued taxes                                                                                                                                                                      |   | **228,798**                              | ** **     | 217,993                |     |
| Accrued interest                                                                                                                                                                   |   | **68,194**                               | ** **     | 68,952                 |     |
| Notes payable and other short-term  obligations (Note 4)                                                                                                                           |   | **236,936**                              | ** **     | 351,412                |     |
| Long-term debt due within one year                                                                                                                                                 |   | **729,793**                              | ** **     | 839,103                |     |
| Energy risk management current liabilities                                                                                                                                         |   | **329,496**                              | ** **     | 296,122                |     |
| Other                                                                                                                                                                              |   | **106,170**                              | ** **     | 107,438                |     |
| **Total Current Liabilities**                                                                                                                                                      |   | **3,063,714**                            | ** **     | 3,121,443              |     |
|                                                                                                                                                                               |   |                                     | ** **     |                   |     |
| **Non-Current Liabilities**                                                                                                                                                        |   |                                     | ** **     |                   |     |
| Long-term debt (Note 3)                                                                                                                                                            |   | **4,133,169**                            | ** **     | 4,131,909              |     |
| Deferred income taxes                                                                                                                                                              |   | **1,583,035**                            | ** **     | 1,557,981              |     |
| Unamortized investment tax credits                                                                                                                                                 |   | **106,616**                              | ** **     | 108,884                |     |
| Accrued pension and other postretirement  benefit costs                                                                                                                            |   | **681,916**                              | ** **     | 662,834                |     |
| Accrued cost of removal                                                                                                                                                            |   | **501,025**                              | ** **     | 490,856                |     |
| Energy risk management non-current  liabilities                                                                                                                                    |   | **88,221**                               | ** **     | 64,861                 |     |
| Other                                                                                                                                                                              |   | **209,094**                              | ** **     | 205,344                |     |
| **Total Non-Current Liabilities**                                                                                                                                                  |   | **7,303,076**                            | ** **     | 7,222,669              |     |
|                                                                                                                                                                               |   |                                     | ** **     |                   |     |
| **Liabilities of Discontinued Operations**  (Note 8)                                                                                                                               |   | **9,693**                                | ** **     | 11,594                 |     |
|                                                                                                                                                                               |   |                                     | ** **     |                   |     |
| **Commitments and Contingencies**  (Note 6)                                                                                                                                        |   |                                     | ** **     |                   |     |
|                                                                                                                                                                               |   |                                     | ** **     |                   |     |
| **Total Liabilities**                                                                                                                                                              |   | **10,376,483**                           | ** **     | 10,355,706             |     |
|                                                                                                                                                                               |   |                                     | ** **     |                   |     |
| **Cumulative Preferred Stock of Subsidiaries**                                                                                                                                     |   |                                     | ** **     |                   |     |
| Not subject to mandatory redemption                                                                                                                                                |   | **62,818**                               | ** **     | 62,818                 |     |
|                                                                                                                                                                               |   |                                     | ** **     |                   |     |
| **Common Stock Equity** (Note 2)                                                                                                                                                   |   |                                     | ** **     |                   |     |
| Common stock - $.01 par value; authorized  shares –  600,000,000; issued                                                                                                 |   |                                     | ** **     |                   |     |
| shares – 179,665,285 at March 31, 2004, and  178,438,369 at December 31, 2003; outstanding shares – 179,544,917 at March 31,  2004, and 178,336,854 at December 31, 2003 |   | **1,797**                                | ** **     | 1,784                  |     |
| Paid-in capital                                                                                                                                                                    |   | **2,220,748**                            | ** **     | 2,195,985              |     |
| Retained earnings                                                                                                                                                                  |   | **1,569,995**                            | ** **     | 1,551,003              |     |
| Treasury shares at cost – 120,368 shares at  March 31, 2004, and 101,515 shares at December 31, 2003                                                                          |   | **(3,862**                               | **)**          | (3,255                 | )        |
| Accumulated other comprehensive income  (loss)                                                                                                                                     |   | **(43,369**                              | **)**          | (44,835                | )        |
| **Total Common Stock Equity**                                                                                                                                                      |   | **3,745,309**                            | ** **     | 3,700,682              |     |
|                                                                                                                                                                               |   |                                     | ** **     |                   |     |
| **Total Liabilities and Shareholders’ Equity**                                                                                                                                |   | **$**                                    | **14,184,610** | ** **             | $        | 14,119,206 |   |

 

**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 STATEMENTS OF CHANGESIN COMMON STOCK EQUITY**

 
|                                                                |   | **Common  Stock**                        |       | **Paid-in  Capital** |       | **Retained  Earnings** |       | **Treasury  Stock** |          | **Accumulated  Other  Comprehensive  Income (Loss)** |       | **Total  Common  Stock  Equity** |       |
|---------------------------------------------------------------------|--------|------------------------------------------|------------|----------------------|------------|------------------------|------------|---------------------|---------------|------------------------------------------------------|------------|----------------------------------|------------|
|                                                                |   | **(dollars  in thousands)  (unaudited)** |       |
|                                                                |   |                                     |       |                 |       |                   |       |                |          |                                                 |       |                             |       |
| **Quarter Ended March 31, 2004**                                    |   |                                     | ** ** |                 | ** ** |                   | ** ** |                | ** **    |                                                 | ** ** |                             | ** ** |
|                                                                |   |                                     | ** ** |                 | ** ** |                   | ** ** |                | ** **    |                                                 | ** ** |                             | ** ** |
| **Balance at January 1, 2004 (178,336,854  shares)**                |   | **$**                                    | **1,784**  | ** **           | **$**      | **2,195,985**          | ** ** | **$**               | **1,551,003** | ** **                                           | **$**      | **(3,255**                       | **)**      | **$** | **(44,835** | **)** | **$** | **3,700,682** | ** ** |
| **Comprehensive income:**                                           |   |                                     | ** ** |                 | ** ** |                   | ** ** |                | ** **    |                                                 | ** ** |                             | ** ** |
| **Net income**                                                      |   |                                     | ** ** |                 | ** ** | **103,015**            | ** ** |                | ** **    |                                                 | ** ** | **103,015**                      | ** ** |
| **Other comprehensive income (loss), net of  tax effect of $(914)** |   |                                     | ** ** |                 | ** ** |                   | ** ** |                | ** **    |                                                 | ** ** |                             | ** ** |
| **Foreign currency translation adjustment**                         |   |                                     |       |                 |       |                   | ** ** |                | ** **    | **986**                                              | ** ** | **986**                          | ** ** |
| **Unrealized gain (loss) on investment trusts**                     |   |                                     |       |                 |       |                   | ** ** |                | ** **    | **755**                                              | ** ** | **755**                          | ** ** |
| **Cash flow hedges**                                                |   |                                     |       |                 |       |                   | ** ** |                | ** **    | **(275**                                             | **)**      | **(275**                         | **)**      |
| **Total comprehensive income**                                      |   |                                     | ** ** |                 | ** ** |                   | ** ** |                | ** **    |                                                 | ** ** | **104,481**                      | ** ** |
|                                                                |   |                                     | ** ** |                 | ** ** |                   | ** ** |                | ** **    |                                                 | ** ** |                             | ** ** |
| **Issuance of common stock - net**(1,226,916  shares)               |   | **13**                                   | ** ** | **21,082**           | ** ** |                   | ** ** |                | ** **    |                                                 | ** ** | **21,095**                       | ** ** |
| **Treasury shares purchased**(18,853  shares)                       |   |                                     |       |                 |       |                   | ** ** | **(607**            | **)**         |                                                 |       | **(607**                         | **)**      |
| **Dividends on common stock ($0.47 per share)**                     |   |                                     |       |                 |       | **(83,987**            | **)**      |                | ** **    |                                                 | ** ** | **(83,987**                      | **)**      |
| **Other**                                                           |   |                                     | ** ** | **3,681**            |       | **(36**                | **)**      |                | ** **    |                                                 | ** ** | **3,645**                        | ** ** |
|                                                                |   |                                     | ** ** |                 | ** ** |                   | ** ** |                | ** **    |                                                 | ** ** |                             | ** ** |
| **Ending balance at March 31, 2004  (179,544,917 shares)**          |   | **$**                                    | **1,797**  | ** **           | **$**      | **2,220,748**          | ** ** | **$**               | **1,569,995** | ** **                                           | **$**      | **(3,862**                       | **)**      | **$** | **(43,369** | **)** | **$** | **3,745,309** | ** ** |
|                                                                |   |                                     | ** ** |                 | ** ** |                   | ** ** |                | ** **    |                                                 | ** ** |                             | ** ** |
| Quarter Ended March 31, 2003                                        |   |                                     |       |                 |       |                   |       |                |          |                                                 |       |                             |       |
|                                                                |   |                                     |       |                 |       |                   |       |                |          |                                                 |       |                             |       |
| Balance at January 1, 2003 (168,663,115  shares)                    |   | $                                        | 1,687      |                 | $          | 1,918,136              |       | $                   | 1,403,453     |                                                 | $          | —                           |       | $ | (29,800 | ) | $ | 3,293,476 |   |
| Comprehensive income:                                               |   |                                     |       |                 |       |                   |       |                |          |                                                 |       |                             |       |
| Net income                                                          |   |                                     |       |                 |       | 166,085                |       |                |          |                                                 |       | 166,085                          |       |
| Other comprehensive income (loss), net of  tax effect of $(275)     |   |                                     |       |                 |       |                   |       |                |          |                                                 |       |                             |       |
| Foreign currency translation adjustment                             |   |                                     |       |                 |       |                   |       |                |          | 2,090                                                |       | 2,090                            |       |
| Unrealized gain (loss) on investment trusts                         |   |                                     |       |                 |       |                   |       |                |          | (851                                                 | )          | (851                             | )          |
| Cash flow hedges                                                    |   |                                     |       |                 |       |                   |       |                |          | (452                                                 | )          | (452                             | )          |
| Total comprehensive income                                          |   |                                     |       |                 |       |                   |       |                |          |                                                 |       | 166,872                          |       |
|                                                                |   |                                     |       |                 |       |                   |       |                |          |                                                 |       |                             |       |
| Issuance of common stock - net (7,213,804  shares)                  |   | 72                                       |       | 193,896              |       |                   |       | —              |          |                                                 |       | 193,968                          |       |
| Dividends on common stock ($0.46 per share)                         |   |                                     |       |                 |       | (77,685                | )          |                |          |                                                 |       | (77,685                          | )          |
| Other                                                               |   |                                     |       | 4,190                |       | 8                      |       | —              |          |                                                 |       | 4,198                            |       |
| Ending balance at March 31, 2003  (175,876,919 shares)              |   | $                                        | 1,759      |                 | $          | 2,116,222              |       | $                   | 1,491,861     |                                                 | $          | —                           |       | $ | (29,013 | ) | $ | 3,580,829 |   |

 

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

 

8

----

 

**CINERGY CORP.**

**CONDENSED CONSOLIDATED STATEMENTS OF CASHFLOWS**

 
|                                                                                  |   | **Quarter  Ended  March 31**             |        |
|---------------------------------------------------------------------------------------|--------|------------------------------------------|-------------|
|                                                                                  |   | **2004**                                 |        | **2003** |   |
|                                                                                  |   | **(dollars  in thousands)  (unaudited)** |        |
|                                                                                  |   |                                     | * *    |   | * * |
| **Cash Flows from Continuing Operations**                                             |   |                                     |        |   |   |
| **Operating Activities**                                                              |   |                                     |        |   |   |
| Net income                                                                            |   | **$**                                    | **103,015** | ** ** | $ | 166,085 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities:    |   |                                     | ** **  |   |   |
| Depreciation                                                                          |   | **104,857**                              | ** **  | 100,605 |   |
| Loss on discontinued operations, net of tax                                           |   | **—**                               | ** **  | 170 |   |
| Loss on impairment or disposal of  investments                                        |   | **22,766**                               |        | — |   |
| Cumulative effect of changes in accounting  principles, net of tax                    |   | **—**                               | ** **  | (26,462 | ) |
| Change in net position of energy risk  management activities                          |   | **(7,030**                               | **)**       | 9,730 |   |
| Deferred income taxes and investment tax  credits - net                               |   | **11,627**                               | ** **  | 18,013 |   |
| Equity in earnings of unconsolidated  subsidiaries                                    |   | **(2,748**                               | **)**       | (592 | ) |
| Allowance for equity funds used during  construction                                  |   | **(254**                                 | **)**       | (3,579 | ) |
| Regulatory assets deferrals                                                           |   | **(18,377**                              | **)**       | (17,422 | ) |
| Regulatory assets amortization                                                        |   | **25,367**                               | ** **  | 27,830 |   |
| Accrued pension and other postretirement  benefit costs                               |   | **19,082**                               | ** **  | 15,954 |   |
| Deferred costs under gas cost recovery  mechanism                                     |   | **25,728**                               | ** **  | (38,659 | ) |
| Cost of removal                                                                       |   | **(3,805**                               | **)**       | (3,252 | ) |
| Changes in current assets and current  liabilities:                                   |   |                                     | ** **  |   |   |
| Restricted deposits                                                                   |   | **(1,666**                               | **)**       | 35 |   |
| Accounts and notes receivable                                                         |   | **27,156**                               | ** **  | (57,486 | ) |
| Fuel, emission allowances, and supplies                                               |   | **82,044**                               | ** **  | 76,756 |   |
| Prepayments                                                                           |   | **(35,336**                              | **)**       | (4,261 | ) |
| Accounts payable                                                                      |   | **123,620**                              | ** **  | 135,435 |   |
| Accrued taxes and interest                                                            |   | **10,047**                               | ** **  | (22,464 | ) |
| Other assets                                                                          |   | **(7,943**                               | **)**       | (3,111 | ) |
| Other liabilities                                                                     |   | **4,555**                                | ** **  | 3,375 |   |
|                                                                                  |   |                                     | ** **  |   |   |
| **Net cash provided by operating activities**                                         |   | **482,705**                              | ** **  | 376,700 |   |
|                                                                                  |   |                                     | ** **  |   |   |
| **Financing Activities**                                                              |   |                                     | ** **  |   |   |
| Change in short-term debt                                                             |   | **(114,318**                             | **)**       | (341,475 | ) |
| Issuance of long-term debt                                                            |   | **—**                               | ** **  | 35,000 |   |
| Redemption of long-term debt                                                          |   | **(114,652**                             | **)**       | — |   |
| Issuance of common stock                                                              |   | **21,095**                               | ** **  | 193,968 |   |
| Dividends on common stock                                                             |   | **(83,987**                              | **)**       | (77,685 | ) |
|                                                                                  |   |                                     | ** **  |   | ** ** |
| **Net cash used in financing activities**                                             |   | **(291,862**                             | **)**       | (190,192 | ) |
|                                                                                  |   |                                     | ** **  |   |   |
| **Investing Activities**                                                              |   |                                     | ** **  |   |   |
| Construction expenditures (less allowance  for equity funds used during construction) |   | **(145,748**                             | **)**       | (147,733 | ) |
| Proceeds from notes receivable                                                        |   | **4,238**                                | ** **  | — |   |
| Acquisitions and other investments                                                    |   | **(14,317**                              | **)**       | (7,858 | ) |
| Proceeds from disposition of subsidiaries and  investments                            |   | **14,405**                               | ** **  | — |   |
|                                                                                  |   |                                     | ** **  |   |   |
| **Net cash used in investing activities**                                             |   | **(141,422**                             | **)**       | (155,591 | ) |
|                                                                                  |   |                                     | ** **  |   |   |
| **Net increase in cash and cash equivalents  from continuing operations**             |   | **49,421**                               | ** **  | 30,917 |   |
|                                                                                  |   |                                     | ** **  |   |   |
| **Cash and cash equivalents from continuing  operations at beginning of period**      |   | **169,120**                              | ** **  | 200,112 |   |
|                                                                                  |   |                                     | ** **  |   |   |
| **Cash and cash equivalents from continuing  operations at end of period**            |   | **$**                                    | **218,541** | ** ** | $ | 231,029 |   |
|                                                                                  |   |                                     | ** **  |   |   |
| **Cash Flows from Discontinued Operations**                                           |   |                                     | ** **  |   |   |
| Operating activities                                                                  |   | **$**                                    | **158**     | ** ** | $ | 17,513 |   |
| Financing activities                                                                  |   | **(158**                                 | **)**       | (10,152 | ) |
| Investing activities                                                                  |   | **—**                               | ** **  | (202 | ) |
|                                                                                  |   |                                     | ** **  |   |   |
| **Net increase in cash and cash equivalents  from discontinued operations**           |   | **—**                               | ** **  | 7,159 |   |
| **Cash and cash equivalents from discontinued  operations at beginning of period**    |   | **—**                               | ** **  | 20,971 |   |
| **Cash and cash equivalents from discontinued  operations at end of period**          |   | **$**                                    | **—**  | ** ** | $ | 28,130 |   |
|                                                                                  |   |                                     | ** **  |   |   |
| **Supplemental Disclosure of Cash Flow  Information**                                 |   |                                     | ** **  |   |   |
| Cash paid during the period for:                                                      |   |                                     | ** **  |   |   |
| Interest (net of amount capitalized)                                                  |   | **$**                                    | **68,397**  | ** ** | $ | 67,259 |   |
| Income taxes                                                                          |   | **$**                                    | **7,057**   | ** ** | $ | 67,384 |   |

 

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

 

9

----

 

**THE CINCINNATI GAS &ELECTRIC COMPANY**

**AND SUBSIDIARY COMPANIES**

** **

**10**

----

** **

**THE CINCINNATI GAS & ELECTRIC COMPANY**

**CONDENSEDCONSOLIDATED STATEMENTS OF INCOMEAND COMPREHENSIVE INCOME**

 
|                                                                                 |   | **Quarter  Ended  March 31**             |        |
|--------------------------------------------------------------------------------------|--------|------------------------------------------|-------------|
|                                                                                 |   | **2004**                                 |        | **2003** |   |
|                                                                                 |   | **(dollars  in thousands)  (unaudited)** |        |
|                                                                                 |   |                                     | * *    |   | * * |
| **Operating Revenues**                                                               |   |                                     |        |   |   |
| Electric                                                                             |   | **$**                                    | **437,607** | ** ** | $ | 428,564 |   |
| Gas                                                                                  |   | **327,652**                              | ** **  | 275,276 |   |
| **Total Operating Revenues**                                                         |   | **765,259**                              | ** **  | 703,840 |   |
|                                                                                 |   |                                     | ** **  |   |   |
| **Operating Expenses**                                                               |   |                                     | ** **  |   |   |
| Fuel and purchased power                                                             |   | **132,792**                              | ** **  | 130,554 |   |
| Gas purchased                                                                        |   | **223,517**                              | ** **  | 171,765 |   |
| Operation and maintenance                                                            |   | **156,375**                              | ** **  | 134,758 |   |
| Depreciation                                                                         |   | **44,386**                               | ** **  | 49,264 |   |
| Taxes other than income taxes                                                        |   | **64,195**                               | ** **  | 60,518 |   |
| **Total Operating Expenses**                                                         |   | **621,265**                              | ** **  | 546,859 |   |
|                                                                                 |   |                                     | ** **  |   |   |
| **Operating Income**                                                                 |   | **143,994**                              | ** **  | 156,981 |   |
|                                                                                 |   |                                     | ** **  |   |   |
| **Miscellaneous Income - Net**                                                       |   | **2,854**                                | ** **  | 6,584 |   |
| **Interest Expense**                                                                 |   | **22,436**                               | ** **  | 25,843 |   |
|                                                                                 |   |                                     | ** **  |   |   |
| **Income Before Taxes**                                                              |   | **124,412**                              | ** **  | 137,722 |   |
|                                                                                 |   |                                     | ** **  |   |   |
| **Income Taxes**                                                                     |   | **46,957**                               | ** **  | 51,424 |   |
|                                                                                 |   |                                     | ** **  |   |   |
| **Income Before Cumulative Effect of Changes  in Accounting Principles**             |   | **77,455**                               | ** **  | 86,298 |   |
|                                                                                 |   |                                     | ** **  |   |   |
| Cumulative effect of changes in accounting  principles, net of tax (Note 1(e)(*ii*)) |   | **—**                               | ** **  | 30,938 |   |
|                                                                                 |   |                                     | ** **  |   |   |
| **Net Income**                                                                       |   | **$**                                    | **77,455**  | ** ** | $ | 117,236 |   |
|                                                                                 |   |                                     | ** **  |   |   |
| **Preferred Dividend Requirement**                                                   |   | **211**                                  | ** **  | 211 |   |
|                                                                                 |   |                                     | ** **  |   |   |
| **Net Income Applicable to Common Stock**                                            |   | **$**                                    | **77,244**  | ** ** | $ | 117,025 |   |
|                                                                                 |   |                                     | ** **  |   |   |
| **Net Income**                                                                       |   | **$**                                    | **77,455**  | ** ** | $ | 117,236 |   |
|                                                                                 |   |                                     | ** **  |   |   |
| **Other Comprehensive Income (Loss), Net of  Tax**                                   |   | **(324**                                 | **)**       | (306 | ) |
|                                                                                 |   |                                     | ** **  |   |   |
| **Comprehensive Income**                                                             |   | **$**                                    | **77,131**  | ** ** | $ | 116,930 |   |

 

**Theaccompanying notes as they relate to The Cincinnati Gas & Electric Companyare an integral part of these condensed consolidated financial statements.**

 

11

----

 

**THE CINCINNATI GAS& ELECTRIC COMPANYCONDENSED CONSOLIDATED BALANCE SHEETS**

 
|                                                                                                                               |   | **March 31  2004**                       |          | **December  31  2003** |     |
|------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------|---------------|------------------------|----------|
|                                                                                                                               |   | **(dollars  in thousands)  (unaudited)** |          |
|                                                                                                                               |   |                                     |          |                   |     |
| **ASSETS**                                                                                                                         |   |                                     | * *      |                   | * * |
|                                                                                                                               |   |                                     |          |                   |     |
| **Current Assets**                                                                                                                 |   |                                     |          |                   |     |
| Cash and cash equivalents                                                                                                          |   | **$**                                    | **22,781**    | ** **             | $        | 15,842 |   |
| Restricted deposits                                                                                                                |   | **137**                                  | ** **    | 137                    |     |
| Notes receivable from affiliated companies                                                                                         |   | **35,431**                               | ** **    | 110,149                |     |
| Accounts receivable less accumulated  provision for doubtful accounts of $ 997 at March 31, 2004, and $1,602 at  December 31, 2003 |   | **97,134**                               | ** **    | 107,733                |     |
| Accounts receivable from affiliated  companies                                                                                     |   | **33,090**                               | ** **    | 58,406                 |     |
| Fuel, emission allowances, and supplies                                                                                            |   | **116,446**                              | ** **    | 135,948                |     |
| Energy risk management current assets                                                                                              |   | **121,606**                              | ** **    | 72,830                 |     |
| Prepayments and other                                                                                                              |   | **17,694**                               | ** **    | 15,049                 |     |
| **Total Current Assets**                                                                                                           |   | **444,319**                              | ** **    | 516,094                |     |
|                                                                                                                               |   |                                     | ** **    |                   |     |
| **Property, Plant, and Equipment - at Cost**                                                                                       |   |                                     | ** **    |                   |     |
| Utility plant in service                                                                                                           |   |                                     | ** **    |                   |     |
| Electric                                                                                                                           |   | **2,185,391**                            | ** **    | 2,155,457              |     |
| Gas                                                                                                                                |   | **1,127,129**                            | ** **    | 1,104,797              |     |
| Common                                                                                                                             |   | **291,081**                              | ** **    | 288,394                |     |
| **Total Utility Plant In Service**                                                                                                 |   | **3,603,601**                            | ** **    | 3,548,648              |     |
| Construction work in progress                                                                                                      |   | **61,202**                               | ** **    | 71,947                 |     |
| **Total Utility Plant**                                                                                                            |   | **3,664,803**                            | ** **    | 3,620,595              |     |
| Non-regulated property, plant, and  equipment                                                                                      |   | **3,595,575**                            | ** **    | 3,576,187              |     |
| Accumulated depreciation                                                                                                           |   | **2,659,140**                            | ** **    | 2,625,568              |     |
| **Net Property, Plant, and Equipment**                                                                                             |   | **4,601,238**                            | ** **    | 4,571,214              |     |
|                                                                                                                               |   |                                     | ** **    |                   |     |
| **Other Assets**                                                                                                                   |   |                                     | ** **    |                   |     |
| Regulatory assets                                                                                                                  |   | **585,651**                              | ** **    | 594,764                |     |
| Energy risk management non-current assets                                                                                          |   | **48,955**                               | ** **    | 36,583                 |     |
| Other investments                                                                                                                  |   | **1,294**                                | ** **    | 1,083                  |     |
| Other                                                                                                                              |   | **69,329**                               | ** **    | 89,741                 |     |
| **Total Other Assets**                                                                                                             |   | **705,229**                              | ** **    | 722,171                |     |
|                                                                                                                               |   |                                     | ** **    |                   |     |
| **Total Assets**                                                                                                                   |   | **$**                                    | **5,750,786** | ** **             | $        | 5,809,479 |   |

 

**Theaccompanying notes as they relate to The Cincinnati Gas & Electric Companyare an integral part of these condensed consolidated financial statements.**

 

12

----

 

**THE CINCINNATI GAS & ELECTRIC COMPANYCONDENSED CONSOLIDATED BALANCE SHEETS**

 
|                                                                                                                                       |   | **March 31  2004**                       |          | **December  31  2003** |     |
|--------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------|---------------|------------------------|----------|
|                                                                                                                                       |   | **(dollars  in thousands)  (unaudited)** |          |
|                                                                                                                                       |   |                                     |          |                   |     |
| **LIABILITIES AND SHAREHOLDER’S EQUITY**                                                                                              |   |                                     | * *      |                   | * * |
|                                                                                                                                       |   |                                     |          |                   |     |
| **Current Liabilities**                                                                                                                    |   |                                     |          |                   |     |
| Accounts payable                                                                                                                           |   | **$**                                    | **226,138**   | ** **             | $        | 217,652 |   |
| Accounts payable to affiliated companies                                                                                                   |   | **53,425**                               | ** **    | 136,470                |     |
| Accrued taxes                                                                                                                              |   | **177,933**                              | ** **    | 146,216                |     |
| Accrued interest                                                                                                                           |   | **21,667**                               | ** **    | 21,572                 |     |
| Notes payable and other short-term  obligations (Note 4)                                                                                   |   | **112,100**                              | ** **    | 112,100                |     |
| Notes payable to affiliated companies (Note  4)                                                                                            |   | **55,013**                               | ** **    | 49,126                 |     |
| Long-term debt due within one year                                                                                                         |   | **—**                               | ** **    | 110,000                |     |
| Energy risk management current liabilities                                                                                                 |   | **107,861**                              | ** **    | 77,791                 |     |
| Other                                                                                                                                      |   | **33,799**                               | ** **    | 32,319                 |     |
| **Total Current Liabilities**                                                                                                              |   | **787,936**                              | ** **    | 903,246                |     |
|                                                                                                                                       |   |                                     | ** **    |                   |     |
| **Non-Current Liabilities**                                                                                                                |   |                                     | ** **    |                   |     |
| Long-term debt (Note 3)                                                                                                                    |   | **1,459,125**                            | ** **    | 1,458,807              |     |
| Deferred income taxes                                                                                                                      |   | **992,767**                              | ** **    | 985,481                |     |
| Unamortized investment tax credits                                                                                                         |   | **77,701**                               | ** **    | 79,186                 |     |
| Accrued pension and other postretirement  benefit costs                                                                                    |   | **223,717**                              | ** **    | 219,393                |     |
| Accrued cost of removal                                                                                                                    |   | **158,141**                              | ** **    | 155,336                |     |
| Energy risk management non-current  liabilities                                                                                            |   | **24,387**                               | ** **    | 11,665                 |     |
| Other                                                                                                                                      |   | **78,341**                               | ** **    | 69,687                 |     |
| **Total Non-Current Liabilities**                                                                                                          |   | **3,014,179**                            | ** **    | 2,979,555              |     |
|                                                                                                                                       |   |                                     | ** **    |                   |     |
| **Commitments and Contingencies** (Note 6)                                                                                                 |   |                                     | ** **    |                   |     |
|                                                                                                                                       |   |                                     | ** **    |                   |     |
| **Total Liabilities**                                                                                                                      |   | **3,802,115**                            | ** **    | 3,882,801              |     |
|                                                                                                                                       |   |                                     | ** **    |                   |     |
| **Cumulative Preferred Stock**                                                                                                             |   |                                     | ** **    |                   |     |
| Not subject to mandatory redemption                                                                                                        |   | **20,485**                               | ** **    | 20,485                 |     |
|                                                                                                                                       |   |                                     | ** **    |                   |     |
| **Common Stock Equity**                                                                                                                    |   |                                     | ** **    |                   |     |
| Common stock - $8.50 par value; authorized  shares - 120,000,000; outstanding shares - 89,663,086 at March 31, 2004 and  December 31, 2003 |   | **762,136**                              | ** **    | 762,136                |     |
| Paid-in capital                                                                                                                            |   | **586,528**                              | ** **    | 586,528                |     |
| Retained earnings                                                                                                                          |   | **612,310**                              | ** **    | 589,993                |     |
| Accumulated other comprehensive income  (loss)                                                                                             |   | **(32,788**                              | **)**         | (32,464                | )        |
| **Total Common Stock Equity**                                                                                                              |   | **1,928,186**                            | ** **    | 1,906,193              |     |
|                                                                                                                                       |   |                                     | ** **    |                   |     |
| **Total Liabilities and Shareholder’s Equity**                                                                                        |   | **$**                                    | **5,750,786** | ** **             | $        | 5,809,479 |   |

 

**Theaccompanying notes as they relate to The Cincinnati Gas & Electric Companyare an integral part of these condensed consolidated financial statements.**

 

13

----

 

**THE CINCINNATI GAS& ELECTRIC COMPANYCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

 
|                                                                                  |   | **Quarter  Ended  March 31**             |       |
|---------------------------------------------------------------------------------------|--------|------------------------------------------|------------|
|                                                                                  |   | **2004**                                 |       | **2003** |   |
|                                                                                  |   | **(dollars  in thousands)  (unaudited)** |       |
|                                                                                  |   |                                     | * *   |   | * * |
| **Operating Activities**                                                              |   |                                     |       |   |   |
| Net income                                                                            |   | **$**                                    | **77,455** | ** ** | $ | 117,236 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities:    |   |                                     | ** ** |   |   |
| Depreciation                                                                          |   | **44,386**                               | ** ** | 49,264 |   |
| Deferred income taxes and investment tax  credits - net                               |   | **(2,863**                               | **)**      | 13,092 |   |
| Cumulative effect of changes in accounting  principles, net of tax                    |   | **—**                               | ** ** | (30,938 | ) |
| Change in net position of energy risk  management activities                          |   | **(18,356**                              | **)**      | 1,041 |   |
| Allowance for equity funds used during  construction                                  |   | **(245**                                 | **)**      | (719 | ) |
| Regulatory assets deferrals                                                           |   | **(6,446**                               | **)**      | (5,949 | ) |
| Regulatory assets amortization                                                        |   | **14,636**                               | ** ** | 16,376 |   |
| Accrued pension and other postretirement  benefit costs                               |   | **4,324**                                | ** ** | 3,803 |   |
| Deferred costs under gas cost recovery  mechanism                                     |   | **25,728**                               | ** ** | (38,659 | ) |
| Cost of removal                                                                       |   | **(1,736**                               | **)**      | — |   |
| Changes in current assets and current  liabilities:                                   |   |                                     | ** ** |   | ** ** |
| Restricted deposits                                                                   |   | **—**                               | ** ** | 34 |   |
| Accounts and notes receivable                                                         |   | **107,163**                              | ** ** | 103,008 |   |
| Fuel, emission allowances, and supplies                                               |   | **19,293**                               | ** ** | 21,444 |   |
| Prepayments                                                                           |   | **(2,748**                               | **)**      | 361 |   |
| Accounts payable                                                                      |   | **(74,720**                              | **)**      | (60,051 | ) |
| Accrued taxes and interest                                                            |   | **31,812**                               | ** ** | (4,137 | ) |
| Other assets                                                                          |   | **4,579**                                | ** ** | 1,534 |   |
| Other liabilities                                                                     |   | **10,156**                               | ** ** | (6,924 | ) |
|                                                                                  |   |                                     | ** ** |   |   |
| **Net cash provided by operating activities**                                         |   | **232,418**                              | ** ** | 179,816 |   |
|                                                                                  |   |                                     | ** ** |   |   |
| **Financing Activities**                                                              |   |                                     | ** ** |   |   |
| Change in short-term debt, including net  affiliate notes                             |   | **9,357**                                | ** ** | (86,487 | ) |
| Redemption of long-term debt                                                          |   | **(110,000**                             | **)**      | — |   |
| Dividends on preferred stock                                                          |   | **(51**                                  | **)**      | (211 | ) |
| Dividends on common stock                                                             |   | **(54,926**                              | **)**      | (47,082 | ) |
|                                                                                  |   |                                     | ** ** |   |   |
| **Net cash used in financing activities**                                             |   | **(155,620**                             | **)**      | (133,780 | ) |
|                                                                                  |   |                                     | ** ** |   |   |
| **Investing Activities**                                                              |   |                                     | ** ** |   |   |
| Construction expenditures (less allowance  for equity funds used during construction) |   | **(69,857**                              | **)**      | (64,501 | ) |
| Other investments                                                                     |   | **(2**                                   | **)**      | (1 | ) |
|                                                                                  |   |                                     | ** ** |   |   |
| **Net cash used in investing activities**                                             |   | **(69,859**                              | **)**      | (64,502 | ) |
|                                                                                  |   |                                     | ** ** |   |   |
| **Net increase (decrease) in cash and cash  equivalents**                             |   | **6,939**                                | ** ** | (18,466 | ) |
|                                                                                  |   |                                     | ** ** |   |   |
| **Cash and cash equivalents at beginning of  period**                                 |   | **15,842**                               | ** ** | 45,336 |   |
|                                                                                  |   |                                     | ** ** |   |   |
| **Cash and cash equivalents at end of period**                                        |   | **$**                                    | **22,781** | ** ** | $ | 26,870 |   |
|                                                                                  |   |                                     | ** ** |   |   |
| **Supplemental Disclosure of Cash Flow  Information**                                 |   |                                     | ** ** |   |   |
| Cash paid during the period for:                                                      |   |                                     | ** ** |   |   |
| Interest (net of amount capitalized)                                                  |   | **$**                                    | **21,341** | ** ** | $ | 30,010 |   |
| Income taxes                                                                          |   | **$**                                    | **3,447**  | ** ** | $ | 29,451 |   |

 

**Theaccompanying notes as they relate to The Cincinnati Gas & Electric Companyare an integral part of these condensed consolidated financial statements.**

 

14

----

 

**PSIENERGY, INC.****AND SUBSIDIARY COMPANY**

 

15

----

 

**PSI ENERGY, INC.CONDENSED CONSOLIDATED STATEMENTS OFINCOME AND COMPREHENSIVE INCOME**

 
|                                                                                 |   | **Quarter  Ended  March 31**             |        |
|--------------------------------------------------------------------------------------|--------|------------------------------------------|-------------|
|                                                                                 |   | **2004**                                 |        | **2003** |   |
|                                                                                 |   | **(dollars  in thousands)  (unaudited)** |        |
|                                                                                 |   |                                     | * *    |   | * * |
| **Operating Revenues**                                                               |   |                                     |        |   |   |
| Electric                                                                             |   | **$**                                    | **416,279** | ** ** | $ | 411,688 |   |
|                                                                                 |   |                                     | ** **  |   |   |
| **Operating Expenses**                                                               |   |                                     | ** **  |   |   |
| Fuel and purchased power                                                             |   | **136,796**                              | ** **  | 166,872 |   |
| Operation and maintenance                                                            |   | **126,911**                              | ** **  | 115,278 |   |
| Depreciation                                                                         |   | **48,831**                               | ** **  | 39,681 |   |
| Taxes other than income taxes                                                        |   | **16,412**                               | ** **  | 15,882 |   |
| **Total Operating Expenses**                                                         |   | **328,950**                              | ** **  | 337,713 |   |
|                                                                                 |   |                                     | ** **  |   |   |
| **Operating Income**                                                                 |   | **87,329**                               | ** **  | 73,975 |   |
|                                                                                 |   |                                     | ** **  |   |   |
| **Miscellaneous Income - Net**                                                       |   | **547**                                  | ** **  | 2,158 |   |
| **Interest Expense**                                                                 |   | **19,924**                               | ** **  | 20,253 |   |
|                                                                                 |   |                                     | ** **  |   |   |
| **Income Before Taxes**                                                              |   | **67,952**                               | ** **  | 55,880 |   |
|                                                                                 |   |                                     | ** **  |   |   |
| **Income Taxes**                                                                     |   | **27,146**                               | ** **  | 21,659 |   |
|                                                                                 |   |                                     | ** **  |   |   |
| **Income Before Cumulative Effect of a Change  in Accounting Principle**             |   | **40,806**                               | ** **  | 34,221 |   |
|                                                                                 |   |                                     | ** **  |   |   |
| Cumulative effect of a change in accounting  principle, net of tax (Note 1(e)(*ii*)) |   | **—**                               | ** **  | (494 | ) |
|                                                                                 |   |                                     | ** **  |   |   |
| **Net Income**                                                                       |   | **$**                                    | **40,806**  | ** ** | $ | 33,727 |   |
|                                                                                 |   |                                     | ** **  |   |   |
| **Preferred Dividend Requirement**                                                   |   | **647**                                  | ** **  | 647 |   |
|                                                                                 |   |                                     | ** **  |   | ** ** |
| **Net Income Applicable to Common Stock**                                            |   | **$**                                    | **40,159**  | ** ** | $ | 33,080 |   |
|                                                                                 |   |                                     | ** **  |   |   |
| **Net Income**                                                                       |   | **$**                                    | **40,806**  | ** ** | $ | 33,727 |   |
|                                                                                 |   |                                     | ** **  |   |   |
| **Other Comprehensive Income (Loss), Net of  Tax**                                   |   | **484**                                  | ** **  | (630 | ) |
|                                                                                 |   |                                     | ** **  |   |   |
| **Comprehensive Income**                                                             |   | **$**                                    | **41,290**  | ** ** | $ | 33,097 |   |

 

**Theaccompanying notes as they relate to PSI Energy, Inc. are an integral part ofthese condensed consolidated financial statements.**

 

16

----

 

**PSI ENERGY, INC.CONDENSED CONSOLIDATED BALANCE SHEETS**

 
|                                                                                                                                |   | **March 31  2004**                       |          | **December  31  2003** |     |
|-------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------|---------------|------------------------|----------|
|                                                                                                                                |   | **(dollars  in thousands)  (unaudited)** |          |
|                                                                                                                                |   |                                     |          |                   |     |
| **ASSETS**                                                                                                                          |   |                                     | * *      |                   | * * |
|                                                                                                                                |   |                                     |          |                   |     |
| **Current Assets**                                                                                                                  |   |                                     |          |                   |     |
| Cash and cash equivalents                                                                                                           |   | **$**                                    | **16,796**    | ** **             | $        | 6,565 |   |
| Restricted deposits                                                                                                                 |   | **94,341**                               | ** **    | 92,675                 |     |
| Notes receivable from affiliated companies                                                                                          |   | **21,411**                               | ** **    | 65,715                 |     |
| Accounts receivable less accumulated  provision for doubtful accounts of $1,185 at March 31, 2004, and $1,110 at  December 31, 2003 |   | **45,752**                               | ** **    | 37,194                 |     |
| Accounts receivable from affiliated  companies                                                                                      |   | **21,161**                               | ** **    | 459                    |     |
| Fuel, emission allowances, and supplies                                                                                             |   | **126,245**                              | ** **    | 149,392                |     |
| Energy risk management current assets                                                                                               |   | **7,881**                                | ** **    | 7,959                  |     |
| Prepayments and other                                                                                                               |   | **3,439**                                | ** **    | 5,303                  |     |
| **Total Current Assets**                                                                                                            |   | **337,026**                              | ** **    | 365,262                |     |
|                                                                                                                                |   |                                     | ** **    |                   |     |
| **Property, Plant, and Equipment - at Cost**                                                                                        |   |                                     | ** **    |                   |     |
| Utility plant in service                                                                                                            |   | **6,232,060**                            | ** **    | 6,183,475              |     |
| Construction work in progress                                                                                                       |   | **218,580**                              | ** **    | 203,512                |     |
| **Total Utility Plant**                                                                                                             |   | **6,450,640**                            | ** **    | 6,386,987              |     |
| Accumulated depreciation                                                                                                            |   | **2,175,599**                            | ** **    | 2,133,235              |     |
| **Net Property, Plant, and Equipment**                                                                                              |   | **4,275,041**                            | ** **    | 4,253,752              |     |
|                                                                                                                                |   |                                     | ** **    |                   |     |
| **Other Assets**                                                                                                                    |   |                                     | ** **    |                   |     |
| Regulatory assets                                                                                                                   |   | **421,228**                              | ** **    | 417,387                |     |
| Energy risk management non-current assets                                                                                           |   | **3,587**                                | ** **    | 7,061                  |     |
| Other investments                                                                                                                   |   | **68,558**                               | ** **    | 66,803                 |     |
| Other                                                                                                                               |   | **33,607**                               | ** **    | 29,372                 |     |
| **Total Other Assets**                                                                                                              |   | **526,980**                              | ** **    | 520,623                |     |
|                                                                                                                                |   |                                     | ** **    |                   |     |
| **Total Assets**                                                                                                                    |   | **$**                                    | **5,139,047** | ** **             | $        | 5,139,637 |   |

 

**Theaccompanying notes as they relate to PSI Energy, Inc. are an integral part ofthese condensed consolidated financial statements.**

 

17

----

 

**PSI ENERGY, INC.CONDENSED CONSOLIDATED BALANCE SHEETS**

 
|                                                                                                                                                            |   | **March 31  2004**                       |          | **December  31  2003** |     |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------|---------------|------------------------|----------|
|                                                                                                                                                            |   | **(dollars  in thousands)  (unaudited)** |          |
|                                                                                                                                                            |   |                                     |          |                   |     |
| **LIABILITIES AND SHAREHOLDER’S EQUITY**                                                                                                                   |   |                                     | * *      |                   | * * |
|                                                                                                                                                            |   |                                     |          |                   |     |
| **Current Liabilities**                                                                                                                                         |   |                                     |          |                   |     |
| Accounts payable                                                                                                                                                |   | **$**                                    | **53,657**    | ** **             | $        | 58,286 |   |
| Accounts payable to affiliated companies                                                                                                                        |   | **21,460**                               | ** **    | 69,746                 |     |
| Accrued taxes                                                                                                                                                   |   | **84,376**                               | ** **    | 69,419                 |     |
| Accrued interest                                                                                                                                                |   | **24,228**                               | ** **    | 26,615                 |     |
| Notes payable and other short-term  obligations (Note 4)                                                                                                        |   | **80,500**                               | ** **    | 80,500                 |     |
| Notes payable to affiliated companies (Note  4)                                                                                                                 |   | **182,689**                              | ** **    | 188,446                |     |
| Long-term debt due within one year                                                                                                                              |   | **1,100**                                | ** **    | —                 |     |
| Energy risk management current liabilities                                                                                                                      |   | **15,007**                               | ** **    | 14,744                 |     |
| Other                                                                                                                                                           |   | **24,846**                               | ** **    | 25,636                 |     |
| **Total Current Liabilities**                                                                                                                                   |   | **487,863**                              | ** **    | 533,392                |     |
|                                                                                                                                                            |   |                                     | ** **    |                   |     |
| **Non-Current Liabilities**                                                                                                                                     |   |                                     | ** **    |                   |     |
| Long-term debt (Note 3)                                                                                                                                         |   | **1,719,524**                            | ** **    | 1,720,476              |     |
| Deferred income taxes                                                                                                                                           |   | **595,712**                              | ** **    | 573,946                |     |
| Unamortized investment tax credits                                                                                                                              |   | **28,915**                               | ** **    | 29,698                 |     |
| Accrued pension and other postretirement  benefit costs                                                                                                         |   | **198,526**                              | ** **    | 193,336                |     |
| Accrued cost of removal                                                                                                                                         |   | **342,884**                              | ** **    | 335,520                |     |
| Energy risk management non-current  liabilities                                                                                                                 |   | **2,122**                                | ** **    | 2,796                  |     |
| Other                                                                                                                                                           |   | **76,300**                               | ** **    | 74,958                 |     |
| **Total Non-Current Liabilities**                                                                                                                               |   | **2,963,983**                            | ** **    | 2,930,730              |     |
|                                                                                                                                                            |   |                                     | ** **    |                   |     |
| **Commitments and Contingencies**  (Note 6)                                                                                                                     |   |                                     | ** **    |                   |     |
|                                                                                                                                                            |   |                                     | ** **    |                   |     |
| **Total Liabilities**                                                                                                                                           |   | **3,451,846**                            | ** **    | 3,464,122              |     |
|                                                                                                                                                            |   |                                     | ** **    |                   |     |
| **Cumulative Preferred Stock**                                                                                                                                  |   |                                     | ** **    |                   |     |
| Not subject to mandatory redemption                                                                                                                             |   | **42,333**                               | ** **    | 42,333                 |     |
|                                                                                                                                                            |   |                                     | ** **    |                   |     |
| **Common Stock Equity**                                                                                                                                         |   |                                     | ** **    |                   |     |
| Common stock - without par value; $.01  stated value; authorized shares - 60,000,000; outstanding shares - 53,913,701  at March 31, 2004, and December 31, 2003 |   | **539**                                  | ** **    | 539                    |     |
| Paid-in capital                                                                                                                                                 |   | **627,274**                              | ** **    | 627,274                |     |
| Retained earnings                                                                                                                                               |   | **1,029,992**                            | ** **    | 1,018,790              |     |
| Accumulated other comprehensive income  (loss)                                                                                                                  |   | **(12,937**                              | **)**         | (13,421                | )        |
| **Total Common Stock Equity**                                                                                                                                   |   | **1,644,868**                            | ** **    | 1,633,182              |     |
|                                                                                                                                                            |   |                                     | ** **    |                   |     |
| **Total Liabilities and Shareholder’s Equity**                                                                                                             |   | **$**                                    | **5,139,047** | ** **             | $        | 5,139,637 |   |

 

**Theaccompanying notes as they relate to PSI Energy, Inc. are an integral part ofthese condensed consolidated financial statements.**

 

18

----

**PSI ENERGY, INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

 
|                                                                                  |   | **Quarter  Ended  March 31** |       |
|---------------------------------------------------------------------------------------|--------|------------------------------|------------|
|                                                                                  |   | **2004**                     |       | **2003** |   |
|                                                                                  |   | **(dollars  in thousands)**  |       |
|                                                                                  |   | **(unaudited)**              | ** ** |
|                                                                                  |   |                         | * *   |   | * * |
| **Operating Activities**                                                              |   |                         |       |   |   |
| Net income                                                                            |   | **$**                        | **40,806** | ** ** | $ | 33,727 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities:    |   |                         | ** ** |   |   |
| Depreciation                                                                          |   | **48,831**                   | ** ** | 39,681 |   |
| Cumulative effect of a change in accounting  principle, net of tax                    |   | **—**                   | ** ** | 494 |   |
| Deferred income taxes and investment tax  credits - net                               |   | **20,656**                   | ** ** | (2,654 | ) |
| Change in net position of energy risk  management activities                          |   | **3,141**                    | ** ** | (1,245 | ) |
| Allowance for equity funds used during  construction                                  |   | **(9**                       | **)**      | (2,860 | ) |
| Regulatory assets deferrals                                                           |   | **(11,931**                  | **)**      | (11,473 | ) |
| Regulatory assets amortization                                                        |   | **10,731**                   | ** ** | 11,455 |   |
| Accrued pension and other postretirement  benefit costs                               |   | **5,190**                    | ** ** | 3,808 |   |
| Cost of removal                                                                       |   | **(2,069**                   | **)**      | (3,252 | ) |
| Changes in current assets and current  liabilities:                                   |   |                         | ** ** |   |   |
| Restricted deposits                                                                   |   | **(1,666**                   | **)**      | — |   |
| Accounts and notes receivable                                                         |   | **15,044**                   | ** ** | 38,520 |   |
| Fuel, emission allowances, and supplies                                               |   | **23,147**                   | ** ** | 12,907 |   |
| Prepayments                                                                           |   | **1,170**                    | ** ** | 1,345 |   |
| Accounts payable                                                                      |   | **(52,915**                  | **)**      | (108,622 | ) |
| Accrued taxes and interest                                                            |   | **12,570**                   | ** ** | 5,158 |   |
| Other assets                                                                          |   | **(3,080**                   | **)**      | (1,219 | ) |
| Other liabilities                                                                     |   | **1,420**                    | ** ** | 1,066 |   |
|                                                                                  |   |                         | ** ** |   |   |
| **Net cash provided by operating activities**                                         |   | **111,036**                  | ** ** | 16,836 |   |
|                                                                                  |   |                         | ** ** |   |   |
| **Financing Activities**                                                              |   |                         | ** ** |   | ** ** |
| Change in short-term debt, including net  affiliate notes                             |   | **(5,757**                   | **)**      | 56,810 |   |
| Issuance of long-term debt                                                            |   | **—**                   | ** ** | 35,000 |   |
| Dividends on preferred stock                                                          |   | **(647**                     | **)**      | (647 | ) |
| Dividends on common stock                                                             |   | **(28,957**                  | **)**      | (30,503 | ) |
|                                                                                  |   |                         | ** ** |   |   |
| **Net cash provided by (used in) financing  activities**                              |   | **(35,361**                  | **)**      | 60,660 |   |
|                                                                                  |   |                         | ** ** |   |   |
| **Investing Activities**                                                              |   |                         | ** ** |   |   |
| Construction expenditures (less allowance  for equity funds used during construction) |   | **(64,500**                  | **)**      | (74,581 | ) |
| Other investments                                                                     |   | **(944**                     | **)**      | (827 | ) |
|                                                                                  |   |                         | ** ** |   |   |
| **Net cash used in investing activities**                                             |   | **(65,444**                  | **)**      | (75,408 | ) |
|                                                                                  |   |                         | ** ** |   |   |
| **Net increase in cash and cash equivalents**                                         |   | **10,231**                   | ** ** | 2,088 |   |
|                                                                                  |   |                         | ** ** |   |   |
| **Cash and cash equivalents at beginning of  period**                                 |   | **6,565**                    | ** ** | 2,007 |   |
|                                                                                  |   |                         | ** ** |   |   |
| **Cash and cash equivalents at end of period**                                        |   | **$**                        | **16,796** | ** ** | $ | 4,095 |   |
|                                                                                  |   |                         | ** ** |   | ** ** |
| **Supplemental Disclosure of Cash Flow  Information**                                 |   |                         | ** ** |   |   |
| Cash paid during the period for:                                                      |   |                         | ** ** |   | ** ** |
| Interest (net of amount capitalized)                                                  |   | **$**                        | **24,743** | ** ** | $ | 20,465 |   |
| Income taxes                                                                          |   | **$**                        | **3,132**  | ** ** | $ | 36,000 |   |
|                                                                                  |   |                         | ** ** |   | ** ** |
| Non-cash financing and investing  activities:                                         |   |                         | ** ** |   |   |
| Issuance of promissory notes to affiliated  company for acquisition of assets         |   | **$**                        | **—** | ** ** | $ | 375,969 |   |

** **

**Theaccompanying notes as they relate to PSI Energy, Inc. are an integral part ofthese condensed consolidated financial statements.**

 

19

----

 

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

 

 

20

----

 

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

**CONDENSED STATEMENTS OF INCOME**

 
|                                                  |   | **Quarter  Ended  March 31** |       |
|-------------------------------------------------------|--------|------------------------------|------------|
|                                                  |   | **2004**                     |       | **2003** |   |
|                                                  |   | **(dollars  in thousands)**  |       |
|                                                  |   | **(unaudited)**              |       |
|                                                  |   |                         | * *   |   | * * |
| **Operating Revenues**                                |   |                         |       |   |   |
| Electric                                              |   | **$**                        | **56,215** | ** ** | $ | 54,929 |   |
| Gas                                                   |   | **58,139**                   | ** ** | 49,384 |   |
| **Total Operating Revenues**                          |   | **114,354**                  | ** ** | 104,313 |   |
|                                                  |   |                         | ** ** |   |   |
| **Operating Expenses**                                |   |                         | ** ** |   |   |
| Electricity purchased from parent company  for resale |   | **39,453**                   | ** ** | 39,123 |   |
| Gas purchased                                         |   | **40,833**                   | ** ** | 31,500 |   |
| Operation and maintenance                             |   | **13,760**                   | ** ** | 12,585 |   |
| Depreciation                                          |   | **4,925**                    | ** ** | 4,445 |   |
| Taxes other than income taxes                         |   | **1,438**                    | ** ** | 1,161 |   |
| **Total Operating Expenses**                          |   | **100,409**                  | ** ** | 88,814 |   |
|                                                  |   |                         | ** ** |   |   |
| **Operating Income**                                  |   | **13,945**                   | ** ** | 15,499 |   |
|                                                  |   |                         | ** ** |   |   |
| **Miscellaneous Income - Net**                        |   | **499**                      | ** ** | 1,479 |   |
| **Interest Expense**                                  |   | **1,227**                    | ** ** | 1,502 |   |
|                                                  |   |                         | ** ** |   |   |
| **Income Before Taxes**                               |   | **13,217**                   | ** ** | 15,476 |   |
|                                                  |   |                         | ** ** |   |   |
| **Income Taxes**                                      |   | **5,329**                    | ** ** | 6,070 |   |
|                                                  |   |                         | ** ** |   |   |
| **Net Income**                                        |   | **$**                        | **7,888**  | ** ** | $ | 9,406 |   |

 

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

 

21

----

 

**THE UNION LIGHT, HEAT ANDPOWER COMPANY**

**CONDENSED BALANCE SHEETS**

 
|                                                                                                                            |   | **March 31  2004**          |        | **December  31  2003** |   |
|---------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------|-------------|------------------------|--------|
|                                                                                                                            |   | **(dollars  in thousands)** |        |
|                                                                                                                            |   | **(unaudited)**             |        |
|                                                                                                                            |   |                        |        |                   |   |
| **ASSETS**                                                                                                                      |   |                        |        |                   |   |
|                                                                                                                            |   |                        |        |                   |   |
| **Current Assets**                                                                                                              |   |                        |        |                   |   |
| Cash and cash equivalents                                                                                                       |   | **$**                       | **8,020**   | ** **             | $      | 1,899 |   |
| Notes receivable from affiliated companies                                                                                      |   | **5,881**                   | ** **  | 17,906                 |   |
| Accounts receivable less accumulated  provision for doubtful accounts of $219 at March 31, 2004, and $192 at  December 31, 2003 |   | **3,488**                   | ** **  | 2,458                  |   |
| Accounts receivable from affiliated  companies                                                                                  |   | **171**                     | ** **  | 4,407                  |   |
| Fuel and supplies                                                                                                               |   | **4,884**                   | ** **  | 7,936                  |   |
| Prepayments and other                                                                                                           |   | **140**                     | ** **  | 279                    |   |
| **Total Current Assets**                                                                                                        |   | **22,584**                  | ** **  | 34,885                 |   |
|                                                                                                                            |   |                        | ** **  |                   |   |
| **Property, Plant, and Equipment - at Cost**                                                                                    |   |                        | ** **  |                   |   |
| Utility plant in service                                                                                                        |   |                        | ** **  |                   |   |
| Electric                                                                                                                        |   | **276,724**                 | ** **  | 273,895                |   |
| Gas                                                                                                                             |   | **241,892**                 | ** **  | 239,670                |   |
| Common                                                                                                                          |   | **53,357**                  | ** **  | 53,297                 |   |
| **Total Utility Plant In Service**                                                                                              |   | **571,973**                 | ** **  | 566,862                |   |
| Construction work in progress                                                                                                   |   | **8,369**                   | ** **  | 6,165                  |   |
| **Total Utility Plant**                                                                                                         |   | **580,342**                 | ** **  | 573,027                |   |
| Accumulated depreciation                                                                                                        |   | **180,228**                 | ** **  | 176,368                |   |
| **Net Property, Plant, and Equipment**                                                                                          |   | **400,114**                 | ** **  | 396,659                |   |
|                                                                                                                            |   |                        | ** **  |                   |   |
| **Other Assets**                                                                                                                |   |                        | ** **  |                   |   |
| Regulatory assets                                                                                                               |   | **13,240**                  | ** **  | 13,224                 |   |
| Other                                                                                                                           |   | **1,010**                   | ** **  | 3,903                  |   |
| **Total Other Assets**                                                                                                          |   | **14,250**                  | ** **  | 17,127                 |   |
|                                                                                                                            |   |                        | ** **  |                   |   |
| **Total Assets**                                                                                                                |   | **$**                       | **436,948** | ** **             | $      | 448,671 |   |

 

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

 

22

----

 

**THE UNION LIGHT, HEAT ANDPOWER COMPANY**

**CONDENSED BALANCE SHEETS**

 
|                                                                                                                                    |   | **March 31  2004**          |        | **December  31  2003** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------|-------------|------------------------|--------|
|                                                                                                                                    |   | **(dollars  in thousands)** |        |
|                                                                                                                                    |   | **(unaudited)**             |        |
|                                                                                                                                    |   |                        |        |                   |   |
| **LIABILITIES  AND SHAREHOLDER’S EQUITY**                                                                                          |   |                        |        |                   |   |
|                                                                                                                                    |   |                        |        |                   |   |
| **Current Liabilities**                                                                                                                 |   |                        |        |                   |   |
| Accounts payable                                                                                                                        |   | **$**                       | **12,073**  | ** **             | $      | 13,431 |   |
| Accounts payable to affiliated companies                                                                                                |   | **19,367**                  | ** **  | 21,131                 |   |
| Accrued taxes                                                                                                                           |   | **8,001**                   | ** **  | 298                    |   |
| Accrued interest                                                                                                                        |   | **917**                     | ** **  | 1,230                  |   |
| Notes payable to affiliated companies (Note  4)                                                                                         |   | **21,196**                  | ** **  | 45,233                 |   |
| Other                                                                                                                                   |   | **6,673**                   | ** **  | 6,815                  |   |
| **Total Current Liabilities**                                                                                                           |   | **68,227**                  | ** **  | 88,138                 |   |
|                                                                                                                                    |   |                        | ** **  |                   |   |
| **Non-Current Liabilities**                                                                                                             |   |                        | ** **  |                   |   |
| Long-term debt                                                                                                                          |   | **54,693**                  | ** **  | 54,685                 |   |
| Deferred income taxes                                                                                                                   |   | **54,295**                  | ** **  | 55,488                 |   |
| Unamortized investment tax credits                                                                                                      |   | **2,815**                   | ** **  | 2,879                  |   |
| Accrued pension and other postretirement  benefit costs                                                                                 |   | **17,458**                  | ** **  | 16,953                 |   |
| Accrued cost of removal                                                                                                                 |   | **27,968**                  | ** **  | 27,443                 |   |
| Other                                                                                                                                   |   | **14,248**                  | ** **  | 13,729                 |   |
| **Total Non-Current Liabilities**                                                                                                       |   | **171,477**                 | ** **  | 171,177                |   |
|                                                                                                                                    |   |                        | ** **  |                   |   |
| **Commitments and Contingencies**(Note  6)                                                                                              |   |                        | ** **  |                   |   |
|                                                                                                                                    |   |                        | ** **  |                   |   |
| **Total Liabilities**                                                                                                                   |   | **239,704**                 | ** **  | 259,315                |   |
|                                                                                                                                    |   |                        | ** **  |                   |   |
| **Common Stock Equity**                                                                                                                 |   |                        | ** **  |                   |   |
| Common stock - $15.00 par value; authorized  shares - 1,000,000; outstanding shares - 585,333 at March 31, 2004, and  December 31, 2003 |   | **8,780**                   | ** **  | 8,780                  |   |
| Paid-in capital                                                                                                                         |   | **23,541**                  | ** **  | 23,541                 |   |
| Retained earnings                                                                                                                       |   | **165,412**                 | ** **  | 157,524                |   |
| Accumulated other comprehensive income  (loss)                                                                                          |   | **(489**                    | **)**       | (489                   | )      |
| **Total Common Stock Equity**                                                                                                           |   | **197,244**                 | ** **  | 189,356                |   |
|                                                                                                                                    |   |                        | ** **  |                   |   |
| **Total Liabilities and Shareholder’s Equity**                                                                                     |   | **$**                       | **436,948** | ** **             | $      | 448,671 |   |

 

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

 

23

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**THE UNION LIGHT, HEAT ANDPOWER COMPANY**

**CONDENSED STATEMENTS OF CASH F**LOWS

 
|                                                                                  |   | **Quarter  Ended  March 31** |       |
|---------------------------------------------------------------------------------------|--------|------------------------------|------------|
|                                                                                  |   | **2004**                     |       | **2003** |   |
|                                                                                  |   | **(dollars  in thousands)**  |       |
|                                                                                  |   | **(unaudited)**              |       |
|                                                                                  |   |                         | * *   |   | * * |
| **Operating Activities**                                                              |   |                         |       |   |   |
| Net income                                                                            |   | **$**                        | **7,888**  | ** ** | $ | 9,406 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities:    |   |                         | ** ** |   |   |
| Depreciation                                                                          |   | **4,925**                    | ** ** | 4,445 |   |
| Deferred income taxes and investment tax  credits - net                               |   | **(1,258**                   | **)**      | 4,451 |   |
| Allowance for equity funds used during  construction                                  |   | **14**                       | ** ** | (85 | ) |
| Regulatory assets deferrals                                                           |   | **(253**                     | **)**      | (33 | ) |
| Regulatory assets amortization                                                        |   | **192**                      | ** ** | (22 | ) |
| Accrued pension and other postretirement  benefit costs                               |   | **505**                      | ** ** | 271 |   |
| Deferred costs under gas cost recovery  mechanism                                     |   | **3,719**                    | ** ** | (9,372 | ) |
| Cost of removal                                                                       |   | **(414**                     | **)**      | — |   |
| Changes in current assets and current  liabilities:                                   |   |                         | ** ** |   |   |
| Accounts and notes receivable                                                         |   | **15,231**                   | ** ** | 4,417 |   |
| Fuel and supplies                                                                     |   | **3,052**                    | ** ** | 4,666 |   |
| Prepayments                                                                           |   | **139**                      | ** ** | 158 |   |
| Accounts payable                                                                      |   | **(3,122**                   | **)**      | 2,783 |   |
| Accrued taxes and interest                                                            |   | **7,390**                    | ** ** | (480 | ) |
| Other assets                                                                          |   | **18**                       | ** ** | 20 |   |
| Other liabilities                                                                     |   | **(408**                     | **)**      | 174 |   |
|                                                                                  |   |                         | ** ** |   |   |
| **Net cash provided by operating activities**                                         |   | **37,618**                   | ** ** | 20,799 |   |
|                                                                                  |   |                         | ** ** |   |   |
| **Financing Activities**                                                              |   |                         | ** ** |   |   |
| Change in short-term debt, including net  affiliate notes                             |   | **(24,037**                  | **)**      | (9,533 | ) |
|                                                                                  |   |                         | ** ** |   |   |
| **Net cash used in financing activities**                                             |   | **(24,037**                  | **)**      | (9,533 | ) |
|                                                                                  |   |                         | ** ** |   |   |
| **Investing Activities**                                                              |   |                         | ** ** |   |   |
| Construction expenditures (less allowance  for equity funds used during construction) |   | **(7,460**                   | **)**      | (7,633 | ) |
|                                                                                  |   |                         | ** ** |   |   |
| **Net cash used in investing activities**                                             |   | **(7,460**                   | **)**      | (7,633 | ) |
|                                                                                  |   |                         | ** ** |   |   |
| **Net increase in cash and cash equivalents**                                         |   | **6,121**                    | ** ** | 3,633 |   |
|                                                                                  |   |                         | ** ** |   |   |
| **Cash and cash equivalents at beginning of  period**                                 |   | **1,899**                    | ** ** | 3,926 |   |
|                                                                                  |   |                         | ** ** |   |   |
| **Cash and cash equivalents at end of period**                                        |   | **$**                        | **8,020**  | ** ** | $ | 7,559 |   |
|                                                                                  |   |                         | ** ** |   |   |
| **Supplemental Disclosure of Cash Flow  Information**                                 |   |                         | ** ** |   |   |
| Cash paid during the period for:                                                      |   |                         | ** ** |   |   |
| Interest (net of amount capitalized)                                                  |   | **$**                        | **1,480**  | ** ** | $ | 1,437 |   |
| Income taxes                                                                          |   | **$**                        | **3**      | ** ** | $ | 3,000 |   |

### ** **

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

 

24

----

 

**NOTESTO CONDENSED FINANCIAL STATEMENTS**

** **

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 & ElectricCompany (**CG&E**), PSI Energy,Inc. (**PSI**), The Union Light, Heatand Power Company (**ULH&P**) andall 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 Significant AccountingPolicies**

*** ***

***(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 readin conjunction with the Financial Statements and the notes thereto included inthe registrants’ combined Form 10-K for the year ended December 31, 2003 (200310-K).  Certain amounts in the 2003Condensed Financial Statements have been reclassified to conform to the 2004presentation.

 

Management makes estimates andassumptions when preparing financial statements under generally acceptedaccounting principles (GAAP).  Actualresults could differ, as these estimates and assumptions involve judgment.

 

***(b)***           RevenueRecognition

* *

*(i)          *Utility Revenues

 

**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 energysales that 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 unbilledrevenues, we use complex systems that consider various factors, including weather,in our calculation of retail customer consumption at the end of eachmonth.  Given the use of these systemsand the fact that customers are billed monthly, we believe it is unlikely thatmaterially different results will occur in future periods when revenue issubsequently billed.

 

25

----

 

The amount of unbilled revenuesfor **Cinergy**, **CG&E**, **PSI**,and **ULH&P** as of March 31, 2004and 2003, were as follows:

 

|                          |   | **2004**           |       | **2003**   |     |
|-------------------------------|--------|--------------------|------------|------------|----------|
|                          |   | **(in  millions)** |       |
|                          |   |               | * *   |       | * * |
| **Cinergy**                   |   | **$**              | **133**    | ** ** | $        | 119 |   |
| **CG&E** and subsidiaries |   | **80**             | ** ** | 67         |     |
| **PSI**                       |   | **53**             | ** ** | 52         |     |
| **ULH&P**                 |   | **14**             | ** ** | 12         |     |
|                               |        |                    |            |            |          |  |  |

 

*(ii)          Energy Marketing 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 (EITF) Issue 02-3, *Issues Involved in Accounting for Derivative Contracts Held for TradingPurposes and Contracts Involved in Energy Trading and Risk ManagementActivities*.  Generally,trading contracts are reported on a net basis and non-trading contracts arereported on a gross basis.  Netreporting requires presentation of realized and unrealized gains and losses ontrading derivatives on a net basis in *OperatingRevenues*.  Gross reportingrequires presentation of sales contracts in *OperatingRevenues* and purchase contracts in *Fueland purchased power* expense or *Gaspurchased* expense.

 

***(c)***           Derivatives

 

**Cinergy**designates derivatives as fair value hedges for certain volumes of our naturalgas inventory.  Under this accountingelection, changes in the fair value of both the derivative as well as thehedged item (the specified inventory) are included in the Condensed Statementsof Income.  We assess the effectivenessof the derivatives in offsetting the change in fair value of the inventory on aquarterly basis.  For the three monthsended March 31, 2004, the net loss recognized for the hedges’ ineffectivenesswas approximately $4 million.

 

***(d)***           Stock-BasedCompensation

 

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

 

26

----

 

|                                |                                                                                                                             | **Quarter  Ended March 31**                   |       |
|-------------------------------------|----------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------|------------|
|                                |                                                                                                                             | **(in  millions, except per share  amounts)** |       |
|                                |                                                                                                                             | **2004**                                      |       | **2003** |   |
|                                |                                                                                                                             |                                          |       |   |   |
| Net income, as reported             |                                                                                                                             | **$**                                         | **103**    | ** ** | $ | 166 |   |
|                                |                                                                                                                             |                                          | ** ** |   |   |
| Add:                                | Stock-based  employee compensation expense included in reported net income, net of related  tax effects.                         |                                          | **4**      | ** ** | 4 |   |
|                                |                                                                                                                             |                                          | ** ** |   |   |
| Deduct:                             | Stock-based  employee compensation expense determined under fair value based method for  all awards, net of related tax effects. |                                          | **3**      | ** ** | 5 |   |
|                                |                                                                                                                             |                                          | ** ** |   |   |
| Pro-forma net income                |                                                                                                                             | **$**                                         | **104**    | ** ** | $ | 165 | ** ** |
|                                |                                                                                                                             |                                          | ** ** |   |   |
| EPS - as reported                   |                                                                                                                             | **$**                                         | **0.57**   | ** ** | $ | 0.96 |   |
| EPS - pro-forma                     |                                                                                                                             | **$**                                         | **0.58**   | ** ** | $ | 0.95 |   |
|                                |                                                                                                                             |                                          | ** ** |   |   |
| EPS assuming dilution - as reported |                                                                                                                             | **$**                                         | **0.57**   | ** ** | $ | 0.95 |   |
| EPS assuming dilution - pro-forma   |                                                                                                                             | **$**                                         | **0.57**   | ** ** | $ | 0.94 |   |

 

The pro-forma amounts reflectcertain assumptions used in estimating fair values.  As a result of this and other factors which may affect the timingand amounts of stock-based compensation, the pro-forma effect on *Net Income* and EPS may not berepresentative of future periods.

 

***(e)***           AccountingChanges

* *

*(i)          *Consolidation of Variable Interest Entities (VIE)

 

In January 2003, the FinancialAccounting Standards Board (FASB) issued Interpretation No. 46, *Consolidation of Variable Interest*

*Entities* (Interpretation 46), whichsignificantly changes the consolidation requirements for traditional specialpurpose entities (SPE) and certain other entities subject to its scope.  This interpretation defines a VIE as (a) anentity that does not have sufficient equity to support its activities withoutadditional financial support or (b) any entity that has equity investors thatdo not have voting rights, do not absorb first dollar losses, or receivereturns.  These entities must beconsolidated when certain criteria are met. The interpretation was originally to be effective as of July 1, 2003 for**Cinergy**; however, the FASBsubsequently permitted deferral of the effective date to December 31, 2003 fortraditional SPEs and to March 31, 2004 for all other entities subject to thescope of Interpretation 46.  We electedto implement Interpretation 46 for traditional SPEs in accordance with theoriginal implementation date of July 1, 2003 and for all other entities,including certain operating joint ventures, as of March 31, 2004.  The consolidation of certain operating jointventures as of March 31, 2004, had an immaterial impact on our financialposition.

 

**Cinergy**also holds interests in several operating joint ventures which do not requireconsolidation.  If all these entitieswere consolidated, their total assets and liabilities would be immaterial toour Condensed Balance Sheets.

 

27

----

 

*(ii)          Cumulative Effect of Changes inAccounting Principles*

 

In 2003, **Cinergy**,**CG&E**, and **PSI**recognized*Cumulative effect of changes in accountingprinciples, net of tax* gain/(loss) of approximately $26 million, $31million, and $(0.5) million, respectively. The cumulative effect of changes in accounting principles was a resultof the adoption of Statement of Financial Accounting Standards No. 143, *Accounting for Asset Retirement Obligations*and the rescission of EITF Issue 98-10, *Accountingfor Contracts Involved in Energy Trading and Risk Management Activities*as discussed in the 2003 10-K.

 

**2.             Common Stock**

** **

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

 

**3.             Long-term Debt**

 

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

 

In April 2004, **Cinergy Corp.** repaid at maturity $200million of its 6.125% Debentures.

 

28

----

 

**4.             Notes Payable and Other Short-termObligations**

** **

At March 31, 2004, **CinergyCorp.** had $956 million remaining unused and available capacityrelating to its $1 billion revolving credit facilities.  These revolving credit facilities includethe following:

 

 

| **Credit  Facility**        |   | **Expiration** |     | **Established  Lines** |     | **Outstanding  and  Committed** |     | **Unused and  Available** |     |
|-----------------------------|--------|----------------|----------|------------------------|----------|---------------------------------|----------|---------------------------|----------|
|                        |   |           |     |                   |     | **(in  millions)**              |     |                      |     |
|                        |   |           | * * |                   | * * |                            | * * |                      | * * |
| 364-day senior revolving    |   | April 2004     |     |                   |     |                            |     |                      |     |
| Direct borrowing            |   |           |     | $                      |     |                            | $        | —                    |     | $ |   |   |
| Commercial paper support    |   |           |     |                   |     | 33                              |     |                      |     |
|                        |   |           |     |                   |     |                            |     |                      |     |
| Total 364-day facility      |   |           |     | 600                    |     | 33                              |     | 567                       |     |
|                        |   |           |     |                   |     |                            |     |                      |     |
| Three-year senior revolving |   | May 2004       |     |                   |     |                            |     |                      |     |
| Direct borrowing            |   |           |     |                   |     | —                          |     |                      |     |
| Commercial paper support    |   |           |     |                   |     | —                          |     |                      |     |
| Letter of credit support    |   |           |     |                   |     | 11                              |     |                      |     |
|                        |   |           |     |                   |     |                            |     |                      |     |
| Total Three-year facility   |   |           |     | 400                    |     | 11                              |     | 389                       |     |
|                        |   |           |     |                   |     |                            |     |                      |     |
| Total Credit Facilities     |   |           |     | $                      | 1,000    |                            | $        | 44                        |     | $ | 956 |   |

 

In April 2004, **Cinergy Corp.** successfully placed twosenior unsecured revolving credit facilities with an aggregate borrowingcapacity of $1.5 billion, comprised of a $500 million 364-day facility and a $1billion three-year facility.  Thesefacilities replaced the two facilities that were scheduled to expire in Apriland May of 2004.

 

In addition to revolving creditfacilities, **Cinergy Corp.**, **CG&E**, and **PSI**also maintain uncommitted lines of credit.  These facilities are not guaranteed sourcesof capital and represent an informal agreement to lend money, subject toavailability, with pricing to be determined at the time of advance.  **CinergyCorp.**, **CG&E**, and **PSI** have established uncommitted lines of$40 million, $15 million, and $60 million, respectively, all of which remainedunused as of March 31, 2004.

 

29

----

 

The following table summarizesour *Notes payable and other short-termobligations* and *Notes payable toaffiliated companies*.

 

|                              |   | **March 31,  2004**    |       | **December  31, 2003** |       |
|-----------------------------------|--------|------------------------|------------|------------------------|------------|
|                              |   | **Established  Lines** |       | **Outstanding**        |       | **Established  Lines** |   | **Outstanding** |   |
|                              |   | **(in  millions)**     |       |
| **Cinergy**                       |   |                   |       |                   |       |   |   |   |   |
| **Cinergy Corp.**                 |   |                   |       |                   |       |   |   |   |   |
| Revolving lines                   |   | **$**                  | **1,000**  | ** **             | **$**      | **—** | ** ** | $ | 1,000 |   | $ | — |   |
| Uncommitted lines(1)              |   | **40**                 | ** ** | **—**             | ** ** | 40 |   | — |   |
| Commercial paper(2)               |   |                   | ** ** | **33**                 | ** ** |   |   | 146 |   |
|                              |   |                   | ** ** |                   | ** ** |   |   |   |   |
| Utility operating companies       |   |                   | ** ** |                   | ** ** |   |   |   |   |
| Uncommitted lines(1)              |   | **75**                 | ** ** | **—**             | ** ** | 75 |   | — |   |
| Pollution control notes           |   |                   | ** ** | **193**                | ** ** |   |   | 193 |   |
|                              |   |                   | ** ** |                   | ** ** |   |   |   |   |
| Non-regulated subsidiaries        |   |                   | ** ** |                   | ** ** |   |   |   |   |
| Revolving lines                   |   | **18**                 | ** ** | **9**                  | ** ** | 19 |   | 10 |   |
| Short-term debt                   |   |                   |       | **2**                  | ** ** |   |   | 2 |   |
|                              |   |                   | ** ** |                   | ** ** |   |   |   |   |
| **Cinergy Total**                 |   |                   | ** ** | **$**                  | **237**    | ** ** |   |   | $ | 351 |   |
|                              |   |                   | ** ** |                   | ** ** |   |   |   |   |
| **CG&E****and  subsidiaries** |   |                   | ** ** |                   | ** ** |   |   |   |   |
| Uncommitted lines(1)              |   | **$**                  | **15**     | ** **             | **$**      | **—** | ** ** | $ | 15 |   | $ | — |   |
| Pollution control notes           |   |                   | ** ** | **112**                | ** ** |   |   | 112 |   |
| Money pool                        |   |                   | ** ** | **55**                 | ** ** |   |   | 49 |   |
|                              |   |                   | ** ** |                   | ** ** |   |   |   |   |
| **CG&E Total**                |   |                   | ** ** | **$**                  | **167**    | ** ** |   |   | $ | 161 |   |
|                              |   |                   | ** ** |                   | ** ** |   |   |   |   |
| **PSI**                           |   |                   | ** ** |                   | ** ** |   |   |   |   |
| Uncommitted lines(1)              |   | **$**                  | **60**     | ** **             | **$**      | **—** | ** ** | $ | 60 |   | $ | — |   |
| Pollution control notes           |   |                   | ** ** | **81**                 | ** ** |   |   | 81 |   |
| Money pool                        |   |                   | ** ** | **183**                | ** ** |   |   | 188 |   |
|                              |   |                   | ** ** |                   | ** ** |   |   |   |   |
| **PSI Total**                     |   |                   | ** ** | **$**                  | **264**    | ** ** |   |   | $ | 269 |   |
|                              |   |                   | ** ** |                   | ** ** |   |   |   |   |
| **ULH&P**                     |   |                   | ** ** |                   | ** ** |   |   |   |   |
| Money pool                        |   |                   | ** ** | **$**                  | **21**     | ** ** |   |   | $ | 45 |   |
|                              |   |                   | ** ** |                   | ** ** |   |   |   |   |
| **ULH&P Total**               |   |                   | ** ** | **$**                  | **21**     | ** ** |   |   | $ | 45 |   |

 

----

(1)   Outstanding amounts could be greater thanestablished lines as uncommitted lenders are, at times, willing to loan fundsin excess of the established lines.

 

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

 

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

 

•                  a consolidated net worth of $2 billion; and

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

 

30

----

 

A breach of these covenantscould result in the termination of the credit facilities and the accelerationof the related indebtedness.  Inaddition to breaches of covenants, certain other events that could result inthe termination of available credit and acceleration of the relatedindebtedness include:

 

•                  bankruptcy;

•                  defaults in the payment of other indebtedness; and

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

 

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

 

**5.             Energy Trading Credit Risk**

** **

**Cinergy’s**extension of credit for energy marketing and trading is governed by a CorporateCredit Policy.  Written guidelinesapproved by the Company’s Risk Policy Committee document the management approvallevels for credit limits, evaluation of creditworthiness, and credit riskmitigation procedures.  Exposures tocredit risks are monitored daily by the Corporate Credit Risk function, whichis independent of all trading operations. As of March 31, 2004, approximately 93 percent of the credit exposure,net of credit collateral, related to energy trading and marketing activity waswith counterparties rated investment grade or the counterparties’ obligationswere guaranteed or secured by an investment grade entity.  The majority of these investment gradecounterparties are externally rated.  Ifa counterparty has an external rating, the lower of Standard & Poor’s andMoody’s Investors Service is used.  Aninternal rating system is used when a counterparty is not rated externally.

 

As of March 31, 2004, **CG&E**has a concentration of tradingcredit exposure of approximately $79 million with four counterparties, eachaccounting for greater than 10 percent of **CG&E’s**total trading credit exposure.  All fourof these counterparties are rated investment grade or are guaranteed or securedby an investment grade entity.

 

Energy commodity prices can beextremely 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.  Counterpartycredit limits may be adjusted on a daily basis in response to changes in acounterparty’s creditworthiness, financial status, or public debt ratings.

 

**6.             Commitments and Contingencies**

*** ***

***(a)***                                  Environmental

* *

*(i)           Ozone Transport Rulemakings*

 

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

 

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

 

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

 

*(ii)          Section 126 Petitions*

 

In March 2004, the state ofNorth Carolina filed a petition under Section 126 of the CAA in which it allegesthat sources in 13 upwind states including Ohio, Indiana, and Kentucky,significantly contribute to North Carolina’s non-attainment with certainambient air quality standards. Depending on the EPA’s final disposition of the pending petition, **Cinergy’s** generating stations could becomesubject to requirements for additional sulfur dioxide and NOXreductions.  It is unclear at this timewhether any additional reductions would be required beyond those proposed inthe Interstate Air Quality Rules, which were proposed by the EPA in December2003 and expected to become final in December 2004.

 

*(iii)         Clean Air Act Lawsuit*

 

In November 1999, and through subsequent amendments, the United Statesbrought a lawsuit in the United States Federal District Court for the SouthernDistrict of Indiana (District Court) 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. BeckjordGenerating Station (Beckjord Station). The suit

 

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

 

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

 

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

 

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

 

*(iv)         Manufactured Gas Plant (MGP) Sites*

 

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

 

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

 

In a combination of lawsuitsand NOVs, the 22 sites are in the process of being studied and will beremediated, if necessary.  In 1998 NIPSCO,IGC, and **PSI** entered into SiteParticipation and Cost Sharing Agreements to allocate liability andresponsibilities between them.  TheIndiana Department of Environmental Management (IDEM) oversees investigationand cleanup of all of these sites.  Thusfar, **PSI** has primaryresponsibility for investigating, monitoring and, if necessary, remediatingnine of these sites.  In December 2003, **PSI** entered into a voluntary remediationplan with the state of Indiana, providing a formal framework for the investigationand cleanup of the sites for which **PSI**has primary responsibility.

 

**PSI**notified its insurance carriers of the claims related to MGP sites raised byIDEM and costs included in the Site Participation and Cost SharingAgreements.  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.  The trial court issueda variety of rulings with respect to the claims and defenses in thelitigation.  **PSI**appealed certain adverse rulings to the Indiana Court ofAppeals and the appellate court has remanded the case to the trial court.  **PSI**has filed a petition to transfer the appellate court’s decision to the IndianaSupreme Court for its review.  At thepresent time, **PSI** cannot predictthe outcome of this litigation, including the outcome of the appeals.

 

**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 if the likelihood of incurringadditional costs becomes probable.  Untilall investigation and remediation is complete, we are unable to determine theoverall impact on our financial position or results of operations.

 

**CG&E**has performed site assessments on its sites where we believe MGP activitieshave occurred at some point in the past and found no imminent risk to theenvironment.  At the present time, **CG&E** cannot predict whetherinvestigation and/or remediation will be required in the future at any of thesesites.

 

*(v)           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 80 pending lawsuits. In these lawsuits, plaintiffs claim to have been exposed toasbestos-containing products in the course of their work at the **CG&E** and **PSI** generating stations. The plaintiffs further claim that as the property owner of thegenerating stations,**CG&E** and **PSI** should be held liable for theirinjuries and illnesses based on an alleged duty to warn and protect them fromany asbestos exposure.  A majority ofthe lawsuits to date have been brought against **PSI**.  The impact on **CG&E’s** and **PSI’s** financial position or results of operations of thesecases to date has not been material.

 

Of these lawsuits, one casefiled against **PSI** has been triedto verdict.  The jury returned a verdictagainst **PSI** in the amount ofapproximately $500,000 on a negligence claim and for **PSI** on punitive damages. **PSI** recently received anadverse ruling in an appeal of that verdict and has filed an appeal of thatdecision to the Indiana Supreme Court. In addition, **PSI** hassettled a number of other lawsuits for amounts, which neither individually norin the aggregate are material to **PSI’s**financial position or results of operations.

 

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

 

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**CG&E’s**and **PSI’s** financial position orresults of operations.

 

***(b)***           Regulatory

* *

*(i)           PSI Retail Electric Rate Case*

 

In December 2002, **PSI** filed a petition with the IndianaUtility Regulatory Commission (IURC) seeking approval of a base retail electricrate increase.  **PSI** has filed initial and rebuttaltestimony in this case and the final set of hearings took place in November2003.  **PSI**filed its proposed order in December 2003. Based on updated testimony filed in October 2003 and the proposed order,**PSI** proposes an increase in annualrevenues of approximately $180 million, or an average increase of approximately14 percent over **PSI’s** retailelectric rates in effect at the end of 2002. An IURC decision is anticipated in the second quarter of 2004.

 

*(ii)          CG&E Rate Filings*

 

As discussed in more detail inthe 2003 10-K, **CG&E** mademultiple rate filings in 2003 with the Public Utilities Commission of Ohio(PUCO) seeking to recover investments made in the transmission and distributionsystem.  In December 2003, thesefilings, and **CG&E’s** proposalfor establishing its post market development period market pricing methodology,were consolidated for hearing before the PUCO and the hearing is scheduled forMay 2004.  In addition, the PUCOrequested that **CG&E** propose arate stabilization plan in that same proceeding.  As part of our proposed rate stabilization plan (which seeksrecovery of certain environmental, fuel, and purchased power costs), we seek toend the market development period, which would end the current rate freeze thatis currently scheduled to end no later than December 31, 2005 for all customerclasses, pursuant to the Ohio electric restructuring law.  Our filings also contemplate a distributionrate case in 2004 with revised rates effective January 1, 2005 and mechanismsto recover ongoing transmission costs for Midwest Independent System Operator,Inc. or other applicable Regional Transmission Organizations.  In May 2004, CG&E filed a prefilingnotice with the PUCO formalizing our intent to file a rate case that willrequest an increase of approximately $78 million in distribution rates.  We cannot predict the outcome of theseproceedings.

 

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*(iii)         ULH&P Gas Rate Case*

 

Inthe second quarter of 2001, **ULH&P** filed a retail gas rate case with the Kentucky Public Service Commission(KPSC) seeking to increase base rates for natural gas distribution services andrequesting recovery through a tracking mechanism of the costs of an acceleratedgas main replacement program with an estimated capital cost of $112 millionover 10 years.  Through March 31,2004, **ULH&P** has recovered approximately $2.5 millionunder this tracking mechanism.  TheKentucky Attorney General has appealed to the Franklin Circuit Court the KPSC’sapproval of the tracking mechanism and the KPSC’s orders approving the newtracking mechanism rates.  At thepresent time, **ULH&P** cannot predict the timing or outcome of this litigation.

 

*(iv)         Gas Distribution Plant*

 

In June 2003, the PUCO approvedan amended settlement agreement between **CG&E**and the PUCO Staff in a gas distribution safety case arising out of a gas leakat 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 plan addressingall SHA risers on its distribution system. **Cinergy** has an estimated190,000 SHA risers on its distribution system, of which 155,000 are in **CG&E’s** service area and 31,000 are in **ULH&P’s** service area.  Further investigation as to whether anyadditional SHA risers will need maintenance or replacement is ongoing.  If **CG&E**and**ULH&P** determine thatreplacement of all SHA risers is appropriate, we currently estimate that thereplacement cost could be up to approximately $70 million for **CG&E**, which includes $10 million for **ULH&P**. **CG&E** and**ULH&P** would pursue recovery of thiscost through rates.  At this time, **Cinergy**, **CG&E**,and**ULH&P** cannot predict theoutcome of this matter.

 

***(c)***           Other

*(i)           Gas Customer Choice*

 

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

 

InMarch 2001, **Cinergy**, **CG&E**, andInvestments were named as defendants in a lawsuit filed by Energy Cooperativeand Resources.  This lawsuit concernsany obligations or liabilities Investments may have to Energy Cooperativefollowing its sale of Resources.  Trialis anticipated to occur in November 2004.

 

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We intendto vigorously defend these lawsuits and do not believe their outcome will havea material effect on our financial position or results of operations.

 

*(ii)          Energy Market Investigations*

 

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

 

In August 2003, **Cinergy**, along with 38 other companies, wasnamed as a defendant in civil litigation filed as a purported class action onbehalf of all persons who purchased and/or sold New York Mercantile Exchangenatural gas futures and options contracts between January 1, 2000 and December31, 2002.  The complaint alleges thatimproper price reporting caused damages to the class.  Two similar lawsuits have subsequently been filed, and thesethree lawsuits have been consolidated for pretrial purposes.  Plaintiffs filed a consolidated class actioncomplaint in January 2004.  We believethis action is without merit and intend to defend this lawsuit vigorously;however, we cannot predict the outcome of this matter at this time.

 

In the second quarter of 2003, **Cinergy** received initial and follow-upthird-party subpoenas from the Securities and Exchange Commission (SEC)requesting information related to particular trading activity with one of itscounterparties who was the target of an investigation by the SEC.  **Cinergy**has fully cooperated with the SEC in connection with this matter.  In early 2004, **Cinergy** received two grand jury subpoenas from the AssistantUnited States Attorney in the Southern District of Texas for informationrelating to the same trading activities being investigated by the SEC.  Specifically, the Assistant United StatesAttorney has requested information relating to communications between somecurrent and former employees and another energy company.  We understand that we are neither a targetnor are we under investigation by the Department of Justice in relation tothese communications.

 

At this time, we do not believethe outcome of these investigations and litigation will have a material impacton **Cinergy’s** financial position orresults of operations.

 

*(iii)         Patents*

 

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

* *

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*(iv)         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 accomplishtheir intended commercial purposes.  Theguarantees have various termination dates, from short-term (less than one year)to open-ended.

 

In many cases, the maximumpotential amount of an outstanding guarantee is an express term, set forth inthe guarantee agreement, representing the maximum potential obligation of **Cinergy**under that guarantee (excluding, attimes, certain legal fees to which a guaranty beneficiary may beentitled).  In those cases where thereis no maximum potential amount expressly set forth in the guarantee agreement,we calculate the maximum potential amount by considering the terms of theguaranteed transactions, to the extent such amount is estimable.

 

**Cinergy**has guaranteed the payment of $22 million as of March31, 2004, for borrowings by individuals under the Director, Officer, and KeyEmployee Stock Purchase Program.  **Cinergy**may be obligated to pay the debt’sprincipal and any related interest in the event of an unexcused breach of aguaranteed payment obligation by certain directors, officers, and keyemployees.  Most of the guarantees donot have a set termination date; however, the borrowings associated with themajority of the guarantees are due in the first quarter of 2005.

 

**CinergyCorp.** has also provided performance guarantees onbehalf of certain unconsolidated subsidiaries and joint ventures.  These guarantees support performance undervarious agreements and instruments (such as construction contracts, 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 amount to be $86 millionunder these guarantees as of March 31, 2004. **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**has entered into contracts that includeindemnification provisions as a routine part of its business activities.  Examples of these****contracts include purchase and sale agreements and operatingagreements.  In general, theseprovisions indemnify the counterparty for matters such as breaches ofrepresentations and warranties and covenants contained in the contract.  In some cases, particularly with respect topurchase and sale agreements, the potential liability for certainindemnification obligations is capped, in whole or in part (generally at anaggregate amount not exceeding the sale price), and subject to a deductibleamount before****any payments wouldbecome due.** **In other cases (such as indemnifications for willfulmisconduct of employees in a joint venture), the maximum potential amount isnot estimable given that the magnitude of any claims under thoseindemnifications would be a function of the extent of damages actuallyincurred, which is not practicable to estimate unless and until the eventoccurs.  **Cinergy** has estimated the maximum potential amount, whereestimable, to be $115 million under these indemnification provisions.  The termination period for the majority ofmatters provided by indemnification provisions in purchase and sale agreementsgenerally ranges from 2004 to 2009.

 

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

 

**7.             Pension and Other PostretirementBenefits**

 

As discussed in the 2003 10-K,we provide benefits to retirees in the form of pension and other postretirementbenefits.  Our qualified defined benefitpension plans cover substantially all U.S. employees meeting certain minimumage and service requirements.  Fundingfor the qualified defined benefit pension plans is based on actuariallydetermined contributions, the maximum of which is generally the amountdeductible for income tax purposes and the minimum being that required by theEmployee Retirement 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 (plans that do notmeet the criteria for tax benefits) that cover officers, certain other key employees,and non-employee directors.  We providecertain health care and life insurance benefits to retired U.S. employees andtheir eligible dependents.  Thesebenefits are subject to minimum age and service requirements.  The health care benefits include medicalcoverage, dental coverage, and prescription drugs and are subject to certainlimitations, such as deductibles and co-payments.

 

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

 

|                                                 |   | **Qualified  Pension Benefits** |       | **Non-Qualified  Pension  Benefits** |     | **Other  Postretirement  Benefits** |       |
|------------------------------------------------------|--------|---------------------------------|------------|--------------------------------------|----------|-------------------------------------|------------|
|                                                 |   | **2004**                        |       | **2003**                             |     | **2004**                            |       | **2003** |   | **2004** |   | **2003** |   |
|                                                 |   | **(in  millions)**              |       |
|                                                 |   |                            | * *   |                                 | * * |                                | * *   |   | * * |   | * * |   | * * |
| Service cost                                         |   | **$**                           | **8.8**    | ** **                           | $        | 7.8                                 |       | **$** | **1.2** |   | $ | 0.8 |   | **$** | **1.4** |   | $ | 1.0 |   |
| Interest cost                                        |   | **22.1**                        | ** ** | 21.5                                 |     | **1.7**                             | ** ** | 1.6 |   | **6.0** | ** ** | 5.6 |   |
| Expected return on plans’ assets                |   | **(20.1**                       | **)**      | (20.2                                | )        | **—**                          | ** ** | — |   | **—** | ** ** | — |   |
| Amortization of transition (asset)  obligation       |   | **(0.1**                        | **)**      | (0.2                                 | )        | **—**                          | ** ** | — |   | **0.8** | ** ** | 0.8 |   |
| Amortization of prior service cost                   |   | **1.1**                         | ** ** | 1.2                                  |     | **0.5**                             | ** ** | 0.3 |   | **—** | ** ** | — |   |
| Recognized actuarial (gain) loss                     |   | **0.5**                         | ** ** | —                               |     | **0.7**                             | ** ** | 0.5 |   | **2.1** | ** ** | 1.3 |   |
| Voluntary early retirement costs (Statement  88) (1) |   | **—**                      | ** ** | 2.1                                  |     | **—**                          | ** ** | — |   | **—** | ** ** | — |   |
| Net periodic benefit cost                            |   | **$**                           | **12.3**   |                                 | $        | 12.2                                |       | **$** | **4.1** | ** ** | $ | 3.2 |   | **$** | **10.3** | ** ** | $ | 8.7 |   |

 

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| (1) | Statement of  Financial Accounting Standards No. 88, *Employers’  Accounting for Settlements and Curtailments of Defined Benefit Pension Plans  and for Termination Benefits* (Statement 88) |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

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The net periodic benefit costby registrant for the three months ended March 31 was as follows:

 
|                         |   | **Qualified  Pension Benefits** |       | **Non-Qualified  Pension  Benefits** |     | **Other  Postretirement  Benefits** |     |
|------------------------------|--------|---------------------------------|------------|--------------------------------------|----------|-------------------------------------|----------|
|                         |   | **2004**                        |       | **2003**                             |     | **2004**                            |     | **2003** |   | **2004** |   | **2003** |   |
|                         |   | **(in  millions)**              |       |                                 |
|                         |   |                            | * *   |                                 | * * |                                | * * |   | * * |   | * * |   | * * |
| **Cinergy**(1)               |   | **$**                           | **12.3**   | ** **                           | $        | 12.2                                |     | **$** | **4.1** |   | $ | 3.2 |   | **$** | **10.3** |   | $ | 8.7 |   |
| **CG&E**and subsidiaries |   | **3.7**                         | ** ** | 2.4                                  |     | **0.2**                             |     | 0.2 |   | **2.6** |   | 2.3 |   |
| **PSI**                      |   | **3.2**                         | ** ** | 2.9                                  |     | **0.2**                             |     | 0.2 |   | **5.3** |   | 4.4 |   |
| **ULH&P**                |   | **0.4**                         | ** ** | 0.3                                  |     | **—**                          |     | — |   | **0.2** |   | 0.2 |   |
|                              |        |                                 |            |                                      |          |                                     |          |  |  |  |  |  |  |  |  |  |  |  |  |

 

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

 

On December 8, 2003, PresidentBush signed into law the Medicare Prescription Drug, Improvement andModernization Act of 2003 (the Act). The Act introduced a prescription drug benefit to retirees as well as afederal subsidy to sponsors of retiree health care benefit plans that provide aprescription drug benefit that is actuarially equivalent to the benefitprovided by Medicare.  Even though finalguidelines for determining actuarial equivalence have not been published, webelieve that our coverage for prescription drugs is at least actuariallyequivalent to the benefits provided by Medicare for most current retireesbecause our benefits for that group substantially exceed the benefits providedby Medicare, thereby allowing us to qualify for the subsidy.  We have accounted for the subsidy as areduction of our accumulated postretirement benefit obligation (APBO).  The APBO was reduced by approximately $19million and will be amortized as an actuarial gain over future periods, thusreducing future benefit costs.  Theimpact on 2004 net periodic benefit cost is not expected to be material.  Our accounting treatment for the subsidy isconsistent with draft guidance proposed by the FASB staff in March 2004;however, definitive guidance has not yet been provided and thus our accountingcould change.

 

**8.             Investment Impairment andDiscontinued Operations**

 

**(a)           *Impairment***

 

**Cinergy**holds a portfolio of direct and indirect investmentsin energy technology companies in the Power Technology and InfrastructureServices Business Unit (discussed in Note 9). One of the companies in which **Cinergy**holds a non-controlling interest agreed to sell its major assets.  This company is involved in the developmentand sale of outage management software. Based on the terms of the transaction, **Cinergy**concluded that this cost method investment was other-than-temporarily impairedand recognized a pre-tax impairment charge of approximately $27 million ($21million after-tax) in the first quarter of 2004.  The impairment charge is included in *Miscellaneous (Expense) Income-Net*in **Cinergy’s**Condensed Statements of Income.

 

**(b)           *DiscontinuedOperations***

 

As discussed in the 2003 10-K,in the second quarter of 2003, **Cinergy**completed the disposal of its gas distribution operation in South Africa, soldits remaining wind assets in the U.S., and substantially sold or liquidated theassets of its energy marketing business in the Czech Republic.

 

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

 

40

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The table below reflects theresults of operations and the income (loss) on disposal related to investmentsaccounted for as discontinued operations for the quarters ended March 31, 2004and 2003:

 

|                                                  |   | **Quarter  Ended March 31** |       |
|-------------------------------------------------------|--------|-----------------------------|------------|
|                                                  |   | **2004**                    |       | **2003** |   |
|                                                  |   | **(in  thousands)**         |       |
|                                                  |   |                        | * *   |   | * * |
| **Revenues**(1)                                       |   | **$**                       | **—** | ** ** | $ | 13,824 |   |
|                                                  |   |                        | ** ** |   |   |
| **Income (Loss) Before Taxes**                        |   | **$**                       | **—** | ** ** | $ | (329 | ) |
|                                                  |   |                        | ** ** |   |   |
| **Income Taxes Benefit (Expense)**                    |   | **$**                       | **—** | ** ** | $ | 159 |   |
|                                                  |   |                        | ** ** |   |   |
| **Income (Loss) from Discontinued Operations**        |   |                        | ** ** |   |   |
| Income (Loss) from operations, net of tax             |   | **$**                       | **—** | ** ** | $ | (170 | ) |
|                                                  |   |                        | ** ** |   |   |
| **Total Income (Loss) from Discontinued  Operations** |   | **$**                       | **—** | ** ** | $ | (170 | ) |

 

----

(1)   Presentedfor informational purposes only.  Allresults of operations are reported net in our Condensed Statements of Income.

 

The table below reflects theassets and liabilities related to the investments accounted for as discontinuedoperations as of March 31, 2004 and December 31, 2003:

 

|                  |   | **March 31  2004** |       | **December  312003** |     |
|-----------------------|--------|--------------------|------------|----------------------|----------|
|                  |   | **(in thousands)** |       |
|                  |   |               | * *   |                 | * * |
| **Assets**            |   |               |       |                 |     |
| Current assets        |   | **$**              | **4,343**  | ** **           | $        | 4,501 |   |
|                  |   |               | ** ** |                 |     |
| **Total Assets**      |   | **$**              | **4,343**  | ** **           | $        | 4,501 |   |
|                  |   |               | ** ** |                 |     |
| **Liabilities**       |   |               | ** ** |                 |     |
| Current liabilities   |   | **$**              | **9,693**  | ** **           | $        | 11,594 |   |
|                  |   |               | ** ** |                 |     |
| **Total Liabilities** |   | **$**              | **9,693**  | ** **           | $        | 11,594 |   |

 

**9.             Financial Information by BusinessSegment**

 

As discussed in the 2003 10-K,we conduct operations through our subsidiaries, and manage through thefollowing three reportable segments:

 

•                  Commercial Business Unit (Commercial);

•                  Regulated Businesses Business Unit (Regulated Businesses); and

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

 

The following section describesthe activities of our business units as of March 31, 2004.

 

Commercial manages wholesalegeneration and energy marketing and trading of energy commodities.  Additionally, Commercial operates andmaintains our electric generating plants including some of our jointly-ownedplants.  Commercial is also responsiblefor all of our

41

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international operations andperforms energy risk management activities, trading activities, and customizedenergy solutions.

 

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

 

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 the financialresults by business unit.  Certain prioryear amounts have been reclassified to conform to the current presentation.

 

42

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Financial results by business unit for thequarters ended March 31, 2004, and March 31, 2003, are as indicatedbelow.

 

**Business Units**

 
|                                                               |   | **Cinergy  Business Units** |        |                      |       |                                      |       |
|--------------------------------------------------------------------|--------|-----------------------------|-------------|---------------------------|------------|-------------------------------------------|------------|
|                                                               |   | **Commercial**              |        | **Regulated  Businesses** |       | **Power  Technology  and Infrastructure** |       | **Total** |   | **Reconciling  Eliminations(1)** |   | **Consolidated** |   |
|                                                               |   | **(in  thousands)**         |        |
|                                                               |   |                        | * *    |                      | * *   |                                      | * *   |   | * * |   | * * |   | * * |
| **Quarter Ended  March 31, 2004**                             |   |                        |        |                      |       |                                      |       |   |   |   |   |   |   |
|                                                               |   |                        |        |                      |       |                                      |       |   |   |   |   |   |   |
| **Operating revenues  -**                                          |   |                        | ** **  |                      | ** ** |                                      | ** ** |   | ** ** |   | ** ** |   | ** ** |
| **External customers**                                             |   | **$**                       | **405,707** | ** **                | **$**      | **882,949**                               | ** ** | **$** | **2** | ** ** | **$** | **1,288,658** | ** ** | **$** | **—** | ** ** | **$** | **1,288,658** | ** ** |
| **Intersegment  revenues**                                         |   | **39,453**                  | ** **  | **—**                | ** ** | **—**                                | ** ** | **39,453** | ** ** | **(39,453** | **)** | **—** | ** ** |
|                                                               |   |                        | ** **  |                      | ** ** |                                      | ** ** |   | ** ** |   | ** ** |   | ** ** |
| **Gross margins -**                                                |   |                        | ** **  |                      | ** ** |                                      | ** ** |   | ** ** |   | ** ** |   | ** ** |
| **Electric**                                                       |   | **181,380**                 | ** **  | **409,834**               | ** ** | **—**                                | ** ** | **591,214** | ** ** | **—** | ** ** | **591,214** | ** ** |
| **Gas**                                                            |   | **23,134**                  | ** **  | **104,196**               | ** ** | **—**                                | ** ** | **127,330** | ** ** | **—** | ** ** | **127,330** | ** ** |
|                                                               |   |                        | ** **  |                      | ** ** |                                      | ** ** |   | ** ** |   | ** ** |   | ** ** |
| **Segment profit  (loss)(2)**                                      |   | **46,092**                  | ** **  | **79,505**                | ** ** | **(22,582**                               | **)**      | **103,015** | ** ** | **—** | ** ** | **103,015** | ** ** |
|                                                               |   |                        |        |                      |       |                                      |       |   |   |   |   |   |   |
| Quarter Ended March 31, 2003                                  |   |                        |        |                      |       |                                      |       |   |   |   |   |   |   |
|                                                               |   |                        | ** **  |                      | ** ** |                                      | ** ** |   | ** ** |   | ** ** |   | ** ** |
| Operating revenues -                                               |   |                        |        |                      |       |                                      |       |   |   |   |   |   |   |
| External customers                                                 |   | $                           | 433,642     |                      | $          | 834,315                                   |       | $ | 1 |   | $ | 1,267,958 |   | $ | — |   | $ | 1,267,958 |   |
| Intersegment revenues                                              |   | 39,123                      |        | —                    |       | —                                    |       | 39,123 |   | (39,123 | ) | — |   |
|                                                               |   |                        | ** **  |                      | ** ** |                                      | ** ** |   | ** ** |   | ** ** |   | ** ** |
| Gross margins -                                                    |   |                        |        |                      |       |                                      |       |   |   |   |   |   |   |
| Electric                                                           |   | 174,207                     |        | 378,986                   |       | —                                    |       | 553,193 |   | — |   | 553,193 |   |
| Gas                                                                |   | 60,028                      |        | 102,890                   |       | —                                    |       | 162,918 |   | — |   | 162,918 |   |
|                                                               |   |                        |        |                      |       |                                      |       |   |   |   |   |   |   |
| Discontinued operations, net of tax                                |   | (170                        | )           | —                    |       | —                                    |       | (170 | ) | — |   | (170 | ) |
| Cumulative effect of changes in accounting  principles, net of tax |   | 26,462                      |        | —                    |       | —                                    |       | 26,462 |   | — |   | 26,462 |   |
|                                                               |   |                        |        |                      |       |                                      |       |   |   |   |   |   |   |
| Segment profit (loss)(2)                                           |   | 97,105                      |        | 74,069                    |       | (5,089                                    | )          | 166,085 |   | — |   | 166,085 |   |

 

----

(1)          The Reconciling Eliminations categoryeliminates the intersegment revenues of Commercial and the intersegment costsof Regulated Businesses.

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

 

43

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Total segment assets at March 31, 2004, and December 31,2003, were as follows:

 

**Business Units**

 
|                                             |   | **Cinergy  Business Units** |          |                      |         |                                      |         |
|--------------------------------------------------|--------|-----------------------------|---------------|---------------------------|--------------|-------------------------------------------|--------------|
|                                             |   | **Commercial**              |          | **Regulated  Businesses** |         | **Power  Technology  and Infrastructure** |         | **Total** |   | **All  Other (1)** |   | **Consolidated** |   |
|                                             |   | **(in  thousands)**         |          |
|                                             |   |                        | *** ***  |                      | *** *** |                                      | *** *** |   | *** *** |   | *** *** |   | *** *** |
| **Segment assets from  continuing operations**   |   | **$**                       | **5,551,997** | ** **                | **$**        | **8,415,370**                             | ** **   | **$** | **152,397** | ** ** | **$** | **14,119,764** | ** ** | **$** | **60,503** | ** ** | **$** | **14,180,267** | ** ** |
| **Segment assets from  discontinued operations** |   | **4,343**                   | ** **    | **—**                | ** **   | **—**                                | ** **   | **4,343** | ** ** | **—** | ** ** | **4,343** | ** ** |
| **Total segment  assets at March 31, 2004** |   | **$**                       | **5,556,340** | ** **                | **$**        | **8,415,370**                             | ** **   | **$** | **152,397** | ** ** | **$** | **14,124,107** | ** ** | **$** | **60,503** | ** ** | **$** | **14,184,610** | ** ** |
|                                             |   |                        | ** **    |                      | ** **   |                                      | ** **   |   | ** ** |   | ** ** |   | ** ** |
| Segment assets from continuing operations        |   | $                           | 5,360,886     |                      | $            | 8,515,478                                 |         | $ | 175,619 |   | $ | 14,051,983 |   | $ | 62,722 |   | $ | 14,114,705 |   |
| Segment assets from discontinued operations      |   | 4,501                       |          | —                    |         | —                                    |         | 4,501 |   | — |   | 4,501 |   |
| Total segment assets at December 31,  2003  |   | $                           | 5,365,387     |                      | $            | 8,515,478                                 |         | $ | 175,619 |   | $ | 14,056,484 |   | $ | 62,722 |   | $ | 14,119,206 |   |

 

----

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

 

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**10.**                               EPS

 

A reconciliation of EPS to EPS – assuming dilution is presented belowfor the quarters ended March 31, 2004 and 2003:

 
|                                                                                             |   | **Income**                                    |        | **Shares** |        | **EPS**    |       |
|--------------------------------------------------------------------------------------------------|--------|-----------------------------------------------|-------------|------------|-------------|------------|------------|
|                                                                                             |   | **(in  thousands, except per share amounts)** |        |
| **Quarter Ended  March 31, 2004**                                                           |   |                                          | ** **  |       | ** **  |       | ** ** |
| **EPS:**                                                                                         |   |                                          | ** **  |       | ** **  |       | ** ** |
| **Net Income**                                                                                   |   | **$**                                         | **103,015** | ** ** | **179,261** | ** ** | **$**      | **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 - assuming  dilution:**                                                                    |   |                                          | ** **  |       | ** **  |       | ** ** |
| **Net income plus  assumed conversions**                                                         |   | **$**                                         | **103,015** | ** ** | **181,926** | ** ** | **$**      | **0.57** | ** ** |
|                                                                                             |   |                                          | ** **  |       | ** **  |       | ** ** |
| Quarter Ended March 31, 2003                                                                |   |                                          |        |       |        |       |       |
| EPS:                                                                                             |   |                                          |        |       |        |       |       |
| Income before discontinued operations and  cumulative effect of changes in accounting principles |   | $                                             | 139,793     |       |        |       | $          | 0.81 |   |
| Discontinued operations, net of tax                                                              |   | (170                                          | )           |       |        | —     |       |
| Cumulative effect of changes in accounting  principles, net of tax                               |   | 26,462                                        |        |       |        | 0.15       |       |
| Net Income                                                                                       |   | $                                             | 166,085     |       | 173,387     |       | $          | 0.96 |   |
|                                                                                             |   |                                          |        |       |        |       |       |
| Effect of dilutive securities:                                                                   |   |                                          |        |       |        |       |       |
| Common stock options                                                                             |   |                                          |        | 724        |        |       |       |
| Directors’ compensation plans                                                               |   |                                          |        | 134        |        |       |       |
| Contingently issuable common stock                                                               |   |                                          |        | 717        |        |       |       |
|                                                                                             |   |                                          |        |       |        |       |       |
| EPS - assuming dilution:                                                                         |   |                                          |        |       |        |       |       |
| Net income plus assumed conversions                                                              |   | $                                             | 166,085     |       | 174,962     |       | $          | 0.95 |   |

 

Options to purchase shares of common stock are excluded from thecalculation of EPS - assuming dilution when the exercise price of these optionsplus unrecognized compensation expense is greater than the average market priceof a common share during the period multiplied by the number of optionsoutstanding at the end of the period because they are anti-dilutive.  Approximately 0.9 million and 3.5 millionshares were excluded from the EPS - assuming dilution calculation for thequarters ended March 31, 2004 and 2003, respectively.

 

Also excluded from the EPS - assuming dilution calculation for thequarters ended March 31, 2004 and 2003, are up to 9.7 million and 10.8million shares, respectively, issuable pursuant to the stock purchase contractsissued by **Cinergy Corp.** inDecember 2001 associated with the preferred trust securitiestransaction.  The number of sharesissuable pursuant to the stock purchase contracts is contingent upon the marketprice of **Cinergy Corp.** stock inFebruary 2005 and could range between 9.2 and 10.8 million shares.

 

45

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**CAUTIONARY STATEMENTS**

 

## **CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKINGINFORMATION**

 

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

 

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

 

•                  Factors affecting operations, such as:

 

(1)          unanticipated weather conditions;

(2)          unscheduled generation outages;

(3)          unusual maintenance or repairs;

(4)          unanticipated changes in costs;

(5)          environmental incidents; and

(6)          electric transmission or gas pipeline systemconstraints.

 

•                  Legislative and regulatory initiatives.

 

•                  Additional competition in electric or gas markets and continuedindustry consolidation.

 

•                  Financial or regulatory accounting principles including costs ofcompliance with existing and future environmental requirements.

 

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

 

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

 

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

 

•                  Availability of, or cost of, capital.

 

•                  Employee workforce factors.

 

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

 

•                  Costs and effects of legal and administrative proceedings, settlements,investigations, and claims.  Examplescan be found in Note 6 of the “Notes to Condensed Financial Statements” in“Item I. Financial Statements”.

 

We undertake no obligation to update the information contained herein.

 

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

 

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

 

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

 

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, 2003(2003 10-K).  The results discussedbelow are not necessarily indicative of the results to be expected in anyfuture periods.

 

### **INTRODUCTION**

 

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

 

•                  factors affecting current and future operations;

•                  potential sources of cash for future capital expenditures;

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

•                  how the above items affect our overall financial condition.

 

### **ORGANIZATION**

 

**Cinergy Corp.**, 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, throughits subsidiaries, in nearby areas of Kentucky and Indiana.  **CG&E**is responsible for the majority of our power marketing and tradingactivity.  **CG&E’s** principal subsidiary, **ULH&P**, is a Kentucky corporation organized in 1901, thatprovides electric and gas service in northern Kentucky.  **CG&E’s**other subsidiaries are insignificant to its results of operations.

 

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

 

47

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Services is a service company that provides our subsidiaries with avariety of centralized administrative, management, and support services.  Investments holds most of our domesticnon-regulated, energy-related businesses and investments, including gasmarketing and trading operations.

 

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

 

### **LIQUIDITY AND CAPITAL RESOURCES**

##### *** ***

##### ***Environmental Commitment andContingency Issues***

* *

*AmbientAir Standards*

 

In 1997, the United States (U.S.) Environmental Protection Agency (EPA)revised the National Ambient Air Quality Standards for ozone and fineparticulate matter.  On April 15,2004, the EPA made final state ozone non-attainment area designations.  Several counties in which we operate havebeen designated as being in non-attainment with the new ozone standard.  EPA is also under a court ordered deadlineto make final fine particulate area designations by December 15, 2004.  Several counties in which we operate arelikely to be designated as non-attainment with the fine particulatestandard.  Those counties that aredesignated as being in non-attainment with the new ozone and/or fineparticulate standards are required to develop a plan of compliance.  **Cinergy**cannot predict the effect of the ozone non-attainment designations at thistime.

 

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

 

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

 

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

 

An EWG is an entity,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 U.S. is limited to making onlywholesale sales of electricity.

 

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

 

48

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retail within theU.S.  An entity claiming status as aFUCO must provide notification thereof to the SEC under PUHCA.

 

**Cinergy** has been granted SEC authority underPUHCA to invest (including by way of guarantees) an aggregate amount in EWGsand FUCOs equal to the sum of (1) our average consolidated retained earningsfrom time to time plus (2) $2 billion. As of March 31, 2004, we had invested or committed to invest approximately$0.8 billion in EWGs and FUCOs, leaving available investment capacity under theorder of approximately $2.7 billion.

 

•                  Qualifying Facilities and Energy-Related Non-utility Entities

 

SEC regulations under thePUHCA permit **Cinergy** and other registeredholding companies to invest and/or guarantee an amount equal to 15 percent ofconsolidated capitalization (consolidated capitalization is the sum of *Notes payable and other short-term obligations*,*Long-term debt* (including amountsdue within one year), *Cumulative PreferredStock of Subsidiaries*, and total *CommonStock Equity*) in domestic qualifying cogeneration and small powerproduction plants (qualifying facilities) and certain other domesticenergy-related non-utility entities.  AtMarch 31, 2004, we had invested and/or guaranteed approximately$1.0 billion of the $1.3 billion available.

 

•                  Energy-Related Assets

 

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

 

•                  Infrastructure Services Companies

 

**Cinergy** has been granted SEC authority underPUHCA to invest up to $500 million in companies that derive or will derivesubstantially all of their operating revenues from the sale of InfrastructureServices including:

 

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

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

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

 

49

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At March 31, 2004,we had invested approximately $26 million in these Infrastructure Servicescompanies.

 

##### ***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, 2004, we had $737million outstanding under the guarantees issued, of which approximately 91percent represents guarantees of obligations reflected on **Cinergy’s** Condensed Balance Sheets.  The amount outstanding represents **Cinergy Corp.’s** guarantees of liabilitiesand commitments of its consolidated subsidiaries, unconsolidated subsidiaries,and joint ventures.  See Note 6(c)(*iv*) of the “Notes to Condensed Financial Statements” in “Item I. FinancialStatements” for a discussion of guarantees in accordance with FinancialAccounting Standards Board (FASB) Interpretation No. 45, *Guarantor’s Accounting and Disclosure Requirementsfor Guarantees, Including Indirect Guarantees of Indebtedness of Others*(Interpretation 45).  Interpretation 45requires disclosure of maximum potential liabilities for guarantees issued onbehalf of unconsolidated subsidiaries and joint ventures and underindemnification clauses in various contracts. The Interpretation 45 disclosure differs from the PUHCA restrictions inthat it requires a calculation of maximum potential liability, rather thanactual amounts outstanding; it excludes guarantees issued on behalf ofconsolidated subsidiaries; and it includes potential liabilities underindemnification clauses.

 

##### ***Collateral Requirements***

 

**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 ourMarch 31, 2004 trading portfolio, if such an event were to occur, **Cinergy** would be required to issue up toapproximately $86 million in collateral related to its gas and power tradingoperations, of which $41 million is related to **CG&E**.

 

#### **Capital Resources**

 

**Cinergy**, **CG&E**, **PSI**,and **ULH&P** meet current andfuture capital requirement needs through a combination of internally and externallygenerated funds, including the issuance of debt and/or equity securities.  **Cinergy**,**CG&E**, **PSI**, and **ULH&P**believe that they have adequate financial resources to meet their future needs.

 

##### ***Notes Payable and OtherShort-term Obligations***

 

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

 

50

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|                           |   | **Short-term  Regulatory Authority  March 31, 2004** |   |
|--------------------------------|--------|-----------------------------------------------------------|--------|
|                           |   | **(in  millions)**                                        |   |
|                           |   | **Authority**                                             |   | **Outstanding** |   |
|                           |   |                                                      |   |   |   |
| **Cinergy Corp.**              |   | $                                                         | 5,000  | (1) | $ | 33 |   |
| **CG&E**  and subsidiaries |   | 671                                                       |   | 55 |   |
| **PSI**                        |   | 600                                                       |   | 183 |   |
| **ULH&P**                  |   | 65                                                        |   | 21 |   |
|                                |        |                                                           |        |  |  |  |  |

 

----

(1)     **CinergyCorp.**, under the PUHCA, was granted 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 specificregulatory debt authorizations.

 

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

 

51

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**Cinergy Corp.’s**short-termborrowing consists primarily of unsecured revolving lines of credit and thesale of commercial paper.  **Cinergy Corp.’s** $1 billion revolving creditfacilities and $800 million commercial paper program also support theshort-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 is a summary of outstandingshort-term borrowings for **Cinergy**,**CG&E**, **PSI**, and **ULH&P**,including variable rate pollution control notes:

 
|                           |   | **Short-term  Borrowings  March 31, 2004** |     |
|--------------------------------|--------|-------------------------------------------------|----------|
|                           |   | **Established  Lines**                          |     | **Outstanding** |   | **Unused** |   | **Standby  Liquidity(3)** |   | **Available  Revolving  Lines of  Credit** |   |
|                           |   | **(in  millions)**                              |     |
|                           |   |                                            | * * |   | * * |   | * * |   | * * |   | * * |
| **Cinergy**                    |   |                                            |     |   |   |   |   |   |   |   |   |
| **Cinergy Corp.**              |   |                                            |     |   |   |   |   |   |   |   |   |
| Revolving lines                |   | $                                               | 1,000    |   | $ | — |   | $ | 1,000 |   | $ | 44 |   | $ | 956 |   |
| Uncommitted lines(1)           |   | 40                                              |     | — |   | 40 |   |   |   |   |   |
| Commercial paper(2)            |   |                                            |     | 33 |   | 767 |   |   |   |   |   |
|                           |   |                                            |     |   |   |   |   |   |   |   |   |
| Utility operating companies    |   |                                            |     |   |   |   |   |   |   |   |   |
| Uncommitted lines(1)           |   | 75                                              |     | — |   | 75 |   |   |   |   |   |
| Pollution control notes        |   |                                            |     | 193 |   |   |   |   |   |   |   |
|                           |   |                                            |     |   |   |   |   |   |   |   |   |
| Non-regulated subsidiaries     |   |                                            |     |   |   |   |   |   |   |   |   |
| Revolving lines                |   | 18                                              |     | 9 |   | 9 |   |   |   | 9 |   |
| Short-term debt                |   |                                            |     | 2 |   |   |   |   |   |   |   |
|                           |   |                                            |     |   |   |   |   |   |   |   |   |
| **Cinergy Total**              |   |                                            |     | $ | 237 |   |   |   |   |   | $ | 965 |   |
|                           |   |                                            |     |   |   |   |   |   |   |   |   |
| **CG&E**  and subsidiaries |   |                                            |     |   |   |   |   |   |   |   |   |
| Uncommitted lines(1)           |   | $                                               | 15       |   | $ | — |   | $ | 15 |   |   |   |   |   |
| Pollution control notes        |   |                                            |     | 112 |   |   |   |   |   |   |   |
| Money pool                     |   |                                            |     | 55 |   |   |   |   |   |   |   |
|                           |   |                                            |     |   |   |   |   |   |   |   |   |
| **CG&E Total**             |   |                                            |     | $ | 167 |   |   |   |   |   |   |   |
|                           |   |                                            |     |   |   |   |   |   |   |   |   |
| **PSI**                        |   |                                            |     |   |   |   |   |   |   |   |   |
| Uncommitted lines(1)           |   | $                                               | 60       |   | $ | — |   | $ | 60 |   |   |   |   |   |
| Pollution control notes        |   |                                            |     | 81 |   |   |   |   |   |   |   |
| Money pool                     |   |                                            |     | 183 |   |   |   |   |   |   |   |
|                           |   |                                            |     |   |   |   |   |   |   |   |   |
| **PSI Total**                  |   |                                            |     | $ | 264 |   |   |   |   |   |   |   |
|                           |   |                                            |     |   |   |   |   |   |   |   |   |
| **ULH&P**                  |   |                                            |     |   |   |   |   |   |   |   |   |
| Money pool                     |   |                                            |     | $ | 21 |   |   |   |   |   |   |   |
|                           |   |                                            |     |   |   |   |   |   |   |   |   |
| **ULH&P Total**            |   |                                            |     | $ | 21 |   |   |   |   |   |   |   |
|                                |        |                                                 |          |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

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

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

(3)     Standby liquidity is reserved against therevolving lines to support the commercial paper program and outstanding lettersof credit (currently $33 million and $11 million, respectively).

 

52

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

 
| **Credit Facility**         |   | **Expiration**     |     | **Established  Lines** |     | **Outstanding  and  Committed** |     | **Unused and  Available** |     |
|-----------------------------|--------|--------------------|----------|------------------------|----------|---------------------------------|----------|---------------------------|----------|
|                        |   | **(in  millions)** |     |
|                        |   |               | * * |                   | * * |                            | * * |                      | * * |
| 364-day senior revolving    |   | April 2004    |     |                   |     |                            |     |                      |     |
| Direct borrowing            |   |               |     | $                      |     |                            | $        | —                    |     | $ |   |   |
| Commercial paper support    |   |               |     |                   |     | 33                              |     |                      |     |
|                        |   |               |     |                   |     |                            |     |                      |     |
| Total 364-day facility      |   |               |     | 600                    |     | 33                              |     | 567                       |     |
|                        |   |               |     |                   |     |                            |     |                      |     |
| Three-year senior revolving |   | May 2004           |     |                   |     |                            |     |                      |     |
| Direct borrowing            |   |               |     |                   |     | —                          |     |                      |     |
| Commercial paper support    |   |               |     |                   |     | —                          |     |                      |     |
| Letter of credit support    |   |               |     |                   |     | 11                              |     |                      |     |
|                        |   |               |     |                   |     |                            |     |                      |     |
| Total Three-year facility   |   |               |     | 400                    |     | 11                              |     | 389                       |     |
|                        |   |               |     |                   |     |                            |     |                      |     |
| Total Credit Facilities     |   |               |     | $                      | 1,000    |                            | $        | 44                        |     | $ | 956 |   |

 

In April 2004, **Cinergy Corp.**successfully placed two senior unsecured revolving credit facilities with anaggregate borrowing capacity of $1.5 billion, comprised of a $500 million364-day facility and a $1 billion three-year facility.  These facilities replaced the two facilitiesthat were scheduled to expire in April and May 2004.

 

In our credit facilities, **CinergyCorp.** has covenanted to maintain:

 

•                  a consolidated net worth of $2 billion; and

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

 

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

 

•                  bankruptcy;

•                  defaults in the payment of other indebtedness; and

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

 

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

 

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

 

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

 

53

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regulates the issuance of long-term debt by **Cinergy Corp.**  Therespective state utility commissions regulate the issuance of long-term debt byour utility operating companies.

 

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

 
|                                             |   | **Authorized**    |     | **Used** |     | **Available** |     |
|--------------------------------------------------|--------|-------------------|----------|----------|----------|---------------|----------|
|                                             |   | **(in millions)** |     |
|                                             |   |              | * * |     | * * |          | * * |
| **Cinergy Corp.**                                |   |              |     |     |     |          |     |
| PUHCA total capitalization(1)                    |   | $                 | 5,000    |     | $        | 1,472         |     | $ | 3,528 |   |
|                                             |   |              |     |     |     |          |     |
| **CG&E**  and subsidiaries(2)                |   |              |     |     |     |          |     |
| State Public Utility Commissions                 |   | $                 | 575      |     | $        | —        |     | $ | 575 |   |
|                                             |   |              |     |     |     |          |     |
| **PSI**                                          |   |              |     |     |     |          |     |
| State Public Utility Commission(3)               |   | $                 | —   |     | $        | —        |     | $ | — |   |
| State Public Utility Commission -  Tax-Exempt(3) |   | —            |     | —   |     | —        |     |
|                                             |   |              |     |     |     |          |     |
| **ULH&P**                                    |   |              |     |     |     |          |     |
| State Public Utility Commission                  |   | $                 | 75       |     | $        | —        |     | $ | 75 |   |

 

----

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

(2)     Includes amounts for **ULH&P**.

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

 

**Cinergy Corp.** has aneffective shelf registration statement with the SEC relating to the issuance ofup to $750 million in any combination of common stock, preferred stock, stockpurchase contracts or unsecured debt securities, of which approximately $574million remains available for issuance. **CG&E** has an effectiveshelf registration statement with the SEC relating to the issuance of up to$800 million in any combination of unsecured debt securities, first mortgagebonds, or preferred stock, of which $800 million 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, of which $800million remains available for issuance. **ULH&P** has effectiveshelf registration statements with the SEC relating to the issuance of up to$50 million in unsecured debt securities and up to $40 million in firstmortgage bonds, of which $30 million in unsecured debt securities and $20million in first mortgage bonds remain available for issuance.

 

##### ***Off-Balance SheetArrangements***

 

As discussed in the 2003 10-K, **Cinergy**uses off-balance sheet arrangements from time to time to facilitate financingof various projects.  **Cinergy’s** primary off-balance sheetarrangement involves the sale of accounts receivable to a qualifying specialpurpose entity.

 

54

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***Securities Ratings***

 

As of March 31, 2004, the major credit rating agencies rated oursecurities as follows:

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

 

----

(1)     Fitch Ratings (Fitch)

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

(3)     Standard & Poor’s (S&P)

 

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

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

 

A security rating is not a recommendation to buy, sell, or holdsecurities.  These securities ratingsmay be revised or withdrawn at any time, and each rating should be evaluatedindependently of any other rating.

 

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

 

As discussed in the 2003 10-K, **Cinergy**issues new **Cinergy Corp.**common stock shares to satisfy obligations under certain of its employee stockplans and the Cinergy Corp. Direct Stock Purchase and Dividend ReinvestmentPlan.  During the first quarter of 2004,**Cinergy** has issued approximately1.2 million shares under these plans.

 

55

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

 

The Results of Operations discussions for **Cinergy**, **CG&E**,and **PSI** are combined within thissection.

 

### **2004 QUARTERLY** RESULTSOF OPERATIONS - HISTORICAL

#### ** **

#### **Summary of Results**

 

Electric and gas gross margins and net income for **Cinergy**, **CG&E**,and **PSI** for the quarters endedMarch 31, 2004 and 2003 were as follows:

 
|                  |   | **Cinergy(1)**      |        | **CG&E  and subsidiaries** |     | **PSI**    |     |
|-----------------------|--------|---------------------|-------------|--------------------------------|----------|------------|----------|
|                  |   | **2004**            |        | **2003**                       |     | **Change** |     | ***%*****Change** |   | **2004** |   | **2003** |   | **Change** |   | ***%*****Change** |   | **2004** |   | **2003** |   | **Change** |   | ***%*****Change** |   |
|                  |   | **(in  thousands)** |        |
|                  |   |                | * *    |                           | * * |       | * * |   | * * |   | * * |   | * * |   | * * |   | * * |   | * * |   | * * |   | * * |   | * * |
| Net income            |   | **$**               | **103,015** |                           | $        | 166,085    |     | $ | (63,070 | ) | (38 | ) | **$** | **77,455** |   | $ | 117,236 |   | $ | (39,781 | ) | (34 | ) | **$** | **40,806** |   | $ | 33,727 |   | $ | 7,079 |   | 21 |   |
|                  |   |                |        |                           |     |       |     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Electric gross margin |   | **591,214**         |        | 553,193                        |     | 38,021     |     | 7 |   | **304,815** |   | 298,010 |   | 6,805 |   | 2 |   | **279,483** |   | 244,816 |   | 34,667 |   | 14 |   |
| Gas gross margin      |   | **127,330**         |        | 162,918                        |     | (35,588    | )        | (22 | ) | **104,135** |   | 103,511 |   | 624 |   | 1 |   | **—** |   | — |   | — |   | — |   |
|                       |        |                     |             |                                |          |            |          |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

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

 

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

 

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

 

#### **Electric Margins**

 

**Cinergy’s**, **CG&E’s**, and **PSI’s** electric gross margins increased for the quarter endedMarch 31, 2004 as compared to the same period last year.  **Cinergy’s**and**CG&E’s** variances reflect in part, anincrease in net revenues on power marketing, trading, and originationcontracts.  **Cinergy’s**,**CG&E’s**,****and **PSI’s** increases also included higherelectric retail margins as a result of additional megawatt hour (MWh)sales.  **Cinergy’s**and **PSI’s**increasesincluded a higher price received per MWh on certain rate tariffadjustments.  Milder weather in 2004 ascompared to 2003, primarily impacting residential customers, partially offsetthe increases in margins for **Cinergy**,**CG&E**,and **PSI**.** **Additionallyoffsetting **Cinergy’s**and **CG&E’s**increases was an increase in theaverage price of fuel for the quarter.

 

56

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

 
|      |   | **Cinergy(1)**     |     | **CG&E  and subsidiaries** |     | **PSI**    |     |
|-----------|--------|--------------------|----------|--------------------------------|----------|------------|----------|
|      |   | **2004**           |     | **2003**                       |     | **Change** |     | **%  Change** |   | **2004** |   | **2003** |   | **Change** |   | **%  Change** |   | **2004** |   | **2003** |   | **Change** |   | **%  Change** |   |
|      |   | **(in  millions)** |     |
|      |   |               | * * |                           | * * |       | * * |   | * * |   | * * |   | * * |   | * * |   | * * |   | * * |   | * * |   | * * |   | * * |
| Retail    |   | **$**              | **670**  |                           | $        | 684        |     | $ | (14 | ) | (2 | ) | **$** | **334** |   | $ | 334 |   | $ | — |   | — |   | **$** | **336** |   | $ | 350 |   | $ | (14 | ) | (4 | ) |
| Wholesale |   | **169**            |     | 112                            |     | 57         |     | 51 |   | **71** |   | 70 |   | 1 |   | 1 |   | **71** |   | 56 |   | 15 |   | 27 |   |
| Other     |   | **39**             |     | 27                             |     | 12         |     | 44 |   | **33** |   | 25 |   | 8 |   | 32 |   | **9** |   | 6 |   | 3 |   | 50 |   |
| Total     |   | **$**              | **878**  |                           | $        | 823        |     | $ | 55 |   | 7 |   | **$** | **438** |   | $ | 429 |   | $ | 9 |   | 2 |   | **$** | **416** |   | $ | 412 |   | $ | 4 |   | 1 |   |

 

----

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

 

Retail electric operating revenues decreased for **Cinergy**and **PSI** mainly due to a three percent and five percent decrease inthe average retail price per MWh, respectively, in the first quarter of 2004 ascompared to 2003.  These averagedecreases resulted in approximately $23 million and $19 million lower retailrevenues for **Cinergy** and **PSI**, respectively.  The declines in the retail price per MWhwere mainly due to decreases in rate tariff adjustments associated with **PSI’s** fuel cost recovery program partiallyoffset by approximately $9 million in increases in other rate tariffadjustments related to emission allowances, construction work in progress, andclean coal technologies tracking mechanisms. The cost of fuel for **PSI’s**retail customers is passed on dollar-for-dollar under the state mandated fuelcost recovery mechanism.  Milder weatherin the first quarter of 2004 as compared to 2003 also contributed to thedecline in retail electric revenues, primarily for residential customers.  Heating degree days in **PSI’s** service territory decreasedapproximately nine percent in the first quarter of 2004 as compared to2003.  These variances were partiallyoffset by an increase of approximately $12 million and $6 million for **Cinergy** and **PSI**, respectively, due to higher amounts of MWh delivered tonon-residential customers.

 

**CG&E’s** retailrevenues were flat for the quarter ended March 31, 2004, as compared to2003.  The average retail price per MWhdecreased causing an approximate $4 million decline in retail revenue in 2004as compared to 2003.  This decreaseprimarily reflects customers switching from full service to transportation onlyservice as a result of deregulation in the state of Ohio.  Milder weather in the first quarter of 2004as compared to 2003 also contributed to the decline in retail electricrevenues, primarily for residential customers. Heating degree days decreased approximately seven percent in **CG&E’s** service territory in the firstquarter of 2004 as compared to 2003. These decreases were offset by an increase in MWh delivered tonon-residential customers.

 

Electric wholesale revenues increased for **Cinergy** and **PSI**and remained relatively flat for **CG&E**forthe first quarter of 2004 as compared to 2003. **Cinergy’s** increase includesa number of factors.   Net revenues onpower marketing, trading, and origination contracts increased approximately $20million over the first quarter of 2003. The increase in power trading results is attributable to higher earningson physical and financial trading primarily within the Midwest and the PJMInterconnection (PJM) market. Additionally, approximately $16 million of **Cinergy’s** variance includes increases in wholesale revenues fromnon-regulated energy service subsidiaries that started operations, or becamefully consolidated, during the second half of 2003.

 

57

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The majority of the remaining increase was attributable to increases inwholesale sales from excess generation capacity after serving regulated retailcustomers.

 

**CG&E’s** electricwholesale revenues remained relatively flat for the quarter.  Net revenues on power marketing, trading,and origination contracts increased by approximately $24 million over the firstquarter of 2003.  The increase in powertrading results is attributable to higher earnings on physical and financialtrading primarily within the Midwest and the PJM market.  This increase was offset by a decrease in MWhavailable for wholesale activity due in part to a decrease in generationavailable for these transactions.

 

The majority of **PSI’s**increase was attributable to increases in wholesale sales from excessgeneration capacity after serving regulated retail customers.  This increase was partially offset by anapproximate $5 million decrease in net revenues on power marketing, trading,and origination contracts, due to **PSI’s**discontinuation of entering into any new transactions beginning in 2002.  Revenues continue to be affected by changesin the fair value of existing contracts over the remaining duration of thecontracts.

 

Other *Electric operating revenues*increased for **Cinergy**, **CG&E**, and **PSI** for the first quarter of 2004, as compared to 2003.  **Cinergy’s**,**CG&E’s**, and **PSI’s** increases reflect higher transmission revenues primarilyresulting from Midwest Independent System Operator, Inc. (Midwest ISO)operations of approximately $6 million, $3 million, and $3 million,respectively.  **Cinergy’s** and **CG&E’s** other *Electricoperating revenues* also increased by approximately $5 millionreflecting an increase in third party coal sales and the introduction of coaltrading activity.

 

##### ***Fuel and Purchased Power***

 
|            |   | **Cinergy(1)**     |     | **CG&E  and subsidiaries** |     | **PSI**    |     |
|-----------------|--------|--------------------|----------|--------------------------------|----------|------------|----------|
|            |   | **2004**           |     | **2003**                       |     | **Change** |     | **%  Change** |   | **2004** |   | **2003** |   | **Change** |   | **%  Change** |   | **2004** |   | **2003** |   | **Change** |   | **%  Change** |   |
|            |   | **(in  millions)** |     |
|            |   |               | * * |                           | * * |       | * * |   | * * |   | * * |   | * * |   | * * |   | * * |   | * * |   | * * |   | * * |   | * * |
| Fuel            |   | **$**              | **249**  |                           | $        | 240        |     | $ | 9 |   | 4 |   | **$** | **115** |   | $ | 105 |   | $ | 10 |   | 10 |   | **$** | **114** |   | $ | 135 |   | $ | (21 | ) | (16 | ) |
| Purchased power |   | **38**             |     | 30                             |     | 8          |     | 27 |   | **18** |   | 26 |   | (8 | ) | (31 | ) | **23** |   | 32 |   | (9 | ) | (28 | ) |
|                 |        |                    |          |                                |          |            |          |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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

 

58

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*Fuel*

 

*Fuel*primarily represents the cost of coal, natural gas, and oil that is used togenerate electricity.  The followingtable details the changes to fuel expense from the quarter ended March 31,2003, to the quarter ended March 31, 2004:

 
|                                         |   | **Cinergy(1)**     |       | **CG&E** |       | **PSI**    |       |
|----------------------------------------------|--------|--------------------|------------|--------------|------------|------------|------------|
|                                         |   | **(in  millions)** |       |
|                                         |   |               | * *   |         | * *   |       | * *   |
| Fuel Expense – March 31, 2003      |   | $                  | 240        |         | $          | 105        |       | $ | 135 |   |
|                                         |   |               |       |         |       |       |       |
| *Increase  (Decrease) due to changes in:*    |   |               |       |         |       |       |       |
| Price of fuel                                |   | **12**             | ** ** | **11**       | ** ** | **1**      | ** ** |
| Deferred fuel cost                           |   | **(36**            | **)**      | **—**   | ** ** | **(36**    | **)**      |
| Fuel consumption                             |   | **8**              | ** ** | **(6**       | **)**      | **14**     | ** ** |
| New entities(2)                              |   | **14**             | ** ** | **—**   | ** ** | **—** | ** ** |
| Other(3)                                     |   | **11**             | ** ** | **5**        | ** ** | **—** | ** ** |
|                                         |   |               | ** ** |         | ** ** |       | ** ** |
| **Fuel Expense –  March 31, 2004** |   | **$**              | **249**    | ** **   | **$**      | **115**    | ** ** | **$** | **114** | ** ** |

 

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

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

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

 

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

 

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

 

*Purchased power*expense increased for **Cinergy** anddecreased for **CG&E** and **PSI** for the quarter ended March 31,2004, as compared to 2003.  **CG&E’s** and **PSI’s** decreases in *Purchasedpower* expense reflect substantial reductions in the amount ofpurchases made for wholesale full requirements customers.  Both **CG&E’s**and **PSI’s** decreases were partiallyoffset by an increase in the amount of MWh purchased primarily fornon-residential customers, consistent with the increases in load for thecustomers discussed previously as part of retail electric revenues.

 

**Cinergy’s** increasewas due to a significantly greater amount of third party purchases by itssubsidiaries in 2004, as opposed to intercompany purchases in 2003 that wereeliminated.

 

#### **Gas Margins**

 

**CG&E’s** gas grossmargins remained relatively flat and **Cinergy’s**decreased for the quarter ended March 31, 2004, as compared to the sameperiod last year.  **CG&E’s** gas margins increased by $8million primarily due to rate tariff adjustments associated with a low-income

 

59

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subsidy program, Ohio excise taxes, and the gas main replacementprogram.  This was offset by a $7million decrease reflecting less volume sold due to milder weather during2004.  Heating degree days decreasedapproximately seven percent in **CG&E’s**service territory in the first quarter of 2004 as compared to 2003.

 

**Cinergy’s**gasmargins fell approximately $36 million due to lower margins from our gasmarketing and trading business.  Ourdomestic gas marketing and trading business experienced a $28 million declinein physical and financial trading margins. Natural gas prices were extremely volatile in the first quarter of2003.  The reduction in gas marketingand trading margins resulted from fewertrading opportunities caused by lower volatility, lower price levels,and milder weather in 2004.  The remaining decline was due to a drop inour storage and transportation margins. Our volume sold from storage experienced a 35 percent decline in 2004, reflecting milder weather.

 

#### **Other Revenues**

 

*Other revenues* for **Cinergy**increased for the quarter endedMarch 31, 2004, as compared to 2003. Operating fees received by a non-regulated subsidiary that providescogeneration services increased approximately $7 million as a result ofoperational efficiencies.  *Other revenues* also increasedapproximately $6 million due to non-regulated energy service subsidiaries thatstarted operations, or became fully consolidated, during the second half of2003.

 

#### **Operating Expenses**

##### *** ***

***Operation andMaintenance***

 

*Operation and maintenance*expense increased for **Cinergy**, **CG&E**, and **PSI** for the quarter ended March 31, 2004, as compared to2003.  **Cinergy’s**,**CG&E’s**, and **PSI’s** increases include approximately $18million, $4 million, and $14 million, respectively, of higher expenses relatedto emissions allowances.  Theseincreases primarily reflect a reduction in the amount deferred under **PSI’s** emission allowances trackingmechanism as authorized by the Indiana Utility Regulatory Commission (IURC) andhigher expenses due to an increase in the weighted average cost and the numberof allowances used during the period. The expenses also reflect increases of approximately $10 million, $5million, and $3 million for **Cinergy**,**CG&E**, and **PSI**, respectively, in employee incentivecompensation costs.  In addition, highercosts of approximately $9 million, $7 million, and $2 million for **Cinergy**, **CG&E**,and **PSI**, respectively, were due tochanges in transmission costs largely resulting from changes in the Midwest ISOoperations in 2003.  Maintenanceexpenses were higher by approximately $3 million for **CG&E**.  Maintenanceexpenses decreased for **PSI**,partially offsetting **PSI’s**aforementioned increases.  Approximately$6 million of **Cinergy’s** increaserelates to non-regulated energy service subsidiaries that started operations,or became fully consolidated, during the second half of 2003.

 

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

 

*Depreciation* expenseincreased for **Cinergy** and **PSI**, and decreased for **CG&E** for the quarter endedMarch 31, 2004, as compared to 2003. ** **Approximately $7 million of **Cinergy’s** and **PSI’s**

 

60

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increase was due to the addition of depreciable plant primarilyincluding pollution control equipment. Partially offsetting **Cinergy’s**increase and contributing to **CG&E’s**decrease was an approximate $7.5 million reduction due to higher estimateduseful lives of certain of **CG&E’s**assets resulting from a new depreciation study completed during the thirdquarter of 2003.  Approximately $3million of **Cinergy’s** increase andpartially offsetting **CG&E’s**decrease was the addition of depreciable plant primarily including pollutioncontrol equipment and additions related to the accelerated gas main replacementprogram.

 

##### ***Taxes Other Than IncomeTaxes***

 

*Taxes other than income taxes*expense increased for **Cinergy** and **CG&E** for the quarter ended March 31,2004, as compared to 2003.  Thisincrease was primarily related to an approximate $3 million increase in Ohiogross receipts taxes, reflecting higher sales for the comparative period.

 

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

 

*Miscellaneous (Expense) Income - Net*decreased for **Cinergy** for thequarter ended March 31, 2004, as compared to 2003.  This decrease reflects an approximate $27million pre-tax impairment charge ($21 million after-tax) on a non-controllinginterest in an investment primarily involved in the development and sale ofoutage management software.  Thedecrease was partially offset by interest income of approximately $5 million onthe notes receivable of two subsidiaries consolidated in the third quarter of2003, as discussed in the 2003 10-K. Additionally, partially offsetting the decrease was approximately $4million in gains on the disposal of other non-regulated investments.

 

#### **Interest Expense**

 

*Interest**Expense* increased for **Cinergy** for the quarter endedMarch 31, 2004, as compared to 2003. Approximately $6 million of the increase reflects the recognition of anote payable to a trust.  Also reflectedin the increase is approximately $5 million related to additional debt recordedin accordance with the consolidation of two new entities.  The note payable and additional debt wereboth recorded in the third quarter of 2003 resulting from the adoption ofInterpretation No. 46, *Consolidation ofVariable Interest Entities* (Interpretation 46), as discussed in the2003 10-K.  Partially offsetting theseincreases was an increase in interest capitalized in the first quarter of 2004,as compared to 2003, primarily reflecting the post-in-service carrying costsdeferred for recovery as authorized by the IURC.

 

#### **Preferred DividendRequirement of Subsidiary Trust**

 

*Preferred Dividend Requirement of SubsidiaryTrust* decreased for **Cinergy**for the quarter ended March 31, 2004, as compared to 2003, as a result ofthe implementation of Interpretation 46. Effective July 1, 2003, the preferred trust securities and therelated dividends are no longer reported in **Cinergy’s**financial statements.  However, interestexpense is still being incurred on a note payable to this trust as discussedabove.

 

#### **Income Taxes**

 

The effective income tax rate for **Cinergy**decreased for the quarter ended March 31, 2004, as compared to2003.  **CG&E’s**and**PSI’s**effective income taxrates remained flat for the comparative period.  **Cinergy’s** decreasewas primarily a result of changes in the amount of

 

61

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estimated tax credits associated with the production and sale ofsynthetic fuel, as discussed further below. **Cinergy’s** effective taxrate for 2004 is expected to be approximately 24 percent.

 

In July 2002, Cinergy Capital & Trading, Inc. (Capital &Trading) acquired a coal-based synthetic fuel production facility.  The synthetic fuel produced at this facilityqualifies for tax credits in accordance with Section 29 of the InternalRevenue Code.  Eligibility for thesecredits expires after 2007.  **Cinergy** received a private letter rulingfrom the Internal Revenue Service  inconnection with the acquisition of the facility.  To date, **Cinergy** hasrecorded approximately $145 million in tax credits, including approximately $25million in 2004.

 

#### **Cumulative Effect of Changesin Accounting Principles**

 

In 2003, **Cinergy**,**CG&E**, and **PSI**recognized *Cumulativeeffect of changes in accounting principles, net of tax* gain/(loss)of approximately $26 million, $31 million, and $(0.5) million,respectively.  The cumulative effect ofchanges in accounting principles was a result of the adoption of Statement ofFinancial Accounting Standards No. 143, *Accountingfor Asset Retirement Obligations*, and the rescission of EmergingIssues Task Force (EITF) Issue 98-10, *Accountingfor Contracts Involved in Energy Trading and Risk Management Activities*,as discussed in the 2003 10-K.

 

62

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**ULH&P**

 

Electric and gas gross margins and net income for **ULH&P** for the quarters endedMarch 31, 2004 and 2003, were as follows:

 
|                   |   | **ULH&P**       |       |
|------------------------|--------|---------------------|------------|
|                   |   | **2004**            |       | **2003** |   | **Change** |   | ***%*****Change** |   |
|                   |   | **(in  thousands)** |       |
|                   |   |                |       |   |   |   |   |   |   |
| Electric  gross margin |   | **$**               | **16,762** |   | $ | 15,806 |   | 956 |   | 6 |   |
| Gas gross  margin      |   | **17,306**          |       | 17,884 |   | (578 | ) | (3 | ) |
| Net income             |   | **7,888**           |       | 9,406 |   | (1,518 | ) | (16 | ) |
|                        |        |                     |            |  |  |  |  |  |  |  |  |

 

#### **Summary of Results**

 

Electric gross margins increased for **ULH&P**for the quarter ended March 31, 2004 compared to 2003.  This increase was primarily due to increasesin MWh delivered to non-residential customers. Gas gross margins decreased for the same period.  The majority of the decrease is due tomilder weather in the first quarter of 2004 as compared to 2003.  Heating degree days decreased approximatelyseven percent as compared to the same period last year.  The decrease due to milder weather waspartially offset by rate tariff adjustments associated with the gas mainreplacement program.

 

The decrease in net income for the year was primarily due to increased *Operation and maintenance* expense for thequarter ended March 31, 2004, as compared to 2003.  The majority of this increase was due toapproximately $800,000 in higher employee benefits and incentive compensationprogram expenses.

 

63

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**MD&A - RESULTSOF OPERATIONS - FUTURE**

 

### **FUTUREEXPECTATIONS/TRENDS**

 

In the “Future Expectations/Trends” section, we discuss electric andgas industry developments, market risk sensitive instruments and positions, andaccounting matters.  Each of thesediscussions will address the current status and potential future impact on ourresults of operations and financial condition.

 

### **ELECTRICINDUSTRY**

#### ** **

#### **FERC and Midwest ISO**

##### *** ***

##### ***Day-Ahead and Real-TimeEnergy Markets***

 

In response to prior FERC orders, in March 2004, the Midwest ISOfiled with the FERC proposed changes to its existing transmission tariff to addterms and conditions to implement a centralized security-constrained economicdispatch platform supported by a Day-Ahead and Real-Time Energy Market design,including Locational Marginal Pricing and Financial Transmission Rights (EnergyMarkets Tariff).  At this time, **Cinergy** cannot predict the effect thefiling will have on its results of operations.

 

***Blackout Report***

 

In April 2004, the U.S.-Canada Power System Outage Task Forceissued its Final Report on the August 14, 2003 Blackout in the UnitedStates and Canada.  The report reviewedthe causes of the Blackout and made 46 recommendations intended to minimize thelikelihood and scope of similar events in the future.  One of the recommendations is to make reliability standardsmandatory and enforceable with penalties for noncompliance.  In the past, compliance with North ElectricReliability Council’s reliability standards and guidelines has largely beenvoluntary.  At this time, we do notbelieve the Final Report will have a material impact on our financial positionor results of operations.

 

***FERC’s Market Screen Orders***

 

In April 2004, FERC issued various orders and rulemakings thatapplied to granting market-based rate authority and specifically addressedgeneration market power, transmission market power, barriers to entry, andaffiliated company issues.  At thistime, we cannot predict the effect such orders will have on our financialposition or results of operations.

 

### **MARKETRISK SENSITIVE INSTRUMENTS AND POSITIONS**

 

The transactions associated with the Commercial Business Unit’s(Commercial) energy marketing and trading activities give rise to variousrisks, 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 (and due to its substantial investment in generation assets), itsexposure to movements in the price of electricity and other energy commoditiesmay become greater.  As a result, we maybe subject to increased future earnings volatility.

 

64

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

 

*Changes in Fair Value*

 

The changes in fair value of the energy risk management assets andliabilities, for the periods ended March 31, 2004 and 2003, are presentedin the table below:

 
|                                                                                      |   | **Change in  Fair Value** |       |
|-------------------------------------------------------------------------------------------|--------|---------------------------|------------|
|                                                                                      |   | **March 31,  2004**  |       | **March 31,  2003** |   |
|                                                                                      |   | **Cinergy(1)**            |       | **CG&E** |   | **Cinergy(1)** |   | **CG&E** |   |
|                                                                                      |   | **(in  millions)**        |       |
|                                                                                      |   |                      | * *   |   | * * |   | * * |   | * * |
| Fair value of contracts outstanding at  beginning of period                               |   | $                         | **41**     |   | $ | **20** |   | $ | 75 |   | $ | 42 |   |
|                                                                                      |   |                      |       |   |   |   |   |   |   |
| Changes in fair value attributable to  changes in valuation techniques and assumptions(2) |   | **—**                | ** ** | **—** |   | 1 |   | 1 |   |
|                                                                                      |   |                      |       |   |   |   |   |   |   |
| Other changes in fair value(3)                                                            |   | **49**                    |       | **28** |   | 73 |   | 4 |   |
|                                                                                      |   |                      |       |   |   |   |   |   |   |
| Option premiums paid/(received)                                                           |   | **6**                     |       | **1** |   | (2 | ) | 1 |   |
|                                                                                      |   |                      |       |   |   |   |   |   |   |
| Cumulative effect of changes in accounting  principle                                     |   | **—**                |       | **—** |   | (20 | ) | (13 | ) |
|                                                                                      |   |                      |       |   |   |   |   |   |   |
| Contracts settled                                                                         |   | **(48**                   | **)**      | **(10** | **)** | (114 | ) | (37 | ) |
|                                                                                      |   |                      |       |   |   |   |   |   |   |
| Fair value of contracts outstanding at end  of period                                     |   | $                         | **48**     |   | $ | **39** |   | $ | 13 |   | $ | (2 | ) |

 

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

(2)     Represents changes in fairvalue recognized in income, caused by changes in assumptions used incalculating fair value or changes in modeling techniques.

(3)     Represents changes in fairvalue recognized in income, primarily attributable to fluctuations inprice.  This amount includes bothrealized and unrealized gains on energy trading contracts.

 

The following are the balances at March 31, 2004 and 2003 of ourenergy risk management assets and liabilities:

 
|                                              |   | **March 31,  2004** |     | **March 31,  2003** |     |
|---------------------------------------------------|--------|--------------------------|----------|--------------------------|----------|
|                                              |   | **Cinergy(1)**           |     | **CG&E**             |     | **Cinergy(1)** |   | **CG&E** |   |
|                                              |   | **(in  millions)**       |     |
|                                              |   |                     | * * |                     | * * |   | * * |   | * * |
| Energy risk management assets - current           |   | $                        | **352**  |                     | $        | **122** |   | $ | 439 |   | $ | 74 |   |
| Energy risk management assets - non-current       |   | **114**                  |     | **49**                   |     | 93 |   | 34 |   |
|                                              |   |                     |     |                     |     |   |   |   |   |
| Energy risk management liabilities -  current     |   | **(330**                 | **)**    | **(108**                 | **)**    | (434 | ) | (90 | ) |
| Energy risk management liabilities -  non-current |   | **(88**                  | **)**    | **(24**                  | **)**    | (85 | ) | (20 | ) |
|                                              |   |                     |     |                     |     |   |   |   |   |
|                                              |   | $                        | **48**   |                     | $        | **39** |   | $ | 13 |   | $ | (2 | ) |

 

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

 

65

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The following table presents the expected maturity of the energy riskmanagement assets and liabilities as of March 31, 2004, for **Cinergy** and **CG&E**:

 
|                                                   |   | **Fair Value  of Contracts as of March 31, 2004** |       |
|--------------------------------------------------------|--------|--------------------------------------------------------|------------|
|                                                   |   | **Maturing**                                           |       |   |   |
| **Source of Fair Value(1)**                            |   | **Within  12 months**                                  |       | **12-36  months** |   | **36-60  months** |   | **Thereafter** |   | **Total  Fair Value** |   |
|                                                   |   | **(in  millions)**                                     | ** ** |
|                                                   |   |                                                   | * *   |   | * * |   | * * |   | * * |   | * * |
| **Cinergy(2)**                                         |   |                                                   |       |   |   |   |   |   |   |   |   |
| Prices actively quoted                                 |   | $                                                      | 3          |   | $ | 9 |   | $ | — |   | $ | — |   | $ | 12 |   |
|                                                   |   |                                                   |       |   |   |   |   |   |   |   |   |
| Prices based on models and other valuation  methods(3) |   | 19                                                     |       | 20 |   | 2 |   | (5 | ) | 36 |   |
|                                                   |   |                                                   |       |   |   |   |   |   |   |   |   |
| Total                                                  |   | $                                                      | 22         |   | $ | 29 |   | $ | 2 |   | $ | (5 | ) | $ | 48 |   |
|                                                   |   |                                                   |       |   |   |   |   |   |   |   |   |
| **CG&E**                                           |   |                                                   |       |   |   |   |   |   |   |   |   |
| Prices actively quoted                                 |   | $                                                      | 8          |   | $ | 12 |   | $ | — |   | $ | — |   | $ | 20 |   |
|                                                   |   |                                                   |       |   |   |   |   |   |   |   |   |
| Prices based on models and other valuation  methods(3) |   | 6                                                      |       | 13 |   | — |   | — |   | 19 |   |
|                                                   |   |                                                   |       |   |   |   |   |   |   |   |   |
| Total                                                  |   | $                                                      | 14         |   | $ | 25 |   | $ | — |   | $ | — |   | $ | 39 |   |

 

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(1)          While liquidity varies bytrading regions, active quotes are generally available for two years forstandard electricity transactions and three years for standard gastransactions.  Non-standard transactionsare classified based on the extent, if any, of modeling used in determiningfair value.  Long-term transactions canhave portions in both categories depending on the tenor.

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

(3)          A substantial portion ofthose amounts include option values.

 

*EnergyTrading Credit Risk*

 

**Cinergy’s** extensionof credit for energy marketing and trading is governed by a Corporate CreditPolicy.  Written guidelines approved bythe Company’s Risk Policy Committee document the management approval levels forcredit limits, evaluation of creditworthiness, and credit risk mitigationprocedures.  **Cinergy** analyzes net credit exposure and establishes creditreserves based on the counterparties’ credit rating, payment history, and tenorof the outstanding obligation. Exposures to credit risks are monitored daily by the Corporate CreditRisk function, which is independent of all trading operations.  Energy commodity prices can be extremelyvolatile and the market can, at times, lack liquidity.  Because of these issues, credit risk isgenerally greater than with other commodity trading.

 

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

 

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**Cinergy**(1)

 
| **Rating**                            |   | **Total  Exposure  Before Credit  Collateral** | ** ** | **Credit  Collateral** | ** ** | **Net  Exposure** | ** ** | **Percentage  of  Total  Net Exposure** | ** ** | **Number of  Counterparties  Greater than 10%** |   | **Net  Exposure of  Counterparties  Greater than  10%(4)** |     |
|---------------------------------------|--------|------------------------------------------------|------------|------------------------|------------|-------------------|------------|-----------------------------------------|------------|-------------------------------------------------|--------|------------------------------------------------------------|----------|
|                                  |   | **(in  thousands)**                            |       |
|                                  |   |                                           | * *   |                   | * *   |              | * *   |                                    | * *   |                                            |   |                                                       | * * |
| Investment Grade(2)                   |   | $                                              | 498,587    |                   | $          | 20,205            |       | $                                       | 478,382    |                                            | 78     | %                                                          | —   |   | $ | — |   |
| Internally Rated-Investment Grade(3)  |   | 100,077                                        |       | 6,266                  |       | 93,811            |       | 15                                      |       | —                                          |   | —                                                     |     |
| Non-Investment Grade                  |   | 101,391                                        |       | 69,407                 |       | 31,984            |       | 5                                       |       | —                                          |   | —                                                     |     |
| Internally Rated-Non-Investment Grade |   | 38,881                                         |       | 27,283                 |       | 11,598            |       | 2                                       |       | —                                          |   | —                                                     |     |
|                                  |   |                                           |       |                   |       |              |       |                                    |       |                                            |   |                                                       |     |
| Total                                 |   | $                                              | 738,936    |                   | $          | 123,161           |       | $                                       | 615,775    |                                            | 100    | %                                                          | —   |   | $ | — |   |

 
|                                  |   | **Maturity  of Credit Risk Exposure** |    |
|---------------------------------------|--------|---------------------------------------|---------|
| **Rating**                            |   | **Less than  2 Years**                |    | **2-5 Years** |   | **Exposure  Greater than  5 Years** |   | **Total  Exposure  Before Credit  Collateral** |   |
|                                  |   | **(in  thousands)**                   |    |
|                                  |   |                                  |    |   |   |   |   |   |   |
| Investment Grade(2)                   |   | $                                     | 454,488 |   | $ | 37,274 |   | $ | 6,825 |   | $ | 498,587 |   |
| Internally Rated-Investment Grade(3)  |   | 97,409                                |    | 2,396 |   | 272 |   | 100,077 |   |
| Non-Investment Grade                  |   | 101,391                               |    | — |   | — |   | 101,391 |   |
| Internally Rated-Non-Investment Grade |   | 38,774                                |    | 107 |   | — |   | 38,881 |   |
|                                  |   |                                  |    |   |   |   |   |   |   |
| Total                                 |   | $                                     | 692,062 |   | $ | 39,777 |   | $ | 7,097 |   | $ | 738,936 |   |

 

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(1)       Includes amounts related tonon-registrants.

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

(3)       Counterparties include avariety of entities, including investor-owned utilities, privately heldcompanies, cities and municipalities.  **Cinergy** assigns internal credit ratings toall counterparties within our credit risk portfolio, applying fundamentalanalytical tools.  Included in thisanalysis is a review of (but not limited to) counterparty financial statementswith consideration given to off-balance sheet obligations and assets, specificbusiness environment, access to capital, and indicators from debt and equitycapital  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**

 
| **Rating**                            |   | **Total  Exposure  Before Credit  Collateral** |     | **Credit  Collateral** |     | **Net  Exposure** |     | **Percentage  of  Total  Net Exposure** |     | **Number of  Counterparties  Greater than 10%** |   | **Net  Exposure of  Counterparties  Greater than  10%(3)** |     |
|---------------------------------------|--------|------------------------------------------------|----------|------------------------|----------|-------------------|----------|-----------------------------------------|----------|-------------------------------------------------|--------|------------------------------------------------------------|----------|
|                                  |   | **(in  thousands)**                            |     |
|                                  |   |                                           | * * |                   | * * |              | * * |                                    | * * |                                            |   |                                                       | * * |
| Investment Grade(1)                   |   | $                                              | 126,312  |                   | $        | 9,253             |     | $                                       | 117,059  |                                            | 95     | %                                                          | 4        |   | $ | 79,054 |   |
| Internally Rated-Investment Grade(2)  |   | 5,037                                          |     | 214                    |     | 4,823             |     | 4                                       |     | —                                          |   | —                                                     |     |
| Non-Investment Grade                  |   | 15,618                                         |     | 14,313                 |     | 1,305             |     | 1                                       |     | —                                          |   | —                                                     |     |
| Internally Rated-Non-Investment Grade |   | 1,643                                          |     | 1,491                  |     | 152               |     | —                                  |     | —                                          |   | —                                                     |     |
|                                  |   |                                           |     |                   |     |              |     |                                    |     |                                            |   |                                                       |     |
| Total                                 |   | $                                              | 148,610  |                   | $        | 25,271            |     | $                                       | 123,339  |                                            | 100    | %                                                          | 4        |   | $ | 79,054 |   |

 
|                                  |   | **Maturity  of Credit Risk Exposure** |     |
|---------------------------------------|--------|---------------------------------------|----------|
| **Rating**                            |   | **Less than  2 Years**                |     | **2-5 Years** |   | **Exposure  Greater than  5 Years** |   | **Total  Exposure  Before Credit  Collateral** |   |
|                                  |   | **(in  thousands)**                   |     |
|                                  |   |                                  | * * |   | * * |   | * * |   | * * |
| Investment Grade(1)                   |   | $                                     | 115,605  |   | $ | 13,346 |   | $ | (2,639 | ) | $ | 126,312 |   |
| Internally Rated-Investment Grade(2)  |   | 5,133                                 |     | (96 | ) | — |   | 5,037 |   |
| Non-Investment Grade                  |   | 15,618                                |     | — |   | — |   | 15,618 |   |
| Internally Rated-Non-Investment Grade |   | 1,643                                 |     | — |   | — |   | 1,643 |   |
|                                  |   |                                  |     |   |   |   |   |   |   |
| Total                                 |   | $                                     | 137,999  |   | $ | 13,250 |   | $ | (2,639 | ) | $ | 148,610 |   |

 

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(1)   Includes counterparties rated Investment Grade orthe counterparties’ obligations are guaranteed or secured by an InvestmentGrade entity.

(2)   Counterparties include various cities andmunicipalities.

(3)   Exposures, positive or negative, with counterpartiesthat are related to one another are not aggregated when no right of offsetexists and as a result, credit is extended and evaluated on a separate basis.

 

### **ACCOUNTINGMATTERS**

 

#### **Critical Accounting Policies**

 

Preparation of financial statements and related disclosures incompliance with generally accepted accounting principles (GAAP) requires theuse of assumptions and estimates.  Incertain instances, the application of GAAP requires judgments regarding futureevents, including the likelihood of success of particular initiatives, legaland regulatory challenges, and anticipated recovery of costs.  Therefore, the possibility exists for materiallydifferent reported amounts under different conditions or assumptions.

 

**Cinergy’s** 2003 10-Kincludes a discussion of accounting policies that are significant to thepresentation of **Cinergy’s**financial position and results of operations. These include:

 

•                  Fair Value Accounting for Energy Marketing and Trading;

•                  Retail Customer Revenue Recognition;

•                  Regulatory Accounting;

•                  Pension and Other Postretirement Benefits;

•                  Income Taxes;

•                  Legal and Environmental Contingencies; and

•                  Impairment of Long-lived Assets.

 

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#### **Accounting Changes**

 

##### ***Consolidation of VariableInterest Entities***(VIE)

 

In January 2003, the FASB issued Interpretation 46, whichsignificantly changes the consolidation requirements for traditional specialpurpose entities (SPE) and certain other entities subject to its scope.  This interpretation defines a VIE as (a) anentity that does not have sufficient equity to support its activities withoutadditional financial support or (b) any entity that has equity investors thatdo not have voting rights, do not absorb first dollar losses, or receivereturns.  These entities must beconsolidated when certain criteria are met. The interpretation was originally to be effective as of July 1,2003 for **Cinergy**; however, theFASB subsequently permitted deferral of the effective date to December 31,2003 for traditional SPEs and to March 31, 2004 for all other entitiessubject to the scope of Interpretation 46. We elected to implement Interpretation 46 for traditional SPEs inaccordance with the original implementation date of July 1, 2003 and forall other entities, including certain operating joint ventures, as ofMarch 31, 2004.  The consolidationof certain operating joint ventures as of March 31, 2004, had animmaterial impact on our financial position.

 

**Cinergy** also holdsinterests in several operating joint ventures which do not requireconsolidation.  If all these entitieswere consolidated, their total assets and liabilities would be immaterial toour Condensed Balance Sheets.

 

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**QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK**

 

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

 

This information is provided in, and incorporated by reference from,the “Market Risk Sensitive Instruments and Positions” section in “Item2.  Management’s Discussion and Analysisof Financial Condition and Results of Operations” in “Part I. FinancialInformation”.

 

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**CONTROLS AND PROCEDURES**

 

**ITEM 4. CONTROLS AND PROCEDURES**

 

Disclosurecontrols and procedures are our controls and other procedures that are designedto provide reasonable assurance that information required to be disclosed by usin the reports that we file or submit under the Securities Exchange Act of 1934(Exchange Act) is recorded, processed, summarized, and reported, within thetime periods specified in the Securities and Exchange Commission’s (SEC) rulesand forms.  Disclosure controls andprocedures include, without limitation, controls and procedures designed toprovide reasonable assurance that information required to be disclosed by us inthe reports that we file under the Exchange Act is accumulated and communicatedto our management, including our chief executive officer and chief financialofficer, as appropriate to allow timely decisions regarding requireddisclosure.

 

Under thesupervision and with the participation of our management, including our chiefexecutive officer and chief financial officer, we have evaluated theeffectiveness of our disclosure controls and procedures as of March 31,2004, and, based upon this evaluation, our chief executive officer and chieffinancial officer have concluded that these controls and procedures areeffective in providing reasonable assurance that information requiringdisclosure is recorded, processed, summarized, and reported within thetimeframe specified by the SEC’s rules and forms.

 

Under the supervision and with the participation of our management,including our chief executive officer and chief financial officer, we haveevaluated any change in our internal control over financial reporting (as suchterm is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) duringthe fiscal quarter ended March 31, 2004 and found no change that hasmaterially affected, or is reasonably likely to materially affect, our internalcontrol over financial reporting.

 

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**PART II. OTHER INFORMATION**

 

**ITEM 1. LEGAL PROCEEDINGS**

 

**CLEAN AIR ACT (CAA) LAWSUIT**

 

InNovember 1999, and through subsequent amendments, the United States (U.S.)brought a lawsuit in the United States Federal District Court for the SouthernDistrict of Indiana (District Court) against **Cinergy**,The Cincinnati Gas & Electric Company (**CG&E**),and PSI Energy, Inc. (**PSI**)alleging various violations of the CAA. Specifically, the lawsuit alleges that we violated the CAA by notobtaining Prevention of Significant Deterioration (PSD), Non-Attainment NewSource Review (NSR), and Ohio and Indiana State Implementation Plan (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 U.S. Environmental Protection Agency (EPA) and **Cinergy** relating to alleged violations of Ohio’s SIPprovisions governing particulate matter at Unit 1 at **CG&E’s** W.C. Beckjord Generating Station (BeckjordStation).  The suit seeks (1) injunctiverelief to require installation of pollution control technology on variousgenerating units at **CG&E’s**Beckjord Station and Miami Fort Generating Station (Miami Fort Station), and **PSI’s** Cayuga Generating Station, GallagherGenerating Station (Gallagher Station), Wabash River Generating Station, andGibson Generating Station (Gibson Station), and (2) civil penalties in amountsof up to $27,500 per day for each violation. In addition, three northeast states and two environmental groups haveintervened in the case.  In May 2004, theCity of Louisville, Kentucky filed a motion to intervene in the case withrespect to all claims made by the United States against **PSI** and **Cinergy**regarding the Gallagher Station.  Alsoin May 2004, plaintiffs filed a motion to amend the most recent complaintpursuant to the Court’s pre-trial procedures scheduling order.  This amended complaint added four newprojects to the lawsuit, which had been subject to earlier EPA Notices ofViolation (NOVs).  These new projectsare at stations previously named in the lawsuit.  Plaintiffs also dropped their claims with respect to a number ofprojects, the United States dropped ten projects and the three northeast statesdropped an additional five projects. The case is currently in discovery, and the District Court has set thecase for trial by jury commencing in August 2005.

 

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

 

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

 

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

 

**MANUFACTURED GAS PLANT SITES (MGP)**

 

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

 

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

 

In a combination of lawsuits and NOVs, the 22 sites are in the processof being studied and will be remediated, if necessary.  In 1998 NIPSCO, IGC, and **PSI** entered into Site Participation andCost Sharing Agreements to allocate liability and responsibilities betweenthem.  The Indiana Department ofEnvironmental Management (IDEM) oversees investigation and cleanup of all ofthese sites.  Thus far, **PSI** has primary responsibility forinvestigating, monitoring and, if necessary, remediating nine of thesesites.  In December 2003, **PSI** entered into a voluntary remediationplan with the state of Indiana, providing a formal framework for theinvestigation and cleanup of the sites for which **PSI** has primary responsibility.

 

**PSI** notified itsinsurance carriers of the claims related to MGP sites raised by IDEM and costsincluded in the Site Participation and Cost Sharing Agreements.  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.  The trial court issueda variety of rulings with respect to the claims and defenses in thelitigation.  **PSI**appealed certain adverse rulings to the Indiana Court ofAppeals and the appellate court has remanded the case to the trial court.  **PSI**has filed a petition to transfer the appellate court’s decision to the IndianaSupreme Court for its review.  At thepresent time, **PSI** cannot predictthe outcome of this litigation, including the outcome of the appeals.

 

**PSI** has accruedcosts related to investigation, remediation, and groundwater monitoring forthose sites where such costs are probable and can be reasonably estimated.  We will continue to investigate andremediate the sites as outlined in the voluntary remediation plan.  As additional facts become known andinvestigation is completed, we will assess if the likelihood of incurring 

 

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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** hasperformed site assessments on its sites where we believe MGP activities haveoccurred at some point in the past and found no imminent risk to theenvironment.  At the present time, **CG&E** cannot predict whetherinvestigation and/or remediation will be required in the future at any of thesesites.

 

We currently, and from time to time, are involved in lawsuits, claims,and complaints incidental to the conduct of our business.  In the opinion of management, no suchproceeding is likely to have a material adverse effect on us.

 

See Note 6 of the “Notes to Condensed Financial Statements” in “Item 1.Financial Statements” for further information regarding our commitments andcontingencies.

 

**ITEM2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUERPURCHASES OF EQUITY SECURITIES**

 

The number of shares provided in the table below represent sharesexchanged in connection with employee option exercises and shares purchased bythe plan trustee on behalf of the 401(k) Excess Plan.

 
| **Period**                              |   | **(a) Total  Number of  Shares (or  Units)  Purchased** |   | **(b)  Average  Price Paid per  Share (or  Unit)** |   | **(c) Total  Number of  Shares (or  Units)  Purchased as  Part of  Publicly  Announced  Plans or  Programs** |   | **(d)  Maximum  Number (or  Approximate  Dollar Value)  of Shares (or  Units) that  May Yet Be  Purchased  Under the  Plans or  Programs** |
|-----------------------------------------|--------|---------------------------------------------------------|--------|----------------------------------------------------|--------|--------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------|
| January 1 – January 31   |   | 111,447                                                 |   | $                                                  | 38.71  |                                                                                                         | N/A    |                                                                                                                                       | N/A |
| February 1 – February 29 |   | 377,757                                                 |   | $                                                  | 38.63  |                                                                                                         | N/A    |                                                                                                                                       | N/A |
| March 1 – March 31       |   | 8,769                                                   |   | $                                                  | 40.07  |                                                                                                         | N/A    |                                                                                                                                       | N/A |

 

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**ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**

 

The annual meeting of shareholders of **CinergyCorp.**, was held on May 4, 2004, in Covington, Kentucky.

 

At the meeting, shareholders ratified the selection of Deloitte andTouche, the members of Deloitte Touche Tohmatsu and their respectiveaffiliates, as the Company’s independent auditors and elected three Class Idirectors to the board of **Cinergy Corp.**to serve for three-year terms ending in 2007, as set forth below:

 
| **Directors**       |   | **Votes For** |   | **Votes  Withheld** |   |
|---------------------|--------|---------------|--------|---------------------|--------|
|                |   |          |   |                |   |
| **Class I**         |   |          |   |                |   |
| Michael G. Browning |   | 155,496,837   |   | 3,747,963           |   |
| George C. Juilfs    |   | 156,161,356   |   | 3,083,444           |   |
| Dudley S. Taft      |   | 156,170,459   |   | 3,074,341           |   |

 

In lieu of the annual meeting of shareholders of The Cincinnati Gas& Electric Company (**CG&E**),a resolution was duly adopted via unanimous written consent of **Cinergy Corp.**, **CG&E’s** sole shareholder, effective May 3, 2004 electingthe following members to the Board of Directors for one-year terms expiring in2005:

 

•                  James E. Rogers

•                  R. Foster Duncan

•                  James L. Turner

 

The annual meeting of shareholders of PSI Energy, Inc. (**PSI**) was held on May 4, 2004, in Covington,Kentucky.  Proxies were not solicitedfor the annual meeting.  **Cinergy Corp.** owns all of the 53,913,701outstanding shares, representing a like number of votes, of the common stock of**PSI**.  By unanimous vote, the following members to the Board ofDirectors were elected at the annual meeting for one-year terms expiring in2005:

 

•                  Michael G. Browning

•                  James E. Rogers

•                  Douglas F. Esamann

 

None of the 650,989 outstanding shares, representing 423,331 votes, ofthe preferred stock of **PSI**, werepresent or voted at the annual meeting.

 

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**ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K**

 

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

 
| **Exhibit  Designation**   |   | **Registrant**                              |   | **Nature of  Exhibit**                                                                                                                                                       |   | **Previously  Filed  as Exhibit to:** |
|----------------------------|--------|---------------------------------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------|
|                       |   |                                        |   |                                                                                                                                                                         |   |                                  |
| **Additional****Exhibits** |   |                                        |   |                                                                                                                                                                         |   |                                  |
|                       |   |                                        |   |                                                                                                                                                                         |   |                                  |
| 10-rr                      |   | **Cinergy Corp.**                           |   | Amendment to Cinergy Corp. 401(k) Excess Plan, adopted March 31,  2004, effective January 1, 2004.                                                                 |   |                                  |
|                       |   |                                        |   |                                                                                                                                                                         |   |                                  |
| **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 Exchange Act, as adopted  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.**  |   |                                  |
|                       |   |                                        |   |                                                                                                                                                                         |   |                                  |
| 31-b                       |   | **Cinergy  Corp. CG&E  PSI  ULH&P** |   | **Certification by R. Foster  Duncan pursuant to Rule 13a-14(a)/15d-14(a) of the Exchange Act, as adopted  pursuant to Section 302 of 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 R. Foster Duncan pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.                      |   |                                  |

 

(b)   The following reports on Form 8-K werefurnished or filed during the quarter ended March 31, 2004.

 
| **Date of  Report**   |   | **Registrant**     |   | **Item  Furnished or Filed**                           |
|-----------------------|--------|--------------------|--------|--------------------------------------------------------|
|                  |   |               |   |                                                   |
| January 23, 2004 |   | **Cinergy  Corp.** |   | Item 12. Results of Operations and Financial Condition |

 

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**SIGNATURES**

 

Pursuant to the requirements of the Securities Exchange Act of 1934,each of the Registrants has duly caused this report to be signed on its behalfby the undersigned thereunto duly authorized.

 
|                    | CINERGY CORP.                             |   |
|-------------------------|-------------------------------------------|--------|
|                    | THE CINCINNATI GAS & ELECTRIC COMPANY |   |
|                    | PSI ENERGY, INC.                          |   |
|                    | THE UNION LIGHT, HEAT AND POWER COMPANY   |   |
| Registrants             |
|                    |
|                    |
|                    |
| Date:  May 7, 2004 | /s/ Lynn J. Good                          |   |
|                    |     Lynn J. Good      |   |
|                    | (duly authorized officer                  |   |
|                    | and                                       |   |
|                    | principal accounting officer)             |   |
|                         |                                           |        |  |  |

 

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