** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-Q**

(Mark One)

 

**ý****   QUARTERLY REPORT PURSUANT TOSECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

For the quarterly periodended **September 30, 2004**

or

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

For the transition periodfrom             to             

 
| **Commission  File Number** |   | **Registrant,  State of Incorporation,  Address and Telephone Number**                                                                  |   | **I.R.S.  Employer  Identification No.** |
|-----------------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------|
|                        |   |                                                                                                                                    |   |                                     |
| **1-11377**                 |   | **CINERGY CORP.**

(A Delaware  Corporation)

139 East Fourth Street

Cincinnati, Ohio 45202

(513) 421-9500                            |   | **31-1385023**                           |
|                        |   |                                                                                                                                    |   |                                     |
| **1-1232**                  |   | **THE CINCINNATI GAS &  ELECTRIC COMPANY**

(An Ohio Corporation)

139 East Fourth Street

Cincinnati, Ohio 45202

(513) 421-9500   |   | **31-0240030**                           |
|                        |   |                                                                                                                                    |   |                                     |
| **1-3543**                  |   | **PSI ENERGY, INC.**

(An Indiana  Corporation)

1000 East Main Street

Plainfield, Indiana  46168

(513) 421-9500                      |   | **35-0594457**                           |
|                        |   |                                                                                                                                    |   |                                     |
| **2-7793**                  |   | **THE UNION LIGHT, HEAT AND POWER  COMPANY**

(A Kentucky  Corporation)

139 East Fourth Street

Cincinnati, Ohio 45202

(513) 421-9500 |   | **31-0473080**                           |

 

----

 

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

Yes ý  No o

----

 

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

 

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

 

----

 

As of October 31, 2004, shares of common stock outstanding for eachregistrant were as listed:

 
| **Registrant**                                 | ** ** | **Description**                                | ** ** | **Shares**  |
|------------------------------------------------|------------|------------------------------------------------|------------|-------------|
|                                           |       |                                           |       |        |
| **Cinergy Corp.**                              |       | Par value $.01 per share                       |       | 181,244,979 |
|                                           |       |                                           |       |        |
| **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     |

 

----

 

 

 

----

 

**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**                                                    |       |       |
|              |         |                                                                                            |       |       |
| 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                                              |       |       |
|              |         | 2004  Year to Date Results of Operations - Historical                                           |       |       |
|              |         | Results of Operations -  Future                                                                 |       |       |
|              |         |                                                                                            |       |       |
| 3                 | ** **   | **Quantitative  and Qualitative Disclosures About Market Risk**                                 |       |       |
|              |         |                                                                                            |       |       |
| 4                 | ** **   | **Controls and  Procedures**                                                                    |       |       |
|              |         |                                                                                            |       |       |
|              | ** **   | **PART II.  OTHER INFORMATION**                                                            | ** ** | ** ** |
|              | ** **   | ** **                                                                                      |       |       |
| 1                 | ** **   | **Legal Proceedings**                                                                           |       |       |
|              | ** **   | ** **                                                                                      | ** ** | ** ** |
| 2                 | ** **   | **Unregistered  Sales of Equity Securities and Use of Proceeds**                                |       |       |
|              | ** **   | ** **                                                                                      | ** ** | ** ** |
| 6                 | ** **   | **Exhibits**                                                                                    |       |       |
|              |         |                                                                                            |       |       |
|              | ** **   | **Signatures**                                                                                  |       |       |

 

2

----

 

**CINERGY CORP****.**

**AND SUBSIDIARY COMPANIES**

 

3

----

 

**CINERGY CORP.**

**CONDENSED CONSOLIDATED STATEMENTSOF INCOME**

 
| ** **                                                                                            |   | **Quarter Ended  September 30**                |       | **Year to Date  September 30** |       |
|-------------------------------------------------------------------------------------------------------|--------|------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                                            |   | **2004**                                       | ** ** | 2003                           | ** ** | **2004** | ** ** | 2003 |   |
| ** **                                                                                            |   | ***(in thousands, except per share amounts)*** |       |
| ** **                                                                                            |   | ***(unaudited)***                              |       |
| **Operating  Revenues**                                                                               |   |                                           |       |                           |       |   |   |   |   |
| Electric                                                                                              |   | **$994,074**                                   | ** ** | $920,638                       |       | **$2,764,468** | ** ** | $2,512,954 |   |
| Gas                                                                                                   |   | **65,298**                                     | ** ** | 124,533                        |       | **524,226** | ** ** | 638,378 |   |
| Other                                                                                                 |   | **69,211**                                     | ** ** | 46,806                         |       | **182,284** | ** ** | 142,525 |   |
| **Total  Operating Revenues**                                                                         |   | **1,128,583**                                  | ** ** | 1,091,977                      |       | **3,470,978** | ** ** | 3,293,857 |   |
|                                                                                                  |   | ** **                                     | ** ** |                           |       | ** ** | ** ** |   |   |
|                                                                                                  |   | ** **                                     | ** ** |                           |       | ** ** | ** ** |   |   |
| **Operating  Expenses**                                                                               |   | ** **                                     | ** ** |                           |       | ** ** | ** ** |   |   |
| Fuel and  purchased power                                                                             |   | **333,771**                                    | ** ** | 329,997                        |       | **914,404** | ** ** | 840,332 |   |
| Gas purchased                                                                                         |   | **19,792**                                     | ** ** | 79,582                         |       | **290,728** | ** ** | 368,896 |   |
| Operation and  maintenance                                                                            |   | **412,720**                                    | ** ** | 323,401                        |       | **1,184,451** | ** ** | 985,528 |   |
| Depreciation                                                                                          |   | **122,099**                                    | ** ** | 98,522                         |       | **341,287** | ** ** | 300,145 |   |
| Taxes other than  income taxes                                                                        |   | **57,001**                                     | ** ** | 55,828                         |       | **204,320** | ** ** | 200,535 |   |
| **Total  Operating Expenses**                                                                         |   | **945,383**                                    | ** ** | 887,330                        |       | **2,935,190** | ** ** | 2,695,436 |   |
|                                                                                                  |   | ** **                                     | ** ** |                           |       | ** ** | ** ** |   |   |
|                                                                                                  |   | ** **                                     | ** ** |                           |       | ** ** | ** ** |   |   |
| **Operating  Income**                                                                                 |   | **183,200**                                    | ** ** | 204,647                        |       | **535,788** | ** ** | 598,421 |   |
|                                                                                                  |   | ** **                                     | ** ** |                           |       | ** ** | ** ** |   |   |
|                                                                                                  |   | ** **                                     | ** ** |                           |       | ** ** | ** ** |   |   |
| **Equity  in Earnings of Unconsolidated Subsidiaries**                                                |   | **8,016**                                      | ** ** | 4,956                          |       | **18,095** | ** ** | 11,652 |   |
| **Miscellaneous  Income (Expense) – Net**                                                        |   | **(944**                                       | **)**      | 12,296                         |       | **(11,419** | **)** | 27,678 |   |
| **Interest  Expense**                                                                                 |   | **71,775**                                     | ** ** | 73,905                         |       | **209,446** | ** ** | 193,734 |   |
| **Preferred  Dividend Requirement of Subsidiary Trust**                                               |   | **—**                                     | ** ** | —                         |       | **—** | ** ** | 11,940 |   |
| **Preferred  Dividend Requirements of Subsidiaries**                                                  |   | **858**                                        | ** ** | 858                            |       | **2,574** | ** ** | 2,574 |   |
| ** **                                                                                            |   | ** **                                     | ** ** |                           |       | ** ** | ** ** |   |   |
|                                                                                                  |   | ** **                                     | ** ** |                           |       | ** ** | ** ** |   |   |
| **Income  Before Taxes**                                                                              |   | **117,639**                                    | ** ** | 147,136                        |       | **330,444** | ** ** | 429,503 |   |
|                                                                                                  |   | ** **                                     | ** ** |                           |       | ** ** | ** ** |   |   |
| ** **                                                                                            |   | ** **                                     | ** ** |                           |       | ** ** | ** ** |   |   |
| **Income  Taxes**                                                                                     |   | **24,716**                                     | ** ** | 35,155                         |       | **76,002** | ** ** | 102,121 |   |
|                                                                                                  |   | ** **                                     | ** ** |                           |       | ** ** | ** ** |   |   |
| ** **                                                                                            |   | ** **                                     | ** ** |                           |       | ** ** | ** ** |   |   |
| **Income  Before Discontinued Operations and Cumulative Effect of Changes in Accounting  Principles** |   | **92,923**                                     | ** ** | 111,981                        |       | **254,442** | ** ** | 327,382 |   |
|                                                                                                  |   | ** **                                     | ** ** |                           |       | ** ** | ** ** |   |   |
|                                                                                                  |   | ** **                                     | ** ** |                           |       | ** ** | ** ** |   |   |
| Discontinued  operations, net of tax                                                                  |   | **—**                                     | ** ** | —                         |       | **—** | ** ** | 8,875 |   |
| Cumulative  effect of changes in accounting principles, net of tax (Note 1(d)(*ii*))                  |   | **—**                                     | ** ** | —                         |       | **—** | ** ** | 26,462 |   |
| **Net  Income**                                                                                       |   | **$92,923**                                    | ** ** | $111,981                       |       | **$254,442** | ** ** | $362,719 |   |
|                                                                                                  |   | ** **                                     | ** ** |                           |       | ** ** | ** ** |   |   |
|                                                                                                  |   | ** **                                     | ** ** |                           |       | ** ** | ** ** |   |   |
| **Average  Common Shares Outstanding**                                                                |   | **180,881**                                    | ** ** | 177,751                        |       | **180,129** | ** ** | 175,944 |   |
|                                                                                                  |   | ** **                                     | ** ** |                           |       | ** ** | ** ** |   |   |
|                                                                                                  |   | ** **                                     | ** ** |                           |       | ** ** | ** ** |   |   |
| **Earnings  Per Common Share – Basic** (Note 10)                                                 |   | ** **                                     | ** ** |                           |       | ** ** | ** ** |   |   |
| Income before  discontinued operations and cumulative effect of changes in accounting  principles     |   | **$0.51**                                      | ** ** | $0.63                          |       | **$1.41** | ** ** | $1.86 |   |
| Discontinued  operations, net of tax                                                                  |   | **—**                                     | ** ** | —                         |       | **—** | ** ** | 0.05 |   |
| Cumulative  effect of changes in accounting principles, net of tax                                    |   | **—**                                     | ** ** | —                         |       | **—** | ** ** | 0.15 |   |
| Net income                                                                                            |   | **$0.51**                                      | ** ** | $0.63                          |       | **$1.41** | ** ** | $2.06 |   |
|                                                                                                  |   | ** **                                     | ** ** |                           |       | ** ** | ** ** |   |   |
|                                                                                                  |   | ** **                                     | ** ** |                           |       | ** ** | ** ** |   |   |
| **Earnings  Per Common Share – Diluted** (Note 10)                                               |   | ** **                                     | ** ** |                           |       | ** ** | ** ** |   |   |
| Income before  discontinued operations and cumulative effect of changes in accounting  principles     |   | **$0.50**                                      | ** ** | $0.62                          |       | **$1.39** | ** ** | $1.84 |   |
| Discontinued  operations, net of tax                                                                  |   | **—**                                     | ** ** | —                         |       | **—** | ** ** | 0.05 |   |
| Cumulative  effect of changes in accounting principles, net of tax                                    |   | **—**                                     | ** ** | —                         |       | **—** | ** ** | 0.15 |   |
| Net income                                                                                            |   | **$0.50**                                      | ** ** | $0.62                          |       | **$1.39** | ** ** | $2.04 |   |
|                                                                                                  |   | ** **                                     | ** ** |                           |       | ** ** | ** ** |   |   |
|                                                                                                  |   | ** **                                     | ** ** |                           |       | ** ** | ** ** |   |   |
| **Dividends  Declared Per Common Share**                                                              |   | **$0.47**                                      | ** ** | $0.46                          |       | **$1.41** | ** ** | $1.38 |   |
|                                                                                                  |   | ** **                                     | ** ** |                           |       | ** ** | ** ** |   |   |

 

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

 

4

----

 

**CINERGYCORP.CONDENSED CONSOLIDATED BALANCESHEETS**

 

**ASSETS**

 
| ** **                                                                                                                              | ** ** | **September 30  2004**       | ** **     | December  31  2003 | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|----------------|--------------------|------------|
| ** **                                                                                                                              | ** ** | ***(dollars in thousands)*** | ** **     |
| ** **                                                                                                                              | ** ** | ***(unaudited)***            | ** **     |
|                                                                                                                                    | * *   | * *                     | * *       | * *           | * *   |
| **Current  Assets**                                                                                                                     |       | ** **                   |           |               |       |
| Cash and cash  equivalents                                                                                                              |       | **$**                        | **152,374**    |               | $          | 169,120 |   |
| Restricted  deposits                                                                                                                    |       | **140,944**                  |           | 92,813             |       |
| Notes  receivable, current                                                                                                              |       | **84,171**                   |           | 189,854            |       |
| Accounts  receivable less accumulated provision for doubtful accounts of $5,724 at  September 30, 2004, and $7,884 at December 31, 2003 |       | **822,989**                  |           | 1,074,518          |       |
| Fuel, emission  allowances, and supplies                                                                                                |       | **436,113**                  |           | 357,625            |       |
| Energy risk  management current assets                                                                                                  |       | **469,592**                  |           | 305,058            |       |
| Prepayments and  other                                                                                                                  |       | **127,847**                  |           | 53,609             |       |
| **Total  Current Assets**                                                                                                               |       | **2,234,030**                |           | 2,242,597          |       |
|                                                                                                                                    |       | ** **                   |           |               |       |
|                                                                                                                                    |       | ** **                   |           |               |       |
| **Property,  Plant, and Equipment – at Cost**                                                                                      |       | ** **                   |           |               |       |
| Utility plant in  service                                                                                                               |       | **10,049,768**               |           | 9,732,123          |       |
| Construction  work in progress                                                                                                          |       | **282,488**                  |           | 275,459            |       |
| **Total  Utility Plant**                                                                                                                |       | **10,332,256**               |           | 10,007,582         |       |
| Non-regulated  property, plant, and equipment                                                                                           |       | **4,620,851**                |           | 4,527,943          |       |
| Accumulated  depreciation                                                                                                               |       | **5,159,602**                |           | 4,908,019          |       |
| **Net  Property, Plant, and Equipment**                                                                                                 |       | **9,793,505**                |           | 9,627,506          |       |
|                                                                                                                                    |       | ** **                   |           |               |       |
|                                                                                                                                    |       | ** **                   |           |               |       |
| **Other  Assets**                                                                                                                       |       | ** **                   |           |               |       |
| Regulatory  assets                                                                                                                      |       | **992,917**                  |           | 1,012,151          |       |
| Investments in  unconsolidated subsidiaries                                                                                             |       | **516,732**                  |           | 494,520            |       |
| Energy risk  management non-current assets                                                                                              |       | **136,756**                  |           | 97,334             |       |
| Notes  receivable, non-current                                                                                                          |       | **199,005**                  |           | 213,853            |       |
| Other  investments                                                                                                                      |       | **120,964**                  |           | 184,044            |       |
| Goodwill and  other intangible assets                                                                                                   |       | **61,426**                   |           | 45,349             |       |
| Other                                                                                                                                   |       | **187,995**                  |           | 197,351            |       |
| **Total  Other Assets**                                                                                                                 |       | **2,215,795**                |           | 2,244,602          |       |
|                                                                                                                                    |       | ** **                   |           |               |       |
|                                                                                                                                    |       | ** **                   |           |               |       |
| **Assets  of Discontinued Operations**                                                                                                  |       | **—**                   |           | 4,501              |       |
| ** **                                                                                                                              |       | ** **                   |           |               |       |
| **Total  Assets**                                                                                                                       |       | **$**                        | **14,243,330** |               | $          | 14,119,206 |   |
|                                                                                                                                    |       | ** **                   |           |               |       |

 

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

 

5

----

 

**CINERGY CORP.**

**CONDENSED CONSOLIDATED BALANCESHEETS**

 

**LIABILITIES AND SHAREHOLDERS’ EQUITY**

 
| ** **                                                                                                                                                                                                                                                               | ** ** | **September 30  2004**       | ** **     | December  31  2003 | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|----------------|--------------------|------------|
|                                                                                                                                                                                                                                                                     | * *   | ***(dollars in thousands)*** | * *       |
|                                                                                                                                                                                                                                                                     | * *   | ***(unaudited)***            | * *       |
| **Current  Liabilities**                                                                                                                                                                                                                                                 |       |                         | ** **     |               |       |
| Accounts payable                                                                                                                                                                                                                                                         |       | **$**                        | **1,078,526**  | ** **         | $          | 1,240,423 |   |
| Accrued taxes                                                                                                                                                                                                                                                            |       | **137,099**                  | ** **     | 217,993            |       |
| Accrued interest                                                                                                                                                                                                                                                         |       | **61,191**                   | ** **     | 68,952             |       |
| Notes payable  and other short-term obligations (Note 4)                                                                                                                                                                                                                 |       | **1,196,763**                | ** **     | 351,412            |       |
| Long-term debt  due within one year                                                                                                                                                                                                                                      |       | **220,413**                  | ** **     | 839,103            |       |
| Energy risk  management current liabilities                                                                                                                                                                                                                              |       | **396,148**                  | ** **     | 296,122            |       |
| Other                                                                                                                                                                                                                                                                    |       | **145,072**                  | ** **     | 107,438            |       |
| **Total  Current Liabilities**                                                                                                                                                                                                                                           |       | **3,235,212**                | ** **     | 3,121,443          |       |
|                                                                                                                                                                                                                                                                     |       | ** **                   | ** **     |               |       |
|                                                                                                                                                                                                                                                                     |       | ** **                   | ** **     |               |       |
| **Non-Current  Liabilities**                                                                                                                                                                                                                                             |       | ** **                   | ** **     |               |       |
| Long-term debt  (Note 3)                                                                                                                                                                                                                                                 |       | **3,935,936**                | ** **     | 4,131,909          |       |
| Deferred income  taxes                                                                                                                                                                                                                                                   |       | **1,648,069**                | ** **     | 1,557,981          |       |
| Unamortized  investment tax credits                                                                                                                                                                                                                                      |       | **101,977**                  | ** **     | 108,884            |       |
| Accrued pension  and other postretirement benefit costs                                                                                                                                                                                                                  |       | **602,698**                  | ** **     | 662,834            |       |
| Accrued cost of  removal                                                                                                                                                                                                                                                 |       | **520,844**                  | ** **     | 490,856            |       |
| Energy risk  management non-current liabilities                                                                                                                                                                                                                          |       | **133,328**                  | ** **     | 64,861             |       |
| Other                                                                                                                                                                                                                                                                    |       | **221,509**                  | ** **     | 205,344            |       |
| **Total  Non-Current Liabilities**                                                                                                                                                                                                                                       |       | **7,164,361**                | ** **     | 7,222,669          |       |
|                                                                                                                                                                                                                                                                     |       | ** **                   | ** **     |               |       |
|                                                                                                                                                                                                                                                                     |       | ** **                   | ** **     |               |       |
| **Liabilities  of Discontinued Operations**                                                                                                                                                                                                                              |       | **—**                   | ** **     | 11,594             |       |
|                                                                                                                                                                                                                                                                     |       | ** **                   | ** **     |               |       |
| **Commitments  and Contingencies** (Note 6)                                                                                                                                                                                                                              |       | ** **                   | ** **     |               |       |
|                                                                                                                                                                                                                                                                     |       | ** **                   | ** **     |               |       |
| **Total  Liabilities**                                                                                                                                                                                                                                                   |       | **10,399,573**               | ** **     | 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 – 181,122,065  at September 30, 2004, and 178,438,369 at December 31, 2003; outstanding  shares – 180,995,556 at September 30, 2004, and 178,336,854 at December 31,  2003 |       | **1,811**                    | ** **     | 1,784              |       |
| Paid-in capital                                                                                                                                                                                                                                                          |       | **2,272,651**                | ** **     | 2,195,985          |       |
| Retained  earnings                                                                                                                                                                                                                                                       |       | **1,551,848**                | ** **     | 1,551,003          |       |
| Treasury shares  at cost – 126,509 shares at September 30, 2004, and 101,515 shares at  December 31, 2003                                                                                                                                                           |       | **(4,026**                   | **)**          | (3,255             | )          |
| Accumulated  other comprehensive loss                                                                                                                                                                                                                                    |       | **(41,345**                  | **)**          | (44,835            | )          |
| **Total  Common Stock Equity**                                                                                                                                                                                                                                           |       | **3,780,939**                | ** **     | 3,700,682          |       |
|                                                                                                                                                                                                                                                                     |       | ** **                   | ** **     |               |       |
|                                                                                                                                                                                                                                                                     |       | ** **                   | ** **     |               |       |
| **Total  Liabilities and Shareholders’ Equity**                                                                                                                                                                                                                     |       | **$**                        | **14,243,330** | ** **         | $          | 14,119,206 |   |
|                                                                                                                                                                                                                                                                     |       | ** **                   | ** **     |               |       |

 

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

 

6

----

 

**CINERGY CORP.**

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

 
| ** **                                                          | ** **   | **Common  Stock**                                      | ** **   | **Paid-in  Capital** | ** **   | **Retained  Earnings** | ** **   | **Treasury  Stock** | ** **    | **Accumulated  Other  Comprehensive  Income (Loss)** | ** **   | **Total  Common  Stock  Equity** | ** **   |
|---------------------------------------------------------------------|--------------|--------------------------------------------------------|--------------|----------------------|--------------|------------------------|--------------|---------------------|---------------|------------------------------------------------------|--------------|----------------------------------|--------------|
|                                                                | *** *** | ***(dollars in thousands, except per share amounts)*** | *** *** |
|                                                                | *** *** | ***(unaudited)***                                      | *** *** |
|                                                                | *** *** | *** ***                                           | *** *** | *** ***         | *** *** | *** ***           | *** *** | *** ***        | *** ***  | *** ***                                         | *** *** | *** ***                     | *** *** |
| **Quarter  Ended September 30, 2004**                               | ** **   | ** **                                             | ** **   | ** **           | ** **   | ** **             | ** **   | ** **          | ** **    | ** **                                           | ** **   | ** **                       | ** **   |
| ** **                                                          | ** **   | ** **                                             | ** **   | ** **           | ** **   | ** **             | ** **   | ** **          | ** **    | ** **                                           | ** **   | ** **                       | ** **   |
| **Balance  at July 1, 2004 (180,323,246 shares)**              | ** **   | **$**                                                  | **1,804**    | ** **           | **$**        | **2,248,084**          | ** **   | **$**               | **1,543,883** | ** **                                           | **$**        | **(3,966**                       | **)**        | **$** | **(39,804** | **)** | **$** | **3,750,001** | ** ** |
| **Comprehensive  income:**                                          | ** **   | ** **                                             | ** **   | ** **           | ** **   | ** **             | ** **   | ** **          | ** **    | ** **                                           | ** **   | ** **                       | ** **   |
| **Net  income**                                                     | ** **   | ** **                                             | ** **   | ** **           | ** **   | **92,923**             | ** **   | ** **          | ** **    | ** **                                           | ** **   | **92,923**                       | ** **   |
| **Other  comprehensive loss, net of tax effect of $1,162**          | ** **   | ** **                                             | ** **   | ** **           | ** **   | ** **             | ** **   | ** **          | ** **    | ** **                                           | ** **   | ** **                       | ** **   |
| **Foreign  currency translation adjustment**                        | ** **   | ** **                                             | ** **   | ** **           | ** **   | ** **             | ** **   | ** **          | ** **    | **(741**                                             | **)**        | **(741**                         | **)**        |
| **Unrealized  loss on investment trusts**                           | ** **   | ** **                                             | ** **   | ** **           | ** **   | ** **             | ** **   | ** **          | ** **    | **(662**                                             | **)**        | **(662**                         | **)**        |
| **Cash  flow hedges**                                               | ** **   | ** **                                             | ** **   | ** **           | ** **   | ** **             | ** **   | ** **          | ** **    | **(138**                                             | **)**        | **(138**                         | **)**        |
| **Total  comprehensive income**                                     | ** **   | ** **                                             | ** **   | ** **           | ** **   | ** **             | ** **   | ** **          | ** **    | ** **                                           | ** **   | **91,382**                       | ** **   |
| ** **                                                          | ** **   | ** **                                             | ** **   | ** **           | ** **   | ** **             | ** **   | ** **          | ** **    | ** **                                           | ** **   | ** **                       | ** **   |
| **Issuance  of common stock – net (675,273 shares)**      | ** **   | **7**                                                  | ** **   | **20,989**           | ** **   | ** **             | ** **   | ** **          | ** **    | ** **                                           | ** **   | **20,996**                       | ** **   |
| **Treasury  shares purchased (2,963 shares)**                  | ** **   | ** **                                             | ** **   | ** **           | ** **   | ** **             | ** **   | **(60**             | **)**         | ** **                                           | ** **   | **(60**                          | **)**        |
| **Dividends  on common stock ($0.47 per share)**          | ** **   | ** **                                             | ** **   | ** **           | ** **   | **(84,873**            | **)**        | ** **          | ** **    | ** **                                           | ** **   | **(84,873**                      | **)**        |
| **Other**                                                           | ** **   | ** **                                             | ** **   | **3,578**            | ** **   | **(85**                | **)**        | ** **          | ** **    | ** **                                           | ** **   | **3,493**                        | ** **   |
| ** **                                                          | ** **   | ** **                                             | ** **   | ** **           | ** **   | ** **             | ** **   | ** **          | ** **    | ** **                                           | ** **   | ** **                       | ** **   |
| **Ending  balance at September 30, 2004 (180,995,556 shares)** | ** **   | **$**                                                  | **1,811**    | ** **           | **$**        | **2,272,651**          | ** **   | **$**               | **1,551,848** | ** **                                           | **$**        | **(4,026**                       | **)**        | **$** | **(41,345** | **)** | **$** | **3,780,939** | ** ** |
|                                                                | ** **   | ** **                                             | ** **   | ** **           | ** **   | ** **             | ** **   | ** **          | ** **    | ** **                                           | ** **   | ** **                       | ** **   |
|                                                                | ** **   |                                                   |         |                 |         |                   |         |                |          |                                                 |         |                             |         |
| Quarter Ended September  30, 2003                                   |         |                                                   |         |                 |         |                   |         |                |          |                                                 |         |                             |         |
|                                                                |         |                                                   |         |                 |         |                   |         |                |          |                                                 |         |                             |         |
| Balance at July  1, 2003 (176,947,118 shares)                  |         | $                                                      | 1,769        |                 | $            | 2,135,968              |         | $                   | 1,495,502     |                                                 | $            | —                           |         | $ | (24,423 | ) | $ | 3,608,816 |   |
| Comprehensive  income:                                              |         |                                                   |         |                 |         |                   |         |                |          |                                                 |         |                             |         |
| Net income                                                          |         |                                                   |         |                 |         | 111,981                |         |                |          |                                                 |         | 111,981                          |         |
| Other  comprehensive income (loss), net of tax effect of $2,532     |         |                                                   |         |                 |         |                   |         |                |          |                                                 |         |                             |         |
| Foreign currency  translation adjustment                            |         |                                                   |         |                 |         |                   |         |                |          | (8,365                                               | )            | (8,365                           | )            |
| Minimum pension  liability adjustment                               |         |                                                   |         |                 |         |                   |         |                |          | 26                                                   |         | 26                               |         |
| Unrealized gain  on investment trusts                               |         |                                                   |         |                 |         |                   |         |                |          | 32                                                   |         | 32                               |         |
| Cash flow hedges                                                    |         |                                                   |         |                 |         |                   |         |                |          | 3,050                                                |         | 3,050                            |         |
| Total  comprehensive income                                         |         |                                                   |         |                 |         |                   |         |                |          |                                                 |         | 106,724                          |         |
|                                                                |         |                                                   |         |                 |         |                   |         |                |          |                                                 |         |                             |         |
| Issuance of  common stock – net (952,704 shares)          |         | 10                                                     |         | 31,824               |         |                   |         |                |          |                                                 |         | 31,834                           |         |
| Dividends on  common stock ($0.46 per share)              |         |                                                   |         |                 |         | (81,725                | )            |                |          |                                                 |         | (81,725                          | )            |
| Other                                                               |         |                                                   |         | 2,600                |         | (31                    | )            |                |          |                                                 |         | 2,569                            |         |
|                                                                |         |                                                   |         |                 |         |                   |         |                |          |                                                 |         |                             |         |
| Ending balance  at September 30, 2003 (177,899,822 shares)     |         | $                                                      | 1,779        |                 | $            | 2,170,392              |         | $                   | 1,525,727     |                                                 | $            | —                           |         | $ | (29,680 | ) | $ | 3,668,218 |   |
|                                                                |         |                                                   |         |                 |         |                   |         |                |          |                                                 |         |                             |         |

 

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

 

7

----

 

**CINERGY CORP.**

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

**(Continued)**

 
| ** **                                                                                            | ** **   | **Common  Stock**                                      | ** **   | **Paid-in  Capital** | ** **   | **Retained  Earnings** | ** **   | **Treasury  Stock** | ** **    | **Accumulated  Other  Comprehensive  Income (Loss)** | ** **   | **Total  Common  Stock  Equity** | ** **   |
|-------------------------------------------------------------------------------------------------------|--------------|--------------------------------------------------------|--------------|----------------------|--------------|------------------------|--------------|---------------------|---------------|------------------------------------------------------|--------------|----------------------------------|--------------|
|                                                                                                  | *** *** | ***(dollars in thousands, except per share amounts)*** | *** *** |
|                                                                                                  | *** *** | ***(unaudited)***                                      | *** *** |
|                                                                                                  | *** *** | *** ***                                           | *** *** | *** ***         | *** *** | *** ***           | *** *** | *** ***        | *** ***  | *** ***                                         | *** *** | *** ***                     | *** *** |
| **Year  to Date September 30, 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**                                                                                       | ** **   | ** **                                             | ** **   | ** **           | ** **   | **254,442**            | ** **   | ** **          | ** **    | ** **                                           | ** **   | **254,442**                      | ** **   |
| **Other  comprehensive income (loss), net of tax effect of $(1,928)**                                 | ** **   | ** **                                             | ** **   | ** **           | ** **   | ** **             | ** **   | ** **          | ** **    | ** **                                           | ** **   | ** **                       | ** **   |
| **Foreign  currency translation adjustment**                                                          | ** **   | ** **                                             | ** **   | ** **           | ** **   | ** **             | ** **   | ** **          | ** **    | **691**                                              | ** **   | **691**                          | ** **   |
| **Unrealized  loss on investment trusts**                                                             | ** **   | ** **                                             | ** **   | ** **           | ** **   | ** **             | ** **   | ** **          | ** **    | **(166**                                             | **)**        | **(166**                         | **)**        |
| **Cash  flow hedges**                                                                                 | ** **   | ** **                                             | ** **   | ** **           | ** **   | ** **             | ** **   | ** **          | ** **    | **2,965**                                            | ** **   | **2,965**                        | ** **   |
| **Total  comprehensive income**                                                                       | ** **   | ** **                                             | ** **   | ** **           | ** **   | ** **             | ** **   | ** **          | ** **    | ** **                                           | ** **   | **257,932**                      | ** **   |
| ** **                                                                                            | ** **   | ** **                                             | ** **   | ** **           | ** **   | ** **             | ** **   | ** **          | ** **    | ** **                                           | ** **   | ** **                       | ** **   |
| **Issuance  of common stock – net (2,683,696 shares)**                                           | ** **   | **27**                                                 | ** **   | **67,200**           | ** **   | ** **             | ** **   | ** **          | ** **    | ** **                                           | ** **   | **67,227**                       | ** **   |
| **Treasury  shares purchased (24,994 shares)**                                                        | ** **   | ** **                                             | ** **   | ** **           | ** **   | ** **             | ** **   | **(771**            | **)**         | ** **                                           | ** **   | **(771**                         | **)**        |
| **Dividends  on common stock ($1.41 per share)**                                                      | ** **   | ** **                                             | ** **   | ** **           | ** **   | **(253,418**           | **)**        | ** **          | ** **    | ** **                                           | ** **   | **(253,418**                     | **)**        |
| **Other**                                                                                             | ** **   | ** **                                             | ** **   | **9,466**            | ** **   | **(179**               | **)**        | ** **          | ** **    | ** **                                           | ** **   | **9,287**                        | ** **   |
| ** **                                                                                            | ** **   | ** **                                             | ** **   | ** **           | ** **   | ** **             | ** **   | ** **          | ** **    | ** **                                           | ** **   | ** **                       | ** **   |
| **Ending  balance at September 30, 2004 (180,995,556 shares)**                                        | ** **   | **$**                                                  | **1,811**    | ** **           | **$**        | **2,272,651**          | ** **   | **$**               | **1,551,848** | ** **                                           | **$**        | **(4,026**                       | **)**        | **$** | **(41,345** | **)** | **$** | **3,780,939** | ** ** |
|                                                                                                  |         | ** **                                             | ** **   | ** **           | ** **   | ** **             | ** **   | ** **          | ** **    | ** **                                           | ** **   | ** **                       | ** **   |
|                                                                                                  |         |                                                   |         |                 |         |                   |         |                |          |                                                 |         |                             |         |
| Year to Date  September 30, 2003                                                                      |         |                                                   |         |                 |         |                   |         |                |          |                                                 |         |                             |         |
|                                                                                                  |         | $                                                      | 1,687        |                 | $            | 1,918,136              |         | $                   | 1,403,453     |                                                 | $            | —                           |         | $ | (29,800 | ) | $ | 3,293,476 |   |
| Balance at  January 1, 2003 (168,663,115 shares)                                                      |         |                                                   |         |                 |         |                   |         |                |          |                                                 |         |                             |         |
| Comprehensive  income:                                                                                |         |                                                   |         |                 |         |                   |         |                |          |                                                 |         |                             |         |
| Net income                                                                                            |         |                                                   |         |                 |         | 362,719                |         |                |          |                                                 |         | 362,719                          |         |
| Other  comprehensive income (loss), net of tax effect of $(26)                                        |         |                                                   |         |                 |         |                   |         |                |          |                                                 |         |                             |         |
| Foreign currency  translation adjustment, net of reclassification adjustments of $6,134 (net of  tax) |         |                                                   |         |                 |         |                   |         |                |          | (2,312                                               | )            | (2,312                           | )            |
| Minimum pension  liability adjustment                                                                 |         |                                                   |         |                 |         |                   |         |                |          | 26                                                   |         | 26                               |         |
| Unrealized gain  on investment trusts                                                                 |         |                                                   |         |                 |         |                   |         |                |          | 2,551                                                |         | 2,551                            |         |
| Cash flow hedges                                                                                      |         |                                                   |         |                 |         |                   |         |                |          | (145                                                 | )            | (145                             | )            |
| Total  comprehensive income                                                                           |         |                                                   |         |                 |         |                   |         |                |          |                                                 |         | 362,839                          |         |
|                                                                                                  |         |                                                   |         |                 |         |                   |         |                |          |                                                 |         |                             |         |
| Issuance of  common stock – net (9,236,707 shares)                                               |         | 92                                                     |         | 251,179              |         |                   |         |                |          |                                                 |         | 251,271                          |         |
| Dividends on  common stock ($1.38 per share)                                                          |         |                                                   |         |                 |         | (240,402               | )            |                |          |                                                 |         | (240,402                         | )            |
| Other                                                                                                 |         |                                                   |         | 1,077                |         | (43                    | )            |                |          |                                                 |         | 1,034                            |         |
|                                                                                                  |         |                                                   |         |                 |         |                   |         |                |          |                                                 |         |                             |         |
| Ending balance  at September 30, 2003 (177,899,822 shares)                                            |         | $                                                      | 1,779        |                 | $            | 2,170,392              |         | $                   | 1,525,727     |                                                 | $            | —                           |         | $ | (29,680 | ) | $ | 3,668,218 |   |
|                                                                                                  |         |                                                   |         |                 |         |                   |         |                |          |                                                 |         |                             |         |

 

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

 

8

----

 

**CINERGY CORP.**

**CONDENSED CONSOLIDATED STATEMENTSOF CASH FLOWS**

 
| ** **                                                                            | ** **   | **Year to Date  September 30** | ** **   |
|---------------------------------------------------------------------------------------|--------------|--------------------------------|--------------|
| ** **                                                                            | ** **   | **2004**                       | ** **   | 2003 | ** ** |
| ** **                                                                            | ** **   | ** **                     | ** **   |   | ** ** |
| *** ***                                                                          | *** *** | ***(dollars in thousands)***   | *** *** |
| *** ***                                                                          | *** *** | ***(unaudited)***              | *** *** |
| **Cash  Flows from Continuing Operations**                                            |         |                           |         |   |   |
| **Operating  Activities**                                                             |         |                           |         |   |   |
| Net income                                                                            |         | **$**                          | **254,442**  | ** ** | $ | 362,719 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities:    |         | ** **                     | ** **   |   |   |
| Depreciation                                                                          |         | **341,287**                    | ** **   | 300,145 |   |
| Income of  discontinued operations, net of tax                                        |         | **—**                     | ** **   | (8,875 | ) |
| Loss on  impairment or disposal of subsidiaries and investments, net                  |         | **38,268**                     | ** **   | — |   |
| Cumulative  effect of changes in accounting principles, net of tax                    |         | **—**                     | ** **   | (26,462 | ) |
| Change in net  position of energy risk management activities                          |         | **(35,463**                    | **)**        | (18,097 | ) |
| Deferred income  taxes and investment tax credits – net                          |         | **81,649**                     | ** **   | 35,828 |   |
| Equity in  earnings of unconsolidated subsidiaries                                    |         | **(18,095**                    | **)**        | (11,652 | ) |
| Allowance for  equity funds used during construction                                  |         | **(1,122**                     | **)**        | (7,111 | ) |
| Regulatory  assets deferrals                                                          |         | **(55,877**                    | **)**        | (47,863 | ) |
| Regulatory  assets amortization                                                       |         | **74,176**                     | ** **   | 74,277 |   |
| Accrued pension  and other postretirement benefit costs                               |         | **(60,136**                    | **)**        | (19,792 | ) |
| Deferred costs  under gas cost recovery mechanism                                     |         | **16,762**                     | ** **   | (31,803 | ) |
| Cost of removal                                                                       |         | **(13,037**                    | **)**        | (10,658 | ) |
| Changes in  current assets and current liabilities:                                   |         | ** **                     | ** **   |   |   |
| Accounts and  notes receivable                                                        |         | **358,465**                    | ** **   | 338,099 |   |
| Fuel, emission  allowances, and supplies                                              |         | **(78,502**                    | **)**        | (3,288 | ) |
| Prepayments                                                                           |         | **(70,124**                    | **)**        | (29,923 | ) |
| Accounts payable                                                                      |         | **(161,574**                   | **)**        | (364,181 | ) |
| Accrued taxes  and interest                                                           |         | **(88,347**                    | **)**        | (15,069 | ) |
| Other assets                                                                          |         | **(14,726**                    | **)**        | 11,265 |   |
| Other liabilities                                                                     |         | **68,087**                     | ** **   | 58,130 |   |
| **Net  cash provided by operating activities**                                        |         | **636,133**                    | ** **   | 585,689 |   |
|                                                                                  |         | ** **                     | ** **   |   |   |
| **Financing  Activities**                                                             |         | ** **                     | ** **   |   |   |
| Change in  short-term debt                                                            |         | **783,258**                    | ** **   | (332,414 | ) |
| Issuance of  long-term debt                                                           |         | **—**                     | ** **   | 688,166 |   |
| Redemption of  long-term debt                                                         |         | **(824,411**                   | **)**        | (187,873 | ) |
| Issuance of  common stock                                                             |         | **67,227**                     | ** **   | 251,271 |   |
| Dividends on  common stock                                                            |         | **(253,418**                   | **)**        | (240,402 | ) |
| **Net  cash provided by (used in) financing activities**                              |         | **(227,344**                   | **)**        | 178,748 |   |
|                                                                                  |         | ** **                     | ** **   |   |   |
| **Investing  Activities**                                                             |         | ** **                     | ** **   |   |   |
| Construction  expenditures (less allowance for equity funds used during construction) |         | **(473,354**                   | **)**        | (498,013 | ) |
| Proceeds from  notes receivable                                                       |         | **12,966**                     | ** **   | 5,076 |   |
| Withdrawal of  restricted cash held on deposit                                        |         | **14,861**                     | ** **   | — |   |
| Acquisitions and  other investments                                                   |         | **(9,734**                     | **)**        | (36,464 | ) |
| Proceeds from disposition  of subsidiaries and investments                            |         | **29,726**                     | ** **   | 51,252 |   |
| **Net  cash used in investing activities**                                            |         | **(425,535**                   | **)**        | (478,149 | ) |
|                                                                                  |         | ** **                     | ** **   |   |   |
| **Net  increase (decrease) in cash and cash equivalents from continuing operations**  |         | **(16,746**                    | **)**        | 286,288 |   |
| **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**            |         | **$**                          | **152,374**  | ** ** | $ | 486,400 |   |
|                                                                                  |         | ** **                     | ** **   |   |   |
| **Cash  Flows from Discontinued Operations**                                          |         | ** **                     | ** **   |   |   |
| Operating  activities                                                                 |         | **$**                          | **(7,093**   | **)** | $ | (7,285 | ) |
| Financing  activities                                                                 |         | **7,093**                      | ** **   | (13,484 | ) |
| Investing  activities                                                                 |         | **—**                     | ** **   | (202 | ) |
| **Net  decrease in cash and cash equivalents from discontinued operations**           |         | **—**                     | ** **   | (20,971 | ) |
| **Cash  and cash equivalents from discontinued operations at beginning of period**    |         | **—**                     | ** **   | 20,971 |   |
| **Cash  and cash equivalents from discontinued operations at end of period**          |         | **$**                          | **—**   | ** ** | $ | — |   |
|                                                                                  |         | ** **                     | ** **   |   |   |
| **Supplemental  Disclosure of Cash Flow Information**                                 |         | ** **                     | ** **   |   |   |
| Cash paid during  the period for:                                                     |         | ** **                     | ** **   |   |   |
| Interest (net of  amount capitalized)                                                 |         | **$**                          | **219,100**  | ** ** | $ | 182,108 |   |
| Income taxes                                                                          |         | **$**                          | **46,272**   | ** ** | $ | 90,281 |   |
| Non-cash  financing activities:                                                       |         | ** **                     | ** **   |   |   |
| Issuance of debt  securities held as restricted cash                                  |         | **$**                          | **54,890**   | ** ** | $ | — |   |

 

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

 

9

----

 

**THE CINCINNATIGAS** &ELECTRIC COMPANY

**AND SUBSIDIARY COMPANIES**

 

10

----

 

**THE CINCINNATI GAS & ELECTRICCOMPANY**

**CONDENSEDCONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME**

 
| ** **                                                                           | ** **   | **Quarter Ended  September 30** | ** **   | **Year to Date  September 30** | ** ** |
|--------------------------------------------------------------------------------------|--------------|---------------------------------|--------------|--------------------------------|------------|
| ** **                                                                           | ** **   | **2004**                        | ** **   | 2003                           | ** ** | **2004** | ** ** | 2003 | ** ** |
| *** ***                                                                         | *** *** | ***(dollars in thousands)***    | *** *** |
| *** ***                                                                         | *** *** | ***(unaudited)***               | *** *** |
| * *                                                                             | * *     | * *                        | * *     | * *                       | * *   | * * | * * | * * | * * |
| **Operating  Revenues**                                                              |         |                            |         |                           |       |   |   |   |   |
| Electric                                                                             |         | **$**                           | **493,742**  | ** **                     | $          | 474,840 |   | **$** | **1,386,625** | ** ** | $ | 1,300,859 |   |
| Gas                                                                                  |         | **60,055**                      | ** **   | 66,399                         |       | **478,358** | ** ** | 426,986 |   |
| **Total  Operating Revenues**                                                        |         | **553,797**                     | ** **   | 541,239                        |       | **1,864,983** | ** ** | 1,727,845 |   |
|                                                                                 |         | ** **                      | ** **   |                           |       | ** ** | ** ** |   |   |
| ** **                                                                           |         | ** **                      | ** **   |                           |       | ** ** | ** ** |   |   |
| **Operating  Expenses**                                                              |         | ** **                      | ** **   |                           |       | ** ** | ** ** |   |   |
| Fuel and  purchased power                                                            |         | **155,963**                     | ** **   | 144,794                        |       | **426,754** | ** ** | 381,615 |   |
| Gas purchased                                                                        |         | **19,721**                      | ** **   | 32,223                         |       | **290,656** | ** ** | 252,074 |   |
| Operation and  maintenance                                                           |         | **166,589**                     | ** **   | 133,466                        |       | **482,248** | ** ** | 394,156 |   |
| Depreciation                                                                         |         | **45,943**                      | ** **   | 42,542                         |       | **135,806** | ** ** | 142,119 |   |
| Taxes other than  income taxes                                                       |         | **45,316**                      | ** **   | 44,553                         |       | **158,816** | ** ** | 154,810 |   |
| **Total  Operating Expenses**                                                        |         | **433,532**                     | ** **   | 397,578                        |       | **1,494,280** | ** ** | 1,324,774 |   |
|                                                                                 |         | ** **                      | ** **   |                           |       | ** ** | ** ** |   |   |
|                                                                                 |         | ** **                      | ** **   |                           |       | ** ** | ** ** |   |   |
| **Operating  Income**                                                                |         | **120,265**                     | ** **   | 143,661                        |       | **370,703** | ** ** | 403,071 |   |
|                                                                                 |         | ** **                      | ** **   |                           |       | ** ** | ** ** |   |   |
|                                                                                 |         | ** **                      | ** **   |                           |       | ** ** | ** ** |   |   |
| **Miscellaneous  Income – Net**                                                 |         | **7,204**                       | ** **   | 9,654                          |       | **13,247** | ** ** | 23,137 |   |
| **Interest  Expense**                                                                |         | **24,083**                      | ** **   | 29,514                         |       | **68,934** | ** ** | 84,781 |   |
| ** **                                                                           |         | ** **                      | ** **   |                           |       | ** ** | ** ** |   |   |
| ** **                                                                           |         | ** **                      | ** **   |                           |       | ** ** | ** ** |   |   |
| **Income  Before Taxes**                                                             |         | **103,386**                     | ** **   | 123,801                        |       | **315,016** | ** ** | 341,427 |   |
| ** **                                                                           |         | ** **                      | ** **   |                           |       | ** ** | ** ** |   |   |
| ** **                                                                           |         | ** **                      | ** **   |                           |       | ** ** | ** ** |   |   |
| **Income  Taxes**                                                                    |         | **39,313**                      | ** **   | 44,938                         |       | **118,179** | ** ** | 125,347 |   |
| ** **                                                                           |         | ** **                      | ** **   |                           |       | ** ** | ** ** |   |   |
| ** **                                                                           |         | ** **                      | ** **   |                           |       | ** ** | ** ** |   |   |
| **Income  Before Cumulative Effect of Changes in Accounting Principles**             |         | **64,073**                      | ** **   | 78,863                         |       | **196,837** | ** ** | 216,080 |   |
|                                                                                 |         | ** **                      | ** **   |                           |       | ** ** | ** ** |   |   |
|                                                                                 |         | ** **                      | ** **   |                           |       | ** ** | ** ** |   |   |
| Cumulative  effect of changes in accounting principles, net of tax (Note 1(d)(*ii*)) |         | **—**                      | ** **   | —                         |       | **—** | ** ** | 30,938 |   |
|                                                                                 |         | ** **                      | ** **   |                           |       | ** ** | ** ** |   |   |
| **Net  Income**                                                                      |         | **$**                           | **64,073**   | ** **                     | $          | 78,863 |   | **$** | **196,837** | ** ** | $ | 247,018 |   |
| ** **                                                                           |         | ** **                      | ** **   |                           |       | ** ** | ** ** |   |   |
| **Preferred  Dividend Requirement**                                                  |         | **211**                         | ** **   | 211                            |       | **634** | ** ** | 634 |   |
| ** **                                                                           |         | ** **                      | ** **   |                           |       | ** ** | ** ** |   |   |
| **Net  Income Applicable to Common Stock**                                           |         | **$**                           | **63,862**   | ** **                     | $          | 78,652 |   | **$** | **196,203** | ** ** | $ | 246,384 |   |
|                                                                                 |         | ** **                      | ** **   |                           |       | ** ** | ** ** |   |   |
|                                                                                 |         | ** **                      | ** **   |                           |       | ** ** | ** ** |   |   |
| **Net  Income**                                                                      |         | **$**                           | **64,073**   | ** **                     | $          | 78,863 |   | **$** | **196,837** | ** ** | $ | 247,018 |   |
| ** **                                                                           |         | ** **                      | ** **   |                           |       | ** ** | ** ** |   |   |
| **Other  Comprehensive Income (Loss), Net of Tax**                                   |         | **(2**                          | **)**        | 2,720                          |       | **2,881** | ** ** | (307 | ) |
| ** **                                                                           |         | ** **                      | ** **   |                           |       | ** ** | ** ** |   |   |
| **Comprehensive  Income**                                                            |         | **$**                           | **64,071**   | ** **                     | $          | 81,583 |   | **$** | **199,718** | ** ** | $ | 246,711 |   |
| ** **                                                                           |         | ** **                      | ** **   |                           |       | ** ** | ** ** |   |   |

 

**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 COMPANY**

**CONDENSEDCONSOLIDATED BALANCE****SHEETS**

 

**ASSETS**

 
| ** **                                                                                                                                  | ** **   | **September 30  2004**       | ** **    | December  31  2003 | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------|--------------|------------------------------|---------------|--------------------|------------|
| *** ***                                                                                                                                | *** *** | ***(dollars in thousands)*** | *** ***  |
| *** ***                                                                                                                                | *** *** | ***(unaudited)***            | *** ***  |
| * *                                                                                                                                    | * *     | * *                     | * *      | * *           | * *   |
| **Current  Assets**                                                                                                                         |         |                         |          |               |       |
| Cash and cash  equivalents                                                                                                                  |         | **$**                        | **9,225**     | ** **         | $          | 15,842 |   |
| Restricted  deposits                                                                                                                        |         | **120**                      | ** **    | 137                |       |
| Notes receivable  from affiliated companies                                                                                                 |         | **33,534**                   | ** **    | 110,149            |       |
| Accounts  receivable less accumulated provision for doubtful accounts of  $984 at September 30, 2004, and $1,602 at  December 31, 2003 |         | **210,693**                  | ** **    | 107,733            |       |
| Accounts  receivable from affiliated companies                                                                                              |         | **48,243**                   | ** **    | 58,406             |       |
| Fuel, emission  allowances, and supplies                                                                                                    |         | **185,720**                  | ** **    | 135,948            |       |
| Energy risk  management current assets                                                                                                      |         | **178,155**                  | ** **    | 72,830             |       |
| Prepayments and  other                                                                                                                      |         | **51,697**                   | ** **    | 15,049             |       |
| **Total  Current Assets**                                                                                                                   |         | **717,387**                  | ** **    | 516,094            |       |
|                                                                                                                                        |         | ** **                   | ** **    |               |       |
|                                                                                                                                        |         | ** **                   | ** **    |               |       |
| **Property,  Plant, and Equipment – at Cost**                                                                                          |         | ** **                   | ** **    |               |       |
| Utility plant in  service                                                                                                                   |         | ** **                   | ** **    |               |       |
| Electric                                                                                                                                    |         | **2,232,418**                | ** **    | 2,155,457          |       |
| Gas                                                                                                                                         |         | **1,155,415**                | ** **    | 1,104,797          |       |
| Common                                                                                                                                      |         | **291,302**                  | ** **    | 288,394            |       |
| **Total  Utility Plant In Service**                                                                                                         |         | **3,679,135**                | ** **    | 3,548,648          |       |
| Construction  work in progress                                                                                                              |         | **65,285**                   | ** **    | 71,947             |       |
| **Total  Utility Plant**                                                                                                                    |         | **3,744,420**                | ** **    | 3,620,595          |       |
| Non-regulated  property, plant, and equipment                                                                                               |         | **3,627,899**                | ** **    | 3,576,187          |       |
| Accumulated  depreciation                                                                                                                   |         | **2,719,785**                | ** **    | 2,625,568          |       |
| **Net  Property, Plant, and Equipment**                                                                                                     |         | **4,652,534**                | ** **    | 4,571,214          |       |
|                                                                                                                                        |         | ** **                   | ** **    |               |       |
|                                                                                                                                        |         | ** **                   | ** **    |               |       |
| **Other  Assets**                                                                                                                           |         | ** **                   | ** **    |               |       |
| Regulatory  assets                                                                                                                          |         | **578,522**                  | ** **    | 594,764            |       |
| Energy risk  management non-current assets                                                                                                  |         | **48,205**                   | ** **    | 36,583             |       |
| Other                                                                                                                                       |         | **89,320**                   | ** **    | 90,824             |       |
| **Total  Other Assets**                                                                                                                     |         | **716,047**                  | ** **    | 722,171            |       |
|                                                                                                                                        |         | ** **                   | ** **    |               |       |
|                                                                                                                                        |         | ** **                   | ** **    |               |       |
| **Total  Assets**                                                                                                                           |         | **$**                        | **6,085,968** | ** **         | $          | 5,809,479 |   |
|                                                                                                                                        |         | ** **                   | ** **    |               |       |

 

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

 

12

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**THECINCINNATI GAS & ELECTRIC COMPANY**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

 

**LIABILITIES AND SHAREHOLDERS’EQUITY**

 
| ** **                                                                                                                                                           | ** **   | **September 30  2004**       | ** **    | December  31  2003 | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------|------------------------------|---------------|--------------------|------------|
| *** ***                                                                                                                                                         | *** *** | ***(dollars in thousands)*** | *** ***  |
| *** ***                                                                                                                                                         | *** *** | ***(unaudited)***            | *** ***  |
| * *                                                                                                                                                             | * *     | * *                     | * *      | * *           | * *   |
| **Current  Liabilities**                                                                                                                                             |         |                         |          |               |       |
| Accounts payable                                                                                                                                                     |         | **$**                        | **330,002**   | ** **         | $          | 217,652 |   |
| Accounts payable  to affiliated companies                                                                                                                            |         | **34,714**                   | ** **    | 136,470            |       |
| Accrued taxes                                                                                                                                                        |         | **177,519**                  | ** **    | 146,216            |       |
| Accrued interest                                                                                                                                                     |         | **21,800**                   | ** **    | 21,572             |       |
| Notes payable  and other short-term obligations (Note 4)                                                                                                             |         | **112,100**                  | ** **    | 112,100            |       |
| Notes payable to  affiliated companies (Note 4)                                                                                                                      |         | **242,039**                  | ** **    | 49,126             |       |
| Long-term debt  due within one year                                                                                                                                  |         | **150,000**                  | ** **    | 110,000            |       |
| Energy risk  management current liabilities                                                                                                                          |         | **126,171**                  | ** **    | 77,791             |       |
| Other                                                                                                                                                                |         | **36,304**                   | ** **    | 32,319             |       |
| **Total  Current Liabilities**                                                                                                                                       |         | **1,230,649**                | ** **    | 903,246            |       |
|                                                                                                                                                                 |         | ** **                   | ** **    |               |       |
|                                                                                                                                                                 |         | ** **                   | ** **    |               |       |
| **Non-Current  Liabilities**                                                                                                                                         |         | ** **                   | ** **    |               |       |
| Long-term debt  (Note 3)                                                                                                                                             |         | **1,309,738**                | ** **    | 1,458,807          |       |
| Deferred income  taxes                                                                                                                                               |         | **1,037,868**                | ** **    | 985,481            |       |
| Unamortized  investment tax credits                                                                                                                                  |         | **74,600**                   | ** **    | 79,186             |       |
| Accrued pension  and other postretirement benefit costs                                                                                                              |         | **199,106**                  | ** **    | 219,393            |       |
| Accrued cost of  removal                                                                                                                                             |         | **161,865**                  | ** **    | 155,336            |       |
| Energy risk management  non-current liabilities                                                                                                                      |         | **48,200**                   | ** **    | 11,665             |       |
| Other                                                                                                                                                                |         | **66,689**                   | ** **    | 69,687             |       |
| **Total  Non-Current Liabilities**                                                                                                                                   |         | **2,898,066**                | ** **    | 2,979,555          |       |
|                                                                                                                                                                 |         | ** **                   | ** **    |               |       |
|                                                                                                                                                                 |         | ** **                   | ** **    |               |       |
| **Commitments  and Contingencies**(Note 6)                                                                                                                           |         | ** **                   | ** **    |               |       |
|                                                                                                                                                                 |         | ** **                   | ** **    |               |       |
| **Total  Liabilities**                                                                                                                                               |         | **4,128,715**                | ** **    | 3,882,801          |       |
|                                                                                                                                                                 |         | ** **                   | ** **    |               |       |
|                                                                                                                                                                 |         | ** **                   | ** **    |               |       |
| **Cumulative  Preferred Stock**                                                                                                                                      |         | ** **                   | ** **    |               |       |
| Not subject to  mandatory redemption                                                                                                                                 |         | **20,485**                   | ** **    | 20,485             |       |
|                                                                                                                                                                 |         | ** **                   | ** **    |               |       |
|                                                                                                                                                                 |         | ** **                   | ** **    |               |       |
| **Common  Stock Equity**                                                                                                                                             |         | ** **                   | ** **    |               |       |
| Common stock –  $8.50 par value; authorized shares – 120,000,000; outstanding  shares – 89,663,086 at September 30, 2004,  and December 31, 2003 |         | **762,136**                  | ** **    | 762,136            |       |
| Paid-in capital                                                                                                                                                      |         | **586,528**                  | ** **    | 586,528            |       |
| Retained  earnings                                                                                                                                                   |         | **617,687**                  | ** **    | 589,993            |       |
| Accumulated  other comprehensive loss                                                                                                                                |         | **(29,583**                  | **)**         | (32,464            | )          |
| **Total  Common Stock Equity**                                                                                                                                       |         | **1,936,768**                | ** **    | 1,906,193          |       |
|                                                                                                                                                                 |         | ** **                   | ** **    |               |       |
|                                                                                                                                                                 |         | ** **                   | ** **    |               |       |
| **Total  Liabilities and Shareholders’ Equity**                                                                                                                 |         | **$**                        | **6,085,968** | ** **         | $          | 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 COMPANY**

**CONDENSEDCONSOLIDATED STATEMEN****TS OF CASHFLOWS**

 
| ** **                                                                                  | ** **   | **Year to Date   September 30** | ** **   |
|---------------------------------------------------------------------------------------------|--------------|---------------------------------|--------------|
| ** **                                                                                  | ** **   | **2004**                        | ** **   | 2003 | ** ** |
| *** ***                                                                                | *** *** | ***(dollars in thousands)***    | *** *** |
| *** ***                                                                                | *** *** | ***(unaudited)***               | *** *** |
| * *                                                                                    | * *     | * *                        | * *     | * * | * * |
| **Operating  Activities**                                                                   |         |                            |         |   |   |
| Net income                                                                                  |         | **$**                           | **196,837**  | ** ** | $ | 247,018 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities:          |         | ** **                      | ** **   |   |   |
| Depreciation                                                                                |         | **135,806**                     | ** **   | 142,119 |   |
| Deferred income  taxes and investment tax credits – net                                |         | **47,546**                      | ** **   | 35,406 |   |
| Cumulative  effect of changes in accounting principles, net of tax                          |         | **—**                      | ** **   | (30,938 | ) |
| Change in net  position of energy risk management activities                                |         | **(32,032**                     | **)**        | (24,465 | ) |
| Allowance for  equity funds used during construction                                        |         | **(699**                        | **)**        | (2,566 | ) |
| Regulatory  assets deferrals                                                                |         | **(28,231**                     | **)**        | (17,984 | ) |
| Regulatory  assets amortization                                                             |         | **41,688**                      | ** **   | 31,411 |   |
| Accrued pension  and other postretirement benefit costs                                     |         | **(20,287**                     | **)**        | 4,719 |   |
| Deferred costs  under gas cost recovery mechanism                                           |         | **16,762**                      | ** **   | (31,803 | ) |
| Cost of removal                                                                             |         | **(5,490**                      | **)**        | — |   |
| Changes in  current assets and current liabilities:                                         |         | ** **                      | ** **   |   |   |
| Accounts and  notes receivable                                                              |         | **(20,238**                     | **)**        | 157,926 |   |
| Fuel, emission  allowances, and supplies                                                    |         | **(49,786**                     | **)**        | (29,517 | ) |
| Prepayments                                                                                 |         | **(36,751**                     | **)**        | (8,040 | ) |
| Accounts payable                                                                            |         | **11,201**                      | ** **   | (163,059 | ) |
| Accrued taxes  and interest                                                                 |         | **31,839**                      | ** **   | 44,048 |   |
| Other assets                                                                                |         | **(14,009**                     | **)**        | 6,990 |   |
| Other  liabilities                                                                          |         | **5,973**                       | ** **   | (15,350 | ) |
|                                                                                        |         | ** **                      | ** **   |   |   |
| **Net  cash provided by operating activities**                                              |         | **280,129**                     | ** **   | 345,915 |   |
|                                                                                        |         | ** **                      | ** **   |   |   |
| **Financing  Activities**                                                                   |         | ** **                      | ** **   |   |   |
| Change in  short-term debt, including net affiliate notes                                   |         | **196,383**                     | ** **   | (44,374 | ) |
| Issuance of  long-term debt                                                                 |         | **—**                      | ** **   | 256,198 |   |
| Redemption of  long-term debt                                                               |         | **(110,000**                    | **)**        | (100,000 | ) |
| Dividends on  preferred stock                                                               |         | **(634**                        | **)**        | (634 | ) |
| Dividends on  common stock                                                                  |         | **(168,509**                    | **)**        | (166,655 | ) |
|                                                                                        |         | ** **                      | ** **   |   |   |
| **Net  cash used in financing activities**                                                  |         | **(82,760**                     | **)**        | (55,465 | ) |
|                                                                                        |         | ** **                      | ** **   |   |   |
| **Investing  Activities**                                                                   |         | ** **                      | ** **   |   |   |
| Construction  expenditures (less allowance for equity funds used during  construction) |         | **(219,307**                    | **)**        | (236,235 | ) |
| Proceeds from  disposition of subsidiaries and investments                                  |         | **15,321**                      | ** **   | — |   |
|                                                                                        |         | ** **                      | ** **   |   |   |
| **Net cash  used in investing activities**                                                  |         | **(203,986**                    | **)**        | (236,235 | ) |
|                                                                                        |         | ** **                      | ** **   |   |   |
| **Net  increase (decrease) in cash and cash equivalents**                                   |         | **(6,617**                      | **)**        | 54,215 |   |
| ** **                                                                                  |         | ** **                      | ** **   |   |   |
| **Cash  and cash equivalents at beginning of period**                                       |         | **15,842**                      | ** **   | 45,336 |   |
| ** **                                                                                  |         | ** **                      | ** **   |   |   |
| **Cash  and cash equivalents at end of period**                                             |         | **$**                           | **9,225**    | ** ** | $ | 99,551 |   |
|                                                                                        |         | ** **                      | ** **   |   |   |
|                                                                                        |         | ** **                      | ** **   |   |   |
| **Supplemental  Disclosure of Cash Flow Information**                                       |         | ** **                      | ** **   |   |   |
| Cash paid during  the period for:                                                           |         | ** **                      | ** **   |   |   |
| Interest (net of  amount capitalized)                                                       |         | **$**                           | **65,629**   | ** ** | $ | 69,321 |   |
| Income taxes                                                                                |         | **$**                           | **16,646**   | ** ** | $ | 38,146 |   |
|                                                                                        |         | ** **                      | ** **   |   |   |

 

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

 

14

----

 

**PSI ENERGY, INC.**

**AND SUBSIDIARY COMPANY**

 

15

----

 

**PSI ENERGY, INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE****INCOME**

 
| ** **                                                                           | ** **   | **Quarter Ended   September 30** | ** **   | **Year to Date   September 30** | ** ** |
|--------------------------------------------------------------------------------------|--------------|----------------------------------|--------------|---------------------------------|------------|
| ** **                                                                           | ** **   | **2004**                         | ** **   | 2003                            | ** ** | **2004** | ** ** | 2003 | ** ** |
| *** ***                                                                         | *** *** | ***(dollars in thousands)***     | *** *** |
| *** ***                                                                         | *** *** | ***(unaudited)***                | *** *** |
| * *                                                                             | * *     | * *                         | * *     | * *                        | * *   | * * | * * | * * | * * |
| **Operating  Revenues**                                                              |         |                             |         |                            |       |   |   |   |   |
| Electric                                                                             |         | **$**                            | **480,089**  | ** **                      | $          | 437,084 |   | **$** | **1,310,812** | ** ** | $ | 1,210,157 |   |
|                                                                                 |         | ** **                       | ** **   |                            |       | ** ** | ** ** |   |   |
|                                                                                 |         | ** **                       | ** **   |                            |       | ** ** | ** ** |   |   |
| **Operating  Expenses**                                                              |         | ** **                       | ** **   |                            |       | ** ** | ** ** |   |   |
| Fuel and  purchased power                                                            |         | **160,541**                      | ** **   | 177,786                         |       | **436,937** | ** ** | 466,656 |   |
| Operation and  maintenance                                                           |         | **134,586**                      | ** **   | 118,848                         |       | **399,788** | ** ** | 361,146 |   |
| Depreciation                                                                         |         | **62,106**                       | ** **   | 41,360                          |       | **165,996** | ** ** | 121,776 |   |
| Taxes other than  income taxes                                                       |         | **10,481**                       | ** **   | 10,322                          |       | **41,014** | ** ** | 42,354 |   |
| **Total  Operating Expenses**                                                        |         | **367,714**                      | ** **   | 348,316                         |       | **1,043,735** | ** ** | 991,932 |   |
|                                                                                 |         | ** **                       | ** **   |                            |       | ** ** | ** ** |   |   |
|                                                                                 |         | ** **                       | ** **   |                            |       | ** ** | ** ** |   |   |
| **Operating  Income**                                                                |         | **112,375**                      | ** **   | 88,768                          |       | **267,077** | ** ** | 218,225 |   |
|                                                                                 |         | ** **                       | ** **   |                            |       | ** ** | ** ** |   |   |
|                                                                                 |         | ** **                       | ** **   |                            |       | ** ** | ** ** |   |   |
| **Miscellaneous  Income (Expense) – Net**                                       |         | **2,213**                        | ** **   | (2,221                          | )          | **5,777** | ** ** | 5,348 |   |
| **Interest  Expense**                                                                |         | **24,864**                       | ** **   | 22,147                          |       | **66,489** | ** ** | 64,574 |   |
| ** **                                                                           |         | ** **                       | ** **   |                            |       | ** ** | ** ** |   |   |
| ** **                                                                           |         | ** **                       | ** **   |                            |       | ** ** | ** ** |   |   |
| **Income  Before Taxes**                                                             |         | **89,724**                       | ** **   | 64,400                          |       | **206,365** | ** ** | 158,999 |   |
| ** **                                                                           |         | ** **                       | ** **   |                            |       | ** ** | ** ** |   |   |
| ** **                                                                           |         | ** **                       | ** **   |                            |       | ** ** | ** ** |   |   |
| **Income  Taxes**                                                                    |         | **41,237**                       | ** **   | 26,808                          |       | **91,626** | ** ** | 64,107 |   |
| ** **                                                                           |         | ** **                       | ** **   |                            |       | ** ** | ** ** |   |   |
| ** **                                                                           |         | ** **                       | ** **   |                            |       | ** ** | ** ** |   |   |
| **Income  Before Cumulative Effect of a Change in Accounting Principle**             |         | **48,487**                       | ** **   | 37,592                          |       | **114,739** | ** ** | 94,892 |   |
|                                                                                 |         | ** **                       | ** **   |                            |       | ** ** | ** ** |   |   |
|                                                                                 |         | ** **                       | ** **   |                            |       | ** ** | ** ** |   |   |
| Cumulative  effect of a change in accounting principle, net of tax (Note 1(d)(*ii*)) |         | **—**                       | ** **   | —                          |       | **—** | ** ** | (494 | ) |
|                                                                                 |         | ** **                       | ** **   |                            |       | ** ** | ** ** |   |   |
| **Net  Income**                                                                      |         | **$**                            | **48,487**   | ** **                      | $          | 37,592 |   | **$** | **114,739** | ** ** | $ | 94,398 |   |
| ** **                                                                           |         | ** **                       | ** **   |                            |       | ** ** | ** ** |   |   |
| **Preferred  Dividend Requirement**                                                  |         | **647**                          | ** **   | 647                             |       | **1,940** | ** ** | 1,940 |   |
| ** **                                                                           |         | ** **                       | ** **   |                            |       | ** ** | ** ** |   |   |
| **Net  Income Applicable to Common Stock**                                           |         | **$**                            | **47,840**   | ** **                      | $          | 36,945 |   | **$** | **112,799** | ** ** | $ | 92,458 |   |
| ** **                                                                           |         | ** **                       | ** **   |                            |       | ** ** | ** ** |   |   |
| ** **                                                                           |         | ** **                       | ** **   |                            |       | ** ** | ** ** |   |   |
| **Net  Income**                                                                      |         | **$**                            | **48,487**   | ** **                      | $          | 37,592 |   | **$** | **114,739** | ** ** | $ | 94,398 |   |
| ** **                                                                           |         | ** **                       | ** **   |                            |       | ** ** | ** ** |   |   |
| **Other  Comprehensive Income (Loss), Net of Tax**                                   |         | **(614**                         | **)**        | (77                             | )          | **(248** | **)** | 2,247 |   |
| ** **                                                                           |         | ** **                       | ** **   |                            |       | ** ** | ** ** |   |   |
| **Comprehensive  Income**                                                            |         | **$**                            | **47,873**   | ** **                      | $          | 37,515 |   | **$** | **114,491** | ** ** | $ | 96,645 |   |
|                                                                                 |         | ** **                       | ** **   |                            |       | ** ** | ** ** |   |   |

 

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

 

16

----

 

**PSI ENERGY, INC.**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

 

**ASSETS**

 
| ** **                                                                                                                                  | ** **   | **September 30  2004**       | ** **    | December  31  2003 | ** **   |
|---------------------------------------------------------------------------------------------------------------------------------------------|--------------|------------------------------|---------------|--------------------|--------------|
| *** ***                                                                                                                                | *** *** | ***(dollars in thousands)*** | *** ***  |
| *** ***                                                                                                                                | *** *** | ***(unaudited)***            | *** ***  |
| *** ***                                                                                                                                | *** *** | *** ***                 | *** ***  | *** ***       | *** *** |
| **Current  Assets**                                                                                                                         |         |                         |          |               |         |
| Cash and cash  equivalents                                                                                                                  |         | **$**                        | **32,108**    | ** **         | $            | 6,565 |   |
| Restricted  deposits                                                                                                                        |         | **140,644**                  | ** **    | 92,675             |         |
| Notes receivable  from affiliated companies                                                                                                 |         | **31,295**                   | ** **    | 65,715             |         |
| Accounts  receivable less accumulated provision for doubtful accounts of  $209 at September 30, 2004, and $1,110 at  December 31, 2003 |         | **44,563**                   | ** **    | 37,194             |         |
| Accounts  receivable from affiliated companies                                                                                              |         | **2,390**                    | ** **    | 459                |         |
| Fuel, emission  allowances, and supplies                                                                                                    |         | **128,092**                  | ** **    | 149,392            |         |
| Energy risk  management current assets                                                                                                      |         | **4,544**                    | ** **    | 7,959              |         |
| Prepayments and  other                                                                                                                      |         | **5,424**                    | ** **    | 5,303              |         |
| **Total  Current Assets**                                                                                                                   |         | **389,060**                  | ** **    | 365,262            |         |
|                                                                                                                                        |         | ** **                   | ** **    |               |         |
|                                                                                                                                        |         | ** **                   | ** **    |               |         |
| **Property,  Plant, and Equipment – at Cost**                                                                                          |         | ** **                   | ** **    |               |         |
| Utility plant in  service                                                                                                                   |         | **6,370,633**                | ** **    | 6,183,475          |         |
| Construction  work in progress                                                                                                              |         | **217,203**                  | ** **    | 203,512            |         |
| **Total  Utility Plant**                                                                                                                    |         | **6,587,836**                | ** **    | 6,386,987          |         |
| Accumulated  depreciation                                                                                                                   |         | **2,256,363**                | ** **    | 2,133,235          |         |
| **Net  Property, Plant, and Equipment**                                                                                                     |         | **4,331,473**                | ** **    | 4,253,752          |         |
|                                                                                                                                        |         | ** **                   | ** **    |               |         |
|                                                                                                                                        |         | ** **                   | ** **    |               |         |
| **Other  Assets**                                                                                                                           |         | ** **                   | ** **    |               |         |
| Regulatory  assets                                                                                                                          |         | **414,395**                  | ** **    | 417,387            |         |
| Energy risk  management non-current assets                                                                                                  |         | **2,396**                    | ** **    | 7,061              |         |
| Other  investments                                                                                                                          |         | **68,451**                   | ** **    | 66,803             |         |
| Other                                                                                                                                       |         | **38,938**                   | ** **    | 29,372             |         |
| **Total  Other Assets**                                                                                                                     |         | **524,180**                  | ** **    | 520,623            |         |
|                                                                                                                                        |         | ** **                   | ** **    |               |         |
|                                                                                                                                        |         | ** **                   | ** **    |               |         |
| **Total  Assets**                                                                                                                           |         | **$**                        | **5,244,713** | ** **         | $            | 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 BALANCESHEETS**

 

**LIABILITIES AND SHAREHOLDERS’ EQUITY**

 
| ** **                                                                                                                                                                         | ** **   | **September 30  2004**       | ** **    | December  31  2003 | ** **   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------|------------------------------|---------------|--------------------|--------------|
| *** ***                                                                                                                                                                       | *** *** | ***(dollars in thousands)*** | *** ***  |
| *** ***                                                                                                                                                                       | *** *** | ***(unaudited)***            | *** ***  |
| *** ***                                                                                                                                                                       | *** *** | *** ***                 | *** ***  | *** ***       | *** *** |
| **Current  Liabilities**                                                                                                                                                           |         |                         |          |               |         |
| Accounts payable                                                                                                                                                                   |         | **$**                        | **80,001**    | ** **         | $            | 58,286 |   |
| Accounts payable  to affiliated companies                                                                                                                                          |         | **44,884**                   | ** **    | 69,746             |         |
| Accrued taxes                                                                                                                                                                      |         | **71,963**                   | ** **    | 69,419             |         |
| Accrued interest                                                                                                                                                                   |         | **26,926**                   | ** **    | 26,615             |         |
| Notes payable  and other short-term obligations (Note 4)                                                                                                                           |         | **135,500**                  | ** **    | 80,500             |         |
| Notes payable to  affiliated companies (Note 4)                                                                                                                                    |         | **153,589**                  | ** **    | 188,446            |         |
| Long-term debt  due within one year                                                                                                                                                |         | **51,100**                   | ** **    | —             |         |
| Energy risk  management current liabilities                                                                                                                                        |         | **4,328**                    | ** **    | 14,744             |         |
| Other                                                                                                                                                                              |         | **24,295**                   | ** **    | 25,636             |         |
| **Total  Current Liabilities**                                                                                                                                                     |         | **592,586**                  | ** **    | 533,392            |         |
|                                                                                                                                                                               |         | ** **                   | ** **    |               |         |
|                                                                                                                                                                               |         | ** **                   | ** **    |               |         |
| **Non-Current  Liabilities**                                                                                                                                                       |         | ** **                   | ** **    |               |         |
| Long-term debt                                                                                                                                                                     |         | **1,669,821**                | ** **    | 1,720,476          |         |
| Deferred income  taxes                                                                                                                                                             |         | **624,143**                  | ** **    | 573,946            |         |
| Unamortized  investment tax credits                                                                                                                                                |         | **27,377**                   | ** **    | 29,698             |         |
| Accrued pension  and other postretirement benefit costs                                                                                                                            |         | **185,843**                  | ** **    | 193,336            |         |
| Accrued cost of  removal                                                                                                                                                           |         | **358,979**                  | ** **    | 335,520            |         |
| Energy risk  management non-current liabilities                                                                                                                                    |         | **1,028**                    | ** **    | 2,796              |         |
| Other                                                                                                                                                                              |         | **81,580**                   | ** **    | 74,958             |         |
| **Total  Non-Current Liabilities**                                                                                                                                                 |         | **2,948,771**                | ** **    | 2,930,730          |         |
|                                                                                                                                                                               |         | ** **                   | ** **    |               |         |
|                                                                                                                                                                               |         | ** **                   | ** **    |               |         |
| **Commitments  and Contingencies**(Note  6)                                                                                                                                        |         | ** **                   | ** **    |               |         |
|                                                                                                                                                                               |         | ** **                   | ** **    |               |         |
| **Total  Liabilities**                                                                                                                                                             |         | **3,541,357**                | ** **    | 3,464,122          |         |
|                                                                                                                                                                               |         | ** **                   | ** **    |               |         |
|                                                                                                                                                                               |         | ** **                   | ** **    |               |         |
| **Cumulative  Preferred Stock**                                                                                                                                                    |         | ** **                   | ** **    |               |         |
| Not subject to  mandatory redemption                                                                                                                                               |         | **42,333**                   | ** **    | 42,333             |         |
|                                                                                                                                                                               |         | ** **                   | ** **    |               |         |
|                                                                                                                                                                               |         | ** **                   | ** **    |               |         |
| **Common Stock  Equity**                                                                                                                                                           |         | ** **                   | ** **    |               |         |
| Common stock –  without par value; $.01 stated value; authorized shares – 60,000,000;  outstanding shares – 53,913,701 at September 30, 2004, and December 31, 2003 |         | **539**                      | ** **    | 539                |         |
| Paid-in capital                                                                                                                                                                    |         | **627,274**                  | ** **    | 627,274            |         |
| Retained  earnings                                                                                                                                                                 |         | **1,046,879**                | ** **    | 1,018,790          |         |
| Accumulated  other comprehensive loss                                                                                                                                              |         | **(13,669**                  | **)**         | (13,421            | )            |
| **Total  Common Stock Equity**                                                                                                                                                     |         | **1,661,023**                | ** **    | 1,633,182          |         |
|                                                                                                                                                                               |         | ** **                   | ** **    |               |         |
|                                                                                                                                                                               |         | ** **                   | ** **    |               |         |
| **Total  Liabilities and Shareholders’ Equity**                                                                                                                               |         | **$**                        | **5,244,713** | ** **         | $            | 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.**

**CONDENSED CONSOLIDATED STATEMENTSOF CASH FLOWS**

 
| ** **                                                                            | ** **   | **Year to Date   September 30** | ** **   |
|---------------------------------------------------------------------------------------|--------------|---------------------------------|--------------|
| ** **                                                                            | ** **   | **2004**                        | ** **   | 2003 | ** ** |
| *** ***                                                                          | *** *** | ***(dollars in thousands)***    | *** *** |
| *** ***                                                                          | *** *** | ***(unaudited)***               | *** *** |
| * *                                                                              | * *     | * *                        | * *     | * * | * * |
| **Operating  Activities**                                                             |         |                            |         |   |   |
| Net income                                                                            |         | **$**                           | **114,739**  | ** ** | $ | 94,398 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities:    |         | ** **                      | ** **   |   |   |
| Depreciation                                                                          |         | **165,996**                     | ** **   | 121,776 |   |
| Cumulative  effect of a change in accounting principle, net of tax                    |         | **—**                      | ** **   | 494 |   |
| Deferred income  taxes and investment tax credits – net                          |         | **48,045**                      | ** **   | 14,370 |   |
| Change in net  position of energy risk management activities                          |         | **(4,104**                      | **)**        | (1,731 | ) |
| Allowance for  equity funds used during construction                                  |         | **(423**                        | **)**        | (4,545 | ) |
| Regulatory  assets deferrals                                                          |         | **(27,646**                     | **)**        | (29,879 | ) |
| Regulatory  assets amortization                                                       |         | **32,488**                      | ** **   | 42,867 |   |
| Accrued pension  and other postretirement benefit costs                               |         | **(7,493**                      | **)**        | (7,471 | ) |
| Cost of removal                                                                       |         | **(7,547**                      | **)**        | (10,658 | ) |
| Changes in  current assets and current liabilities:                                   |         | ** **                      | ** **   |   |   |
| Accounts and  notes receivable                                                        |         | **25,120**                      | ** **   | 65,280 |   |
| Fuel, emission  allowances, and supplies                                              |         | **21,300**                      | ** **   | 27,971 |   |
| Prepayments                                                                           |         | **(820**                        | **)**        | (154 | ) |
| Accounts payable                                                                      |         | **(3,147**                      | **)**        | (164,989 | ) |
| Accrued taxes  and interest                                                           |         | **2,855**                       | ** **   | 14,388 |   |
| Other assets                                                                          |         | **(12,655**                     | **)**        | (6,824 | ) |
| Other  liabilities                                                                    |         | **4,956**                       | ** **   | (909 | ) |
|                                                                                  |         | ** **                      | ** **   |   |   |
| **Net  cash provided by operating activities**                                        |         | **351,664**                     | ** **   | 154,384 |   |
|                                                                                  |         | ** **                      | ** **   |   |   |
| **Financing  Activities**                                                             |         | ** **                      | ** **   |   |   |
| Change in  short-term debt, including net affiliate notes                             |         | **(34,857**                     | **)**        | (8,091 | ) |
| Issuance of  long-term debt                                                           |         | **—**                      | ** **   | 431,968 |   |
| Redemption of  long-term debt                                                         |         | **—**                      | ** **   | (459,865 | ) |
| Contribution  from parent                                                             |         | **—**                      | ** **   | 200,000 |   |
| Dividends on  preferred stock                                                         |         | **(1,940**                      | **)**        | (1,940 | ) |
| Dividends on  common stock                                                            |         | **(84,709**                     | **)**        | (73,324 | ) |
|                                                                                  |         | ** **                      | ** **   |   |   |
| **Net  cash provided by (used in) financing activities**                              |         | **(121,506**                    | **)**        | 88,748 |   |
|                                                                                  |         | ** **                      | ** **   |   |   |
| **Investing  Activities**                                                             |         | ** **                      | ** **   |   |   |
| Construction  expenditures (less allowance for equity funds used during construction) |         | **(217,413**                    | **)**        | (231,201 | ) |
| Withdrawal of  restricted cash held on deposit                                        |         | **14,861**                      | ** **   | — |   |
| Other  investments                                                                    |         | **(2,063**                      | **)**        | (2,486 | ) |
|                                                                                  |         | ** **                      | ** **   |   |   |
| **Net  cash used in investing activities**                                            |         | **(204,615**                    | **)**        | (233,687 | ) |
|                                                                                  |         | ** **                      | ** **   |   |   |
| **Net  increase in cash and cash equivalents**                                        |         | **25,543**                      | ** **   | 9,445 |   |
| ** **                                                                            |         | ** **                      | ** **   |   |   |
| **Cash  and cash equivalents at beginning of period**                                 |         | **6,565**                       | ** **   | 2,007 |   |
| ** **                                                                            |         | ** **                      | ** **   |   |   |
| **Cash  and cash equivalents at end of period**                                       |         | **$**                           | **32,108**   | ** ** | $ | 11,452 |   |
|                                                                                  |         | ** **                      | ** **   |   |   |
|                                                                                  |         | ** **                      | ** **   |   |   |
| **Supplemental  Disclosure of Cash Flow Information**                                 |         | ** **                      | ** **   |   |   |
| Cash paid during  the period for:                                                     |         | ** **                      | ** **   |   |   |
| Interest (net of  amount capitalized)                                                 |         | **$**                           | **74,245**   | ** ** | $ | 72,455 |   |
| Income taxes                                                                          |         | **$**                           | **28,302**   | ** ** | $ | 50,419 |   |
|                                                                                  |         | ** **                      | ** **   |   |   |
| Non-cash  financing activities:                                                       |         | ** **                      | ** **   |   |   |
| Issuance of  promissory notes to affiliated company for acquisition of assets         |         | **$**                           | **—**   | ** ** | $ | 375,969 |   |
| Issuance of debt  securities held as restricted cash                                  |         | **$**                           | **54,890**   | ** ** | $ | — |   |
|                                                                                  |         | ** **                      | ** **   |   |   |

 

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

 

19

----

 

**THE UNION LIGHT, HEATAND POWER COMPANY**

 

20

----

 

**THE UNION LIGHT, HEAT AND POWERCOMPANY**

**CONDENSEDSTATEMENTS OF INCOME**

 
| ** **                                            | ** **   | **Quarter Ended  September 30** | ** **   | **Year to Date  September 30** | ** ** |
|-------------------------------------------------------|--------------|---------------------------------|--------------|--------------------------------|------------|
| ** **                                            | ** **   | **2004**                        | ** **   | 2003                           | ** ** | **2004** | ** ** | 2003 | ** ** |
| *** ***                                          | *** *** | ***(dollars in thousands)***    | *** *** |
| *** ***                                          | *** *** | ***(unaudited)***               | *** *** |
| * *                                              | * *     | * *                        | * *     | * *                       | * *   | * * | * * | * * | * * |
| **Operating  Revenues**                               |         |                            |         |                           |       |   |   |   |   |
| Electric                                              |         | **$**                           | **63,751**   | ** **                     | $          | 64,199 |   | **$** | **176,698** | ** ** | $ | 170,224 |   |
| Gas                                                   |         | **11,119**                      | ** **   | 11,240                         |       | **85,243** | ** ** | 75,007 |   |
| **Total  Operating Revenues**                         |         | **74,870**                      | ** **   | 75,439                         |       | **261,941** | ** ** | 245,231 |   |
|                                                  |         | ** **                      | ** **   |                           |       | ** ** | ** ** |   |   |
|                                                  |         | ** **                      | ** **   |                           |       | ** ** | ** ** |   |   |
| **Operating  Expenses**                               |         | ** **                      | ** **   |                           |       | ** ** | ** ** |   |   |
| Electricity  purchased from parent company for resale |         | **45,461**                      | ** **   | 44,546                         |       | **124,768** | ** ** | 120,805 |   |
| Gas purchased                                         |         | **5,214**                       | ** **   | 5,620                          |       | **53,528** | ** ** | 46,570 |   |
| Operation and  maintenance                            |         | **14,893**                      | ** **   | 14,689                         |       | **42,448** | ** ** | 41,068 |   |
| Depreciation                                          |         | **4,992**                       | ** **   | 4,554                          |       | **14,944** | ** ** | 13,582 |   |
| Taxes other than  income taxes                        |         | **(567**                        | **)**        | 1,135                          |       | **2,110** | ** ** | 3,417 |   |
| **Total  Operating Expenses**                         |         | **69,993**                      | ** **   | 70,544                         |       | **237,798** | ** ** | 225,442 |   |
|                                                  |         | ** **                      | ** **   |                           |       | ** ** | ** ** |   |   |
|                                                  |         | ** **                      | ** **   |                           |       | ** ** | ** ** |   |   |
| **Operating  Income**                                 |         | **4,877**                       | ** **   | 4,895                          |       | **24,143** | ** ** | 19,789 |   |
|                                                  |         | ** **                      | ** **   |                           |       | ** ** | ** ** |   |   |
|                                                  |         | ** **                      | ** **   |                           |       | ** ** | ** ** |   |   |
| **Miscellaneous  Income – Net**                  |         | **294**                         | ** **   | 886                            |       | **1,035** | ** ** | 3,266 |   |
| **Interest  Expense**                                 |         | **1,263**                       | ** **   | 1,548                          |       | **3,760** | ** ** | 4,520 |   |
| ** **                                            |         | ** **                      | ** **   |                           |       | ** ** | ** ** |   |   |
| ** **                                            |         | ** **                      | ** **   |                           |       | ** ** | ** ** |   |   |
| **Income  Before Taxes**                              |         | **3,908**                       | ** **   | 4,233                          |       | **21,418** | ** ** | 18,535 |   |
| ** **                                            |         | ** **                      | ** **   |                           |       | ** ** | ** ** |   |   |
| ** **                                            |         | ** **                      | ** **   |                           |       | ** ** | ** ** |   |   |
| **Income  Taxes**                                     |         | **1,608**                       | ** **   | 1,667                          |       | **8,139** | ** ** | 7,058 |   |
| ** **                                            |         | ** **                      | ** **   |                           |       | ** ** | ** ** |   |   |
| **Net  Income**                                       |         | **$**                           | **2,300**    | ** **                     | $          | 2,566 |   | **$** | **13,279** | ** ** | $ | 11,477 |   |
|                                                  |         | ** **                      | ** **   |                           |       | ** ** | ** ** |   |   |
|                                                       |              |                                 |              |                                |            |  |  |  |  |  |  |  |  |  |  |

 

**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 AND POWERCOMPANY**

**CONDENSEDBALANCE SHEETS**

 

**ASSETS**

 
| ** **                                                                                                                               | ** **   | **September 30  2004**       | ** **   | December  31  2003 | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------|--------------|------------------------------|--------------|--------------------|------------|
| *** ***                                                                                                                             | *** *** | ***(dollars in thousands)*** | *** *** |
| *** ***                                                                                                                             | *** *** | ***(unaudited)***            | *** *** |
| * *                                                                                                                                 | * *     | * *                     | * *     | * *           | * *   |
| **Current  Assets**                                                                                                                      |         |                         |         |               |       |
| Cash and cash  equivalents                                                                                                               |         | **$**                        | **7,699**    | ** **         | $          | 1,899 |   |
| Notes receivable  from affiliated companies                                                                                              |         | **5,301**                    | ** **   | 17,906             |       |
| Accounts  receivable less accumulated provision for doubtful accounts of  $17 at September 30, 2004, and $192 at  December 31, 2003 |         | **1,937**                    | ** **   | 2,458              |       |
| Accounts  receivable from affiliated companies                                                                                           |         | **169**                      | ** **   | 4,407              |       |
| Fuel and  supplies                                                                                                                       |         | **10,789**                   | ** **   | 7,936              |       |
| Prepayments and  other                                                                                                                   |         | **427**                      | ** **   | 279                |       |
| **Total  Current Assets**                                                                                                                |         | **26,322**                   | ** **   | 34,885             |       |
|                                                                                                                                     |         | ** **                   | ** **   |               |       |
|                                                                                                                                     |         | ** **                   | ** **   |               |       |
| **Property,  Plant, and Equipment – at Cost**                                                                                       |         | ** **                   | ** **   |               |       |
| Utility plant in  service                                                                                                                |         | ** **                   | ** **   |               |       |
| Electric                                                                                                                                 |         | **283,525**                  | ** **   | 273,895            |       |
| Gas                                                                                                                                      |         | **251,354**                  | ** **   | 239,670            |       |
| Common                                                                                                                                   |         | **53,551**                   | ** **   | 53,297             |       |
| **Total  Utility Plant In Service**                                                                                                      |         | **588,430**                  | ** **   | 566,862            |       |
| Construction  work in progress                                                                                                           |         | **6,887**                    | ** **   | 6,165              |       |
| **Total  Utility Plant**                                                                                                                 |         | **595,317**                  | ** **   | 573,027            |       |
| Accumulated  depreciation                                                                                                                |         | **186,142**                  | ** **   | 176,368            |       |
| **Net  Property, Plant, and Equipment**                                                                                                  |         | **409,175**                  | ** **   | 396,659            |       |
|                                                                                                                                     |         | ** **                   | ** **   |               |       |
|                                                                                                                                     |         | ** **                   | ** **   |               |       |
| **Other  Assets**                                                                                                                        |         | ** **                   | ** **   |               |       |
| Regulatory  assets                                                                                                                       |         | **13,182**                   | ** **   | 13,224             |       |
| Other                                                                                                                                    |         | **716**                      | ** **   | 3,903              |       |
| **Total  Other Assets**                                                                                                                  |         | **13,898**                   | ** **   | 17,127             |       |
|                                                                                                                                     |         | ** **                   | ** **   |               |       |
|                                                                                                                                     |         | ** **                   | ** **   |               |       |
| **Total  Assets**                                                                                                                        |         | **$**                        | **449,395**  | ** **         | $          | 448,671 |   |
|                                                                                                                                     |         | ** **                   | ** **   |               |       |

 

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

 

22

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**THE UNION LIGHT, HEAT AND POWERCOMPANY**

**CONDENSED BALANCE SHEETS**

** **

**LIABILITIES AND SHAREHOLDER’S EQUITY**

 
| ** **                                                                                                                                                 | ** **   | **September 30  2004**       | ** **   | December  31  2003 | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------|------------------------------|--------------|--------------------|------------|
| *** ***                                                                                                                                               | *** *** | ***(dollars in thousands)*** | *** *** |
| *** ***                                                                                                                                               | *** *** | ***(unaudited)***            | *** *** |
| * *                                                                                                                                                   | * *     | * *                     | * *     | * *           | * *   |
| **Current  Liabilities**                                                                                                                                   |         |                         |         |               |       |
| Accounts payable                                                                                                                                           |         | **$**                        | **3,145**    | ** **         | $          | 13,431 |   |
| Accounts payable  to affiliated companies                                                                                                                  |         | **18,701**                   | ** **   | 21,131             |       |
| Accrued taxes                                                                                                                                              |         | **5,804**                    | ** **   | 298                |       |
| Accrued interest                                                                                                                                           |         | **997**                      | ** **   | 1,230              |       |
| Notes payable to  affiliated companies (Note 4)                                                                                                            |         | **36,895**                   | ** **   | 45,233             |       |
| Other                                                                                                                                                      |         | **6,738**                    | ** **   | 6,815              |       |
| **Total  Current Liabilities**                                                                                                                             |         | **72,280**                   | ** **   | 88,138             |       |
|                                                                                                                                                       |         | ** **                   | ** **   |               |       |
|                                                                                                                                                       |         | ** **                   | ** **   |               |       |
| **Non-Current  Liabilities**                                                                                                                               |         | ** **                   | ** **   |               |       |
| Long-term debt                                                                                                                                             |         | **54,708**                   | ** **   | 54,685             |       |
| Deferred income  taxes                                                                                                                                     |         | **59,546**                   | ** **   | 55,488             |       |
| Unamortized  investment tax credits                                                                                                                        |         | **2,687**                    | ** **   | 2,879              |       |
| Accrued pension  and other postretirement benefit costs                                                                                                    |         | **14,829**                   | ** **   | 16,953             |       |
| Accrued cost of  removal                                                                                                                                   |         | **29,029**                   | ** **   | 27,443             |       |
| Other                                                                                                                                                      |         | **13,681**                   | ** **   | 13,729             |       |
| **Total  Non-Current Liabilities**                                                                                                                         |         | **174,480**                  | ** **   | 171,177            |       |
|                                                                                                                                                       |         | ** **                   | ** **   |               |       |
|                                                                                                                                                       |         | ** **                   | ** **   |               |       |
| **Commitments  and Contingencies**(Note  6)                                                                                                                |         | ** **                   | ** **   |               |       |
|                                                                                                                                                       |         | ** **                   | ** **   |               |       |
| **Total  Liabilities**                                                                                                                                     |         | **246,760**                  | ** **   | 259,315            |       |
|                                                                                                                                                       |         | ** **                   | ** **   |               |       |
|                                                                                                                                                       |         | ** **                   | ** **   |               |       |
| **Common  Stock Equity**                                                                                                                                   |         | ** **                   | ** **   |               |       |
| Common stock –  $15.00 par value; authorized shares – 1,000,000; outstanding shares – 585,333  at September 30, 2004, and December 31, 2003 |         | **8,780**                    | ** **   | 8,780              |       |
| Paid-in capital                                                                                                                                            |         | **23,541**                   | ** **   | 23,541             |       |
| Retained  earnings                                                                                                                                         |         | **170,803**                  | ** **   | 157,524            |       |
| Accumulated  other comprehensive loss                                                                                                                      |         | **(489**                     | **)**        | (489               | )          |
| **Total  Common Stock Equity**                                                                                                                             |         | **202,635**                  | ** **   | 189,356            |       |
|                                                                                                                                                       |         | ** **                   | ** **   |               |       |
|                                                                                                                                                       |         | ** **                   | ** **   |               |       |
| **Total  Liabilities and Shareholder’s Equity**                                                                                                       |         | **$**                        | **449,395**  | ** **         | $          | 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 AND POWER COMPANY**

**CONDENSED STATEMENTS OF CASH FLOWS**

 
| ** **                                                                            | ** ** | **Year to Date  September 30** | ** ** |
|---------------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                            | ** ** | **2004**                       | ** ** | 2003 | ** ** |
| ** **                                                                            | ** ** | ***(dollars in thousands)***   | ** ** |
| ** **                                                                            | ** ** | ***(unaudited)***              | ** ** |
| **Operating  Activities**                                                             |       |                           |       |   |   |
| Net income                                                                            |       | **$**                          | **13,279** | ** ** | $ | 11,477 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities:    |       | ** **                     | ** ** |   |   |
| Depreciation                                                                          |       | **14,944**                     | ** ** | 13,582 |   |
| Deferred income taxes and investment tax  credits – net                          |       | **3,865**                      | ** ** | 4,157 |   |
| Allowance for equity funds used during  construction                                  |       | **12**                         | ** ** | (224 | ) |
| Regulatory assets deferrals                                                           |       | **(1,139**                     | **)**      | (424 | ) |
| Regulatory assets amortization                                                        |       | **1,046**                      | ** ** | 505 |   |
| Accrued pension and other postretirement  benefit costs                               |       | **(2,124**                     | **)**      | 338 |   |
| Deferred costs under gas cost recovery  mechanism                                     |       | **3,990**                      | ** ** | (7,279 | ) |
| Cost of removal                                                                       |       | **(1,267**                     | **)**      | — |   |
| Changes in current assets and current  liabilities:                                   |       | ** **                     | ** ** |   |   |
| Accounts and notes receivable                                                         |       | **17,364**                     | ** ** | 10,776 |   |
| Fuel and supplies                                                                     |       | **(2,853**                     | **)**      | (1,592 | ) |
| Prepayments                                                                           |       | **(148**                       | **)**      | (102 | ) |
| Accounts payable                                                                      |       | **(12,716**                    | **)**      | (10,047 | ) |
| Accrued taxes and interest                                                            |       | **5,273**                      | ** ** | 2,453 |   |
| Other assets                                                                          |       | **409**                        | ** ** | 1,071 |   |
| Other liabilities                                                                     |       | **(1,178**                     | **)**      | 375 |   |
|                                                                                  |       | ** **                     | ** ** |   |   |
| **Net cash  provided by operating activities**                                        |       | **38,757**                     | ** ** | 25,066 |   |
|                                                                                  |       | ** **                     | ** ** |   |   |
| **Financing  Activities**                                                             |       | ** **                     | ** ** |   |   |
| Change in short-term debt, including net  affiliate notes                             |       | **(8,338**                     | **)**      | 9,650 |   |
| Dividends on common stock                                                             |       | **—**                     | ** ** | (6,305 | ) |
|                                                                                  |       | ** **                     | ** ** |   |   |
| **Net cash  provided by (used in) financing activities**                              |       | **(8,338**                     | **)**      | 3,345 |   |
|                                                                                  |       | ** **                     | ** ** |   |   |
| **Investing  Activities**                                                             |       | ** **                     | ** ** |   |   |
| Construction expenditures (less allowance  for equity funds used during construction) |       | **(24,619**                    | **)**      | (27,229 | ) |
|                                                                                  |       | ** **                     | ** ** |   |   |
| **Net cash  used in investing activities**                                            |       | **(24,619**                    | **)**      | (27,229 | ) |
|                                                                                  |       | ** **                     | ** ** |   |   |
| **Net  increase in cash and cash equivalents**                                        |       | **5,800**                      | ** ** | 1,182 |   |
| ** **                                                                            |       | ** **                     | ** ** |   |   |
| **Cash and  cash equivalents at beginning of period**                                 |       | **1,899**                      | ** ** | 3,926 |   |
| ** **                                                                            |       | ** **                     | ** ** |   |   |
| **Cash and  cash equivalents at end of period**                                       |       | **$**                          | **7,699**  | ** ** | $ | 5,108 |   |
|                                                                                  |       | ** **                     | ** ** |   |   |
| **Supplemental  Disclosure of Cash Flow Information**                                 |       | ** **                     | ** ** |   |   |
| Cash paid during the period for:                                                      |       | ** **                     | ** ** |   |   |
| Interest (net of amount capitalized)                                                  |       | **$**                          | **3,814**  | ** ** | $ | 4,240 |   |
| Income taxes                                                                          |       | **$**                          | **4**      | ** ** | $ | 3,001 |   |

 

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

 

24

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**NOTESTO CONDENSED FINANCIAL STATEMENTS**

 

**NOTES TO CONDENSEDFINANCIAL STATEMENTS**

 

In this report **Cinergy**(which includes **Cinergy Corp.** andall of our regulated and non-regulated subsidiaries) is, at times, referred toin the first person as “we”, “our”, or “us”. In addition, when discussing **Cinergy’s**financial information, it necessarily includes the results of The CincinnatiGas & Electric Company (**CG&E**),PSI Energy, Inc. (**PSI**), The UnionLight, Heat and Power Company (**ULH&P**)and all of **Cinergy’s** otherconsolidated subsidiaries.  Whendiscussing **CG&E’s** financialinformation, it necessarily includes the results of **ULH&P** and all of **CG&E’s**other consolidated subsidiaries.

 

**1.      Summaryof Significant Accounting Policies**

 

***(a)***                                  Presentation

 

Our Condensed Financial Statements reflect all adjustments (whichinclude normal, recurring adjustments) necessary in the opinion of theregistrants for a fair presentation of the interim results.  These results are not necessarily indicativeof results for a full year.  Thesestatements should be read in conjunction with the Financial Statements and thenotes thereto included in the registrants’ combined Form 10-K for the yearended December 31, 2003 (2003 10-K). Certain amounts in the 2003 Condensed Financial Statements have beenreclassified to conform to the 2004 presentation.

 

Management makes estimates and assumptions when preparing financialstatements under generally accepted accounting principles.  Key estimates and judgments include:

 

•                  Valuingderivative contracts used in our energy marketing and trading activities;

•                  Evaluating theregulatory recoverability of various costs;

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

•                  Calculations ofunbilled revenues; and

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

 

These estimates and judgments are discussed more fully in CriticalAccounting Policies in our 2003 10-K. Actual results could differ, as these estimates and assumptions involvejudgment about future events or performance. 

 

***(b)***                                  RevenueRecognition

 

*(i)           UtilityRevenues*

 

**CG&E**, **PSI**, and **ULH&P**(collectively, our utility operating companies) record *Operating Revenues* for electric and gasservice when delivered to customers. Customers are billed throughout the month as both gas and electricmeters are read.  We recognize revenues forretail energy sales that have not yet been billed, but where gas or electricityhas been consumed.  This is termed“unbilled revenues” and is a widely recognized and accepted practice forutilities.  In making our estimates ofunbilled revenues, we use complex systems that consider various factors,including weather, in our calculation of retail customer consumption at the endof each month.  Given the use of thesesystems and the fact that customers are billed monthly, we believe it isunlikely that materially different results will occur in future periods whenthese amounts are subsequently billed.

 

25

----

 

**NOTESTO CONDENSED FINANCIAL STATEMENTS**

 

The amount of unbilled revenues for **Cinergy**,**CG&E**, **PSI**, and **ULH&P**as of September 30, 2004 and 2003, were as follows:

 

| * *                     | * * | * *            | * *   | * * | * * |
|------------------------------|----------|---------------------|------------|----------|----------|
| * *                     | * * | **2004**            | ** ** | 2003     | * * |
| * *                     | * * | ***(in millions)*** | * *   |
| **Cinergy**                  |     | **$**               | **137**    |     | $        | 117 |   |
| **CG&E**and subsidiaries |     | **68**              |       | 60       |     |
| **PSI**                      |     | **69**              |       | 57       |     |
| **ULH&P**                |     | **12**              |       | 11       |     |
|                              |          |                     |            |          |          |  |  |

 

*(ii)          EnergyMarketing and Trading Revenues*

 

We market and trade electricity, natural gas, and other energy-relatedproducts.  Many of the contractsassociated with these products qualify as derivatives in accordance withStatement of Financial Accounting Standards No. 133, *Accounting for Derivative 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.  Net reportingrequires presentation of realized and unrealized gains and losses on tradingderivatives 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 valuehedges for certain volumes of our natural gas held in storage.  Under this accounting election, changes inthe fair value of both the derivative as well as the hedged item (the specifiedgas held in storage) are included in *Gas Operating Revenues*in**Cinergy’s** Condensed ConsolidatedStatements of Income.  We assess theeffectiveness of the derivatives in offsetting the change in fair value of thegas held in storage on a quarterly basis. Selected information on **Cinergy’s** hedgeaccounting activities were as follows:

 
| ** **                                                                                                           | ** **   | ** **                            | ** **   | ** **                           | ** ** |
|----------------------------------------------------------------------------------------------------------------------|--------------|---------------------------------------|--------------|--------------------------------------|------------|
| ** **                                                                                                           | ** **   | **Quarter Ended  September 30, 2004** | ** **   | **Year to Date  September 30, 2004** | ** ** |
| *** ***                                                                                                         | *** *** | ***(in millions)***                   | *** *** |
| * *                                                                                                             | * *     | * *                              | * *     | * *                             | * *   |
| Portion of gain (loss) on hedging  instruments determined to be ineffective and included in net income               | ** **   | **$**                                 | **(3**       | **)**                                | **$**      | **—** | ** ** |
| Portion of gain (loss) on hedging  instruments excluded from assessment of effectiveness and included in net  income | ** **   | **(6**                                | **)**        | **(8**                               | **)**      |
|                                                                                                                 | ** **   | ** **                            | ** **   | ** **                           | ** ** |
| Total                                                                                                                | ** **   | **$**                                 | **(9**       | **)**                                | **$**      | **(8** | **)** |
|                                                                                                                 |         |                                  |         |                                 |       |

 

***(d)***                                  AccountingChanges 

 

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

 

In January 2003, the Financial Accounting Standards Board (FASB) issuedInterpretation No. 46, *Consolidation ofVariable Interest Entities* (Interpretation 46), which significantlychanges the consolidation requirements for traditional special purpose entities(SPE) and certain other entities

 

26

----

 

**NOTESTO CONDENSED FINANCIAL STATEMENTS**

 

subject to its scope.  Thisinterpretation defines a VIE as (a) an entity that does not have sufficientequity to support its activities without additional financial support or (b)any entity that has equity investors that do not have voting rights, do notabsorb first dollar losses, or receive returns. These entities must be consolidated whenever **Cinergy**would be anticipated to absorb greater than 50 percent of the losses or receivegreater than 50 percent of the returns.

 

In accordance with its two stage adoption guidance, we implementedInterpretation 46 for traditional SPEs on July 1, 2003, and for all otherentities, including certain operating joint ventures, as of March 31,2004.  The consolidation of certainoperating joint ventures as of March 31, 2004, did not have a material impacton our financial position or results of operations.

 

**Cinergy** also holdsinterests in several joint ventures, primarily engaged in cogeneration andenergy efficiency operations, that are considered VIEs which do not requireconsolidation.  Our exposure to loss fromour involvement with these entities is not material.  

** **

*(ii)          CumulativeEffect of Changes in 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 of changes inaccounting principles was a result of the adoption of Statement of FinancialAccounting Standards No. 143, *Accounting forAsset Retirement Obligations* and the rescission of EITF Issue 98-10,*Accounting for Contracts Involved in EnergyTrading and Risk Management Activities* as discussed in the 200310-K.

 

**2.      CommonStock**

 

As discussed in the 2003 10-K, **Cinergy**issues new **Cinergy Corp.** commonstock shares to satisfy obligations under certain of its employee stock plans andthe Cinergy Corp. Direct Stock Purchase and Dividend Reinvestment Plan.  During the nine months ended September 30,2004, **Cinergy** issued approximately2.7 million shares under these plans.

 

**3.      Long-termDebt**

 

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

 

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

 

In September 2004, **Cinergy Corp.**repaid at maturity $500 million of its 6.25% Debentures.

 

**4.      NotesPayable and Other Short-term Obligations**

 

***(a)***                                  Short-termNotes

 

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 two facilities thatwere scheduled to expire in April and May of 2004, respectively.

 

27

----

 

**NOTESTO CONDENSED FINANCIAL STATEMENTS**

 

At September 30, 2004, **Cinergy Corp.**had approximately $582 million remaining unused and available capacity relatingto its $1.5 billion revolving credit facilities.  These revolving credit facilities include thefollowing:

 
| ** **                  | ** **   | ** **     | ** **   | ** **             | ** **   | ** **                      | ** **   | ** **                | ** **   |
|-----------------------------|--------------|----------------|--------------|------------------------|--------------|---------------------------------|--------------|---------------------------|--------------|
| **Credit Facility**         | ** **   | **Expiration** | ** **   | **Established  Lines** | ** **   | **Outstanding  and  Committed** | ** **   | **Unused and  Available** | ** **   |
| *** ***                | *** *** | *** ***   | *** *** | *** ***           | *** *** | ***(in millions)***             | *** *** | *** ***              | *** *** |
| * *                    | * *     | * *       | * *     | * *               | * *     | * *                        | * *     | * *                  | * *     |
| 364-day senior revolving    |         | April 2005     |         |                   |         |                            |         |                      |         |
| Direct borrowing            |         |           |         | $                      |         |                            | $            | —                    |         | $ |   |   |
| Commercial paper support    |         |           |         |                   |         | —                          |         |                      |         |
|                        |         |           |         |                   |         |                            |         |                      |         |
| Total 364-day facility      |         |           |         | 500                    |         | —                          |         | 500                       |         |
|                        |         |           |         |                   |         |                            |         |                      |         |
| Three-year senior revolving |         | April 2007     |         |                   |         |                            |         |                      |         |
| Direct borrowing            |         |           |         |                   |         | —                          |         |                      |         |
| Commercial paper support    |         |           |         |                   |         | 912                             |         |                      |         |
| Letter of credit support    |         |           |         |                   |         | 6                               |         |                      |         |
|                        |         |           |         |                   |         |                            |         |                      |         |
| Total three-year facility   |         |           |         | 1,000                  |         | 918                             |         | 82                        |         |
|                        |         |           |         |                   |         |                            |         |                      |         |
| Total Credit Facilities     |         |           |         | $                      | 1,500        |                            | $            | 918                       |         | $ | 582 |   |
|                        |         |           |         |                   |         |                            |         |                      |         |

 

***(b)***                                  CommercialPaper

 

**Cinergy Corp.’s** commercial paper program issupported by **Cinergy Corp.’s** $1.5 billionrevolving credit facilities.  Thecommercial paper program supports, in part, the short-term borrowing needs of **CG&E** and **PSI** andeliminates their need for separate commercial paper programs.  In September 2004, **CinergyCorp.** expanded its commercial paper program from $800 million to amaximum outstanding principal amount of $1.5 billion.  As of September 30, 2004, **Cinergy Corp.** had $912 million in commercial paperoutstanding.

 

***(c)***                                  VariableRate Pollution Control Notes

 

In August 2004, **PSI** borrowedthe proceeds from the issuance by the Indiana Development Finance Authority of$55 million principal amount of its Environmental Revenue Bonds, Series 2004A,due August 2039.  The initial interestrate for the bonds was 1.13 percent and is reset weekly.  Proceeds from the borrowing will be used forthe acquisition and construction of various solid waste disposal facilitieslocated at various generating stations in Indiana.  The $55 million is being held in escrow by anindependent trustee and will be drawn upon as facilities are built.  Holders of these notes are entitled to creditenhancement in the form of a standby letter of credit which, if drawn upon,provides for the payment of both interest and principal on the notes.  Because the holders of these notes have theright to have their notes redeemed on a weekly basis, they are reflected in *Notes payable and other short-term obligations* on **Cinergy’s** and **PSI’s** balancesheets.

 

28

----

 

**NOTESTO CONDENSED FINANCIAL STATEMENTS**

 

The following table summarizes our *Notespayable and other short-term obligations* and *Notes payable to affiliated companies*.

 
| ** **                             | ** **   | ** **             | ** **   | ** **        | ** ** |               | ** ** | ** **  | ** ** |
|----------------------------------------|--------------|------------------------|--------------|-------------------|------------|--------------------|------------|-------------|------------|
| ** **                             | ** **   | **September 30, 2004** | ** **   | December 31, 2003 | ** ** |
| ** **                             | ** **   | **Established  Lines** | ** **   | **Outstanding**   | ** ** | Established  Lines |       | Outstanding | ** ** |
| *** ***                           | *** *** | ***(in millions)***    | *** *** |
| **Cinergy**                            |         | ** **             | ** **   | ** **        | ** ** |               |       |        |       |
| **Cinergy  Corp.**                     |         | ** **             | ** **   | ** **        | ** ** |               |       |        |       |
| Revolving lines                        |         | **$**                  | **1,500**    | ** **        | **$**      | **—**         | ** ** | $           | 1,000      |   | $ | — |   |
| Uncommitted lines(1)                   |         | **40**                 | ** **   | **—**        | ** ** | 40                 |       | —      |       |
| Commercial paper(2)                    |         | ** **             | ** **   | **912**           | ** ** |               |       | 146         |       |
|                                   |         | ** **             | ** **   | ** **        | ** ** |               |       |        |       |
| Utility operating companies            |         | ** **             | ** **   | ** **        | ** ** |               |       |        |       |
| Uncommitted lines(1)                   |         | **75**                 | ** **   | **—**        | ** ** | 75                 |       | —      |       |
| Pollution control notes                |         | ** **             | ** **   | **248**           | ** ** |               |       | 193         |       |
|                                   |         | ** **             | ** **   | ** **        | ** ** |               |       |        |       |
| Non-regulated subsidiaries             |         | ** **             | ** **   | ** **        | ** ** |               |       |        |       |
| Revolving lines                        |         | **14**                 | ** **   | **10**            | ** ** | 19                 |       | 10          |       |
| Short-term debt                        |         | ** **             | ** **   | **2**             | ** ** |               |       | 2           |       |
| Pollution control notes                |         | ** **             | ** **   | **25**            | ** ** |               |       | —      |       |
|                                   |         | ** **             | ** **   | ** **        | ** ** |               |       |        |       |
| **Cinergy  Total**                     |         | ** **             | ** **   | **$**             | **1,197**  | ** **         |       |        | $          | 351 |   |
|                                   |         | ** **             | ** **   | ** **        | ** ** |               |       |        |       |
| **CG&E**** **and subsidiaries |         | ** **             | ** **   | ** **        | ** ** |               |       |        |       |
| Uncommitted lines(1)                   |         | **$**                  | **15**       | ** **        | **$**      | **—**         | ** ** | $           | 15         |   | $ | — |   |
| Pollution control notes                |         | ** **             | ** **   | **112**           | ** ** |               |       | 112         |       |
| Money pool                             |         | ** **             | ** **   | **242**           | ** ** |               |       | 49          |       |
|                                   |         | ** **             | ** **   | ** **        | ** ** |               |       |        |       |
| **CG&E  Total**                    |         | ** **             | ** **   | **$**             | **354**    | ** **         |       |        | $          | 161 |   |
|                                   |         | ** **             | ** **   | ** **        | ** ** |               |       |        |       |
| **PSI**                                |         | ** **             | ** **   | ** **        | ** ** |               |       |        |       |
| Uncommitted lines(1)                   |         | **$**                  | **60**       | ** **        | **$**      | **—**         | ** ** | $           | 60         |   | $ | — |   |
| Pollution control notes                |         | ** **             | ** **   | **136**           | ** ** |               |       | 81          |       |
| Money pool                             |         | ** **             | ** **   | **154**           | ** ** |               |       | 188         |       |
|                                   |         | ** **             | ** **   | ** **        | ** ** |               |       |        |       |
| **PSI  Total**                         |         | ** **             | ** **   | **$**             | **290**    | ** **         |       |        | $          | 269 |   |
|                                   |         | ** **             | ** **   | ** **        | ** ** |               |       |        |       |
| **ULH&P**                          |         | ** **             | ** **   | ** **        | ** ** |               |       |        |       |
| Money pool                             |         | ** **             | ** **   | **$**             | **37**     | ** **         |       |        | $          | 45 |   |
|                                   |         | ** **             | ** **   | ** **        | ** ** |               |       |        |       |
| **ULH&P  Total**                   |         | ** **             | ** **   | **$**             | **37**     | ** **         |       |        | $          | 45 |   |

 
| (1)    |   | These  facilities are not guaranteed sources of capital and represent an informal  agreement to lend money, subject to availability, with pricing to be  determined at the time of advance.                                      |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                             |
| (2)    |   | In  September 2004, **Cinergy Corp.**  increased its commercial paper program limit from $800 million to $1.5  billion.  The commercial paper program  is supported by **Cinergy Corp.’s**  revolving lines of credit. |

 

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

 

•                  a consolidatednet worth of $2 billion; and

•                   ratio ofconsolidated indebtedness to consolidated total capitalization not in excess of65 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, certainother events that could result in the termination of available credit andacceleration of the related indebtedness include:

 

•                  bankruptcy;

 

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**NOTESTO CONDENSED FINANCIAL STATEMENTS**

 

•                  defaults in thepayment of other indebtedness; and

•                  judgmentsagainst the company that are not paid or insured.

 

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

 

**5.      EnergyTrading Credit Risk**

 

**Cinergy’s** extensionof credit for energy marketing and trading is governed by a Corporate CreditPolicy.  Written guidelines approved by **Cinergy’s** Risk Policy Committee documentthe management approval levels for credit limits, evaluation ofcreditworthiness, and credit risk mitigation procedures.  Exposures to credit risks are monitored dailyby the Corporate Credit Risk function, which is independent of all tradingoperations.  As of September 30, 2004,approximately 90 percent of the credit exposure, net of credit collateral, relatedto energy trading and marketing activity was with counterparties ratedinvestment grade or the counterparties’ obligations were guaranteed or securedby an investment grade entity.  Themajority of these investment grade counterparties are externally rated.  If a counterparty has an external rating, thelower of Standard & Poor’s or Moody’s Investors Service is used; otherwise,**Cinergy’s** internal rating of thecounterparty is used.  The remaining 10percent represents $65 million with counterparties rated non-investment grade. 

 

As of September 30, 2004, **CG&E**had a concentration of trading credit exposure of approximately $39 millionwith two counterparties accounting for greater than 10 percent of **CG&E’s** total trading creditexposure.  These counterparties are ratedinvestment grade.

 

Energy commodity prices can be extremely volatile and the market can,at times, lack liquidity.  Because ofthese issues, credit risk for energy commodities is generally greater than withother commodity trading.

 

We continually review and monitor our credit exposure to allcounterparties and secondary counterparties. If appropriate, we may adjust our credit reserves to attempt tocompensate for increased credit risk within the industry.  Counterparty credit limits may be adjusted ona daily basis in response to changes in a counterparty’s creditworthiness,financial status, or public debt ratings.

 

**6.      Commitmentsand Contingencies**

 

***(a)***                                  Environmental

 

*(i)           OzoneTransport Rulemakings*

 

In October 1998, the United States Environmental Protection Agency(EPA) finalized 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 United States including the three states in which ourelectric utilities 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

 

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**NOTESTO CONDENSED FINANCIAL STATEMENTS**

 

under the NOX SIP Call. Various states and industry groups challenged the final rules in theCourt of Appeals for the District of Columbia Circuit, but the court upheld thekey provisions of the rules.

 

The EPA has proposed withdrawal of the Section 126 rule in states withapproved rules under the final NOX SIP Call, which includes Indiana,Kentucky, and Ohio.  All three stateshave adopted a cap and trade program as the mechanism to achieve the requiredreductions.  In September 2000, **Cinergy** announced a plan for itssubsidiaries, **CG&E** and **PSI**, to invest in pollution control andother equipment to reduce NOX emissions.  We have installed selective catalyticreduction units (SCR) and other pollution controls and implemented certaincombustion improvements at various generating stations to meet the May 2004compliance deadline under the NOX SIP Call.  **Cinergy**also utilizes the NOX emission allowance market to buy or sell NOXemission allowances as appropriate.  Wecurrently estimate that we will incur capital costs of approximately $44million in addition to $757 million already incurred to comply with thisprogram.

 

*(ii)          Section126 Petitions*

 

In March 2004, the state of North Carolina filed a petition underSection 126 of the CAA in which it alleges that sources in 13 upwind statesincluding Ohio, Indiana, and Kentucky, significantly contribute to NorthCarolina’s non-attainment with certain ambient air quality standards.  Depending on the EPA’s final disposition ofthe pending petition and its proposal discussed above, **Cinergy’s** generating stations could becomesubject to requirements for additional sulfur dioxide and NOXemissions reductions.  It is unclear atthis time whether any additional reductions would be necessary beyond thoserequired under the CAA.

 

*(iii)         CleanAir Act Lawsuit*

 

In November 1999,and through subsequent amendments, the United States brought a lawsuit in theUnited States Federal District Court for the Southern District of Indiana(District Court) against **Cinergy**, **CG&E**, and **PSI** alleging various violations of the CAA.  Specifically, the lawsuit alleges that weviolated the CAA by not obtaining Prevention of Significant Deterioration(PSD), Non-Attainment New Source Review (NSR), and Ohio and Indiana SIP permitsfor various projects at our owned and co-owned generating stations.  Additionally, the suit claims that weviolated an Administrative Consent Order entered into in 1998 between the EPAand **Cinergy** relating to allegedviolations of Ohio’s SIP provisions governing particulate matter at Unit 1 at **CG&E’s** W.C. Beckjord Generating Station(Beckjord Station).  The suit seeks (1)injunctive relief 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, Wabash River Generating Station, and Gibson GeneratingStation (Gibson Station), and (2) civil penalties in amounts of up to $27,500per day for each violation.  In addition,three northeast states and two environmental groups have intervened in thecase.  The case is currently indiscovery, and the District Court has set the case for trial by jury commencingin February 2006.

 

In March 2000, theUnited 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 Columbus Southern Power Company (CSP) and jointly-owned byCSP, 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

 

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**NOTESTO CONDENSED FINANCIAL STATEMENTS**

 

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 cannot seek monetary damages for alleged violations that occurred priorto November 3, 1994; however, they are entitled to seek injunctive relief forsuch alleged violations.  Neither partyappealed that decision.

 

In addition, **Cinergy** and **CG&E** have been informed by DP&L that in June 2000, theEPA issued a Notice of Violation (NOV) to DP&L for alleged violations ofPSD, NSR, and Ohio SIP requirements at a generating station operated byDP&L and jointly-owned by **CG&E**.  The NOV indicated the EPA may (1) issue anorder requiring compliance with the requirements of the Ohio SIP, or (2) bringa civil action seeking injunctive relief and civil penalties of up to $27,500per day for each violation.  In September2004, Marilyn Wall and the Sierra Club brought a lawsuit against **Cinergy**, DP&L and CSP for alleged violations of the CAAat this same generating station.

 

It is not possible to predict whether resolution of these matters wouldhave a material effect on our financial position or results of operations.  We intend to defend against the allegations,discussed above, vigorously in court.  

 

* (iv)        Carbon Dioxide (CO2 ) Lawsuit*

 

In July 2004, the states of Connecticut, New York, California, Iowa,New Jersey, Rhode Island, Vermont, Wisconsin, and the City of New York broughta lawsuit in the United States District Court for the Southern District of NewYork against **Cinergy** and AmericanElectric Power Company, Inc., American Electric Power Service Corporation, TheSouthern Company, Tennessee Valley Authority, and Xcel Energy Inc.  That same day, a similar lawsuit was filedagainst the same companies by Open Space Institute, Inc., Open SpaceConservancy, Inc., and The Audubon Society of New Hampshire.  These lawsuits allege that the defendants’emissions of CO2 from the combustion of fossil fuels at electricgenerating facilities contribute to global warming and amount to a publicnuisance.  The complaints also allegethat the defendants could generate the same amount of electricity whileemitting significantly less CO2. Plaintiffs are seeking an injunction requiring each defendant to cap itsCO2 emissions and then reduce them by a specified percentage eachyear for at least a decade.  **Cinergy** intends to defend this lawsuitvigorously in court and filed a motion to dismiss with the other defendants inSeptember 2004; however, we are not able to predict whether resolution of thesematters would have a material effect on our financial position or results ofoperations.

 

*(v)           SelectiveCatalytic Reduction Units at Gibson Generating Station*

 

In May 2004, SCRs and other pollution control equipment becameoperational at Units 4 and 5 of **PSI’s**Gibson Station in accordance with compliance deadlines under the NOXSIP Call.  In June and July 2004, GibsonStation temporarily shut down the equipment on these units due to a concernover an acid aerosol mist haze (plume) sometimes occurring in areas near theplant.  Portions of the plume from thoseunits’ stacks appeared to break apart and descend to ground level at certaintimes under certain weather conditions. As a result, and, working with the City of Mt. Carmel, Illinois,Illinois EPA, Indiana Department of Environmental Management (IDEM), UnitedStates EPA, and the State of Illinois, we developed a protocol regarding theuse of the SCRs while we explore alternatives to address this issue.  After the protocol was finalized, theIllinois Attorney General brought an action in Wabash County Circuit Court against **PSI** seeking a preliminary injunction to enforce the protocol.  In August 2004, the court granted thatpreliminary injunction.  **PSI** is appealing that decision to the Fifth DistrictAppellate Court, but we cannot predict the ultimate outcome of that appeal orof the underlying action by the Illinois Attorney General.

 

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**NOTESTO CONDENSED FINANCIAL STATEMENTS**

 

We will seek recovery of any related capital as well as increasedemission allowance expenditures through the regulatory process.  Wedo not believe costs related to resolving this matter will have a materialimpact on our financial position or results of operations.

 

*(vi)         ManufacturedGas Plant (MGP) Sites*

 

Prior to the 1950s, gas was produced at MGPsites through a process that involved the heating of coal and/or oil.  The gas produced from this process was soldfor residential, commercial, and industrial uses.

 

Coal tar residues, related hydrocarbons, andvarious metals have been found at former MGP sites in Indiana, including atleast 22 sites that **PSI** or itspredecessors previously owned and sold in a series of transactions withNorthern Indiana Public Service Company (NIPSCO) and Indiana Gas Company, Inc.(IGC).

 

The 22 sites are in the process of beingstudied and will be remediated, if necessary. In 1998 NIPSCO, IGC, and **PSI**entered into Site Participation and Cost Sharing Agreements to allocateliability and responsibilities between them. The IDEM oversees investigation and cleanup of all of these sites.  Thus far, **PSI**has primary responsibility for investigating, monitoring and, if necessary,remediating nine of these sites.  InDecember 2003, **PSI** entered into avoluntary remediation plan with the state of Indiana, providing a formalframework for the investigation and cleanup of the sites for which **PSI** has primary responsibility.

 

In April 1998, **PSI** filed suit in Hendricks County in the state of Indianaagainst 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 issued a variety of rulings with respect to the claimsand defenses in the litigation.  **PSI**appealed certain adverse rulings to theIndiana Court of Appeals and the appellate court has remanded the case to thetrial court.  The court has set the casefor trial commencing in January 2005.  Atthe present time, **PSI** cannotpredict the 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 and remediatethe sites as outlined in the voluntary remediation plan.  As additional facts become known andinvestigation is completed, we will assess whether 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** and **ULH&P**have performed site assessments on certain of their sites where we believe MGP activitieshave occurred at some point in the past and have found no imminent risk to theenvironment.  At the present time, **CG&E** and **ULH&P** cannot predict whether investigation and/orremediation will be required in the future at any of these sites. 

 

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**NOTESTO CONDENSED FINANCIAL STATEMENTS**

 

*(vii)        AsbestosClaims Litigation*

 

**CG&E** and **PSI** have been named as defendants orco-defendants in lawsuits related to asbestos at their electric generatingstations.  Currently, there areapproximately 100 pending lawsuits.  Inthese lawsuits, plaintiffs claim to have been exposed to asbestos-containingproducts in the course of their work at the **CG&E**and **PSI** generating stations.  The plaintiffs further claim that as theproperty owner of the generating stations,**CG&E** and **PSI** shouldbe held liable for their injuries and illnesses based on an alleged duty towarn and protect them from any asbestos exposure.  A majority of the lawsuits to date have beenbrought against **PSI**.  The impact on **CG&E’s** and **PSI’s**financial position or results of operations of these cases to date has not beenmaterial.

  

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

 

At this time, **CG&E** and**PSI**are not able to predict theultimate outcome of these lawsuits or the impact on **CG&E’s** and **PSI’s**financial position or results of operations.

 

***(b)***                                  Regulatory

 

*(i)           PSIRetail Electric Rate Case*

 

In December 2002,**PSI**filed a petition with the Indiana Utility RegulatoryCommission (IURC) seeking approval of an increase in base retail electric ratesand approval of certain rate recovery mechanisms.  In May 2004, the IURC issued an order in thiscase and, consequently, **PSI** implementedbase retail electric rate changes to its tariffs.  When combined with revenue increasesattributable to **PSI’s** environmentalconstruction-work-in-progress tracking mechanism, the order results in anapproximate $140 million increase in annual revenues.  **PSI’s** originalrequest for an approximate $180 million annual revenue increase was reduced byapproximately $20 million for a lower return on equity, approximately $15million related to profits from off-system sales (subject to future adjustmentthrough a tracking mechanism and a 50/50 sharing agreement), and approximately$5 million of additional items.  Theorder authorizes full recovery of all requested regulatory assets and anoverall 7.3 percent return, including a 10.5 percent return on equity.  In addition, the IURC’s order provides **PSI** the continuation of a purchased power tracker and theestablishment of new trackers for future NOX emission allowance costs andcertain costs related to the Midwest Independent System Operator, Inc.

 

*(ii)          CG&ERate Filings*

 

As discussed in more detail inthe 2003 10-K, **CG&E**made multiple ratefilings in 2003 with the Public Utilities Commission of Ohio (PUCO) seekingapproval of **CG&E's**methodology forestablishing market-based rates for generation service at the end of the marketdevelopment period and to recover investments made in the transmission anddistribution system.  In December 2003,these filings, and **CG&E's**proposalfor establishing its post-market development period market pricing methodology,were consolidated for hearing before the PUCO.  In addition, the PUCO requested in theseproceedings that **CG&E** propose a ratestabilization plan as an alternative to market-based rates so as to mitigatethe potential for significant rate increases when the market development(frozen rate) period comes to an end.  Thereis no requirement in Ohio law that **CG&E** filesuch a plan.  However, in January 2004, **CG&E** filed its proposed rate stabilization plan. 

 

In May 2004, **CG&E** entered into a settlement agreement with many ofthe parties to these proceedings requesting that the PUCO approve a modifiedversion of the rate stabilization plan.  Underthis plan, **CG&E** would begin to collect anon-bypassable provider of last resort (POLR) charge intended to providerecovery for increased capacity reserves, environmental compliance and emissionallowance expenditures.  The plan also establisheda bypassable generation charge, which included a fuel cost recovery mechanism.  It allowed for a two-year extension of theresidential regulatory transition charge (RTC) in 2009 and 2010 and a three-yearextension of the five percent residential generation rate reduction in theyears 2006-2008.  Finally, it providedfor deferral and recovery of certain transmission and distribution costs.

 

 

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**NOTESTO CONDENSED FINANCIAL STATEMENTS**

 

In September 2004, the PUCO issued an order seeking to modify severalkey provisions of this settlement.  ThePUCO order, among other things, would not allow extension of the RTC forresidential customers or permit deferral and recovery of certain transmissionand distribution costs from residential customers. The PUCO order would allow **CG&E** to end the five percent generation rate reductionfor residential customers (i.e., increase the residential generation rate by fivepercent) beginning January 1, 2006, but would also allow certain customers whohave switched to another generation supplier to entirely avoid the POLRcharge.  As a result of thesemodifications, **CG&E** filed a petition forrehearing in October 2004.  The rehearingpetition requests one of the following to be effective January 1, 2005 fornon-residential customers and January 1, 2006 for residential customers:

 

•      Approval of the modified ratestabilization plan reflected in the May 2004 settlement (as discussed above);

•      Approval of a further modified ratestabilization plan, which includes some of the same provisions as the May 2004plan.  However, this plan (a) changes thePOLR charge to provide recovery only for environmental compliance expendituresand allows customers that have switched to by-pass this charge, (b) adds aninfrastructure maintenance fund charge, (c) adds a system reliability trackerthat would provide recovery primarily for capacity and purchased power, (d)includes recovery of emission allowances costs as part of the fuel costrecovery mechanism, and (e) ends the five percent generation rate reduction forresidential customers but does not include an extension of the residential RTC;or 

•      Approval to proceed with market-basedrates, which is permitted under **CG&E’s**existing transition plan.

 

A rehearing order is expected in the fourth quarter of 2004.  We cannot predict the outcome of thisproceeding.  Because the ratestabilization plan is a voluntary filing on **CG&E's**part,**CG&E**may reject the PUCO's order ifit provides for a rate stabilization plan that is unacceptable to **CG&E**.

** **

In conjunction with theconsolidated filings discussed above, **CG&E** hasalso filed an application for an annual increase of approximately $78 millionin electric distribution base rates, to be effective in the first quarter of2005 for non-residential customers and January 1, 2006 for residentialcustomers.  The proposed ratestabilization plans described above provide for **CG&E**to withdraw this base rate case upon approval of the rate stabilizationplan.  In such event, **CG&E** can then file a new distribution base rate case,with rates to become effective January 1, 2006. If the PUCO's order on rehearing provides for a rate stabilization planthat is unacceptable to **CG&E**, **CG&E** may seek to proceed immediately with market-basedrates for its commercial, industrial and other public authority customerclasses and also proceed immediately with this base rate case for such classes.  Market based rates must be approved by thePUCO and would eliminate the various deferral and recovery mechanismscontemplated with the rate stabilization plan.

 

*(iii)         ULH&PGas Rate Case*

 

In the second quarter of 2001, **ULH&P** filed a retail gasrate case with the Kentucky Public Service Commission (KPSC) requesting, amongother things, deferral of costs associated with an accelerated gas mainreplacement program of up to $112 million over ten years.  The costs would be recovered through atracking mechanism for an initial three year period, with the possibility ofrenewal up to ten years.  The trackingmechanism allows **ULH&P** to recoverdepreciation costs and rate of return annually over the life of the deferredassets.  Through September 30, 2004, **ULH&P** has recovered approximately $3.9 million under this trackingmechanism.  The Kentucky Attorney Generalhas

 

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**NOTESTO CONDENSED FINANCIAL STATEMENTS**

 

appealed to the Franklin Circuit Court theKPSC’s approval of the tracking mechanism and the new tracking mechanismrates.  At the present time, **ULH&P** cannotpredict the timing or outcome of this litigation.

 

*(iv)         GasDistribution Plant*

 

In June 2003, the PUCO approved an amended settlement agreement between**CG&E** and the PUCO Staff in agas distribution safety case arising out of a gas leak at a servicehead-adapter (SHA) style riser on **CG&E’s**distribution system.  The amendedsettlement agreement required **CG&E**to expend a minimum of $700,000 to replace SHA risers by December 31, 2003, andto file a comprehensive plan addressing all SHA risers on its distributionsystem.  **Cinergy**has approximately 180,000 SHA risers on itsdistribution system, of which approximately 150,000 are in **CG&E’s** service area and approximately30,000 are in **ULH&P’s** servicearea.  Further investigation to determinewhether any additional SHA risers will need maintenance or replacement isestimated to be completed by the end of the third quarter of 2005.  If **CG&E**and**ULH&P** determine thatreplacement of all SHA risers is appropriate, we currently estimate that thereplacement cost could be approximately $70 million for **CG&E**, which includes approximately $10million for **ULH&P**.  **CG&E**and**ULH&P** would pursuerecovery of this cost through rates.  Atthis time, **Cinergy**, **CG&E**, and**ULH&P** cannot predict the outcome of this matter.

 

***(c)***                                  Other

* *

*(i)           GasCustomer Choice*

 

In January 2000, CinergyInvestments, Inc. (Investments) sold Cinergy Resources, Inc. (Resources), aformer subsidiary, to Licking Rural Electrification, Inc., doing business as TheEnergy Cooperative.  In February 2001, **Cinergy, CG&E**, and Resources were named as defendants inthree class action lawsuits brought by customers relating to The EnergyCooperative's removal from the Ohio Gas Customer Choice program and the failureto deliver gas to customers. Subsequently, these class action suits were amended and consolidatedinto one suit (Class-action).  In October2001, **Cinergy, CG&E,** and Investmentsinitiated litigation against The Energy Cooperative requesting indemnificationby The Energy Cooperative for the claims asserted by former customers in theClass-action litigation (Cinergy lawsuit). 

 

In March 2001, **Cinergy**, **CG&E**, andInvestments were named as defendants in a lawsuit filed by The EnergyCooperative and Resources (Energy Cooperative lawsuit).  This lawsuit concerned any obligations orliabilities Investments may have had to The Energy Cooperative following itssale of Resources.  All three matterswere settled in the second quarter of 2004. In the Energy Cooperative lawsuit, The Energy Cooperative agreed toindemnify**Cinergy,****CG&E**andInvestments for the claims asserted by the former residential customers in theClass-action litigation.  In exchange,**Cinergy** has agreed to settle claims that it brought in the **Cinergy** lawsuit.  Thesettlement is pending final court approval. None of these settlements are material to **Cinergy’s**financial position or results of operations.

 

 

*(ii)          EnergyMarket Investigations*

 

In July 2003, **Cinergy**received a subpoena from the Commodity Futures Trading Commission (CFTC).  As has been previously reported by the press,the CFTC has served subpoenas on numerous

 

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**NOTESTO CONDENSED FINANCIAL STATEMENTS**

 

other energy companies.  The CFTCrequest sought certain information regarding our trading activities, includingprice reporting to energy industry publications for the period May 2000 throughJanuary 2001.  Based on our review ofthese matters, we terminated one employee and took disciplinary action on asecond employee.  We have beencooperating fully with the CFTC and are negotiating to resolve thisinvestigation.

 

In August 2003, **Cinergy**,along with Cinergy Marketing & Trading (Marketing & Trading) and 37other companies, was named as a defendant in civil litigation filed as apurported class action on behalf of all persons who purchased and/or sold NewYork Mercantile Exchange natural gas futures and options contracts betweenJanuary 1, 2000, and December 31, 2002. The complaint alleges that improper price reporting caused damages tothe class.  Two similar lawsuits havesubsequently been filed, and these three lawsuits have been consolidated forpretrial purposes.  Plaintiffs filed aconsolidated class action complaint in January 2004.  **Cinergy’s**motion to dismiss was granted in September 2004 and Marketing & Trading’smotion to dismiss is currently before the court.  We believe this action is without merit andintend to defend this lawsuit vigorously.

 

In the second quarter of 2003, **Cinergy**received initial and follow-up third-party subpoenas from the Securities andExchange Commission (SEC) requesting information related to particular tradingactivity with one of its counterparties who was the target of an investigationby the SEC.  **Cinergy** has fully cooperated with the SEC in connection withthis matter.

 

**Cinergy**has also been cooperating with theAssistant United States Attorney in the Southern District of Texas regardingvarious investigations the Assistant United States Attorney has into energymarket practices.  We understand that weare neither a target nor are we under investigation by the Department ofJustice in relation to these communications.

 

At this time, we do not believe the outcome of these investigations andlitigation will have a material impact on **Cinergy’s**financial position or results of operations.

 

*(iii)         Patents*

 

Ronald A. Katz Technology Licensing, L.P. (RAKTL) has offered us alicense to a portfolio of patents claiming that the patents may be infringed bycertain products and services utilized by us. The patents purportedly relate to various aspects of telephone callprocessing in **Cinergy**callcenters.  As of this date, no legalproceedings have been instituted against us, but if the RAKTL patents arevalid, enforceable, and apply to our business, we could be required to seek alicense from RAKTL or to discontinue certain activities.  Based on the information we have at thistime, we do not believe resolution of this matter will have a material impacton our financial position or results of operations.

 

*(iv)         SyntheticFuel*

 

In July 2002, Cinergy Capital & Trading acquired a coal-basedsynthetic fuel production facility.  Thesynthetic fuel produced at this facility qualifies for tax credits (through2007) in accordance with Internal Revenue Code (IRC) Section 29 if certainrequirements are satisfied.  The threekey requirements are that (a) the synthetic fuel differs significantly inchemical composition from the coal used to produce such synthetic fuel, (b) thefuel produced is sold to an unrelated entity and (c) the fuel was produced froma facility that was placed in service before July 1, 1998.

 

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**NOTESTO CONDENSED FINANCIAL STATEMENTS**

 

During the third quarter of 2004, several unrelated entities announcedthe Internal Revenue Service’s (IRS) intent to challenge the placed in servicedates of some of the entities’ synthetic fuel plants.  A successful IRS challenge could result indisallowance of all credits previously claimed for fuel produced by the subjectplants.  **Cinergy’s**sale of synthetic fuel has generated approximately $189 million in tax creditsthrough September 2004.

 

The IRS has not yet audited **Cinergy** for anytax year in which **Cinergy** hasclaimed Section 29 credits related to synthetic fuel.  However, it is reasonable to anticipate thatthe IRS will evaluate the placed in service date and other key requirements forclaiming the credit.

 

**Cinergy** received aprivate letter ruling from the IRS in connection with the acquisition of thefacility that specifically addressed the significant chemical changerequirement.  Additionally, although notaddressed in the letter ruling, we believe that our facility’s in service datemeets the Section 29 requirements.  

 

IRC Section 29 also provides for a phase out of the credit based on theprice of crude oil.  The phase-out isbased on a prescribed calculation and definition of crude oil prices within theIRC.  Although the price of crude oil hasincreased significantly in 2004, we presently do not expect any impact on ourability to utilize Section 29 credits in 2004. Our results for the nine months ended September 30, 2004 include $69million of tax credits.  If crude oilprices continue to increase, our ability to utilize credits beyond 2004 couldbe impacted.

 

*(v)           Guarantees*

 

In the ordinary course of business, **Cinergy**enters into various agreements providing financial or performanceassurances to third parties on behalf of certain unconsolidated subsidiariesand joint ventures.  These agreements areentered into primarily to support or enhance the creditworthiness otherwiseattributed to these entities****on astand-alone basis, thereby facilitating the extension of sufficient credit toaccomplish their intended commercial purposes. The guarantees have various termination dates, from short-term (lessthan one year) to open-ended.  

 

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

 

**Cinergy**hasguaranteed the payment of $11 million as of September 30, 2004, for borrowingsby individuals under the Director, Officer, and Key Employee Stock PurchaseProgram.  **Cinergy**may be obligated to pay the debt’s principal and anyrelated interest in the event of an unexcused breach of a guaranteed paymentobligation by certain directors, officers, and key employees.  The guarantees do not have a set terminationdate; however, the borrowings associated with these guarantees are due in thefirst quarter of 2005.

 

**Cinergy Corp.** hasalso provided performance guarantees on behalf of certain unconsolidatedsubsidiaries and joint ventures.  Theseguarantees support performance under various agreements and instruments (suchas construction contracts, operations and maintenance agreements, and energy

 

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**NOTESTO CONDENSED FINANCIAL STATEMENTS**

 

service agreements).  **Cinergy Corp.**may be liable in the event ofan unexcused breach of a guaranteed performance obligation by an unconsolidatedsubsidiary.  **Cinergy Corp.** has estimated its maximum potential liability tobe $72 million under these guarantees as of September 30, 2004.  **CinergyCorp.** may also have recourse to third parties for claims required tobe paid under certain of these guarantees. The majority of these guarantees expire at the completion of theunderlying performance agreement, the majority of which expire from 2016 to2019.

 

**Cinergy**has enteredinto contracts that include indemnification provisions as a routine part of itsbusiness activities.  Examples of these****contracts include purchase and saleagreements and operating agreements.  Ingeneral, these provisions indemnify the counterparty for matters such asbreaches of representations and warranties and covenants contained in thecontract.  In some cases, particularlywith respect to purchase and sale agreements, the potential liability forcertain indemnification obligations is capped, in whole or in part (generallyat an aggregate amount not exceeding the sale price), and subject to adeductible amount before****anypayments would become due.** **In other cases (such asindemnifications for willful misconduct of employees in a joint venture), themaximum potential liability is not estimable given that the magnitude of anyclaims under those indemnifications would be a function of the extent ofdamages actually incurred.  **Cinergy** has estimated the maximum potentialliability, where estimable, to be $127 million under these indemnificationprovisions.  The termination period forthe majority of matters provided by indemnification provisions in these typesof agreements generally ranges from 2004 to 2009.    

 

We believe the likelihood that **Cinergy**would be required to perform or otherwise incur any significantlosses associated with any or all of the guarantees described in the precedingparagraphs is remote.

 

**7.     Pensionand Other Postretirement Benefits**

 

As discussed in the 2003 10-K, **CinergyCorp.** sponsors both pension and other postretirement benefitsplans.  Our qualified defined benefitpension plans cover substantially all United States 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 that cover officers,certain other key employees, and non-employee directors.  We provide certain health care and lifeinsurance benefits to retired United States employees and their eligibledependents.  These benefits are subjectto minimum age and service requirements. The health care benefits include medical coverage, dental coverage, andprescription drugs and are subject to certain limitations, such as deductiblesand co-payments.

 

39

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**NOTESTO CONDENSED FINANCIAL STATEMENTS**

 

Our benefit plans’ costs for the quarter and year to date endedSeptember 30, 2004 and 2003, included the following components:

 
| ** **                                          | ** ** | ** **                      | ** **   | ** **                          | ** ** | ** **                         | ** **   | ** ** | ** ** | ** **   | ** **   | ** ** | ** ** |
|-----------------------------------------------------|------------|---------------------------------|--------------|-------------------------------------|------------|------------------------------------|--------------|------------|------------|--------------|--------------|------------|------------|
| ** **                                          | ** ** | **Qualified  Pension Benefits** | ** **   | **Non-Qualified  Pension Benefits** | ** ** | **Other Postretirement  Benefits** | ** **   |
| **Quarter Ended September 30**                      |       | **2004**                        | ** **   | 2003                                |       | **2004**                           | ** **   | 2003       |       | **2004**     | ** **   | 2003       |       |
| * *                                            | * *   | ***(in millions)***             | * *     |
| * *                                            | * *   | *** ***                    | *** *** | * *                            | * *   | *** ***                       | *** *** | * *   | * *   | *** *** | *** *** | * *   | * *   |
| Service cost                                        |       | **$**                           | **8.8**      | ** **                          | $          | 7.8                                |         | **$**      | **1.2**    | ** **   | $            | 0.8        |       | **$** | **1.2** | ** ** | $ | 1.0 |   |
| Interest cost                                       |       | **22.1**                        | ** **   | 21.5                                |       | **1.7**                            | ** **   | 1.6        |       | **5.4**      | ** **   | 5.6        |       |
| Expected return on plans’ assets               |       | **(20.1**                       | **)**        | (20.2                               | )          | **—**                         | ** **   | —     |       | **—**   | ** **   | —     |       |
| Amortization of transition (asset)  obligation      |       | **(0.1**                        | **)**        | (0.2                                | )          | **—**                         | ** **   | —     |       | **0.1**      | ** **   | 0.9        |       |
| Amortization of prior service cost                  |       | **1.1**                         | ** **   | 1.2                                 |       | **0.5**                            | ** **   | 0.3        |       | **—**   | ** **   | —     |       |
| Recognized actuarial (gain) loss                    |       | **0.5**                         | ** **   | —                              |       | **0.7**                            | ** **   | 0.5        |       | **1.9**      | ** **   | 1.3        |       |
| Voluntary early retirement costs (Statement  88)(1) |       | **—**                      | ** **   | 2.1                                 |       | **—**                         | ** **   | —     |       | **—**   | ** **   | —     |       |
| Net periodic benefit cost                           |       | **$**                           | **12.3**     | ** **                          | $          | 12.2                               |         | **$**      | **4.1**    | ** **   | $            | 3.2        |       | **$** | **8.6** | ** ** | $ | 8.8 |   |
|                                                |       | ** **                      | ** **   |                                |       | ** **                         | ** **   |       |       | ** **   | ** **   |       |       |
| **Year to Date September 30**                       |       | ** **                      | ** **   |                                |       | ** **                         | ** **   |       |       | ** **   | ** **   |       |       |
| * *                                            | * *   | *** ***                    | *** *** | * *                            | * *   | *** ***                       | *** *** | * *   | * *   | *** *** | *** *** | * *   | * *   |
| * *                                            | * *   | *** ***                    | *** *** | * *                            | * *   | *** ***                       | *** *** | * *   | * *   | *** *** | *** *** | * *   | * *   |
| Service cost                                        |       | **$**                           | **26.4**     | ** **                          | $          | 23.4                               |         | **$**      | **3.6**    | ** **   | $            | 2.4        |       | **$** | **3.8** | ** ** | $ | 3.0 |   |
| Interest cost                                       |       | **66.3**                        | ** **   | 64.5                                |       | **5.1**                            | ** **   | 4.8        |       | **16.8**     | ** **   | 16.8       |       |
| Expected return on plans’ assets               |       | **(60.3**                       | **)**        | (60.6                               | )          | **—**                         | ** **   | —     |       | **—**   | ** **   | —     |       |
| Amortization of transition (asset)  obligation      |       | **(0.3**                        | **)**        | (0.6                                | )          | **—**                         | ** **   | —     |       | **1.0**      | ** **   | 2.6        |       |
| Amortization of prior service cost                  |       | **3.3**                         | ** **   | 3.6                                 |       | **1.5**                            | ** **   | 0.9        |       | **—**   | ** **   | —     |       |
| Recognized actuarial (gain) loss                    |       | **1.5**                         | ** **   | —                              |       | **2.1**                            | ** **   | 1.5        |       | **5.9**      | ** **   | 3.9        |       |
| Voluntary early retirement costs (Statement  88)(1) |       | **—**                      | ** **   | 6.3                                 |       | **—**                         | ** **   | —     |       | **—**   | ** **   | —     |       |
| Net periodic benefit cost                           |       | **$**                           | **36.9**     | ** **                          | $          | 36.6                               |         | **$**      | **12.3**   | ** **   | $            | 9.6        |       | **$** | **27.5** | ** ** | $ | 26.3 |   |

 
| (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). |
|-----|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

The net periodic benefit costs by registrant for the quarter and yearto date ended September 30, 2004 and 2003, were as follows:

 
| ** **                     | ** ** | ** **                      | ** **   | ** **                          | ** ** | ** **                         | ** **   | ** ** | ** ** | ** **   | ** **   | ** ** | ** ** |
|--------------------------------|------------|---------------------------------|--------------|-------------------------------------|------------|------------------------------------|--------------|------------|------------|--------------|--------------|------------|------------|
| ** **                     | ** ** | **Qualified  Pension Benefits** | ** **   | **Non-Qualified  Pension Benefits** | ** ** | **Other Postretirement  Benefits** | ** **   |
| **Quarter Ended September 30** |       | **2004**                        | ** **   | 2003                                |       | **2004**                           | ** **   | 2003       |       | **2004**     | ** **   | 2003       |       |
| * *                       | * *   | ***(in millions)***             | * *     |
| * *                       | * *   | *** ***                    | *** *** | * *                            | * *   | *** ***                       | *** *** | * *   | * *   | *** *** | *** *** | * *   | * *   |
| **Cinergy(1)**                 |       | **$**                           | **12.3**     | ** **                          | $          | 12.2                               |         | **$**      | **4.1**    | ** **   | $            | 3.2        |       | **$** | **8.6** | ** ** | $ | 8.8 |   |
| **CG&E**and subsidiaries   |       | **3.7**                         | ** **   | 2.4                                 |       | **0.2**                            | ** **   | 0.2        |       | **2.0**      | ** **   | 2.3        |       |
| **PSI**                        |       | **3.2**                         | ** **   | 2.9                                 |       | **0.2**                            | ** **   | 0.2        |       | **4.7**      | ** **   | 4.4        |       |
| **ULH&P**                  |       | **0.4**                         | ** **   | 0.3                                 |       | **—**                         | ** **   | —     |       | **0.2**      | ** **   | 0.2        |       |
| ** **                     |       | ** **                      | ** **   |                                |       | ** **                         | ** **   |       |       | ** **   | ** **   |       |       |
| **Year to Date September 30**  |       | ** **                      | ** **   |                                |       | ** **                         | ** **   |       |       | ** **   | ** **   |       |       |
| ** **                     | * *   | *** ***                    | *** *** | * *                            | * *   | *** ***                       | *** *** | * *   | * *   | *** *** | *** *** | * *   | * *   |
| *** ***                   | * *   | *** ***                    | *** *** | * *                            | * *   | *** ***                       | *** *** | * *   | * *   | *** *** | *** *** | * *   | * *   |
| **Cinergy(1)**                 |       | **$**                           | **36.9**     | ** **                          | $          | 36.6                               |         | **$**      | **12.3**   | ** **   | $            | 9.6        |       | **$** | **27.5** | ** ** | $ | 26.3 |   |
| **CG&E**and subsidiaries   |       | **11.1**                        | ** **   | 7.2                                 |       | **0.6**                            | ** **   | 0.6        |       | **6.6**      | ** **   | 6.9        |       |
| **PSI**                        |       | **9.6**                         | ** **   | 8.7                                 |       | **0.6**                            | ** **   | 0.6        |       | **14.7**     | ** **   | 13.2       |       |
| **ULH&P**                  |       | **1.2**                         | ** **   | 0.9                                 |       | **—**                         | ** **   | —     |       | **0.6**      | ** **   | 0.6        |       |

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

 

On December 8, 2003, President Bush signed into law the MedicarePrescription Drug, Improvement and Modernization Act of 2003 (the Act).  The Act introduced a prescription drugbenefit to retirees as well as a federal subsidy to sponsors of retiree healthcare benefit plans that provide a prescription drug benefit that is actuariallyequivalent to the benefit provided by Medicare. We believe that our

 

40

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**NOTESTO CONDENSED FINANCIAL STATEMENTS**

 

coverage for prescription drugs is at least actuarially equivalent tothe benefits provided by Medicare for most current retirees because our benefitsfor that group substantially exceed the benefits provided by Medicare, therebyallowing us to qualify for the subsidy. We have accounted for the subsidy as a reduction of our accumulatedpostretirement benefit obligation (APBO). The APBO was reduced by approximately $17 million and will be amortizedas an actuarial gain over future periods, thus reducing future benefitcosts.  The impact on our 2004 netperiodic benefit cost is not material. Our accounting treatment for the subsidy is consistent with FASB StaffPosition No. 106-2, *Accounting andDisclosure Requirements Related to the Medicare Prescription Drug, Improvementand Modernization Act of 2003*.

 

**8.     InvestmentActivity**

 

***(a)***                                  InvestmentImpairment

 

**Cinergy** holds aportfolio of direct and indirect investments in the Power Technology andInfrastructure Services Business Unit (Power Technology and Infrastructure)(discussed further in Note 9).  During2004, **Cinergy** recognizedapproximately $49 million in impairment charges associated with thisportfolio.  The majority of these chargesrelate to a company in which **Cinergy**holds a non-controlling interest, that 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-temporarilyimpaired.  These impairment charges areincluded in *Miscellaneous Income (Expense) –Net* in **Cinergy’s**CondensedConsolidated Statements of Income.

 

***(b)***                                  Sale ofInvestment

 

Power Technology and Infrastructure holds an investment in a companythat develops, owns and operates wireless communication towers.  In July 2004, this company agreed to sell themajority of its assets.  The transactionis expected to close in the fourth quarter of 2004 and we would anticipaterecording a gain of approximately $20 million relating to this sale at thattime.  These earnings will be reflectedin *Equity in Earnings of UnconsolidatedSubsidiaries* in **Cinergy’s**CondensedConsolidated Statements of Income.

 

**9.     FinancialInformation by Business Segment**

 

As discussed in the 2003 10-K, we conduct operations through oursubsidiaries, and manage through the following three reportable segments:

 

•                  CommercialBusiness Unit (Commercial);

•                  RegulatedBusinesses Business Unit (Regulated Businesses); and 

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

 

Commercial manages wholesale generation and energy marketing andtrading of energy commodities. Additionally, Commercial operates and maintains our electric generatingplants including some of our jointly-owned plants.  Commercial is also responsible for all of ourinternational operations, performs energy risk management activities, and providescustomized energy solutions. 

 

41

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**NOTESTO CONDENSED FINANCIAL STATEMENTS**

 

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

 

Power Technology and Infrastructure primarily manages Cinergy Ventures,LLC (Ventures).  Ventures identifies,invests in, and integrates new energy technologies into **Cinergy’s** existing businesses, focusedprimarily on operational efficiencies and clean energy technologies.  In addition, Power Technology andInfrastructure manages our investments in other energy infrastructure andtelecommunication service providers.

 

Following are the financial results by business unit.  Certain prior year amounts have beenreclassified to conform to the current presentation.

 

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**NOTESTO CONDENSED FINANCIAL STATEMENTS**

 

Financial results by business unit for the quarters ended September 30,2004, and September 30, 2003, are as indicated below.  

 
| ** **                           | ** **                                                                                                                                                          | ** **                 | ** **  | ** **                | ** ** | ** **                               | ** ** | ** **  | ** ** | ** **                        | ** ** | ** **       | ** ** |
|--------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------------------------|-------------|---------------------------|------------|------------------------------------------|------------|-------------|------------|-----------------------------------|------------|------------------|------------|
| ** **                           | ** **                                                                                                                                                          | ** **                 | ** **  | ** **                | ** ** | ** **                               | ** ** | ** **  | ** ** | ** **                        | ** ** | ** **       | ** ** |
| ** **                           | ** **                                                                                                                                                          | **Cinergy Business Units** | ** **  | ** **                | ** ** | ** **                               | ** ** |
| ** **                           | ** **                                                                                                                                                          | **Commercial**             | ** **  | **Regulated  Businesses** | ** ** | **Power Technology  and Infrastructure** | ** ** | **Total**   | ** ** | **Reconciling  Eliminations (1)** | ** ** | **Consolidated** | ** ** |
| ** **                           | ** **                                                                                                                                                          | ***(in thousands)***       | ** **  |
|                                 | * *                                                                                                                                                            | * *                   | * *    | * *                  | * *   | * *                                 | * *   | * *    | * *   | * *                          | * *   | * *         | * *   |
| **Quarter ended September 30, 2004** |                                                                                                                                                                |                       |        |                      |       |                                     |       |        |       |                              |       |             |       |
|                                 |                                                                                                                                                                |                       |        |                      |       |                                     |       |        |       |                              |       |             |       |
| **Operating revenues**               | ** **                                                                                                                                                          | ** **                 | ** **  | ** **                | ** ** | ** **                               | ** ** | ** **  | ** ** | ** **                        | ** ** | ** **       | ** ** |
| **External customers**               |                                                                                                                                                                | **$**                      | **432,284** |                      | **$**      | **696,298**                              | ** ** | **$**       | **1**      | ** **                        | **$**      | **1,128,583**    |       | **$** | **—** | ** ** | **$** | **1,128,583** | ** ** |
| **Intersegment revenues**            |                                                                                                                                                                | **45,701**                 |        | **59**                    |       | **—**                               | ** ** | **45,760**  |       | **(45,760**                       | **)**      | **—**       | ** ** |
|                                 |                                                                                                                                                                | ** **                 |        | ** **                |       | ** **                               | ** ** | ** **  |       | ** **                        | ** ** | ** **       | ** ** |
| **Gross margins**                    |                                                                                                                                                                | ** **                 |        | ** **                |       | ** **                               | ** ** | ** **  |       | ** **                        | ** ** | ** **       |       |
| **Electric**                         |                                                                                                                                                                | **201,373**                |        | **458,930**               |       | —                                   | ** ** | **660,303** |       | **—**                        | ** ** | **660,303**      | (3)        |
| **Gas**                              |                                                                                                                                                                | **5,622**                  |        | **39,884**                |       | —                                   | ** ** | **45,506**  |       | **—**                        | ** ** | **45,506**       | (4)        |
|                                 |                                                                                                                                                                | ** **                 |        | ** **                |       | ** **                               | ** ** | ** **  |       | ** **                        | ** ** | ** **       | ** ** |
| **Segment profit (loss)**(2)         |                                                                                                                                                                | **42,165**                 |        | **61,493**                |       | **(10,735**                              | **)**      | **92,923**  |       | **—**                        | ** ** | **92,923**       | ** ** |
|                                 |                                                                                                                                                                |                       |        |                      |       |                                     |       |        |       |                              |       |             |       |
|                                 |                                                                                                                                                                |                       |        |                      |       |                                     |       |        |       |                              |       |             |       |
| Quarter  ended September 30, 2003    |                                                                                                                                                                |                       |        |                      |       |                                     |       |        |       |                              |       |             |       |
|                                 | ** **                                                                                                                                                          | ** **                 | ** **  | ** **                | ** ** | ** **                               | ** ** | ** **  | ** ** | ** **                        | ** ** | ** **       | ** ** |
| Operating  revenues                  |                                                                                                                                                                |                       |        |                      |       |                                     |       |        |       |                              |       |             |       |
| External  customers                  |                                                                                                                                                                | $                          | 439,040     |                      | $          | 652,965                                  |       | $           | (28        | )                                 | $          | 1,091,977        |       | $ | — |   | $ | 1,091,977 |   |
| Intersegment  revenues               |                                                                                                                                                                | 43,056                     |        | 126                       |       | —                                   |       | 43,182      |       | (43,182                           | )          | —           |       |
|                                 |                                                                                                                                                                |                       |        |                      |       |                                     |       |        |       |                              |       |             |       |
| Gross  margins                       |                                                                                                                                                                |                       |        |                      |       |                                     |       |        |       |                              |       |             |       |
| Electric                             |                                                                                                                                                                | 190,569                    |        | 400,072                   |       | —                                   |       | 590,641     |       | —                            |       | 590,641          | (3)        |
| Gas                                  |                                                                                                                                                                | 11,415                     |        | 33,536                    |       | —                                   |       | 44,951      |       | —                            |       | 44,951           | (4)        |
|                                 |                                                                                                                                                                |                       |        |                      |       |                                     |       |        |       |                              |       |             |       |
| Segment  profit (loss)(2)            |                                                                                                                                                                | 52,204                     |        | 62,814                    |       | (3,037                                   | )          | 111,981     |       | —                            |       | 111,981          |       |
|                                 |                                                                                                                                                                |                       |        |                      |       |                                     |       |        |       |                              |       |             |       |
|                                 |                                                                                                                                                                |                       |        |                      |       |                                     |       |        |       |                              |       |             |       |
|                                 |                                                                                                                                                                |                       |        |                      |       |                                     |       |        |       |                              |       |             |       |
| (1)                                  | The Reconciling Eliminations category eliminates the intersegment  revenues of Commercial.                                                                          |
| (2)                                  | Management utilizes segment profit (loss), after taxes, to evaluate  segment performance.                                                                           |
| (3)                                  | Electric gross margin is calculated as *Electric operating revenues* less *Fuel and purchased power* expense from  the Condensed Consolidated Statements of Income. |
| (4)                                  | Gas gross margin is calculated as *Gas  operating revenues* less *Gas  purchased* expense from the Condensed Consolidated Statements of  Income.                    |
|                                 |                                                                                                                                                                |
|                                      |                                                                                                                                                                     |                            |             |                           |            |                                          |            |             |            |                                   |            |                  |            |  |  |  |  |  |  |  |

 

 

43

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**NOTESTO CONDENSED FINANCIAL STATEMENTS**

 

Financial results by business unit for year to date September 30, 2004and September 30, 2003, are as indicated below.

 
| ** **                                                        | ** ** | ** **                 | ** **    | ** **                | ** ** | ** **                               | ** ** | ** **    | ** ** | ** **                       | ** ** | ** **       | ** ** |
|-------------------------------------------------------------------|------------|----------------------------|---------------|---------------------------|------------|------------------------------------------|------------|---------------|------------|----------------------------------|------------|------------------|------------|
| ** **                                                        | ** ** | ** **                 | ** **    | ** **                | ** ** | ** **                               | ** ** | ** **    | ** ** | ** **                       | ** ** | ** **       | ** ** |
| ** **                                                        | ** ** | **Cinergy Business Units** | ** **    | ** **                | ** ** | ** **                               | ** ** |
| ** **                                                        | ** ** | **Commercial**             | ** **    | **Regulated  Businesses** | ** ** | **Power Technology  and Infrastructure** | ** ** | **Total**     | ** ** | **Reconciling  Eliminations(1)** | ** ** | **Consolidated** | ** ** |
| ** **                                                        | ** ** | ***(in thousands)***       | ** **    |
|                                                              | * *   | * *                   | * *      | * *                  | * *   | * *                                 | * *   | * *      | * *   | * *                         | * *   | * *         | * *   |
| **Year to Date****September  30****, 2004**                       |       |                       |          |                      |       |                                     |       |          |       |                             |       |             |       |
|                                                              |       |                       |          |                      |       |                                     |       |          |       |                             |       |             |       |
| **Operating revenues**                                            | ** ** | ** **                 | ** **    | ** **                | ** ** | ** **                               | ** ** | ** **    | ** ** | ** **                       | ** ** | ** **       | ** ** |
| **External customers**                                            |       | **$**                      | **1,228,388** |                      | **$**      | **2,242,585**                            |       | **$**         | **5**      | ** **                       | **$**      | **3,470,978**    | ** ** | **$** | **—** | ** ** | **$** | **3,470,978** | ** ** |
| **Intersegment revenues**                                         |       | **124,945**                |          | **83**                    |       | **—**                               | ** ** | **125,028**   | ** ** | **(125,028**                     | **)**      | **—**       | ** ** |
|                                                              |       | ** **                 |          | ** **                |       | ** **                               | ** ** | ** **    | ** ** | ** **                       | ** ** | ** **       | ** ** |
| **Gross margins**                                                 |       | ** **                 |          | ** **                |       | ** **                               | ** ** | ** **    | ** ** | ** **                       | ** ** | ** **       | ** ** |
| **Electric**                                                      |       | **570,119**                |          | **1,279,945**             |       | **—**                               | ** ** | **1,850,064** | ** ** | **—**                       | ** ** | **1,850,064**    | (3)        |
| **Gas**                                                           |       | **45,314**                 |          | **188,184**               |       | **—**                               | ** ** | **233,498**   | ** ** | **—**                       | ** ** | **233,498**      | (4)        |
|                                                              |       | ** **                 |          | ** **                |       | ** **                               | ** ** | ** **    | ** ** | ** **                       | ** ** | ** **       | ** ** |
| **Segment profit (loss)**(2)                                      |       | **117,637**                |          | **176,786**               |       | **(39,981**                              | **)**      | **254,442**   | ** ** | **—**                       | ** ** | **254,442**      | ** ** |
| ** **                                                        |       | ** **                 |          | ** **                |       | ** **                               | ** ** | ** **    | ** ** | ** **                       | ** ** | ** **       | ** ** |
|                                                              |       |                       |          |                      |       |                                     |       |          |       |                             |       |             |       |
| Year to Date September 30, 2003                                   |       |                       |          |                      |       |                                     |       |          |       |                             |       |             |       |
|                                                              | ** ** | ** **                 | ** **    | ** **                | ** ** | ** **                               | ** ** | ** **    | ** ** | ** **                       | ** ** | ** **       | ** ** |
| Operating revenues                                                |       |                       |          |                      |       |                                     |       |          |       |                             |       |             |       |
| External customers                                                |       | $                          | 1,222,898     |                      | $          | 2,070,984                                |       | $             | (25        | )                                | $          | 3,293,857        |       | $ | — |   | $ | 3,293,857 |   |
| Intersegment revenues                                             |       | 143,995                    |          | 132                       |       | —                                   |       | 144,127       |       | (144,127                         | )          | —           |       |
|                                                              |       |                       |          |                      |       |                                     |       |          |       |                             |       |             |       |
| Gross margins                                                     |       |                       |          |                      |       |                                     |       |          |       |                             |       |             |       |
| Electric                                                          |       | 540,250                    |          | 1,132,372                 |       | —                                   |       | 1,672,622     |       | —                           |       | 1,672,622        | (3)        |
| Gas                                                               |       | 96,331                     |          | 173,151                   |       | —                                   |       | 269,482       |       | —                           |       | 269,482          | (4)        |
|                                                              |       |                       |          |                      |       |                                     |       |          |       |                             |       |             |       |
| Discontinued operations, net of tax                               |       | 8,875                      |          | —                    |       | —                                   |       | 8,875         |       | —                           |       | 8,875            |       |
| Cumulative effect of changes in accounting  principle, net of tax |       | 26,462                     |          | —                    |       | —                                   |       | 26,462        |       | —                           |       | 26,462           |       |
|                                                              |       |                       |          |                      |       |                                     |       |          |       |                             |       |             |       |
| Segment profit (loss)(2)                                          |       | 213,641                    |          | 162,988                   |       | (13,910                                  | )          | 362,719       |       | —                           |       | 362,719          |       |
|                                                              |       |                       |          |                      |       |                                     |       |          |       |                             |       |             |       |

 
| (1)    | The Reconciling Eliminations category eliminates the intersegment  revenues of Commercial.                                                                          |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2)    | Management utilizes segment profit (loss), after taxes, to evaluate  segment performance.                                                                           |
| (3)    | Electric gross margin is calculated as *Electric operating revenues* less *Fuel and purchased power* expense from  the Condensed Consolidated Statements of Income. |
| (4)    | Gas gross margin is calculated as *Gas  operating revenues* less *Gas  purchased* expense from the Condensed Consolidated Statements of  Income.                    |
|   |                                                                                                                                                                |

 

 

44

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**NOTESTO CONDENSED FINANCIAL STATEMENTS**

 

Total segment assets at September 30, 2004, and December 31, 2003, areas indicated below:

 
| ** **                                       | ** **   | ** **                 | ** **    | ** **                | ** **   | ** **                               | ** **   | ** **   | ** **   | ** **         | ** **   | ** **       | ** **   |
|--------------------------------------------------|--------------|----------------------------|---------------|---------------------------|--------------|------------------------------------------|--------------|--------------|--------------|--------------------|--------------|------------------|--------------|
| ** **                                       | ** **   | ** **                 | ** **    | ** **                | ** **   | ** **                               | ** **   | ** **   | ** **   | ** **         | ** **   | ** **       | ** **   |
| ** **                                       | ** **   | **Cinergy Business Units** | ** **    | ** **                | ** **   | ** **                               | ** **   |
| ** **                                       | ** **   | **Commercial**             | ** **    | **Regulated  Businesses** | ** **   | **Power Technology  and Infrastructure** | ** **   | **Total**    | ** **   | **All  Other (1)** | ** **   | **Consolidated** | ** **   |
| ** **                                       | ** **   | ***(in thousands)***       | ** **    |
|                                             | *** *** | *** ***               | *** ***  | *** ***              | *** *** | *** ***                             | *** *** | *** *** | *** *** | *** ***       | *** *** | *** ***     | *** *** |
| **Segment assets from continuing  operations**   |         | **$**                      | **5,362,090** | ** **                | **$**        | **8,689,306**                            | ** **   | **$**        | **132,793**  | ** **         | **$**        | **14,184,189**   | ** **   | **$** | **59,141** | ** ** | **$** | **14,243,330** | ** ** |
| **Segment assets from discontinued  operations** |         | **—**                 | ** **    | **—**                | ** **   | **—**                               | ** **   | **—**   | ** **   | **—**         | ** **   | **—**       | ** **   |
| **Total segment assets at September 30, 2004**   |         | **$**                      | **5,362,090** | ** **                | **$**        | **8,689,306**                            | ** **   | **$**        | **132,793**  | ** **         | **$**        | **14,184,189**   | ** **   | **$** | **59,141** | ** ** | **$** | **14,243,330** | ** ** |
|                                             | ** **   | ** **                 | ** **    | ** **                | ** **   | ** **                               | ** **   | ** **   | ** **   | ** **         | ** **   | ** **       | ** **   |
| 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 represents miscellaneous corporate items which  are not allocated to business units for purposes of segment performance  measurement. |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

 

45

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**NOTESTO CONDENSED FINANCIAL STATEMENTS**

 

**10.  EarningsPer Common Share (EPS)**

 

A reconciliation of EPS – basic to EPS –diluted is presented below forthe quarters ended September 30, 2004 and 2003:

 

| ** **                               | ** **   | ** **                                      | ** **   | ** ** | ** **  | ** ** | ** ** |
|------------------------------------------|--------------|-------------------------------------------------|--------------|------------|-------------|------------|------------|
| ** **                               | ** **   | **Income**                                      | ** **   | **Shares** | ** **  | **EPS**    | ** ** |
| *** ***                             | *** *** | ***(in  thousands, except per share amounts)*** | *** *** |
| **Quarter  Ended September 30, 2004**    | ** **   | ** **                                      | ** **   | ** ** | ** **  | ** ** | ** ** |
| **EPS –  basic:**                   | ** **   | ** **                                      | ** **   | ** ** | ** **  | ** ** | ** ** |
| **Net  Income**                          | ** **   | **$**                                           | **92,923**   | ** ** | **180,881** | ** ** | **$**      | **0.51** | ** ** |
| ** **                               | ** **   | ** **                                      | ** **   | ** ** | ** **  | ** ** | ** ** |
| **Effect  of dilutive securities:**      | ** **   | ** **                                      | ** **   | ** ** | ** **  | ** ** | ** ** |
| **Common  stock options**                | ** **   | ** **                                      | ** **   | **616**    | ** **  | ** ** | ** ** |
| **Directors’  compensation plans**  | ** **   | ** **                                      | ** **   | **148**    | ** **  | ** ** | ** ** |
| **Contingently  issuable common stock**  | ** **   | ** **                                      | ** **   | **710**    | ** **  | ** ** | ** ** |
| **Stock  purchase contracts**            | ** **   | ** **                                      | ** **   | **1,123**  | ** **  | ** ** | ** ** |
| ** **                               | ** **   | ** **                                      | ** **   | ** ** | ** **  | ** ** | ** ** |
| **EPS -  diluted:**                      | ** **   | ** **                                      | ** **   | ** ** | ** **  | ** ** | ** ** |
| **Net  income plus assumed conversions** | ** **   | **$**                                           | **92,923**   | ** ** | **183,478** | ** ** | **$**      | **0.50** | ** ** |
| ** **                               | ** **   | ** **                                      | ** **   | ** ** | ** **  | ** ** | ** ** |
| ** **                               | ** **   | ** **                                      | ** **   | ** ** | ** **  | ** ** | ** ** |
| Quarter Ended September 30, 2003         |         |                                            |         |       |        |       |       |
| EPS – basic:                        |         |                                            |         |       |        |       |       |
| Net Income                               |         | $                                               | 111,981      |       | 177,751     |       | $          | 0.63 |   |
|                                     |         |                                            |         |       |        |       |       |
| Effect of dilutive securities:           |         |                                            |         |       |        |       |       |
| Common stock options                     |         |                                            |         | 629        |        |       |       |
| Directors’ compensation plans       |         |                                            |         | 148        |        |       |       |
| Contingently issuable common stock       |         |                                            |         | 891        |        |       |       |
| Stock purchase contracts                 |         |                                            |         | 118        |        |       |       |
|                                     |         |                                            |         |       |        |       |       |
| EPS - diluted:                           |         |                                            |         |       |        |       |       |
| Net income plus assumed conversions      |         | $                                               | 111,981      |       | 179,537     |       | $          | 0.62 |   |
|                                     |         |                                            |         |       |        |       |       |

 

Options to purchase shares of common stock are excluded from thecalculation of EPS - diluted, if they are considered to be anti-dilutive.  Approximately 0.9 million and 2.1 millionshares were excluded from the EPS - diluted calculation for the quarters endedSeptember 30, 2004 and 2003, respectively.

 

Also excluded from the EPS - diluted calculation for the quarters endedSeptember 30, 2004 and 2003, are up to 9.7 million and 10.7 million shares,respectively, issuable pursuant to the stock purchase contracts issued by **Cinergy Corp.** in December 2001 associatedwith the preferred trust securities transaction.  The number of shares issuable pursuant to thestock purchase contracts is contingent upon the market price of **Cinergy Corp.** stock in February 2005 andcould range between 9.2 and 10.8 million shares.

 

 

46

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**NOTESTO CONDENSED FINANCIAL STATEMENTS**

 

A reconciliation of EPS – basic to EPS –diluted is presented below forthe year to date September 30, 2004 and 2003:

 
| ** **                                                                                       | ** **   | ** **                                     | ** **   | ** ** | ** **  | ** ** | ** ** |
|--------------------------------------------------------------------------------------------------|--------------|------------------------------------------------|--------------|------------|-------------|------------|------------|
| ** **                                                                                       | ** **   | **Income**                                     | ** **   | **Shares** | ** **  | **EPS**    | ** ** |
| *** ***                                                                                     | *** *** | ***(in thousands, except per share amounts)*** | *** *** |
| **Year to  Date September 30, 2004**                                                             |         |                                           |         |       |        |       |       |
| **EPS –  basic:**                                                                           |         |                                           |         |       |        |       |       |
| **Net Income**                                                                                   | ** **   | **$**                                          | **254,442**  | ** ** | **180,129** | ** ** | **$**      | **1.41** | ** ** |
| ** **                                                                                       | ** **   | ** **                                     | ** **   | ** ** | ** **  | ** ** | ** ** |
| **Effect  of dilutive securities:**                                                              | ** **   | ** **                                     | ** **   | ** ** | ** **  | ** ** | ** ** |
| **Common  stock options**                                                                        | ** **   | ** **                                     | ** **   | **675**    | ** **  | ** ** | ** ** |
| **Directors’  compensation plans**                                                          | ** **   | ** **                                     | ** **   | **148**    | ** **  | ** ** | ** ** |
| **Contingently  issuable common stock**                                                          | ** **   | ** **                                     | ** **   | **585**    | ** **  | ** ** | ** ** |
| **Stock  purchase contracts**                                                                    | ** **   | ** **                                     | ** **   | **1,027**  | ** **  | ** ** | ** ** |
| ** **                                                                                       | ** **   | ** **                                     | ** **   | ** ** | ** **  | ** ** | ** ** |
| **EPS -  diluted:**                                                                              | ** **   | ** **                                     | ** **   | ** ** | ** **  | ** ** | ** ** |
| **Net  income plus assumed conversions**                                                         | ** **   | **$**                                          | **254,442**  | ** ** | **182,564** | ** ** | **$**      | **1.39** | ** ** |
|                                                                                             |         |                                           |         |       |        |       |       |
|                                                                                             |         |                                           |         |       |        |       |       |
| Year to Date September 30, 2003                                                                  |         |                                           |         |       |        |       |       |
| EPS – basic:                                                                                |         |                                           |         |       |        |       |       |
| Income before discontinued operations and  cumulative effect of changes in accounting principles |         | $                                              | 327,382      |       |        |       | $          | 1.86 |   |
| Discontinued operations, net of tax                                                              |         | 8,875                                          |         |       |        | 0.05       |       |
| Cumulative effect of changes in accounting  principles, net of tax                               |         | 26,462                                         |         |       |        | 0.15       |       |
| Net Income                                                                                       |         | $                                              | 362,719      |       | 175,944     |       | $          | 2.06 |   |
|                                                                                             |         |                                           |         |       |        |       |       |
| Effect of dilutive securities:                                                                   |         |                                           |         |       |        |       |       |
| Common stock options                                                                             |         |                                           |         | 738        |        |       |       |
| Directors’ compensation plans                                                               |         |                                           |         | 147        |        |       |       |
| Contingently issuable common stock                                                               |         |                                           |         | 811        |        |       |       |
| Stock purchase contracts                                                                         |         |                                           |         | 39         |        |       |       |
|                                                                                             |         |                                           |         |       |        |       |       |
| EPS - diluted:                                                                                   |         |                                           |         |       |        |       |       |
| Net income plus assumed conversions                                                              |         | $                                              | 362,719      |       | 177,679     |       | $          | 2.04 |   |
|                                                                                             |         |                                           |         |       |        |       |       |

 

Options to purchase shares of common stock are excluded from thecalculation of EPS - diluted, if they are considered to be anti-dilutive.  Approximately 0.9 million and 2.1 million shareswere excluded from the EPS - diluted calculation for the year to date September30, 2004 and 2003, respectively.

 

Also excluded from the EPS - diluted calculation for the year to dateSeptember 30, 2004 and 2003, are up to 9.8 million and 10.8 million shares,respectively, issuable pursuant to the stock purchase contracts issued by **Cinergy Corp.** in December 2001 associatedwith the preferred trust securities transaction.  The number of shares issuable pursuant to thestock purchase contracts is contingent upon the market price of **Cinergy Corp.** stock in February 2005 andcould range between 9.2 and 10.8 million shares. 

 

**11.  Transferof Generating Assets**

 

In December 2002, the IURC approved a settlement agreement among **PSI**, the Indiana Office of the UtilityConsumer Counselor, and the IURC Staff authorizing **PSI’s** purchases of the Henry County, Indiana and ButlerCounty, Ohio, gas-fired peaking plants from two non-regulated affiliates.  In February 2003, the Federal EnergyRegulatory Commission (FERC) issued an order under Section 203 of the FederalPower Act authorizing **PSI’s**acquisitions of the plants, which occurred on

 

 

47

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**NOTESTO CONDENSED FINANCIAL STATEMENTS**

 

February 5, 2003.  Subsequently,in April 2003, the FERC issued a tolling order allowing additional time toconsider a request for rehearing filed in response to the February 2003 FERCorder.  In September 2004, FERC issued anorder denying the request for rehearing and affirming the acquisition of theplants.

 

In July 2003, **ULH&P**filed an application with the KPSC requesting a certificate of publicconvenience and necessity to acquire **CG&E’s**68.9 percent ownership interest in the East Bend Generating Station, located inBoone County, Kentucky, the Woodsdale Generating Station, located in ButlerCounty, Ohio, and one generating unit at the four-unit Miami Fort Stationlocated in Hamilton County, Ohio.  InDecember 2003, the KPSC conditionally approved this application.  The transfer, which will be made at net bookvalue, will not affect current electric rates for **ULH&P’s** customers, as power will be provided under thesame terms as under the current wholesale power contract with **CG&E** through at least December 31,2006.  In September 2004, **ULH&P** filed applications with the FERC and the SECseeking regulatory approvals for aspects of this transaction.  At this time, **ULH&P** is unable to predict the outcome of this matter.

 

 

48

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**CAUTIONARY STATEMENTS**

 

**CAUTIONARY STATEMENTS REGARDINGFORWARD-LOOKING INFORMATION**

 

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

 

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

 

•                  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 pipelinesystem constraints.

 

•                  Legislative and regulatory initiatives.

 

•                  Additional competition in electric or gas markets andcontinued industry consolidation.

 

•                  Financial or regulatory accounting principlesincluding costs of compliance with existing and future environmentalrequirements.

 

•                  Political, legal, and economic conditions anddevelopments in the countries in which we have a presence.

 

•                  Changing market conditions and other factors relatedto physical energy and financial trading activities.

 

•                  The performance of projects undertaken by ournon-regulated businesses and the success of efforts to invest in and developnew opportunities.

 

•                  Availability of, or cost of, capital.

 

•                  Employee workforce factors.

 

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

 

•                  Costs and effects of legal and administrativeproceedings, settlements, investigations, and claims.  Examples can be found in Note 6 of the “Notesto Condensed Financial Statements” in “Item 1. Financial Statements”.

 

We undertake noobligation to update the information contained herein.

 

 

49

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**MANAGEMENT’SDISCUSSION & ANALYSIS**

 

## **ITEM 2.  MANAGEMENT’SDISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

In this report **Cinergy** (which includes **Cinergy Corp.**and all of our regulated and non-regulated subsidiaries) is, at times, referredto in the first person as “we”, “our”, or “us”. In addition, when discussing **Cinergy’s**financial information, it necessarily includes the results of The CincinnatiGas & Electric Company (**CG&E**),PSI Energy, Inc. (**PSI**), The UnionLight, Heat and Power Company (**ULH&P**),and all of **Cinergy’s** otherconsolidated subsidiaries.  Whendiscussing **CG&E’s** financialinformation, it necessarily includes the results of **ULH&P** and all of **CG&E’s**other consolidated subsidiaries.

 

The following discussionshould be read in conjunction with the accompanying financial statements andrelated notes included elsewhere in this report and the combined Form 10-K forthe year ended December 31, 2003 (2003 10-K). The results discussed below are not necessarily indicative of the resultsto be expected in any future periods.

 

### **INTRODUCTION**

 

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

 

•                  factors affecting current and future operations;

•                  potential sources of cash for future capitalexpenditures;

•                  why revenues and expenses changed from period toperiod; and

•                  how the above items affect our overall financialcondition.

 

### **ORGANIZATION**

 

**CinergyCorp.**, a Delawarecorporation 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 Ohio corporation organized in 1837,is a combination electric and gas public utility company that provides serviceprimarily in the southwestern portion of Ohio and, through **ULH&P**, in nearby areas ofKentucky.  **CG&E** is responsible for the majority of our powermarketing and trading activity.  **CG&E’s** principal subsidiary, **ULH&P**, is a Kentucky corporationorganized in 1901, that provides electric and gas service in northernKentucky.  **CG&E’s** other subsidiaries are insignificant to its resultsof operations.

 

**PSI**, an Indiana corporation organized in1942, is a vertically integrated and regulated electric utility that providesservice in north central, central, and southern Indiana.

 

50

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

 

Services is a servicecompany that provides our subsidiaries with a variety of centralizedadministrative, management, and support services.  Investments holds most of our domesticnon-regulated, energy-related businesses and investments, including gasmarketing and trading operations.

 

The majority of ouroperating revenues are derived from the sale of electricity and the sale and/ortransportation of natural gas.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

***Environmental Issues***

 

InDecember 2003, the United States Environmental Protection Agency (EPA) proposedthe Clean Air Interstate Rule (CAIR), formerly the Interstate Air Quality Rule,that would require states to revise their State Implementation Plans (SIP) toaddress alleged contributions to downwind non-attainment with the revisedNational Ambient Air Quality Standards for ozone and fine particulatematter.  The proposed rule wouldestablish a two-phase, regional cap and trade program for sulfur dioxide (SO2) and nitrogen oxide (NOX), affecting approximately 30 states,including Ohio, Indiana, and Kentucky, and would require SO2 and NOXemissions to be cut approximately 70 percent and 65 percent, respectively, by2015.  The EPA is expected to issue finalrules by December 2004.

 

InDecember 2003, the EPA also issued draft regulations regarding requiredreductions in mercury emissions from coal-fired power plants.  The draft regulations include two possiblealternatives to address emissions reductions. One alternative would include a cap and trade approach to mercury.  The other would be a source specificreduction in emissions, without a cap and trade approach.  The cap and trade approach would provide alonger compliance horizon and provide more flexible compliance options forcoal-fired generators.  The cap and tradeapproach would require a reduction of approximately 30 percent by 2010 and 70percent by 2018.  The source specificreduction approach would require a reduction of approximately 30 percent by2008.  The EPA must issue final rules by March2005.

 

Overthe 2004-2008 time period, estimated capital costs associated with reducingmercury, SO2, and NOX in compliance with the currentlyproposed CAIR and mercury rule are not expected to exceed approximately $1.65billion if the EPA approves the mercury cap and trade approach andapproximately $2.15 billion if the EPA approves the source specific reductionapproach without a cap and trade. Approximately 55 percent of these estimated environmental costs would beincurred at **PSI’s** coal-firedplants, for which recovery would be pursued in accordance with regulatorystatutes governing environmental cost recovery. **CG&E** has proposed threealternatives to the Public Utilities Commission of Ohio (PUCO) for determiningrates after the market development period ends. Two of these alternatives include partial recovery of depreciation andfinancing costs for 2005-2008.  See Note 6(b)(*ii*) of the “Notes to Condensed Financial Statements”in “Item 1. Financial Statements” for more details.

 

Themercury cap and trade approach would provide **Cinergy**with more flexible compliance options, including the purchase of allowances inlieu of further capital expenditures with respect to these investments.  The above estimates include estimated coststo comply at plants that we own but do not operate (which includes 14 percentand 34 percent of **Cinergy’s** and **CG&E’s**megawatt hour (MWh) capacity, respectively).  Thesecosts may change when taking into consideration compliance plans of

 

51

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

 

co-ownersor operators involved.  Moreover, asmarket conditions change, additional compliance options may become availableand our plans will be adjusted accordingly. Costs associated with mercury reduction may be different than thosepredicted, depending on the type of program the EPA finalizes and thestringency and timing of the ultimate requirements.

 

InMay 2004, the EPA issued proposed revisions to its regional haze rules andimplementing guidelines in response to a 2002 judicial ruling overturning keyprovisions of the original program.  The regional haze program is aimed atreducing certain emissions impacting visibility in national parks andwilderness areas.  The EPA is currentlyconsidering whether SO2 and NOX reductions under the CAIRregulation will also satisfy the reduction requirements under the regional hazerule.  However, the regional haze rule,when finalized, could potentially require significant additional SO2and NOX reductions necessitating the installation of pollutioncontrols for certain generating units at **Cinergy’s**power plants.  In light of the EPA’songoing rulemaking efforts and the fact that the states have yet to announcehow they will implement the final rule, at this time, it is not possible topredict whether the regional haze rule will have a material effect on ourfinancial position or results of operations.

 

InApril 2004, the EPA made final state non-attainment area designations toimplement the revised ozone standard. Several counties in which we operate have been designated as being innon-attainment with the new ozone standard. The EPA is also under a court ordered deadline to make finalnon-attainment area designations for the new fine particulate standard byDecember 15, 2004.  Several counties inwhich we operate are likely to be designated as non-attainment for the fineparticulate standard.  Those countiesthat are designated as being in non-attainment with the new ozone and/or fineparticulate standards are required to develop a plan of compliance.  Although the EPA has attempted to structurethe CAIR to resolve purported utility contributions to ozone and fineparticulate non-attainment, at this time, **Cinergy**cannot predict the effect of current or future non-attainment designations onits financial position or results of operations.

 

*Carbon Dioxide (CO2) Lawsuit*

 

In July 2004, the statesof Connecticut, New York, California, Iowa, New Jersey, Rhode Island, Vermont,Wisconsin, and the City of New York brought a lawsuit in the United StatesDistrict Court for the Southern District of New York against **Cinergy** and American Electric PowerCompany, Inc., American Electric Power Service Corporation, The SouthernCompany, Tennessee Valley Authority, and Xcel Energy Inc.  That same day, a similar lawsuit was filedagainst the same companies by Open Space Institute, Inc., Open SpaceConservancy, Inc., and The Audubon Society of New Hampshire.  These lawsuits allege that the defendants’emissions of CO2 from the combustion of fossil fuels at electricgenerating facilities contribute to global warming and amount to a publicnuisance.  The complaints also allegethat the defendants could generate the same amount of electricity whileemitting significantly less CO2. Plaintiffs are seeking an injunction requiring each defendant to cap itsCO2 emissions and then reduce them by a specified percentage eachyear for at least a decade.  **Cinergy** intends to defend this lawsuitvigorously in court and filed a motion to dismiss with the other defendants inSeptember 2004; however, we are not able to predict whether resolution of thesematters would have a material effect on our financial position or results ofoperations.

 

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

 

*Notice of Intent to Sue at Zimmer Generating Station(Zimmer Station)*

 

In July 2004, **Cinergy** received a notice of intent to sueunder the Clean Air Act (CAA) from attorneys representing citizens of theVillage of Moscow, Ohio, the town adjacent to **CG&E’s**Zimmer Station, which notice is required as a predicate to a citizen’senforcement suit under the CAA.  Theletter alleges that emissions from Zimmer Station violate the CAA and the OhioSIP and are causing a public nuisance. At this time, we cannot predict whether the outcome of this matter willhave a material impact on our financial position or results of operations.

 

*Selective Catalytic Reduction Units (SCR) at GibsonGenerating Station (Gibson Station)*

 

In May 2004, SCRs andother pollution control equipment became operational at Units 4 and 5 of **PSI’s** Gibson Station in accordance withcompliance deadlines under the NOX SIP Call.  In June and July 2004, Gibson Stationtemporarily shut down the equipment on these units due to a concern over anacid aerosol mist haze (plume) sometimes occurring in areas near the plant.  Portions of the plume from those units’stacks appeared to break apart and descend to ground level at certain timesunder certain weather conditions.  As aresult, and, working with the City of Mt. Carmel, Illinois, Illinois EPA,Indiana Department of Environmental Management, United States EPA, and theState of Illinois, we developed a protocol regarding the use of the SCRs whilewe explore alternatives to address this issue. After the protocol was finalized, the Illinois Attorney General broughtan action in Wabash County Circuit Court against **PSI**seeking a preliminary injunction to enforce the protocol.  In August 2004, the court granted thatpreliminary injunction.  **PSI** is appealing that decision to the Fifth DistrictAppellate Court, but we cannot predict the ultimate outcome of that appeal orof the underlying action by the Illinois Attorney General.

 

We will seek recovery ofany related capital as well as increased emission allowance expendituresthrough the regulatory process.  We do not believe costs related toresolving this matter will have a material impact on our financial position orresults of operations.

 

##### ***OtherInvesting Activities***

 

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

 

•                  Exempt Wholesale Generators (EWG) and Foreign UtilityCompanies (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 United States is limited tomaking only wholesale sales of electricity. An entity claiming status as an EWG must provide notification thereof tothe SEC under PUHCA.

 

A FUCO is a company allof whose utility assets and operations are located outside the United Statesand which are used for the generation, transmission, or distribution of

 

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

 

electric energy for saleat retail or wholesale, or the distribution of gas at retail.  A FUCO may not derive any income, directly orindirectly, from the generation, transmission, or distribution of electricenergy for sale or the distribution of gas at retail within the UnitedStates.  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 September 30, 2004, we had invested or committed to investapproximately $0.9 billion in EWGs and FUCOs, leaving available investmentcapacity under the order of approximately $2.7 billion.

 

•                  Qualifying Facilities and Energy-Related Non-utilityEntities

 

SEC regulations under thePUHCA permit **Cinergy** and otherregistered holding companies to invest and/or guarantee an amount equal to 15percent of consolidated capitalization (consolidated capitalization is the sumof *Notes payable and other short-termobligations*, *Long-term debt*(including amounts due within one year), *CumulativePreferred Stock of Subsidiaries*, and total *Common Stock Equity*) in domesticqualifying cogeneration and small power production plants (qualifyingfacilities) and certain other domestic energy-related non-utilityentities.  At September 30, 2004, we hadinvested and/or guaranteed approximately $0.9****billion of the $1.4 billion available.

 

In August 2004, **Cinergy** filed an application with the SEC requestingauthority under PUHCA to increase its investment and/or guarantee amount by $2billion above the current authorized amount. **Cinergy** has requested the SEC to issuean order authorizing the increase in the fourth quarter of 2004.

 

•                  Energy-Related Assets

 

**Cinergy** has been granted SEC authority underPUHCA to invest up to $1 billion in non-utility Energy-Related Assets withinthe United States, 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 September 30,2004, 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:

 

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

 

•                  Design, construction, retrofit, and maintenance ofutility transmission and distribution systems;

•                  Installation and maintenance of natural gas pipelines,water and sewer pipelines, and underground and overhead telecommunicationsnetworks; and

•                  Installation and servicing of meter reading devicesand related communications networks, including fiber optic cable.

 

At September 30, 2004, wehad invested approximately $29 million in Infrastructure Services companies.

 

***Guarantees***

 

We are subject to an SECorder under the PUHCA, which limits the amounts **Cinergy Corp.** can have outstanding under guarantees at any onetime to $2 billion.  As of September 30,2004, we had $705 million outstanding under the guarantees issued, of whichapproximately 93 percent represents guarantees of obligations for entitiesconsolidated in **Cinergy’s** financialstatements.  The amount outstandingrepresents **Cinergy Corp.’s**guarantees of liabilities and commitments of its consolidated subsidiaries,unconsolidated subsidiaries, and joint ventures.  See Note 6(c)(*v*) of the “Notes to Condensed Financial Statements” in “Item1. Financial Statements” for a discussion of guarantees in accordance withFinancial Accounting 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.

 

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

 

**Cinergy**has certain contracts in place, primarilywith trading counterparties, that may require the settlement of open positionsor the issuance of collateral in the event our debt ratings are downgradedbelow investment grade.  Based upon ourSeptember 30, 2004 trading portfolio, if such an event were to occur, **Cinergy** would be required to issue up toapproximately $140 million related to its gas and power trading operations, ofwhich $78 million is related to **CG&E**.

 

#### ***Capital Resources***

 

**Cinergy**, **CG&E**,**PSI**, and **ULH&P** meet current and future capitalrequirement needs through a combination of internally and externally generatedfunds, 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.

 

##### ***Salesof Accounts Receivable***

 

**CG&E**, **PSI**,and **ULH&P** have an agreement with Cinergy ReceivablesCompany, LLC (Cinergy Receivables), an affiliate, to sell, on a revolvingbasis, nearly all of the retail accounts receivable and

 

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relatedcollections of **CG&E**, **PSI**,and **ULH&P**. Cinergy Receivables funds its purchase with borrowings from commercialpaper conduits that obtain a security interest in the receivables.  This program accelerates the collection ofcash for **CG&E**, **PSI**, and **ULH&P** related to these retail receivables.  **CinergyCorp.** does not consolidate Cinergy Receivables since it meets therequirements to be accounted for as a qualifying special purpose entity (SPE).  A decline in the long-term senior unsecuredcredit ratings of **CG&E**,**PSI**, and **ULH&P** below investment grade would result in the termination of the saleprogram and discontinuance of future sales of receivables.

 

##### ***NotesPayable and Other Short-term Obligations***

 

We are required to secureauthority to issue short-term debt from the SEC under the PUHCA and from thePUCO.  The SEC under the PUHCA regulatesthe 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**.

 

| ** **                    | ** **   | ** **                                              | ** **   |
|-------------------------------|--------------|---------------------------------------------------------|--------------|
| ** **                    | ** **   | **Short-term Regulatory Authority  September 30, 2004** | ** **   |
| *** ***                  | *** *** | ***(in millions)***                                     | *** *** |
| *** ***                  | *** *** | *** ***                                            | *** *** |
| ** **                    | ** **   | **Authority**                                           | ** **   | **Outstanding** | ** ** |
|                          |         |                                                    |         |   |   |
| **Cinergy  Corp.**            |         | $                                                       | 5,000        | (1) | $ | 912 |   |
| **CG&E** and subsidiaries |         | 665                                                     |         | 242 |   |
| **PSI**                       |         | 600                                                     |         | 154 |   |
| **ULH&P**                 |         | 65                                                      |         | 37 |   |
|                               |              |                                                         |              |  |  |  |  |

 

 

| (1)    | **Cinergy  Corp.**, under  the PUHCA, has approval to increase total capitalization (excluding retained  earnings and accumulated other  comprehensive income (loss)), which may be any combination of short-term  debt, long-term debt, and equity securities, to $5 billion.  Outside this requirement, **Cinergy Corp.** is not subject to specific  regulatory debt authorizations. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                         |

 

For the purposes ofquantifying regulatory authority, short-term debt includes revolving credit anduncommitted credit line borrowings, intercompany money pool obligations, andcommercial paper. **Cinergy Corp.’s**short-termborrowings consist primarily of unsecured revolving lines of credit and thesale of commercial paper.  **Cinergy Corp.’s** $1.5 billion revolvingcredit facilities and commercial paper program also support the short-termborrowing needs of **CG&E**, **PSI**, and **ULH&P**.  In addition, **Cinergy Corp.**, **CG&E**,and **PSI** maintain uncommitted linesof credit.  These facilities are not firmsources of capital but rather informal agreements to lend money, subject toavailability, with pricing determined at the time of advance.

 

*VariableRate Pollution Control Notes*

 

In August 2004, **PSI** borrowed the proceeds from the issuance by the IndianaDevelopment Finance Authority of $55 million principal amount of itsEnvironmental Revenue Bonds, Series 2004A, due August 2039.  The initial interest rate for the bonds was1.13 percent and is reset weekly. Proceeds from the borrowing will be used for the acquisition andconstruction of various solid waste disposal facilities located at variousgenerating stations in Indiana.  The $55million is being held in escrow by an independent trustee and will be drawnupon as facilities are built.  Holders ofthese notes are entitled to credit enhancement in the form of a standby letterof credit, which if drawn upon, provides for the payment of both interest andprincipal on the notes.  Because theholders of these notes have

 

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the right to have theirnotes redeemed on a weekly basis, they are reflected in *Notespayable and other short-term obligations* on the balance sheets of **Cinergy** and **PSI**.

 

The following is asummary of outstanding short-term borrowings for **Cinergy**, **CG&E**,**PSI**, and **ULH&P**, including variable ratepollution control notes:

 
| ** **                    | ** **   | ** **                                    | ** **   | ** **      | ** ** | ** ** | ** ** | ** **                | ** ** | ** **                                 | ** ** |
|-------------------------------|--------------|-----------------------------------------------|--------------|-----------------|------------|------------|------------|---------------------------|------------|--------------------------------------------|------------|
| ** **                    | ** **   | **Short-term Borrowings  September 30, 2004** | ** **   |
| ** **                    | ** **   | **Established  Lines**                        | ** **   | **Outstanding** | ** ** | **Unused** | ** ** | **Standby  Liquidity(3)** | ** ** | **Available  Revolving  Lines of  Credit** | ** ** |
| *** ***                  | *** *** | ***(in millions)***                           | *** *** |
| * *                      | * *     | * *                                      | * *     | * *        | * *   | * *   | * *   | * *                  | * *   | * *                                   | * *   |
| **Cinergy**                   |         |                                          |         |            |       |       |       |                      |       |                                       |       |
| **Cinergy  Corp.**            |         |                                          |         |            |       |       |       |                      |       |                                       |       |
| Revolving lines               |         | $                                             | 1,500        |            | $          | —     |       | $                         | 1,500      |                                       | $          | 918 |   | $ | 582 |   |
| Uncommitted  lines(1)         |         | 40                                            |         | —          |       | 40         |       |                      |       |                                       |       |
| Commercial paper(2)           |         |                                          |         | 912             |       | 588        |       |                      |       |                                       |       |
|                          |         |                                          |         |            |       |       |       |                      |       |                                       |       |
| Utility  operating companies  |         |                                          |         |            |       |       |       |                      |       |                                       |       |
| Uncommitted  lines(1)         |         | 75                                            |         | —          |       | 75         |       |                      |       |                                       |       |
| Pollution  control notes      |         |                                          |         | 248             |       |       |       |                      |       |                                       |       |
|                          |         |                                          |         |            |       |       |       |                      |       |                                       |       |
| Non-regulated  subsidiaries   |         |                                          |         |            |       |       |       |                      |       |                                       |       |
| Revolving lines               |         | 14                                            |         | 10              |       | 4          |       |                      |       | 4                                          |       |
| Short-term debt               |         |                                          |         | 2               |       |       |       |                      |       |                                       |       |
| Pollution  control notes      |         |                                          |         | 25              |       |       |       |                      |       |                                       |       |
|                          |         |                                          |         |            |       |       |       |                      |       |                                       |       |
| **Cinergy  Total**            |         |                                          |         | $               | 1,197      |       |       |                      |       |                                       | $          | 586 |   |
|                          |         |                                          |         |            |       |       |       |                      |       |                                       |       |
| **CG&E**and  subsidiaries |         |                                          |         |            |       |       |       |                      |       |                                       |       |
| Uncommitted  lines(1)         |         | $                                             | 15           |            | $          | —     |       | $                         | 15         |                                       |       |   |   |   |
| Pollution  control notes      |         |                                          |         | 112             |       |       |       |                      |       |                                       |       |
| Money pool                    |         |                                          |         | 242             |       |       |       |                      |       |                                       |       |
|                          |         |                                          |         |            |       |       |       |                      |       |                                       |       |
| **CG&E  Total**           |         |                                          |         | $               | 354        |       |       |                      |       |                                       |       |   |
| ** **                    |         |                                          |         |            |       |       |       |                      |       |                                       |       |
| **PSI**                       |         |                                          |         |            |       |       |       |                      |       |                                       |       |
| Uncommitted  lines(1)         |         | $                                             | 60           |            | $          | —     |       | $                         | 60         |                                       |       |   |   |   |
| Pollution  control notes      |         |                                          |         | 136             |       |       |       |                      |       |                                       |       |
| Money pool                    |         |                                          |         | 154             |       |       |       |                      |       |                                       |       |
|                          |         |                                          |         |            |       |       |       |                      |       |                                       |       |
| **PSI  Total**                |         |                                          |         | $               | 290        |       |       |                      |       |                                       |       |   |
| ** **                    |         |                                          |         |            |       |       |       |                      |       |                                       |       |
| **ULH&P**                 |         |                                          |         |            |       |       |       |                      |       |                                       |       |
| Money pool                    |         |                                          |         | $               | 37         |       |       |                      |       |                                       |       |   |
|                          |         |                                          |         |            |       |       |       |                      |       |                                       |       |
| **ULH&P  Total**          |         |                                          |         | $               | 37         |       |       |                      |       |                                       |       |   |
|                               |              |                                               |              |                 |            |            |            |                           |            |                                            |            |  |  |  |  |  |  |  |

 

 

| (1)    | These facilities are not guaranteed sources of  capital and represent an informal agreement to lend money, subject to  availability, with pricing to be determined at the time of advance.                                      |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2)    | In September 2004, **Cinergy  Corp.** increased its commercial paper program limit from $800  million to $1.5 billion.  The  commercial paper program is supported by **Cinergy  Corp.’s** revolving lines of credit. |
| (3)    | Standby liquidity is reserved against the revolving  lines to support the commercial paper program and outstanding letters of  credit (currently $912 million and $6 million, respectively).                                    |
|   |                                                                                                                                                                                                                            |

 

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

 

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and a $1 billionthree-year facility.  These facilitiesreplaced two facilities that expired in April and May 2004.

 

At September 30, 2004, **Cinergy Corp.** had approximately $582million remaining unused and available capacity relating to its $1.5 billionrevolving credit facilities.  Theserevolving credit facilities include the following:

 

| ** **                   | ** ** | ** **     | ** ** | ** **            | ** ** | ** **                      | ** ** | ** **                | ** ** |
|------------------------------|------------|----------------|------------|-----------------------|------------|---------------------------------|------------|---------------------------|------------|
| **Credit Facility**          | ** ** | **Expiration** | ** ** | **Established Lines** | ** ** | **Outstanding  and  Committed** | ** ** | **Unused and  Available** | ** ** |
| ** **                   | ** ** | ** **     | ** ** | ** **            | ** ** | ***(in millions)***             | ** ** | ** **                | ** ** |
| * *                     | * *   | * *       | * *   | * *              | * *   | * *                        | * *   | * *                  | * *   |
| 364-day senior  revolving    |       | April 2005     |       |                  |       |                            |       |                      |       |
| Direct borrowing             |       |           |       | $                     |       |                            | $          | —                    |       | $ |   |   |
| Commercial paper  support    |       |           |       |                  |       | —                          |       |                      |       |
|                         |       |           |       |                  |       |                            |       |                      |       |
| Total 364-day  facility      |       |           |       | 500                   |       | —                          |       | 500                       |       |
|                         |       |           |       |                  |       |                            |       |                      |       |
| Three-year  senior revolving |       | April 2007     |       |                  |       |                            |       |                      |       |
| Direct borrowing             |       |           |       |                  |       | —                          |       |                      |       |
| Commercial paper  support    |       |           |       |                  |       | 912                             |       |                      |       |
| Letter of credit  support    |       |           |       |                  |       | 6                               |       |                      |       |
|                         |       |           |       |                  |       |                            |       |                      |       |
| Total three-year  facility   |       |           |       | 1,000                 |       | 918                             |       | 82                        |       |
|                         |       |           |       |                  |       |                            |       |                      |       |
| Total Credit  Facilities     |       |           |       | $                     | 1,500      |                            | $          | 918                       |       | $ | 582 |   |
|                         |       |           |       |                  |       |                            |       |                      |       |
|                              |            |                |            |                       |            |                                 |            |                           |            |  |  |  |  |  |

 

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

 

•                  a consolidated net worth of $2 billion; and

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

 

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

 

•                  bankruptcy;

•                  defaults in the payment of other indebtedness; and

•                  judgments against the company that are not paid orinsured.

 

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

 

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

 

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

 

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A current summary of ourlong-term debt authorizations at September 30, 2004, was as follows:

 

| ** **                                    | ** **   | ** **          | ** **   | ** ** | ** ** | ** **    | ** ** |
|-----------------------------------------------|--------------|---------------------|--------------|------------|------------|---------------|------------|
| ** **                                    | ** **   | **Authorized**      | ** **   | **Used**   | ** ** | **Available** | ** ** |
| *** ***                                  | *** *** | ***(in millions)*** | *** *** |
| * *                                      | * *     | * *            | * *     | * *   | * *   | * *      | * *   |
| **Cinergy  Corp.**                            |         |                |         |       |       |          |       |
| PUHCA total  capitalization(1)                |         | $                   | 5,000        |       | $          | 1,705         |       | $ | 3,295 |   |
|                                          |         |                |         |       |       |          |       |
| **CG&E**and  subsidiaries(2)              |         |                |         |       |       |          |       |
| State Public  Utility Commissions             |         | $                   | 575          |       | $          | —        |       | $ | 575 |   |
| State Public  Utility Commission - Tax-Exempt |         | 250                 |         | —     |       | 250           |       |
|                                          |         |                |         |       |       |          |       |
| **PSI**                                       |         |                |         |       |       |          |       |
| State Public  Utility Commission              |         | $                   | 500          |       | $          | —        |       | $ | 500 |   |
| State Public  Utility Commission - Tax-Exempt |         | 250                 |         | 55         |       | 195           |       |
|                                          |         |                |         |       |       |          |       |
| **ULH&P**                                 |         |                |         |       |       |          |       |
| State Public  Utility Commission              |         | $                   | 75           |       | $          | —        |       | $ | 75 |   |

 

 

| (1)    | **Cinergy Corp.**, under PUHCA, has approval to increase  total capitalization (excluding retained earnings and accumulated other  comprehensive income (loss)), which may be any combination of short-term  debt, long-term debt, and equity securities, by $5 billion.  Outside this requirement, **Cinergy Corp.** is not subject to specific  regulatory debt authorizations. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2)    | Includes amounts for **ULH&P**.                                                                                                                                                                                                                                                                                                                                                    |
|   | ** **                                                                                                                                                                                                                                                                                                                                                                             |

 

 

**CinergyCorp.** 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 effective shelfregistration statement with the SEC relating to the issuance of up to $800million in any combination of unsecured debt securities, first mortgage bonds,or preferred stock, all of which remains available for issuance.  **PSI**has an effective shelf registration statement with the SEC relating to theissuance of up to $800 million in any combination of unsecured debt securities,first mortgage bonds, or preferred stock, all of which remains available forissuance.  **ULH&P**has an effective shelf registration statement with the SEC for the issuance ofup to $75 million in unsecured debt securities, all of which remains availablefor issuance.  **ULH&P**also has effective shelf registration statements with the SEC relating to theissuance of up to $40 million in first mortgage bonds, of which $20 millionremains available for issuance.

 

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

 

As discussed in the 200310-K, **Cinergy** uses off-balancesheet arrangements from time to time to facilitate financing of variousprojects.  **Cinergy’s** primary off-balance sheet arrangements involve (a)the sale of accounts receivable to a qualifying SPE, and (b) a forward stockcontract that will result in the issuances of between 9.2 and 10.8 million **Cinergy Corp.** common shares in February 2005.

 

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***Securities Ratings***

 

As of September 30, 2004,the major credit rating agencies rated our securities as follows:

 

| ** **                  | ** ** | ** **   | ** ** | ** **          | ** ** | ** **     | ** ** |
|-----------------------------|------------|--------------|------------|---------------------|------------|----------------|------------|
| ** **                  | ** ** | **Fitch(1)** | ** ** | **Moody’s(2)** | ** ** | **S&P(3)** | ** ** |
|                        |       |         |       |                |       |           |       |
| **Cinergy  Corp.**          |       |         |       |                |       |           |       |
| Corporate Credit            |       | BBB+         |       | Baa2                |       | BBB+           |       |
| Senior Unsecured  Debt      |       | BBB+         |       | Baa2                |       | BBB            |       |
| Commercial Paper            |       | F-2          |       | P-2                 |       | A-2            |       |
| Preferred Trust  Securities |       | BBB+         |       | Baa2                |       | BBB            |       |
|                        |       |         |       |                |       |           |       |
| **CG&E**                |       |         |       |                |       |           |       |
| Senior Secured  Debt        |       | A-           |       | A3                  |       | A-             |       |
| Senior Unsecured  Debt      |       | BBB+         |       | Baa1                |       | BBB            |       |
| Junior Unsecured  Debt      |       | BBB          |       | Baa2                |       | BBB-           |       |
| Preferred Stock             |       | BBB          |       | Baa3                |       | BBB-           |       |
| Commercial Paper            |       | F-2          |       | P-2                 |       | Not Rated      |       |
|                        |       |         |       |                |       |           |       |
| **PSI**                     |       |         |       |                |       |           |       |
| Senior Secured  Debt        |       | A-           |       | A3                  |       | A-             |       |
| Senior Unsecured  Debt      |       | BBB+         |       | Baa1                |       | BBB            |       |
| Junior Unsecured  Debt      |       | BBB          |       | Baa2                |       | BBB-           |       |
| Preferred Stock             |       | BBB          |       | Baa3                |       | BBB-           |       |
| Commercial Paper            |       | F-2          |       | P-2                 |       | Not Rated      |       |
|                        |       |         |       |                |       |           |       |
| **ULH&P**               |       |         |       |                |       |           |       |
| Senior Unsecured  Debt      |       | 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 rating for Fitch is AAA, Moody’s is Aaal, and S&P  is AAA.  |
| The lowest  investment grade credit rating for Fitch is BBB-, Moody’s is Baa3, and  S&P is BBB-. |
|                                                                                                      |

 

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

 

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

 

As discussed in the 200310-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 nine months ended September 30,2004, **Cinergy** issued approximately2.7 million shares under these plans.

 

60

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

 

The Results of Operationsdiscussions for **Cinergy**, **CG&E**, and **PSI** are combined within this section.

 

### **2004QUARTERLY RESULTS OF OPERATIONS -HISTORICAL**

 

#### **Summary of Results**

 

Electric and gas grossmargins and net income for **Cinergy**,**CG&E**, and **PSI** for the quarters ended September 30,2004 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               |   | **$** | **92,923** |   | $ | 111,981 |   | (19,058 | ) | (17 | ) | **$** | **64,073** |   | $ | 78,863 |   | $ | (14,790 | ) | (19 | ) | **$** | **48,487** |   | $ | 37,592 |   | $ | 10,895 |   | 29 |   |
|                     |   | ** ** |   |   |   |   |   |   |   | ** ** |   |   |   |   |   |   |   | ** ** |   |   |   |   |   |   |   |
| Electric gross margin(2) |   | **660,303** |   | 590,641 |   | 69,662 |   | 12 |   | **337,779** |   | 330,046 |   | 7,733 |   | 2 |   | **319,548** |   | 259,298 |   | 60,250 |   | 23 |   |
| Gas gross margin(3)      |   | **45,506** |   | 44,951 |   | 555 |   | 1 |   | **40,334** |   | 34,176 |   | 6,158 |   | 18 |   | **—** |   | — |   | — |   | — |   |
|                          |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

 

| (1)    | The results of **Cinergy**  also include amounts related to non-registrants.                                                                                        |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2)    | Electric gross margin is calculated as *Electric operating revenues* less *Fuel and purchased power* expense from  the Condensed Consolidated Statements of Income. |
| (3)    | Gas gross margin is calculated as *Gas operating revenues* less *Gas purchased* expense from the Condensed  Consolidated Statements of Income.                      |
|   |                                                                                                                                                                |

 

**Cinergy’s**decrease in net income was primarily attributable to the followingfactors:

 

•                  Higher *Operationand maintenance* expense due, in part, to increased emissionallowance expenses;

•                  Higher *Depreciation*expense; and

•                  Impairment and disposal charges on certain investmentsin the Power Technology and Infrastructure Services Business Unit (PowerTechnology and Infrastructure) (reflected in *MiscellaneousIncome (Expense) — Net*).

•                  These expenses were offset by higher electric grossmargins and an adjustment to decrease the estimated annual effective tax rate.

 

**CG&E’s**decrease in net income was primarily attributable to the followingfactors:

 

•                  Higher *Operationand maintenance* expense due primarily to increased emissionallowance expenses.

•                  These higher expenses were offset, in part, by higherelectric and gas gross margins.

 

**PSI’s** increase in net income was primarilyattributable to the following factors:

 

•                  Higher electric gross margins.

•                  These higher margins were offset, in part, by higher *Operation and maintenance* expense, higher *Depreciation* expense and an adjustment toincrease the estimated annual effective tax rate.

 

61

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

 

#### **Electric Margins**

** **

**Cinergy’s**, **CG&E’s**,and **PSI’s** electric gross marginsincreased for the quarter ended September 30, 2004, as compared to the sameperiod last year.  **Cinergy’s**and **PSI’s**variances include a higher price received per MWhprimarily due to the Indiana Utility Regulatory Commission’s (IURC) approval of**PSI’s** average base retail electricrate increase of eight percent in May 2004. This is discussed further in Note 6(b)(*i*)of the “Notes to Condensed Financial Statements” in “Item 1. FinancialStatements”.  For all three companies, growthin non-weather related demand was offset by a decline in MWh sales due tomilder weather in the current period.  **Cinergy’s**and**CG&E’s** variances reflect an increase in net revenues onpower marketing, trading, and origination contracts.

 

**Cinergy’s**and**CG&E’s** variances also reflect adecline due to an increase in the average price of fuel for the period.  Offsetting most of this decline was anincrease in coal origination, which includes contract structuring and marketingof physical coal.

 

##### ***ElectricOperating Revenues***

 
| ** ** | ** ** | ** **         | ** ** | ** **                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** **          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|------------|------------|--------------------|------------|-------------------------------|------------|------------|------------|------------|------------|---------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
| ** ** | ** ** | **Cinergy****(1)** | ** ** | **CG&E and subsidiaries** | ** ** | **PSI**    | ** ** |
| ** ** | ** ** | **2004**           | ** ** | 2003                          |       | Change     |       | %  Change  | ** ** | **2004**            | ** ** | 2003       |       | Change     |       | %  Change  | ** ** | **2004**   | ** ** | 2003       |       | Change     |       | %  Change  | ** ** |
| ** ** | ** ** | ** **         | ** ** | ** **                    | ** ** | ** ** | ** ** | ** ** | ** ** | ***(in millions)*** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| * *   | * *   | * *           | * *   | * *                      | * *   | * *   | * *   | * *   | * *   | * *            | * *   | * *   | * *   | * *   | * *   | * *   | * *   | * *   | * *   | * *   | * *   | * *   | * *   | * *   | * *   |
|            |            |                    |            |                               |            |            |            |            |            |                     |            |            |            |            |            |            |            |            |            |            |            |            |            |            |            |  |  |  |  |  |  |  |  |  |  |  |  |
| Retail    |   | **$**   | **792** |   | $      | 744 |   | $  | 48     |   | 6      |   | **$**  | **383** |   | $  | 377    |   | $      | 6  |   | 2  |   | **$** | **409** |   | $ | 367 |   | $ | 42 |   | 11 |   |
|-----------|--------|---------|---------|--------|--------|-----|--------|----|--------|--------|--------|--------|--------|---------|--------|----|--------|--------|--------|----|--------|----|--------|-------|---------|--------|---|-----|--------|---|----|--------|----|--------|
| Wholesale |   | **139** |    | 141    |   | (2  | )      | (1 | )      | **59** |   | 65     |   | (6      | )      | (9 | )      | **56** |   | 61 |   | (5 | )      | (8    | )  |
| Other     |   | **63**  |    | 36     |   | 27  |   | 75 |   | **52** |   | 33     |   | 19      |   | 58 |   | **15** |   | 9  |   | 6  |   | 67    |    |
| Total     |   | **$**   | **994** |   | $      | 921 |   | $  | 73     |   | 8      |   | **$**  | **494** |   | $  | 475    |   | $      | 19 |   | 4  |   | **$** | **480** |   | $ | 437 |   | $ | 43 |   | 10 |   |

 

 

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

 

Heating degree-days andcooling degree-days are metrics commonly used in the utility industry as ameasure of the impact weather has on results of operations.  Heating degree-days and cooling degree-daysin **CG&E’s** and **PSI’s** service territories for the quartersended September 30, 2004 and 2003, were as follows:

 

|                   |       |                          |       |    |       |   |   |      |       |     |       |   |   |   |   |      |       |
|------------------------|------------|-------------------------------|------------|---------|------------|--------|--------|-----------|------------|----------|------------|--------|--------|--------|--------|-----------|------------|
| ** **             | ** ** | **CG&E and subsidiaries** | ** ** | **PSI** | ** ** |
| ** **             | ** ** | **2004**                      | ** ** | 2003    |       | Change |   | %  Change | ** ** | **2004** | ** ** | 2003   |   | Change |   | %  Change | ** ** |
|                   |       |                          |       |    |       |   |   |      |       |     |       |   |   |   |   |      |       |
| Heating degree-days(1) |       | **36**                        |       | 72      |       | (36    | )      | (50       | )          | **42**   |       | 91     |   | (49    | )      | (54       | )          |
| Cooling degree-days(2) |       | **540**                       |       | 638     |       | (98    | )      | (15       | )          | **535**  |       | 642    |   | (107   | )      | (17       | )          |

 

 

| (1)    | Heating degree-days are the differences between the  average temperature for each day and 65 degrees, assuming the average  temperature is less than 65 degrees.    |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2)    | Cooling degree-days are the differences between the  average temperature for each day and 65 degrees, assuming the average  temperature is greater than 65 degrees. |
|   |                                                                                                                                                                |

 

Although coolingdegree-days declined, retail electric operating revenues increased for **Cinergy** and **PSI** in the thirdquarter of 2004 as compared to 2003. This was mainly due to an increase in the average retail price per MWh, whichresulted in approximately $49 million and $45 million higher retail revenuesfor **Cinergy** and **PSI**,respectively.  The higher retail pricesprimarily reflect a higher

 

62

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

 

price received per MWhdue to **PSI’s** base retail electric rate case.  For all three companies, growth in non-weatherrelated demand was offset by a decline in MWh sales due to milder weather inthe current period.

 

Electric wholesalerevenues remained relatively flat for **Cinergy** anddecreased for **CG&E** and **PSI** for the quarter ended September 30,2004, as compared to 2003.  **Cinergy’s** wholesale revenues increasedapproximately $14 million from non-regulated energy service subsidiaries thatstarted operations, or became fully consolidated, after September 30,2003.  Additionally, net revenues onpower marketing, trading, and origination contracts increased approximately $11million.  The increase in power tradingresults is attributable to higher margins on physical and financial tradingprimarily related to regional spreads between the mideast and midwest markets.  These increases were offset by decreases inwholesale sales from generation available after serving regulated retailcustomers.

 

**CG&E’s** variance reflects decreases in wholesalesales from generation available after serving regulated retail customers.  Partially offsetting this decrease was anapproximate $15 million increase in net revenues on power marketing, trading,and origination contracts.  The increasein power trading results is attributable to higher margins on physical andfinancial trading primarily related to regional spreads between the mideast andmidwest markets.** **Themajority of **PSI’s** decrease wasattributable to decreases in wholesale sales from generation available afterserving regulated retail customers.

 

The decreases inwholesale sales from generation available after serving regulated retailcustomers were primarily caused by lower demand.  In addition, lower market prices caused ourgeneration to be less economic when it was available for wholesale transactions.  As a result, there were fewer opportunitiesto sell into the wholesale market from generation in the third quarter of 2004,as compared to 2003.

 

Other electric operatingrevenues increased for **Cinergy**, **CG&E**, and **PSI** for the quarter ended September 30, 2004, as compared to2003.  **Cinergy’s**and **CG&E’s** higher other electricoperating revenues reflect increases in coal origination of approximately $23 million.  Coal origination includes contractstructuring and marketing of physical coal. **Cinergy’s**,**CG&E’s**, and **PSI’s** increases also reflect approximately $8 million, $2million, and $6 million, respectively, of higher transmission revenuesprimarily resulting from Midwest Independent System Operator, Inc. (MidwestISO) operations.

 

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

 
| ** **                | ** ** | ** **         | ** ** | ** **                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** **          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **   | ** ** | ** ** | ** ** | ** ** | ** ** | ** **   |
|---------------------------|------------|--------------------|------------|-------------------------------|------------|------------|------------|------------|------------|---------------------|------------|------------|------------|------------|------------|------------|------------|------------|--------------|------------|------------|------------|------------|------------|--------------|
| ** **                | ** ** | **Cinergy****(1)** | ** ** | **CG&E and subsidiaries** | ** ** | **PSI**    | ** ** |
| ** **                | ** ** | **2004**           | ** ** | 2003                          |       | Change     |       | %  Change  | ** ** | **2004**            | ** ** | 2003       |       | Change     |       | %  Change  | ** ** | **2004**   | *** *** | 2003       | * *   | Change     | * *   | %  Change  | *** *** |
| ** **                | ** ** | ** **         | ** ** | ** **                    | ** ** | ** ** | ** ** | ** ** | ** ** | ***(in millions)*** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **   |
|                      | * *   | *** ***       | * *   | * *                      | * *   | * *   | * *   | * *   | * *   | * *            | * *   | * *   | * *   | * *   | * *   | * *   | * *   | * *   | * *     | * *   | * *   | * *   | * *   | * *   | * *     |
| Fuel used for  generation |       | **$**              | **259**    |                          | $          | 270        |       | $          | (11        | )                   | (4         | )          | **$**      | **99**     |       | $          | 94         |       | $            | 5          |       | 5          |       | **$**      | **139**      |   | $ | 164 |   | $ | (25 | ) | (15 | ) |
| Coal origination  costs   |       | **29**             |       | 17                            |       | 12         |       | 71         |       | **29**              |       | 17         |       | 12         |       | 71         |       | **—** |         | —     |       | —     |       | —     |         |
| Total fuel                |       | **$**              | **288**    |                          | $          | 287        |       | $          | 1          |                | —     |       | **$**      | **128**    |       | $          | 111        |       | $            | 17         |       | 15         |       | **$**      | **139**      |   | $ | 164 |   | $ | (25 | ) | (15 | ) |
| Purchased power           |       | **46**             |       | 43                            |       | 3          |       | 7          |       | **28**              |       | 34         |       | (6         | )          | (18        | )          | **22**     |         | 14         |       | 8          |       | 57         |         |
| Fuel and  purchased power |       | **$**              | **334**    |                          | $          | 330        |       | $          | 4          |                | 1          |       | **$**      | **156**    |       | $          | 145        |       | $            | 11         |       | 8          |       | **$**      | **161**      |   | $ | 178 |   | $ | (17 | ) | (10 | ) |
|                           |            |                    |            |                               |            |            |            |            |            |                     |            |            |            |            |            |            |            |            |              |            |            |            |            |            |              |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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

 

63

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

 

*Fuel*

 

*Fuel* expense represents the cost of coal,natural gas, and oil that is used to generate electricity, and the cost of coalorigination, which includes contract structuring and marketing of physical coal.  The following table details the changes toexpense for fuel used in generation from the quarter ended September 30, 2003,to the quarter ended September 30, 2004:

 

| ** **                                  | ** ** | ** **          | ** ** | ** **   | ** ** | ** ** | ** ** |
|---------------------------------------------|------------|---------------------|------------|--------------|------------|------------|------------|
| ** **                                  | ** ** | **Cinergy(1)**      | ** ** | **CG&E** | ** ** | **PSI**    | ** ** |
| ** **                                  | ** ** | ***(in millions)*** | ** ** |
|                                        | * *   | * *            | * *   | * *     | * *   | * *   | * *   |
| Fuel Expense – September 30, 2003      |       | $                   | 270        |         | $          | 94         |       | $ | 164 |   |
|                                        |       |                |       |         |       |       |       |
| *Increase  (Decrease) due to changes in:*   |       |                |       |         |       |       |       |
| Price of fuel                               |       | **12**              | ** ** | **13**       | ** ** | **(1**     | **)**      |
| Deferred fuel  cost                         |       | **(14**             | **)**      | **—**   | ** ** | **(14**    | **)**      |
| Fuel consumption                            |       | **(18**             | **)**      | **(8**       | **)**      | **(10**    | **)**      |
| Non-regulated  subsidiaries                 |       | **9**               | ** ** | **—**   | ** ** | **—** | ** ** |
|                                        |       | ** **          | ** ** | ** **   | ** ** | ** ** | ** ** |
| **Fuel  Expense – September 30, 2004** |       | **$**               | **259**    | ** **   | **$**      | **99**     | ** ** | **$** | **139** | ** ** |

 

 

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

 

Deferred fuel cost representschanges in fuel expense associated with **PSI’s**fuel adjustment charge, which recovers retail fuel costs from customers on adollar-for-dollar basis.  The fueladjustment charge is calculated based on the estimated cost of fuel in the nextthree-month period.  **PSI** records any under-recovery orover-recovery resulting from these differences as a deferred asset or liabilityuntil it is billed or refunded to its customers, at which point it is adjustedthrough fuel expense.

 

*Purchased Power*

 

*Purchasedpower* expenseincreased for **Cinergy** and **PSI** and decreased for **CG&E**for the quarter ended September 30, 2004, as compared to 2003.  **Cinergy’s**and **PSI’s** increases primarilyreflect a greater volume of MWhs purchased to serve **PSI’s** native load and wholesale full requirements customers.  Partially offsetting **Cinergy’s**increase and primarily causing **CG&E’s**decrease was a reduction in the amount of MWhs purchased to serve **CG&E’s** wholesale full requirements customers and a lowerprice paid per MWh for these purchases.

 

#### **Gas Margins**

 

**CG&E’s** gas gross margins increased and **Cinergy’s** remained relatively flat for thequarter ended September 30, 2004, as compared to the same period lastyear.  **CG&E’s**gas margins increased by approximately $6 million primarily due to rate tariffadjustments.

 

**Cinergy’s**gas marginsremained relatively flat as **CG&E’s**increase was offset by lower margins from our gas marketing and tradingbusiness.  Margins for our gas marketingand trading business decreased primarily due to timing differences in revenuerecognition between physical storage activities and the associated derivativecontracts that hedge the physical storage. Our gas marketing and trading business regularly hedges its priceexposure of natural gas held in storage by selling derivative contracts forwinter month delivery.  The majority ofthe gas held in storage is designated as being hedged under Statement ofFinancial Accounting Standards No. 133, *Accountingfor Derivative Instruments and Hedging Activities’* (Statement 133)fair value hedge accounting model, which allows the gas to be accounted for atits fair value (based on spot prices). Under generally accepted

 

64

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

 

accounting principles (GAAP),the derivative contracts hedging the gas are accounted for at fair value (basedon forward winter prices).  Conversely,the agreements with pipelines to store this natural gas until the winterperiods are not derivatives and are not adjusted for changes in fair value (seefootnote 1 in the table below). Significant increases in natural gas prices during the third quarter of2004, especially prices for winter months, resulted in an unrealized loss onthe derivative contracts that is included in current earnings.  However, the economic benefit of theseincreased prices for the gas held in storage will not be recognized in revenuesuntil spot and winter prices of gas converge (which we expect will occur in thewinter months when the natural gas is withdrawn from storage and sold).

 

For a more completeunderstanding of our gas marketing and trading results, we have prepared thefollowing table which reconciles the gas margins under GAAP, the impact ofadjusting these margins for the fair value of pipeline agreements and certain gasheld in storage, and the resulting adjusted gas margins:

 

| ** **                                           | ** **   | ** **                   | ** **   | ** ** | ** ** | ** ** | ** ** |
|------------------------------------------------------|--------------|------------------------------|--------------|------------|------------|------------|------------|
| ** **                                           | ** **   | **2004**                     | ** **   | **2003**   | ** ** | **Change** | ** ** |
| *** ***                                         | *** *** | ***(dollars  in millions)*** | *** *** |
| * *                                             | * *     | * *                     | * *     | * *   | * *   | * *   | * *   |
| Gas margins, as  reported (GAAP)                     |         | **$**                        | **5**        |       | $          | 11         |       | $ | (6 | ) |
|                                                 |         | ** **                   |         |       |       |       |       |
| Fair value  adjustments not recognized under GAAP(1) | ** **   | **21**                       | **(2**)      | 1          |       | 20         |       |
|                                                 |         | ** **                   |         |       |       |       |       |
| Adjusted gas  margins                                |         | **$**                        | **26**       |       | $          | 12         |       | $ | 14 |   |

 

 

| (1)    | Relates to fair value of storage agreements.  The value of a storage agreement is the  ability to store and optimize gas between periods of lower prices (typically  summer) and periods of higher prices (typically winter).  A large component of the fair value is  therefore the differences between winter prices and spot prices.  As this spread gets wider, the value of a  storage agreement increases.                                                                                                                                                                                                                                                                                                                    |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2)    | The magnitude of the adjustment in 2004 is driven by  forward price increases in the winter months that are significantly larger  than spot price increases, which caused a recognized loss on the derivative  sales in winter offset by an unrecognized gain on the related storage  agreements.  While such price changes  from one quarter to the next are not unprecedented, they are the most  significant they have been since we discontinued the application of fair  value accounting to natural gas held in storage and pipeline agreements on  January 1, 2003, with the rescission of Emerging Issues Task Force Issue  98-10, *Accounting for Contracts Involved in Energy  Trading and Risk Management Activities*(EITF 98-10). |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |

 

Adjusted gas marginsrepresent a more economic view of the business with all elements of thebusiness reflected at fair value.  Theresulting increase in adjusted gas margins from our gas marketing and tradingbusiness is primarily a result of an increase in physical and financial tradingmargins resulting from favorable price movements in the third quarter of 2004.

 

#### **Other Revenues**

 

*Otherrevenues* for **Cinergy**increased for the quarter ended September30, 2004, as compared to 2003, primarily due to increased revenues ofapproximately $22 million from the sale of synthetic fuel as a result of anincrease in demand for our synthetic fuel.

 

#### **Operating Expenses**

 

##### ***Operationand Maintenance***

 

*Operationand maintenance*expense increased for **Cinergy**, **CG&E**, and **PSI** for the quarter ended September 30, 2004, as compared to2003.  Approximately $27 million of **Cinergy’s** increase is due to an increase in the productionof synthetic fuel as a result of an increase in demand for our syntheticfuel.  **Cinergy’s**,**CG&E’s**, and **PSI’s** increases include approximately $15 million,$7 million, and $8

 

65

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

 

million, respectively, ofhigher expenses related to emission allowances. These increases primarily reflect higher expenses due to an increase inthe cost of SO2 emission allowances as market prices have increased.  **Cinergy’s** and **PSI’s** increases also resulted from timing differences in therecovery of SO2 emission allowances costs under **PSI’s** emission allowances trackingmechanism authorized by the IURC.

 

Maintenance expenses,primarily production and distribution related, were higher by approximately $7million for both **Cinergy** and **CG&E**. The increases for **Cinergy**, **CG&E**, and **PSI** alsoreflect costs incurred in the third quarter of 2004 related to a continuousimprovement initiative of approximately $6 million, $3 million, and $2 million,respectively.  Approximately $5 millionof **Cinergy’s** increase relates tonon-regulated energy service subsidiaries that started operations, or becamefully consolidated, after the second quarter of 2003.  Partially offsetting **Cinergy’s**increases were approximately $12 million of costs incurred in 2003 associatedwith the bankruptcy of Enron Corp.

 

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

 

*Depreciation* expense increased for **Cinergy**and **PSI** for the quarter ended September 30, 2004, as compared to2003. ** **Approximately$12 million of **Cinergy’s** and **PSI’s** increase was due to the addition ofdepreciable plant primarily for pollution control equipment.  Also contributing to **Cinergy’s**and **PSI’s** higher depreciation expense wasan approximate $7.5 million increase due to higher depreciation rateseffective June 2004 that were approved in **PSI’s** latestretail rate case.

 

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

 

*MiscellaneousIncome (Expense) –**Net* decreased for **Cinergy**and**CG&E**and increasedfor**PSI** for the quarterended September 30, 2004, as compared to 2003. **Cinergy’s** decrease reflectsapproximately $15 million in impairment and disposal charges on certaininvestments in Power Technology and Infrastructure.  The values of these investments reflect ourestimates and judgments about the future performance of these investments, forwhich actual results may differ.  **CG&E’s**decrease and **PSI’s**increasewas primarily a result of a final reconciliation recorded in 2003 between thetwo entities of a previous demutualization of a medical insurance carrier usedby both companies.

 

#### **Income Taxes**

 

The effective income taxrate decreased for **Cinergy** andincreased for **CG&E** and**PSI**for the quarter ended September 30, 2004, as compared to 2003.  **Cinergy’s**2004 effective tax rate is expected to be approximately 23 percent, a decreaseof one percent from our prior estimate. The change results from a revision in estimated 2004 pre-tax income withno adjustment to the estimated annual tax credits associated with theproduction and sale of synthetic fuel for the year.  **CG&E’s** and**PSI’s**increases reflect revisions to estimated 2004 pre-tax income and changes inpermanent differences which have an incremental effect on tax expense.

 

In July 2002, CinergyCapital & Trading, Inc. (Capital & Trading) acquired a coal-basedsynthetic fuel production facility.  Thesynthetic fuel produced at this facility qualifies for tax credits inaccordance with Section 29 of the Internal Revenue Code (IRC).  Eligibility for these credits expires after2007.  **Cinergy**receiveda private letter ruling from the Internal Revenue Service (IRS) in connectionwith the acquisition of the facility.  Todate, **Cinergy**has recorded approximately $189million in tax

 

66

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

 

credits, includingapproximately $69 million in 2004.  SeeNote 6(c)(*iv*) of the “Notes to Condensed FinancialStatements” in “Item 1. Financial Statements” for more detail.

 

67

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**MD&A -year to date results of operations -historical**

 

### **2004YEAR TO DATE RESULTS OF OPERATIONS -HISTORICAL**

 

#### **Summary of Results**

 

Electric and gas grossmargins and net income for **Cinergy**,**CG&E**, and **PSI** for the nine months ended September 30,2004 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               |   | **$** | **254,442** |   | $ | 362,719 |   | $ | (108,277 | ) | (30 | ) | **$** | **196,837** |   | $ | 247,018 |   | $ | (50,181 | ) | (20 | ) | **$** | **114,739** |   | $ | 94,398 |   | $ | 20,341 |   | 22 |   |
|                     |   | ** ** |   |   |   |   |   |   |   | ** ** |   |   |   |   |   |   |   | ** ** |   |   |   |   |   |   |   |
| Electric gross margin(2) |   | **1,850,064** |   | 1,672,622 |   | 177,442 |   | 11 |   | **959,871** |   | 919,244 |   | 40,627 |   | 4 |   | **873,875** |   | 743,501 |   | 130,374 |   | 18 |   |
| Gas gross margin(3)      |   | **233,498** |   | 269,482 |   | (35,984 | ) | (13 | ) | **187,702** |   | 174,912 |   | 12,790 |   | 7 |   | **—** |   | — |   | — |   | — |   |
|                          |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

 

| (1)    | The results of **Cinergy**  also include amounts related to non-registrants.                                                                                        |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2)    | Electric gross margin is calculated as *Electric operating revenues* less *Fuel and purchased power* expense from  the Condensed Consolidated Statements of Income. |
| (3)    | Gas gross margin is calculated as *Gas operating revenues* less *Gas purchased* expense from the Condensed  Consolidated Statements of Income.                      |
|   |                                                                                                                                                                |

 

**Cinergy’s**decrease in net income was primarily attributable to the followingfactors:

 

•                  Higher *Operation and maintenance* expense due, in part, to****greater emission allowance expenses;

•                  Higher *Depreciation*expense;

•                  Impairment and disposal charges on certain investmentsin Power Technology and Infrastructure (reflected in *Miscellaneous Income (Expense) — Net*);

•                  Lower gas margins in our gasmarketing and trading business;

•                  Net gains recognized in the first quarter of 2003resulting from the implementation of certain accounting changes that have beenreflected as cumulative effects of changes in accounting principles; and

•                  Gains realized in the second quarter of 2003 from thedisposal of discontinued operations.

•                  These variances were offset, in part, by an increasein electric gross margins.

 

**CG&E’s**decrease in net income was primarily attributable to the followingfactors:

 

•                  Higher *Operationand maintenance* expense due primarily to****greater emission allowance expenses, consulting fees for acontinuous improvement initiative and higher employee benefit expenses; and

•                  Net gains recognized in the first quarter of 2003resulting from the implementation of certain accounting changes that have beenreflected as cumulative effects of changes in accounting principles.

•                  These variances were offset, in part, by increases inelectric and gas gross margins.

 

68

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**MD&A -year to date results of operations -historical**

 

**PSI’s**increase in netincome was primarily attributable to the following factors:

 

•                  Higher electric gross margins.

•                  These higher margins were offset, in part, by higher *Operation and maintenance* expense, higher *Depreciation*expense and an adjustment toincrease the estimated annual effective tax rate.

 

#### **Electric Margins**

 

**Cinergy’s**, **CG&E’s**,and **PSI’s** electric gross marginsincreased for the nine months ended September 30, 2004, as compared to the sameperiod last year.  **Cinergy’s**and **PSI’s**increases included a higher price received per MWhprimarily due to the IURC’s approval of **PSI’s**average base retail electric rate increase of eight percent in May 2004 andcertain rate tariff adjustments.  Also contributingto the increase in electric gross margins for all three companies wereadditional MWhs delivered due to growth in non-weather related demand.**  Cinergy’s**and**CG&E’s**variances reflect an increase in net revenues onpower marketing, trading, and origination contracts.

 

**Cinergy’s**and**CG&E’s** variances also reflect adecline due to an increase in the average price of fuel for the period.  This decline was partially offset by anincrease in coal origination, which includes contract structuring and marketingof physical coal.

 

##### ***ElectricOperating Revenues***

 
| ** ** | ** ** | ** **         | ** ** | ** **                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** **          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|------------|------------|--------------------|------------|-------------------------------|------------|------------|------------|------------|------------|---------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
| ** ** | ** ** | **Cinergy****(1)** | ** ** | **CG&E and subsidiaries** | ** ** | **PSI**    | ** ** |
| ** ** | ** ** | **2004**           | ** ** | 2003                          |       | Change     |       | %  Change  | ** ** | **2004**            | ** ** | 2003       |       | Change     |       | %  Change  | ** ** | **2004**   | ** ** | 2003       |       | Change     |       | %  Change  | ** ** |
| ** ** | ** ** | ** **         | ** ** | ** **                    | ** ** | ** ** | ** ** | ** ** | ** ** | ***(in millions)*** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| * *   | * *   | * *           | * *   | * *                      | * *   | * *   | * *   | * *   | * *   | * *            | * *   | * *   | * *   | * *   | * *   | * *   | * *   | * *   | * *   | * *   | * *   | * *   | * *   | * *   | * *   |
| Retail     |       | **$**              | **2,157**  |                          | $          | 2,063      |       | $          | 94         |                | 5          |       | **$**      | **1,057**  |       | $          | 1,030      |       | $          | 27         |       | 3          |       | **$**      | **1,100**  |   | $ | 1,033 |   | $ | 67 |   | 6 |   |
| Wholesale  |       | **459**            |       | 364                           |       | 95         |       | 26         |       | **204**             |       | 194        |       | 10         |       | 5          |       | **177**    |       | 156        |       | 21         |       | 13         |       |
| Other      |       | **148**            |       | 86                            |       |       | 62         |       | 72         |                | **126**    |       | 77         |       |       | 49         |       | 64         |       | **34**     |       | 21         |       |       | 13         |   | 62 |   |
| Total      |       | **$**              | **2,764**  |                          | $          | 2,513      |       | $          | 251        |                | 10         |       | **$**      | **1,387**  |       | $          | 1,301      |       | $          | 86         |       | 7          |       | **$**      | **1,311**  |   | $ | 1,210 |   | $ | 101 |   | 8 |   |

 

 

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

 

Heating degree-days andcooling degree-days are metrics commonly used in the utility industry as ameasure of the impact weather has on results of operations.  Heating degree-days and cooling degree-daysin **CG&E’s** and **PSI’s** service territories for the ninemonths ended September 30, 2004 and 2003, were as follows:

 

|                   |       |                          |       |    |       |   |   |      |       |      |       |   |   |   |   |      |       |
|------------------------|------------|-------------------------------|------------|---------|------------|--------|--------|-----------|------------|-----------|------------|--------|--------|--------|--------|-----------|------------|
| ** **             | ** ** | **CG&E and subsidiaries** | ** ** | **PSI** | ** ** |
| ** **             | ** ** | **2004**                      | ** ** | 2003    |       | Change |   | %  Change | ** ** | **2004**  | ** ** | 2003   |   | Change |   | %  Change | ** ** |
|                   |       |                          |       |    |       |   |   |      |       |      |       |   |   |   |   |      |       |
| Heating degree-days(1) |       | **3,121**                     |       | 3,387   |       | (266   | )      | (8        | )          | **3,256** |       | 3,697  |   | (441   | )      | (12       | )          |
| Cooling degree-days(2) |       | **867**                       |       | 804     |       | 63     |   | 8         |       | **879**   |       | 841    |   | 38     |   | 5         |       |

 

 

| (1)    | Heating degree-days are the differences between the  average temperature for each day and 65 degrees, assuming the average  temperature is less than 65 degrees.    |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2)    | Cooling degree-days are the differences between the  average temperature for each day and 65 degrees, assuming the average  temperature is greater than 65 degrees. |
|   |                                                                                                                                                                |

 

69

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**MD&A -year to date results of operations -historical**

 

The change in degree daysfor the nine months ended September 30, 2004, as compared to 2003, did not havea material effect on electric operating revenues.

 

Retail electric operatingrevenues increased for **Cinergy** primarily due to a three percent increasein MWhs delivered by **CG&E** and **PSI**for the nine months ended September 30, 2004, ascompared to 2003.  These increasesresulted in approximately $59 million, $28 million, and $31 million higherretail revenues for **Cinergy**, **CG&E**,and **PSI**, respectively.  The increase in MWhs delivered primarilyreflects growth in non-weather related demand.

 

Alsocontributing to the increase in retail electric operating revenues for **Cinergy**and primarily causing the increasein retail electric operating revenues for **PSI**were twopercent and three percent increases, respectively, in the average retail priceper MWh for the first nine months of 2004, as compared to 2003.  These average increases resulted inapproximately $35 million and $36 million higher retail electric operatingrevenues for **Cinergy** and **PSI**, respectively.  Contributing to the average price increasewas a higher price received per MWh due to **PSI’s** baseretail electric rate case.  Alsocontributing to the average price increase were approximately $17 million inincreases in rate tariff adjustments related to emission allowances and cleancoal technology tracking mechanisms.

 

Electric wholesalerevenues increased for **Cinergy**,**CG&E**, and **PSI** for the nine months ended September 30, 2004, as comparedto 2003.  **Cinergy’s** increase includes a number of factors.  Approximately $41 million of the varianceincludes increases in wholesale revenues from non-regulated energy servicesubsidiaries that started operations, or became fully consolidated, after thefirst half of 2003.  Net revenues onpower marketing, trading, and origination contracts increased approximately $34million.  The increase in power tradingresults is attributable to higher margins on physical and financial tradingprimarily related to regional spreads between the mideast and midwest markets.  The majority of the remaining increase wasattributable to increases in wholesale sales from generation available afterserving regulated retail customers.

 

**CG&E’s**net revenues on power marketing, trading,and origination contracts increased approximately $35 million.  The increase in power trading results isattributable to higher margins on physical and financial trading primarily relatedto regional spreads between the mideast and midwest markets.  This increase was offset by a decrease inMWhs available for wholesale activity due in part to a decrease in generationavailable for these transactions.  Themajority of **PSI’s** increase wasattributable to a greater amount of wholesale sales from generation availableafter serving regulated retail customers.

 

Other electric operatingrevenues increased for **Cinergy**, **CG&E**, and **PSI** for the nine months ended September 30, 2004, as comparedto 2003.  **Cinergy’s** and **CG&E’s**higher other electric operating revenues reflect increases in coal originationof approximately $37 million.  Coal originationincludes contract structuring and marketing of physical coal.  **Cinergy’s**,**CG&E’s**, and **PSI’s** increases also reflect approximately $19 million, $7million, and $12 million, respectively, of higher transmission revenuesprimarily resulting from Midwest ISO operations.

 

70

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**MD&A -year to date results of operations -historical**

 

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

 
| ** **                | ** ** | ** **         | ** ** | ** **                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** **          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **   | ** ** | ** ** | ** ** | ** ** | ** ** | ** **   |
|---------------------------|------------|--------------------|------------|-------------------------------|------------|------------|------------|------------|------------|---------------------|------------|------------|------------|------------|------------|------------|------------|------------|--------------|------------|------------|------------|------------|------------|--------------|
| ** **                | ** ** | **Cinergy****(1)** | ** ** | **CG&E and subsidiaries** | ** ** | **PSI**    | ** ** |
| ** **                | ** ** | **2004**           | ** ** | 2003                          |       | Change     |       | %  Change  | ** ** | **2004**            | ** ** | 2003       |       | Change     |       | %  Change  | ** ** | **2004**   | *** *** | 2003       | * *   | Change     | * *   | %  Change  | *** *** |
| ** **                | ** ** | ** **         | ** ** | ** **                    | ** ** | ** ** | ** ** | ** ** | ** ** | ***(in millions)*** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **   |
|                      | * *   | *** ***       | * *   | * *                      | * *   | * *   | * *   | * *   | * *   | * *            | * *   | * *   | * *   | * *   | * *   | * *   | * *   | * *   | * *     | * *   | * *   | * *   | * *   | * *   | * *     |
| Fuel used for  generation |       | **$**              | **719**    |                          | $          | 705        |       | $          | 14         |                | 2          |       | **$**      | **290**    |       | $          | 263        |       | $            | 27         |       | 10         |       | **$**      | **369**      |   | $ | 415 |   | $ | (46 | ) | (11 | ) |
| Coal origination  costs   |       | **68**             |       | 41                            |       | 27         |       | 66         |       | **68**              |       | 41         |       | 27         |       | 66         |       | **—** |         | —     |       | —     |       | —     |         |
| Total fuel                |       | **$**              | **787**    |                          | $          | 746        |       | $          | 41         |                | 5          |       | **$**      | **358**    |       | $          | 304        |       | $            | 54         |       | 18         |       | **$**      | **369**      |   | $ | 415 |   | $ | (46 | ) | (11 | ) |
| Purchased power           |       | **127**            |       | 94                            |       | 33         |       | 35         |       | **69**              |       | 78         |       | (9         | )          | (12        | )          | **68**     |         | 52         |       | 16         |       | 31         |         |
| Fuel and  purchased power |       | **$**              | **914**    |                          | $          | 840        |       | $          | 74         |                | 9          |       | **$**      | **427**    |       | $          | 382        |       | $            | 45         |       | 12         |       | **$**      | **437**      |   | $ | 467 |   | $ | (30 | ) | (6 | ) |
|                           |            |                    |            |                               |            |            |            |            |            |                     |            |            |            |            |            |            |            |            |              |            |            |            |            |            |              |  |  |  |  |  |  |  |  |  |  |  |  |

 

 

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

 

*Fuel*

* *

*Fuel* expense represents the cost of coal,natural gas, and oil that is used to generate electricity, and the cost of coalorigination, which includes contract structuring and marketing of physical coal.  The following table details the changes toexpense for fuel used in generation from the nine months ended September 30,2003, to the nine months ended September 30, 2004:

 

| ** **                                | ** ** | ** **          | ** ** | ** **   | ** ** | ** ** | ** ** |
|-------------------------------------------|------------|---------------------|------------|--------------|------------|------------|------------|
| ** **                                | ** ** | **Cinergy(1)**      | ** ** | **CG&E** | ** ** | **PSI**    | ** ** |
| ** **                                | ** ** | ***(in millions)*** | ** ** |
|                                      | * *   | * *            | * *   | * *     | * *   | * *   | * *   |
| Fuel expense -  September 30, 2003        |       | $                   | 705        |         | $          | 263        |       | $ | 415 |   |
|                                      |       |                |       |         |       |       |       |
| *Increase  (decrease) due to changes in:* |       |                |       |         |       |       |       |
| Price of fuel                             |       | 39                  |       | 36           |       | 3          |       |
| Deferred fuel  cost                       |       | (64                 | )          | —       |       | (64        | )          |
| Fuel consumption                          |       | 6                   |       | (9           | )          | 15         |       |
| Non-regulated  subsidiaries               |       | 33                  |       | —       |       | —     |       |
|                                      |       | ** **          | ** ** | ** **   | ** ** | ** ** | ** ** |
| **Fuel  expense - September 30, 2004**    |       | **$**               | **719**    | ** **   | **$**      | **290**    | ** ** | **$** | **369** | ** ** |

 

 

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

 

Deferred fuel costrepresents changes in fuel expense associated with **PSI’s** fuel adjustment charge, which recovers retail fuel costsfrom customers on a dollar-for-dollar basis. The fuel adjustment charge is calculated based on the estimated cost offuel in the next three-month period.  **PSI** records any under-recovery orover-recovery resulting from these differences as a deferred asset or liabilityuntil it is billed or refunded to its customers, at which point it is adjustedthrough fuel expense.

 

*Purchased Power*

 

*Purchasedpower* expenseincreased for **Cinergy** and **PSI** and decreased for **CG&E** for the nine months ended September30, 2004, as compared to 2003.  **Cinergy’s** increase was primarily due to asignificantly greater number of third party purchases by its subsidiaries in2004.  In 2003, **Cinergy’s** subsidiaries’ *purchased power* expense included certainintercompany purchases that were eliminated in consolidation.

 

Also contributing to **Cinergy’s** increase and primarily causing **PSI’s**increase were additional costs of purchasesmade for **PSI’s** wholesale fullrequirements customers resulting from an increase in both the amount of MWhspurchased for these customers and the price paid per MWh.  Partially offsetting **Cinergy’s**increase and primarily causing**CG&E’s** decrease was a reduction in theamount of MWhs

 

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**MD&A -year to date results of operations -historical**

 

purchased to serve **CG&E’s** wholesale full requirementscustomers, partially offset by an increase in the price paid per MWh for thesepurchases.

 

#### **Gas Margins**

 

**CG&E’s** gas gross margins increased and **Cinergy’s** decreased for the nine monthsended September 30, 2004, as compared to the same period last year.  **CG&E’s**approximate $13 million increase in gas margins included an increase ofapproximately $21 million primarily due to rate tariff adjustments associatedwith the gas main replacement program, a low-income subsidy program, and Ohioexcise taxes.  This was offset by anapproximate $8 million decrease reflecting less volume sold due to milderweather during 2004.  Heating degree daysdecreased approximately eight percent in **CG&E’s**service territory in the first nine months of 2004, as compared to 2003.

 

Lower margins from ourgas marketing and trading business caused an overall decline in **Cinergy’s** gas margins. Margins for our gas marketing and trading business decreased, in part, dueto timing differences in revenue recognition between physical storageactivities and the associated derivative contracts that hedge the physicalstorage.  Our gas marketing and tradingbusiness regularly hedges its price exposure of natural gas held in storage byselling derivative contracts for winter month delivery.  The majority of the gas held in storage isdesignated as being hedged under Statement 133’s fair value hedge accountingmodel, which allows the gas to be accounted for at its fair value (based onspot prices).  Under GAAP, the derivativecontracts hedging the gas are accounted for at fair value (based on forwardwinter prices).  Conversely, theagreements with pipelines to store this natural gas until the winter periodsare not derivatives and are not adjusted for changes in fair value (seefootnote 1 in the table below). Significant increases in natural gas prices during the third quarter of2004, especially prices for winter months, resulted in an unrealized loss onthe derivative contracts that is included in current earnings.  However, the economic benefit of theseincreased prices for the gas held in storage will not be recognized in revenueuntil spot and winter prices of gas converge (which we expect will occur in thewinter months when the natural gas is withdrawn from storage and sold).

 

For a more completeunderstanding of our gas marketing and trading results, we have prepared the followingtable which reconciles the gas margins under GAAP, the impact of adjustingthese margins for the fair value of pipeline agreements and certain gas held instorage, and the resulting adjusted gas margins:

 

| ** **                                            | ** **   | ** **                   | ** **   | ** ** | ** ** | ** ** | ** ** |
|-------------------------------------------------------|--------------|------------------------------|--------------|------------|------------|------------|------------|
| ** **                                            | ** **   | **2004**                     | ** **   | **2003**   | ** ** | **Change** | ** ** |
| *** ***                                          | *** *** | ***(dollars  in millions)*** | *** *** |
| * *                                              | * *     | * *                     | * *     | * *   | * *   | * *   | * *   |
| Gas margins, as  reported (GAAP)                      |         | **$**                        | **46**       | ** ** | $          | 95         |       | $ | (49 | ) |
|                                                  |         | ** **                   | ** **   |       |       |       |       |
| Fair value  adjustments not recognized under GAAP (1) | ** **   | **21**                       | **(2)**      | (6         | )          | 27         |       |
|                                                  |         | ** **                   | ** **   |       |       |       |       |
| Adjusted gas  margins                                 |         | **$**                        | **67**       | ** ** | $          | 89         |       | $ | (22 | ) |

 

 

| (1)    | Relates to fair value of storage agreements.  The value of a storage agreement is the  ability to store and optimize gas between periods of lower prices (typically  summer) and periods of higher prices (typically winter).  A large component of the fair value is  therefore the differences between winter prices and spot prices.  As this spread gets wider, the value of a  storage agreement increases.                                                                                                                                                                                   |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2)    | The magnitude of the adjustment in 2004 is driven by  forward price increases in the winter months that are significantly larger  than spot price increases, which caused a recognized loss on the derivative  sales in winter offset by an unrecognized gain on the related storage  agreements.  While such price changes  from one quarter to the next are not unprecedented, they are the most  significant they have been since we discontinued the application of fair  value accounting to natural gas held in storage and pipeline agreements on  January 1, 2003 with the rescission of EITF 98-10. |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |

 

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**MD&A -year to date results of operations -historical**

 

Adjusted gas marginsrepresent a more economic view of the business with all elements of thebusiness reflected at fair value.  Theresulting decrease in adjusted gas margins was primarily a result of anapproximate $26 million decline in physical and financial trading margins fromour North American gas marketing and trading business, primarily resulting fromfewer trading opportunities caused by lowervolatility, lower price levels, and milder weather in the first quarter of 2004.  Naturalgas prices were extremely volatile in the first quarter of 2003.

 

#### **Other Revenues**

 

*Otherrevenues* for **Cinergy**increased for the nine months endedSeptember 30, 2004, as compared to 2003, primarily due to increased revenues ofapproximately $22 million from non-regulated energy service subsidiaries thatstarted operations, or became fully consolidated, after the first half of2003.  Also contributing to the increasewere increased revenues of approximately $20 million from the sale of syntheticfuel as a result of an increase in demand for our synthetic fuel.

 

#### **Operating Expenses**

 

##### ***Operationand Maintenance***

 

*Operationand maintenance*expense increased for **Cinergy**, **CG&E**, and **PSI** for the nine months ended September 30, 2004, as comparedto 2003.  **Cinergy’s**, **CG&E’s**,and **PSI’s** increases includeapproximately $58 million, $25 million, and $33 million, respectively, ofhigher expenses related to emission allowances. These increases primarilyreflect higher expenses due to an increase in the cost of SO2emission allowances as market prices have increased.  **Cinergy’s** and **PSI’s** increases also resulted from timing differences in therecovery of SO2 emission allowances costs under **PSI’s** emission allowances trackingmechanism authorized by the IURC and an increase in the number of SO2 emissionallowances used during the period. Approximately $35 million of **Cinergy’s**increase is due to an increase in the production of synthetic fuel as a resultof an increase in demand for our synthetic fuel.

 

The higher *Operation and maintenance* expense alsoreflects costs incurred in 2004 related to a continuous improvement initiativeof approximately $18 million, $8 million, and $7 million for **Cinergy**, **CG&E**,and **PSI**, respectively.  Employee benefit expenses increasedapproximately $12 million, $5 million, and $5 million for **Cinergy**,**CG&E**, and **PSI**,****respectively.  Approximately $18 million of **Cinergy’s** increase is due to non-regulatedenergy service subsidiaries that started operations, or became fullyconsolidated, after the second quarter of 2003. In addition, higher costs of approximately $9 million, $7 million, and$2 million for **Cinergy**, **CG&E**, and **PSI**, respectively, were due to changes in transmission costslargely resulting from changes in the Midwest ISO operations in 2003.  Maintenance expenses, primarily productionand distribution related, were higher by approximately $19 million and $17million for **Cinergy** and **CG&E**, respectively.  Partially offsetting **Cinergy’s**increases were approximately $12 million of costs incurred in 2003 associatedwith the bankruptcy of Enron Corp.

 

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

 

*Depreciation* expense increased for **Cinergy** and **PSI**, and decreased for **CG&E**for the nine months ended September 30, 2004, as compared to 2003. ** **Approximately$31 million of **Cinergy’s** and **PSI’s** increase was due to the addition ofdepreciable plant primarily for pollution control equipment. Also contributingto **Cinergy’s** and **PSI’s**higher depreciation expense was an approximate $10 million

 

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** **

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

** **

increase due to higher depreciation rates effective June2004 that were approved in **PSI’s** latestretail rate case.

 

Partially offsetting **Cinergy’s** increase and contributing to **CG&E’s** decrease was an approximate $15million reduction due to longer estimated useful lives of **CG&E’s** generation assets resulting froma depreciation study completed during the third quarter of 2003.  Approximately $6 million of **Cinergy’s** increase and partially offsetting**CG&E’s** decrease was theaddition of depreciable plant primarily for pollution control equipment andadditions related to the accelerated gas main replacement program.

 

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

 

*MiscellaneousIncome (Expense) –**Net*decreased for **Cinergy**and**CG&E**and increased slightly for**PSI** for the nine months ended September 30, 2004.  **Cinergy’s**decreasereflects approximately $49 million in impairment and disposal charges on certaininvestments in Power Technology and Infrastructure.  The values of these investments reflect ourestimates and judgments about the future performance of these investments, forwhich actual results may differ.  Themajority of these charges relate to a company, in which **Cinergy** holds a non-controlling interest,that agreed to sell its major assets. This company is involved in the development and sale of outagemanagement software.  The decrease waspartially offset by interest income of approximately $9 million on the notesreceivable of two subsidiaries consolidated in the third quarter of 2003, asdiscussed in the 2003 10-K.  **CG&E’s**decrease and **PSI’s** increasewas due, in part, to a final reconciliation recorded in 2003 between the twoentities of a previous demutualization of a medical insurance carrier used byboth companies.  Also contributing to **CG&E’s** decrease and partially offsetting **PSI’s** increase was a decline in the allowance for equityfunds used during construction resulting from certain assets being placed intoservice and a decrease in the equity rate applied.

 

#### **Interest Expense**

 

*Interest**Expense* increased for **Cinergy** and decreased for **CG&E** for the nine months endedSeptember 30, 2004, as compared to 2003. Approximately $12 million of **Cinergy’s**increase reflects the recognition of a note payable to a trust.  Also reflected in **Cinergy’s** increase is approximately $9 million related toadditional debt recorded in accordance with the consolidation of two newentities.  The note payable andadditional debt were both recorded in the third quarter of 2003 resulting fromthe adoption of FASB Interpretation No. 46, *Consolidation of VariableInterest Entities* (Interpretation 46), as discussed in the 200310-K.  Partially offsetting **Cinergy’s** increases and primarily contributing to **CG&E’s**decrease was a decline in **CG&E’s** average long-term debt for the nine months endedSeptember 30, 2004, as compared to 2003.** **Also****partiallyoffsetting**Cinergy’s** increases andcontributing to **CG&E’s**decrease were charges recorded during 2003 associated with the re-financing ofcertain debt.

 

#### **Preferred Dividend Requirement of Subsidiary Trust**

 

*PreferredDividend Requirement of Subsidiary Trust* decreased for **Cinergy** for the nine months ended September30, 2004, as compared to 2003, as a result of the implementation ofInterpretation 46.  Effective July 1,2003, the preferred trust securities and the related dividends are no longerreported in **Cinergy’s** financialstatements.  However, interest expense isstill being incurred on a note payable to this trust as discussed above.

 

 

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

 

#### **Income Taxes**

 

The effective income taxrate decreased for **Cinergy**,****remained****flat for**CG&E**,****and increasedfor **PSI**for the nine months ended September30, 2004, as compared to 2003.**  Cinergy’s** 2004 effective incometax rate is expected to be approximately 23 percent as compared to 24 percentin 2003.  The decrease in the effectiveincome tax rate is a result of a greater amount of estimated annual tax creditsassociated with the production and sale of synthetic fuel for 2004 as comparedto 2003. ** PSI’s**effective tax rate increase reflects a revision in estimated 2004pre-tax income and changes in permanent differences which have an incrementaleffect on tax expense.

 

In July 2002, 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 IRC.  Eligibility for these credits expires after2007.  **Cinergy**received a private letter ruling from the IRS in connection with theacquisition of the facility.  To date, **Cinergy** has recorded approximately $189 million in taxcredits, including approximately $69 million in 2004.  See Note 6(c)(*iv*)of the “Notes to Condensed Financial Statements” in “Item 1. FinancialStatements” for more details.

 

#### **Discontinued Operations**

 

During the second quarterof 2003, **Cinergy** completed thedisposal of its gas distribution operation in South Africa, sold its remainingwind assets in the United States, and substantially sold or liquidated theassets of its energy trading operation in the Czech Republic.  Pursuant to Statement of Financial AccountingStandards No. 144, *Accounting for theImpairment or Disposal of Long-lived Assets*, these investments havebeen classified as discontinued operations in our financial statements.

 

**Cumulative Effect of Changes in Accounting Principles, Net ofTax**

 

In 2003, **Cinergy**,**CG&E**, and **PSI**recognizeda *Cumulative effect of changes in accountingprinciples, net of tax* gain/(loss) of approximately $26 million, $31million, and $(0.5) million, respectively. The cumulative effect of changes in accounting principles was a resultof the adoption of Statement of Financial Accounting Standards No. 143, *Accounting for Asset Retirement Obligations*and the rescission of EITF 98-10.

 

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

 

**ULH&P**

 

The Results of Operationsdiscussion for **ULH&P** ispresented only for the nine months ended September 30, 2004, in accordance withGeneral Instruction H(2)(a) of Form 10-Q.

 

Electric and gas grossmargins and net income for **ULH&P**for the nine months ended September 30, 2004 and 2003, were as follows:

 

| ** **                | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **   |
|---------------------------|------------|-----------------------|------------|------------|------------|------------|------------|------------|--------------|
| ** **                | ** ** | **ULH&P**         | ** ** |
| ** **                | ** ** | **2004**              | ** ** | 2003       |       | Change     | * *   | %  Change  | *** *** |
| ** **                | ** ** | ***(in  thousands)*** | ** ** |
| ** **                | ** ** | * *              | ** ** |
| Electric gross  margin(1) |       | **$**                 | **51,930** |       | $          | 49,419     |       | $          | 2,511        |   | 5 |   |
| Gas gross margin(2)       |       | **31,715**            |       | 28,437     |       | 3,278      |       | 12         |         |
|                      |       | ** **            |       |       |       |       |       |       |         |
| Net income                |       | **13,279**            |       | 11,477     |       | 1,802      |       | 16         |         |
|                           |            |                       |            |            |            |            |            |            |              |  |  |  |

 

| (1)    | Electric gross margin is calculated as *Electric operating revenues* less *Electricity purchased from parent company for  resale* expense from the Condensed Statements of Income. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2)    | Gas gross margin is calculated as *Gas operating revenues* less *Gas purchased* expense from the Condensed  Statements of Income.                                                  |
|   |

 

#### **Summary of Results**

 

Electric and gas grossmargins increased for **ULH&P**for the nine months ended September 30, 2004, as compared to 2003.  The increase in electric gross marginsreflects a greater amount of MWhs delivered due to growth in non-weatherrelated demand.  The increase in gasgross margins was due, in part, to rate tariff adjustments associated with thegas main replacement program and the demand-side management program, whichencourages efficient customer gas usage.

 

The increase in netincome for the year was primarily due to the increased electric and gas grossmargins discussed above.  Alsocontributing to the increase was a reduction in property taxes during the firstnine months of 2004, as compared to 2003. These increases were partially offset by higher *Depreciation* expense primarily related tonon-utility property****and higher *Operation and maintenance* expenseassociated with transmission costs, demand-side management programs, andmaintenance.

 

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

 

### **FUTUREEXPECTATIONS/TRENDS**

 

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

 

### **ELECTRICINDUSTRY**

 

#### **Ohio**

 

As discussed in more detail in the 2003 10-K, **CG&E** made multiple rate filings in 2003with the PUCO seeking approval of **CG&E's**methodology for establishing market-based rates for generation service at theend of the market development period and to recover investments made in thetransmission and distribution system.  InDecember 2003, these filings, and **CG&E’s**proposal for establishing its post-market development period market pricingmethodology, were consolidated for hearing before the PUCO.  In addition, the PUCO requested in theseproceedings that **CG&E** proposea rate stabilization plan as an alternative to market-based rates so as tomitigate the potential for significant rate increases when the marketdevelopment (frozen rate) period comes to an end. There is no requirement inOhio law that **CG&E**file****sucha plan. However, in January 2004, **CG&E**filed its proposed rate stabilization plan.

 

In May 2004, **CG&E**entered into a settlement agreement with manyof the parties to these proceedings requesting that the PUCO approve amodified version of the rate stabilization plan. Under this plan, **CG&E**wouldbegin to collect a non-bypassable provider of last resort (POLR) chargeintended to provide recovery for increased capacity reserves, environmentalcompliance and emission allowance expenditures. The plan also established a bypassable generation charge, which includeda fuel cost recovery mechanism.  Itallowed for a two-year extension of the residential regulatory transitioncharge (RTC) in 2009 and 2010 and a three-year extension of the five percentresidential generation rate reduction in the years 2006-2008.  Finally, it provided for deferral and recoveryof certain transmission and distribution costs.

 

In September 2004, the PUCO issued an orderseeking to modify several key provisions of this settlement.  The PUCO order, among other things, would notallow extension of the RTC for residential customers or permit deferral andrecovery of certain transmission and distribution costs from residentialcustomers. The PUCO order would allow **CG&E**to end the five percent generation rate reduction for residential customers(i.e., increase the residential generation rate by five percent) beginningJanuary 1, 2006, but would also allow certain customers who have switched to another generation supplier toentirely avoid the POLR charge.  As aresult of these modifications, **CG&E** fileda petition for rehearing in October 2004. The rehearing petition requests one of the following to be effectiveJanuary 1, 2005 for non-residential customers and January 1, 2006 forresidential customers:

 

•      Approval of the modified rate stabilization plan reflected inthe May 2004 settlement (as discussed above);

•      Approval of a further modified rate stabilization plan, whichincludes some of the same provisions as the May 2004 plan.  However, this plan (a) changes the POLRcharge to provide recovery only for environmental compliance expenditures andallows customers that have switched to by-pass this charge, (b) adds aninfrastructure maintenance fund charge, (c) adds a system reliability trackerthat would provide recovery primarily for capacity and purchased power, (d)includes recovery of emission allowances costs as part of the fuel costrecovery mechanism, and (e) ends the five percent generation rate reduction forresidential customers but does not include an extension of the residential RTC;or,

•      Approval to proceed with market-based rates, which is permittedunder **CG&E’s** existing transition plan.

 

A rehearing order is expected in the fourth quarter of 2004.  We cannot predict the outcome of this proceeding.  Because the rate stabilization plan is avoluntary filing on **CG&E's**part,**CG&E**may reject the PUCO's order ifit provides for a rate stabilization plan that is unacceptable to **CG&E**.

 

In conjunction with the consolidated filings discussed above, **CG&E** has also filed an application for an annualincrease of approximately $78 million in electric distribution base rates, tobe effective in the first quarter of 2005 for non-residential customers andJanuary 1, 2006 for residential customers. The proposed rate stabilization plans described above provide for**CG&E** to withdraw this base rate case upon approval ofthe rate stabilization plan.  In suchevent, **CG&E** can then file a newdistribution base rate case, with rates to become effective January 1, 2006.  If the PUCO's order on rehearing provides fora rate stabilization plan that is unacceptable to **CG&E**,**CG&E**may seek to proceedimmediately with market-based rates for its commercial, industrial and otherpublic authority customer classes and also proceed immediately with this baserate case for such classes.  Market basedrates must be approved by the PUCO and would eliminate the various deferral andrecovery mechanisms contemplated with the rate stabilization plan.

 

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**MD&A- RESULTS OF OPERATIONS - FUTURE**

 

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

 

##### ***Day-Ahead and Real-Time Energy Markets***

 

In response to prior FERCorders, in March 2004, the Midwest ISO filed with the FERC proposed changes toits existing transmission tariff to add terms and conditions to implement acentralized security-constrained economic dispatch platform supported by aDay-Ahead and Real-Time Energy Market design, including Locational MarginalPricing and Financial Transmission Rights (Energy Markets Tariff).  In May 2004, the FERC released an orderscheduling the start-up of the Energy Markets Tariff for no earlier than March1, 2005, and establishing various procedures for resolving outstanding issues.  In August and September 2004, FERC issuedorders that, among other things, conditionally approved the Energy MarketsTariff.  Requests for rehearing of theseorders were subsequently filed.  At thistime, **Cinergy** cannot predict theoutcome of this matter or whether it will have a material effect on our financialposition or results of operations.

 

***Blackout Report***

 

In April 2004, the UnitedStates-Canada Power System Outage Task Force issued its Final Report on theAugust 14, 2003 Blackout in the United States and Canada.  The report reviewed the causes of theBlackout and made 46 recommendations intended to minimize the likelihood andscope of similar events in the future. One of the recommendations is to make reliability standards mandatoryand enforceable with penalties for noncompliance.  In the past, compliance with North AmericanElectric Reliability Council’s reliability standards and guidelines has largelybeen voluntary.  At this time, we do notbelieve the recommendations of the Final Report, if implemented, will have amaterial impact on our financial position or results of operations.

 

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**MD&A- RESULTS OF OPERATIONS - FUTURE**

 

***FERC’s Market Screen Orders***

 

In April 2004, FERCissued an order establishing a new, interim set of market power screens for usein evaluating sales of wholesale power at market-based rates.  In July 2004, the FERC issued an ordergenerally affirming that order.  In April2004, the FERC also commenced a rulemaking to evaluate whether its overall testfor market-based rates should be continued, and to determine a permanent marketpower test to replace the interim test. That rulemaking process remains pending. Under FERC’s interim generation market power analysis, as a member of MidwestISO, **Cinergy** could consider the Midwest ISO geographicmarket for purposes of FERC’s market power analysis once Midwest ISO has asufficient market structure and a single energy market.  **Cinergy** doesnot believe it has market power in generation. However, if **Cinergy** wasunable to establish that it does not have the ability to exercise market powerin generation, it would result in the loss of market-based rate authority incertain regions of the wholesale market and, assuming such loss of market-basedrate authority, would require **Cinergy** tocharge certain wholesale customers cost-based rates for wholesale sales ofelectricity.  In October 2004, FERCissued proposed rules that may affect how and when circumstances have changedto an extent that requires FERC review of previously granted authorization tosell at existing market-based rates.  Atthis time, we cannot predict the outcome of these matters and whether they willhave a material effect on our financial position or results of operations.

 

### **GASINDUSTRY**

 

#### **Gas Prices**

 

Natural gas pricesremained relatively high during the first three quarters of 2004 and areexpected to escalate even more in the fourth quarter. It appears likely thatthe price of natural gas will maintain its historic high level through most of2005.  Price movement will be driven bythe effects of weather conditions, availability of supply, and changes indemand and storage inventories. Currently, neither **CG&E**nor **ULH&P** profit from changesin the cost of natural gas since natural gas purchase costs are passed directlyto the customer dollar-for-dollar under the gas cost recovery mechanism that ismandated under state law.

 

In May 2003, **ULH&P**filed an application with the Kentucky Public Service Commission (KPSC)requesting approval of a price mitigation program designed to mitigate theeffects of gas price volatility on customers. In June 2003, the KPSC approved this program through March 31,2005.  The program will allow thepre-arranging of between 20-75 percent of winter heating season base load gasrequirements and up to 50 percent of summer season base load gasrequirements.  **CG&E** similarly mitigates its gas procurement costs,however, **CG&E’s** gas pricemitigation program has not been pre-approved by the PUCO but rather it issubject to PUCO review as part of the normal gas cost recovery process.

 

**CG&E**and **ULH&P**useprimarily long-term fixed price contracts and contracts with a ceiling andfloor on the price.  These contractsemploy the normal purchases and sales scope exception, and do not involvehedges under Statement 133.

 

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**MD&A- RESULTS OF OPERATIONS - FUTURE**

 

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

 

The transactionsassociated with the Commercial Business Unit’s (Commercial) energy marketingand trading activities and substantial investment in generation assets giverise to various risks, including price risk. Price risk represents the potential risk of loss from adverse changes inthe market price of electricity or other energy commodities.  As Commercial continues to develop its energymarketing and trading business, its exposure to movements in the price ofelectricity and other energy commodities may become greater.  As a result, we may be subject to increasedfuture earnings volatility.

 

As discussed in the 200310-K, **CG&E** and **PSI** executed a new joint operatingagreement in April 2002 whereby we chose to originate all new power marketingand trading contracts since April 2002 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 not presented**PSI** separately in the fair valueand credit risk tables below.

 

#### **Changes in Fair Value**

 

The changes in fair valueof the energy risk management assets and liabilities, for the periods ended September30, 2004 and 2003, are presented in the table below:

 

| ** **                                                                                 | ** ** | ** **                             | ** ** | ** **          | ** ** | ** **     | ** ** | ** **   | ** ** |
|--------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|---------------------|------------|----------------|------------|--------------|------------|
| ** **                                                                                 | ** ** | **Change in Fair Value  Year to Date** | ** ** |
| ** **                                                                                 | ** ** | **September 30, 2004**                 | ** ** | September  30, 2003 | ** ** |
| ** **                                                                                 | ** ** | **Cinergy(1)**                         | ** ** | **CG&E**        | ** ** | **Cinergy(1)** | ** ** | **CG&E** | ** ** |
| ** **                                                                                 | ** ** | ***(in millions)***                    | ** ** |
| ** **                                                                                 | ** ** | *** ***                           | ** ** |
| Fair value of  contracts outstanding at beginning of year                                  |       | **$**                                  | **41**     | ** **          | **$**      | **20**         | ** ** | $            | 75         |   | $ | 42 |   |
|                                                                                       |       | ** **                             | ** ** | ** **          | ** ** |           |       |         |       |
| Changes in fair  value attributable to changes in valuation techniques and assumptions (2) |       | **—**                             | ** ** | **—**          | ** ** | 1              |       | 1            |       |
|                                                                                       |       | ** **                             | ** ** | ** **          | ** ** |           |       |         |       |
| Other changes in  fair value (3)                                                           |       | **129**                                | ** ** | **60**              | ** ** | 120            |       | 40           |       |
|                                                                                       |       | ** **                             | ** ** | ** **          | ** ** |           |       |         |       |
| Option premiums  paid/(received)                                                           |       | **1**                                  | ** ** | **4**               | ** ** | (6             | )          | 3            |       |
|                                                                                       |       | ** **                             | ** ** | ** **          | ** ** |           |       |         |       |
| Accounting  changes (4)                                                                    |       | ** **                             | ** ** | ** **          | ** ** |           |       |         |       |
|                                                                                       |       | ** **                             | ** ** | ** **          | ** ** |           |       |         |       |
| Cumulative  effect of changes in accounting principle                                      |       | **—**                             | ** ** | **—**          | ** ** | (20            | )          | (14          | )          |
|                                                                                       |       | ** **                             | ** ** | ** **          | ** ** |           |       |         |       |
| Consolidation of  previously unconsolidated entities                                       |       | **—**                             | ** ** | **—**          | ** ** | 7              |       | —       |       |
|                                                                                       |       | ** **                             | ** ** | ** **          | ** ** |           |       |         |       |
| Contracts  settled                                                                         |       | **(93**                                | **)**      | **(32**             | **)**      | (129           | )          | (48          | )          |
|                                                                                       |       | ** **                             | ** ** | ** **          | ** ** |           |       |         |       |
| Fair value of  contracts outstanding at end of period                                      |       | **$**                                  | **78**     | ** **          | **$**      | **52**         | ** ** | $            | 48         |   | $ | 24 |   |

 

| (1)    | The results of **Cinergy**  also include amounts related to non-registrants.                                                                                                                          |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2)    | Represents changes in fair value recognized in income,  caused by changes in assumptions used in calculating fair value or changes in  modeling techniques.                                           |
| (3)    | Represents changes in fair value, recognized in  income, primarily attributable to fluctuations in price.  This amount includes both realized and unrealized  gains on energy trading contracts. |
| (4)    | See Note 1(q)(*iv*) and Note  1(q)(*vi*) of the “Notes to Financial  Statements” of the 2003 10-K for further information.                                                                  |
|   |                                                                                                                                                                                                  |

 

 

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The following are thebalances at September 30, 2004 and 2003, of our energy risk management assetsand liabilities:

 

| ** **                                             | ** ** | ** **             | ** ** | ** **          | ** ** | ** **     | ** ** | ** **   | ** ** |
|--------------------------------------------------------|------------|------------------------|------------|---------------------|------------|----------------|------------|--------------|------------|
| ** **                                             | ** ** | **September 30, 2004** | ** ** | September  30, 2003 | ** ** |
| ** **                                             | ** ** | **Cinergy(1)**         | ** ** | **CG&E**        | ** ** | **Cinergy(1)** | ** ** | **CG&E** | ** ** |
| ** **                                             | ** ** | ***(in millions)***    | ** ** |
|                                                   |       | ** **             | ** ** | ** **          |       |           |       |         |       |
| Energy risk  management assets – current          |       | **$**                  | **470**    | ** **          | **$**      | **178**        |       | $            | 224        |   | $ | 79 |   |
| Energy risk  management assets – non-current      |       | **137**                | ** ** | **48**              |       | 127            |       | 62           |       |
|                                                   |       | ** **             | ** ** | ** **          |       |           |       |         |       |
| Energy risk  management liabilities – current     |       | **396**                | ** ** | **126**             |       | 186            |       | 73           |       |
| Energy risk  management liabilities – non-current |       | **133**                | ** ** | **48**              |       | 117            |       | 44           |       |
|                                                   |       | ** **             | ** ** | ** **          |       |           |       |         |       |
|                                                   |       | **$**                  | **78**     | ** **          | **$**      | **52**         |       | $            | 48         |   | $ | 24 |   |

 

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

 

The following tablepresents the expected maturity of the energy risk management assets and liabilitiesas of September 30, 2004, for **Cinergy**and **CG&E**:

 

| ** **                                             | ** ** | ** **                                            | ** **   | ** **        | ** ** | ** **        | ** ** | ** **     | ** ** | ** **               | ** ** |
|--------------------------------------------------------|------------|-------------------------------------------------------|--------------|-------------------|------------|-------------------|------------|----------------|------------|--------------------------|------------|
| ** **                                             | ** ** | **Fair Value of Contracts as of  September 30, 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                                |       | $                                                     | 70           |              | $          | 5                 |       | $              | —     |                     | $          | — |   | $ | 75 |   |
|                                                   |       |                                                  |         |              |       |              |       |           |       |                     |       |
| Prices based on  models and other valuation methods(3) |       | 5                                                     |         | 3                 |       | —            |       | (5             | )          | 3                        |       |
|                                                   |       |                                                  |         |              |       |              |       |           |       |                     |       |
| Total                                                  |       | $                                                     | 75           |              | $          | 8                 |       | $              | —     |                     | $          | (5 | ) | $ | 78 |   |
|                                                   |       |                                                  |         |              |       |              |       |           |       |                     |       |
| **CG&E**                                           |       |                                                  |         |              |       |              |       |           |       |                     |       |
| Prices actively  quoted                                |       | $                                                     | 44           |              | $          | 3                 |       | $              | —     |                     | $          | — |   | $ | 47 |   |
|                                                   |       |                                                  |         |              |       |              |       |           |       |                     |       |
| Prices based on  models and other valuation methods(3) |       | 8                                                     |         | (2                | )          | (1                | )          | —         |       | 5                        |       |
|                                                   |       |                                                  |         |              |       |              |       |           |       |                     |       |
| Total                                                  |       | $                                                     | 52           |              | $          | 1                 |       | $              | (1         | )                        | $          | — |   | $ | 52 |   |

 
| (1)    | While liquidity varies by trading regions, active quotes are  generally available for two years for standard electricity transactions and  three years for standard gas transactions.   Non-standard transactions are classified based on the extent, if any,  of modeling used in determining fair value.   Long-term transactions can have portions in both categories depending  on the tenor. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2)    | The  results of **Cinergy** also include  amounts related to non-registrants.                                                                                                                                                                                                                                                                                                                               |
| (3)    | A  substantial portion of those amounts include option values.                                                                                                                                                                                                                                                                                                                                              |
|   |                                                                                                                                                                                                                                                                                                                                                                                                        |

 

#### **Energy Trading Credit Risk**

 

**Cinergy’s**extension of credit for energy marketing and trading is governed by a CorporateCredit Policy.  Written guidelinesapproved by **Cinergy’s** Risk PolicyCommittee document the management approval levels for credit limits, evaluationof creditworthiness, and credit risk mitigation procedures.  **Cinergy**analyzes net credit exposure and establishes credit reserves based on thecounterparties’ credit rating, payment history, and tenor of the outstanding obligation.  Exposures to credit risks are monitored dailyby the Corporate Credit Risk function, which is independent of all

 

81

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**MD&A- RESULTS OF OPERATIONS - FUTURE**

 

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

 

The following tablesprovide information regarding **Cinergy’s**and **CG&E’s** exposure on energytrading contracts as well as the expected maturities of those exposures as of September30, 2004.  The tables include accountsreceivable and energy risk management assets, which are net of accounts payableand energy risk management liabilities with the same counterparties when wehave the right of offset.  The creditcollateral shown in the following tables includes cash and letters of credit.

 
| ** **                             | ** ** | ** **                                     | ** ** | ** **             | ** ** | ** **        | ** ** | ** **                             | ** ** | ** **                                                             | ** ** | ** **                                                                      | ** ** |
|----------------------------------------|------------|------------------------------------------------|------------|------------------------|------------|-------------------|------------|----------------------------------------|------------|------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------|------------|
| **Cinergy(1)**                         | ** ** | ** **                                     | ** ** | ** **             | ** ** | ** **        | ** ** | ** **                             | ** ** | ** **                                                             | ** ** | ** **                                                                      | ** ** |
|                                   |       |                                           |       |                   |       |              |       |                                   |       |                                                                   |       |                                                                            |       |
| **Rating**                             |       | **Total  Exposure  Before Credit  Collateral** |       | **Credit  Collateral** |       | **Net  Exposure** |       | **Percentage of  Total  Net Exposure** |       | **Number of  Counterparties  Greater than 10%  of Total Net Exposure** |       | **Net Exposure of  Counterparties  Greater than 10% of  Total Net Exposure**(4) |       |
| ** **                             |       | ***(in millions)***                            |       |
|                                   |       |                                           |       |                   |       |              |       |                                   |       |                                                                   |       |                                                                            |       |
| Investment Grade(2)                    |       | $                                              | 561        |                   | $          | 70                |       | $                                      | 491        |                                                                   | 78         | %                                                                               | —     |   | $ | — |   |
| Internally  Rated-Investment Grade(3)  |       | 77                                             |       | —                 |       | 77                |       | 12                                     |       | —                                                                 |       | —                                                                          |       |
| Non-Investment  Grade                  |       | 94                                             |       | 54                     |       | 40                |       | 6                                      |       | —                                                                 |       | —                                                                          |       |
| Internally  Rated-Non-Investment Grade |       | 48                                             |       | 23                     |       | 25                |       | 4                                      |       | —                                                                 |       | —                                                                          |       |
|                                   |       |                                           |       |                   |       |              |       |                                   |       |                                                                   |       |                                                                            |       |
| Total                                  |       | $                                              | 780        |                   | $          | 147               |       | $                                      | 633        |                                                                   | 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 millions)***                   | ** ** |
|                                   | * *   | * *                              | * *   | * * | * * | * * | * * | * * | * * |
| Investment Grade(2)                    |       | $                                     | 480        |   | $ | 66 |   | $ | 15 |   | $ | 561 |   |
| Internally  Rated-Investment Grade(3)  |       | 72                                    |       | 5 |   | — |   | 77 |   |
| Non-Investment  Grade                  |       | 93                                    |       | 1 |   | — |   | 94 |   |
| Internally  Rated-Non-Investment Grade |       | 48                                    |       | — |   | — |   | 48 |   |
|                                   |       |                                  |       |   |   |   |   |   |   |
| Total                                  |       | $                                     | 693        |   | $ | 72 |   | $ | 15 |   | $ | 780 |   |

 
| (1)    | Includes amounts related  to non-registrants.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2)    | Includes counterparties  rated Investment Grade or the counterparties’ obligations are guaranteed or  secured by an Investment Grade entity.                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| (3)    | Counterparties include a  variety of entities, including investor-owned utilities, privately held  companies, cities and municipalities.  **Cinergy** assigns internal credit ratings  to all counterparties within our credit risk portfolio, applying fundamental  analytical tools.  Included in this  analysis is a review of (but not limited to) counterparty financial  statements with consideration given to off-balance sheet obligations and  assets, specific business environment, access to capital, and indicators from  debt and equity capital markets. |
| (4)    | Exposures, positive or  negative, with counterparties that are related to one another are not  aggregated when no right of offset exists and as a result, credit is extended  and evaluated on a separate basis.                                                                                                                                                                                                                                                                                                                                                                   |
|   |

 

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** **

**MD&A- RESULTS OF OPERATIONS - FUTURE**

 
| ** **                             | ** ** | ** **                                     | ** ** | ** **             | ** ** | ** **        | ** ** | ** **                             | ** ** | ** **                                                             | ** ** | ** **                                                                      | ** ** |
|----------------------------------------|------------|------------------------------------------------|------------|------------------------|------------|-------------------|------------|----------------------------------------|------------|------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------|------------|
| **CG&E**                           | ** ** | ** **                                     | ** ** | ** **             | ** ** | ** **        | ** ** | ** **                             | ** ** | ** **                                                             | ** ** | ** **                                                                      | ** ** |
| ** **                             | ** ** | ** **                                     | ** ** | ** **             | ** ** | ** **        | ** ** | ** **                             | ** ** | ** **                                                             | ** ** | ** **                                                                      | ** ** |
| **Rating**                             | ** ** | **Total  Exposure  Before Credit  Collateral** | ** ** | **Credit  Collateral** | ** ** | **Net  Exposure** | ** ** | **Percentage of  Total  Net Exposure** | ** ** | **Number of  Counterparties  Greater than 10%  of Total Net Exposure** | ** ** | **Net Exposure of  Counterparties  Greater than 10% of  Total Net Exposure**(3) | ** ** |
|                                   | * *   | ***(in millions)***                            |
| Investment Grade(1)                    |       | $                                              | 193        |                   | $          | 41                |       | $                                      | 152        |                                                                   | 93         | %                                                                               | 2          |   | $ | 39 |   |
| Internally  Rated-Investment Grade(2)  |       | 9                                              |       | —                 |       | 9                 |       | 5                                      |       | —                                                                 |       | —                                                                          |       |
| Non-Investment  Grade                  |       | 24                                             |       | 21                     |       | 3                 |       | 2                                      |       | —                                                                 |       | —                                                                          |       |
| Internally  Rated-Non-Investment Grade |       | 3                                              |       | 3                      |       | —            |       | —                                 |       | —                                                                 |       | —                                                                          |       |
|                                   |       |                                           |       |                   |       |              |       |                                   |       |                                                                   |       |                                                                            |       |
| Total                                  |       | $                                              | 229        |                   | $          | 65                |       | $                                      | 164        |                                                                   | 100        | %                                                                               | 2          |   | $ | 39 |   |

 
| ** **                             | ** ** | **Maturity of Credit Risk  Exposure** | ** ** |
|----------------------------------------|------------|---------------------------------------|------------|
| ** **                             | ** ** | ** **                            | ** ** |
| **Rating**                             | ** ** | **Less than  2 Years**                | ** ** | **2-5 Years** | ** ** | **Exposure  Greater than  5 Years** | ** ** | **Total Exposure  Before Credit  Collateral** | ** ** |
| ** **                             | ** ** | ***(in millions)***                   | ** ** |
|                                   | * *   | * *                              | * *   | * * | * * | * * | * * | * * | * * |
| Investment Grade(1)                    |       | $                                     | 168        |   | $ | 25 |   | $ | — |   | $ | 193 |   |
| Internally  Rated-Investment Grade(2)  |       | 9                                     |       | — |   | — |   | 9 |   |
| Non-Investment  Grade                  |       | 23                                    |       | 1 |   | — |   | 24 |   |
| Internally  Rated-Non-Investment Grade |       | 3                                     |       | — |   | — |   | 3 |   |
|                                   |       |                                  |       |   |   |   |   |   |   |
| Total                                  |       | $                                     | 203        |   | $ | 26 |   | $ | — |   | $ | 229 |   |

 
| (1)    | Includes counterparties  rated Investment Grade or the counterparties’ obligations are guaranteed or  secured by an Investment Grade entity.                                                                |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2)    | Counterparties include  various cities and municipalities.                                                                                                                                                       |
| (3)    | Exposures, positive or  negative, with counterparties that are related to one another are not  aggregated when no right of offset exists and as a result, credit is extended  and evaluated on a separate basis. |
|   |

 

### **ACCOUNTINGMATTERS**

 

#### **Critical Accounting Policies**

 

Preparation of financialstatements and related disclosures in compliance with GAAP requires the use ofassumptions and estimates.  In certaininstances, the application of GAAP requires judgments regarding future events,including the likelihood of success of particular initiatives, legal andregulatory challenges, and anticipated recovery of costs.  Therefore, the possibility exists formaterially different reported amounts under different conditions orassumptions.

 

**Cinergy’s**2003 10-K includes a discussion of accounting policies that are significant tothe presentation of **Cinergy’s**financial position and results of operations. These include:

 

•                  Fair Value Accounting for EnergyMarketing and Trading;

•                  Retail Customer Revenue Recognition;

•                  Regulatory Accounting;

•                  Pension and Other PostretirementBenefits;

•                  Income Taxes;

•                  Legal and EnvironmentalContingencies; and

•                  Impairment of Long-lived Assets.

 

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**MD&A- RESULTS OF OPERATIONS - FUTURE**

 

#### **Accounting Changes**

 

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

 

In January 2003, the FASBissued Interpretation 46, which significantly changes the consolidationrequirements for traditional SPEs and certain other entities subject to itsscope.  This interpretation defines a VIEas (a) an entity that does not have sufficient equity to support its activitieswithout additional financial support or (b) any entity that has equityinvestors that do not have voting rights, do not absorb first dollar losses, orreceive returns.  These entities must beconsolidated whenever **Cinergy** wouldbe anticipated to absorb greater than 50 percent of the losses or receivegreater than 50 percent of the returns.

 

In accordance with itstwo stage adoption guidance, we implemented Interpretation 46 for traditionalSPEs on July 1, 2003, and for all other entities, including certain operatingjoint ventures, as of March 31, 2004. The consolidation of certain operating joint ventures as of March 31,2004, did not have a material impact on our financial position or results ofoperations.

 

**Cinergy**also holds interests in several joint ventures, primarily engaged incogeneration and energy efficiency operations, that are considered VIEs whichdo not require consolidation.  Ourexposure to loss from our involvement with these entities is not material.

 

### **OTHER**

 

#### **Sale of Investment**

 

Power Technology andInfrastructure holds an investment in a company that develops, owns andoperates wireless communication towers. In July 2004, this company agreed to sell the majority of itsassets.  The transaction is expected toclose in the fourth quarter of 2004 and we would anticipate recording a gain ofapproximately $20 million relating to this sale at that time.  These earnings will be reflected in *Equity in Earnings of Unconsolidated Subsidiaries*in **Cinergy’s**Condensed ConsolidatedStatements of Income.

 

#### **Synthetic Fuel**

 

In July 2002, Capital& Trading acquired a coal-based synthetic fuel production facility.  The synthetic fuel produced at this facilityqualifies for tax credits (through 2007) in accordance with IRC Section 29 ifcertain requirements are satisfied.  Thethree key requirements are that (a) the synthetic fuel differs significantly inchemical composition from the coal used to produce such synthetic fuel, (b) thefuel produced is sold to an unrelated entity and (c) the fuel was produced froma facility that was placed in service before July 1, 1998.

 

During the third quarterof 2004, several unrelated entities announced the IRS’s intent to challenge theplaced in service dates of some of the entities’ synthetic fuel plants.  A successful IRS challenge could result indisallowance of all credits previously claimed for fuel produced by the subjectplants.  **Cinergy’s**sale of synthetic fuel has generated approximately $189 million in tax creditsthrough September 2004.

 

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**MD&A- RESULTS OF OPERATIONS - FUTURE**

 

The IRS has not yetaudited **Cinergy** for any tax year in which **Cinergy** has claimed Section 29 credits related to syntheticfuel.  However, it is reasonable toanticipate that the IRS will evaluate the placed in service date and other keyrequirements for claiming the credit.

 

**Cinergy**received a private letter ruling from the IRS in connection with theacquisition of the facility that specifically addressed the significantchemical change requirement. Additionally, although not addressed in the letter ruling, we believethat our facility’s in service date meets the Section 29 requirements.

 

IRC Section 29 alsoprovides for a phase out of the credit based on the price of crude oil.  The phase-out is based on a prescribedcalculation and definition of crude oil prices within the IRC.  Although the price of crude oil has increasedsignificantly in 2004, we presently do not expect any impact on our ability toutilize Section 29 credits in 2004.  Ourresults for the nine months ended September 30, 2004 include $69 million of taxcredits.  If crude oil prices continue toincrease, our ability to utilize credits beyond 2004 could be impacted.

 

#### **Other Tax Matters**

 

Certain tax matters, forwhich tax contingency provisions have been made, are likely to be resolved asearly as the fourth quarter of 2004 or the first half of 2005.  The resolution of these issues could resultin an adjustment in the tax provisions for these items.  However, we cannot determine the magnitude ofthe potential adjustment until resolution occurs.

 

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**QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

** **

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

 

This information isprovided in, and incorporated by reference from, the “Market Risk SensitiveInstruments and Positions” section in “Item 2. Management’s Discussion andAnalysis of Financial Condition and Results of Operations” in “Part I.Financial Information”.

 

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**CONTROLSAND PROCEDURES**

## ** **

## **ITEM 4.  CONTROLSAND PROCEDURES**

 

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

 

Under the supervision and with the participation ofour management, including our chief executive officer and chief financialofficer, we have evaluated the effectiveness of our disclosure controls andprocedures as of September 30, 2004, and, based upon this evaluation, our chiefexecutive officer and chief financial officer have concluded that thesecontrols and procedures are effective in providing reasonable assurance thatinformation requiring disclosure is recorded, processed, summarized, andreported within the timeframe specified by the SEC’s rules and forms.

 

Under the supervision andwith the participation of our management, including our chief executive officerand chief financial officer, we have evaluated any change in our internalcontrol over financial reporting (as such term is defined in Rules 13a-15(f)and 15d-15(f) under the Exchange Act) during the fiscal quarter ended September30, 2004 and found no change that has materially affected, or is reasonablylikely to materially affect, our internal control over financial reporting.

 

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**PART II.OTHER INFORMATION**

 

## **PART II.  OTHERINFORMATION**

 

## **ITEM 1.  LEGALPROCEEDINGS**

 

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

 

In November 1999, and through subsequent amendments, theUnited States brought a lawsuit in the United States Federal District Court forthe Southern District of Indiana (District Court) against **Cinergy**, The Cincinnati Gas & ElectricCompany (**CG&E**), and PSI Energy, Inc. **(PSI**) alleging various violations of theCAA.  Specifically, the lawsuit allegesthat we violated the CAA by not obtaining Prevention of SignificantDeterioration (PSD), Non-Attainment New Source Review (NSR), and Ohio andIndiana State Implementation Plan (SIP) permits for various projects at ourowned and co-owned generating stations. Additionally, the suit claims that we violated an Administrative ConsentOrder entered into in 1998 between the Environmental Protection Agency (EPA)and **Cinergy** relating to allegedviolations of Ohio’s SIP provisions governing particulate matter at Unit 1 at **CG&E’s** W.C. Beckjord Generating Station(Beckjord Station).  The suit seeks (1)injunctive relief to require installation of pollution control technology onvarious generating units at **CG&E’s**Beckjord Station and Miami Fort Generating Station, and **PSI’s** Cayuga Generating Station, GallagherGenerating Station, Wabash River Generating Station, and Gibson GeneratingStation (Gibson Station), and (2) civil penalties in amounts of up to $27,500per day for each violation.  In addition,three northeast states and two environmental groups have intervened in thecase.  The case is currently in discovery,and the District Court has set the case for trial by jury commencing inFebruary 2006.

 

In March 2000, the United States also filed in the DistrictCourt an amended complaint in a separate lawsuit alleging violations of the CAArelating to PSD, NSR, and Ohio SIP requirements regarding various generatingstations, including a generating station operated by Columbus Southern PowerCompany (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 cannot seek monetary damages for alleged violations that occurred priorto November 3, 1994; however, they are entitled to seek injunctive relief forsuch alleged violations.  Neither partyappealed that decision.

 

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

 

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 againstthe allegations, discussed above, vigorously in court.

 

88

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**PART II.OTHER INFORMATION**

 

### **CARBONDIOXIDE (CO2) LAWSUIT**

 

In July 2004, the statesof Connecticut, New York, California, Iowa, New Jersey, Rhode Island, Vermont,Wisconsin, and the City of New York brought a lawsuit in the United StatesDistrict Court for the Southern District of New York against **Cinergy** and American Electric PowerCompany, Inc., American Electric Power Service Corporation, The SouthernCompany, Tennessee Valley Authority, and Xcel Energy Inc.  That same day, a similar lawsuit was filedagainst the same companies by Open Space Institute, Inc., Open SpaceConservancy, Inc., and The Audubon Society of New Hampshire.  These lawsuits allege that the defendants’emissions of CO2 from the combustion of fossil fuels at electricgenerating facilities contribute to global warming and amount to a publicnuisance.  The complaints also allegethat the defendants could generate the same amount of electricity whileemitting significantly less CO2. Plaintiffs are seeking an injunction requiring each defendant to cap itsCO2 emissions and then reduce them by a specified percentage eachyear for at least a decade.  **Cinergy** intends to defend this lawsuitvigorously in court and filed a motion to dismiss with the other defendants inSeptember 2004; however, we are not able to predict whether resolution of thesematters would have a material effect on our financial position or results ofoperations.

 

### **SELECTIVE CATALYTIC REDUCTION UNITS(SCR) AT GIBSON GENERATING STATION**

 

In May 2004, SCRs andother pollution control equipment became operational at Units 4 and 5 of **PSI’s** Gibson Station in accordance withcompliance deadlines under the NOX SIP Call.  In June and July 2004, Gibson Stationtemporarily shut down the equipment on these units due to a concern over anacid aerosol mist haze (plume) sometimes occurring in areas near theplant.  Portions of the plume from thoseunits’ stacks appeared to break apart and descend to ground level at certaintimes under certain weather conditions. As a result, and, working with the City of Mt. Carmel, Illinois,Illinois EPA, Indiana Department of Environmental Management, United States EPA,and the State of Illinois, we developed a protocol regarding the use of theSCRs while we explore alternatives to address this issue.  After the protocol was finalized, theIllinois Attorney General brought an action in Wabash County Circuit Court on August 9, 2004 against**PSI** seeking a preliminary injunction toenforce the protocol.  In August 2004,the court granted that preliminary injunction. **PSI** appealed that decision to the FifthDistrict Appellate Court at Mt. Vernon, Illinois on October 6, 2004, but wecannot predict the ultimate outcome of that appeal or of the underlying actionby the Illinois Attorney General.

 

We will seek recovery ofany related capital as well as increased emission allowance expendituresthrough the regulatory process.  We do not believe costs related toresolving this matter will have a material impact on our financial position or resultsof operations.

 

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

 

Priorto the 1950s, gas was produced at MGP sites through a process that involved theheating of coal and/or oil.  The gasproduced from this process was sold for residential, commercial, and industrialuses.

 

Coaltar residues, related hydrocarbons, and various metals have been found atformer 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).

 

The 22sites are in the process of being studied and will be remediated, ifnecessary.  In 1998 NIPSCO, IGC, and **PSI** entered into Site Participation andCost Sharing Agreements to allocate liability and responsibilities betweenthem.  The Indiana Department ofEnvironmental Management oversees investigation and cleanup of all of thesesites.  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.

 

InApril 1998, **PSI** filed suit inHendricks County in the state of Indiana against its general liabilityinsurance carriers.  **PSI** sought a declaratory judgment toobligate its insurance carriers to (1) defend MGP claims against **PSI** and compensate **PSI** for its costs of investigating,preventing, mitigating, and remediating damage to property and paying claimsrelated to MGP sites; or (2) pay **PSI’s**cost of defense.  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.  The court has set the case for trialcommencing in January 2005.  At thepresent time, **PSI** cannot predictthe outcome of this litigation, including the outcome of the appeals.

 

89

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**PART II.OTHER INFORMATION**

 

**PSI**has accrued costs related to investigation, remediation, and groundwatermonitoring for those sites where such costs are probable and can be reasonablyestimated.  We will continue toinvestigate and remediate the sites as outlined in the voluntary remediationplan.  As additional facts become knownand investigation is completed, we will assess whether the likelihood ofincurring additional costs becomes probable. Until all investigation and remediation is complete, we are unable todetermine the overall impact on our financial position or results ofoperations.

 

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

 

### **ASBESTOSCLAIMS LITIGATION**

 

**CG&E**and **PSI** have been named asdefendants or co-defendants in lawsuits related to asbestos at their electricgenerating stations.  Currently, thereare approximately 100 pending lawsuits.  Inthese lawsuits, plaintiffs claim to have been exposed to asbestos-containingproducts in the course of their work at the **CG&E**and **PSI** generating stations.  The plaintiffs further claim that as theproperty owner of the generating stations,**CG&E** and **PSI** shouldbe held liable for their injuries and illnesses based on an alleged duty towarn and protect them from any asbestos exposure.  A majority of the lawsuits to date have beenbrought against **PSI**.  The impact on **CG&E’s** and **PSI’s**financial position or results of operations of these cases to date has not beenmaterial.

 

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

 

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

 

90

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**PART II.OTHER INFORMATION**

 

### **ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS**

 

The number of shares (orunits) provided in the table below represent shares exchanged in connectionwith employee option exercises and shares purchased by the plan trustee onbehalf 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** | ** ** |
|                            |       |                                                   |       |                                              |       |                                                                                                     |       |                                                                                                                                    |       |
| July 1 – July 31           |       | 1,086                                                  |       | $                                                 | 38.15      |                                                                                                     | N/A        |                                                                                                                                    | N/A        |   |
| August 1 – August 31       |       | 136,085                                                |       | $                                                 | 39.63      |                                                                                                     | N/A        |                                                                                                                                    | N/A        |   |
| September 1 – September 30 |       | 3,053                                                  |       | $                                                 | 40.45      |                                                                                                     | N/A        |                                                                                                                                    | N/A        |   |
|                            |       |                                                   |       |                                              |       |                                                                                                     |       |                                                                                                                                    |       |

 

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**PART II.OTHER INFORMATION**

 

## **ITEM 6.  EXHIBITS**

 

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

 

| **Exhibit  Designation** | ** ** | **Registrant**                            | ** ** | **Nature of Exhibit**                                                                                                                                                                      | ** ** | **Previously Filed  as Exhibit to:** |
|--------------------------|------------|-------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|
|                     |       |                                      |       |                                                                                                                                                                                       |       |                                 |
| **Additional  Exhibits** |       |                                      |       |                                                                                                                                                                                       |       |                                 |
| 10-rrr                   |       | **Cinergy Corp.**                         | ** ** | Form of incentive stock option grant agreement.                                                                                                                                            |       |                                 |
| 10-sss                   |       | **Cinergy Corp.**                         | ** ** | Form of non-qualified stock option grant  agreement.                                                                                                                                       |       |                                 |
| 10-ttt                   |       | **Cinergy Corp.**                         | ** ** | Form of restricted stock grant agreement.                                                                                                                                                  |       |                                 |
| 10-uuu                   |       | **Cinergy Corp.**                         | ** ** | Form of performance share grant agreement.                                                                                                                                                 |       |                                 |
| 10-vvv                   |       | **Cinergy Corp.**                         | ** ** | Form of phantom stock grant agreement.                                                                                                                                                     |       |                                 |
|                     |       | ** **                                |       |                                                                                                                                                                                       |       |                                 |
| **Certificates**         |       |                                      |       |                                                                                                                                                                                       |       |                                 |
|                     |       |                                      |       |                                                                                                                                                                                       |       |                                 |
| **31-a**                 | ** ** | **Cinergy  Corp. CG&E PSI ULH&P** | ** ** | **Certification  by James E. Rogers pursuant to Rule 13a-14(a)/15d-14(a) of the Securities  Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002.** | ** ** | ** **                           |
| ** **               | ** ** | ** **                                | ** ** | ** **                                                                                                                                                                                 | ** ** | ** **                           |
| **31-b**                 | ** ** | **Cinergy  Corp. CG&E PSI ULH&P** | ** ** | **Certification  by James L. Turner pursuant to Rule 13a-14(a)/15d-14(a) of the Securities  Exchange Act of 1934, as adopted pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.** | ** ** | ** **                           |
| ** **               | ** ** | ** **                                | ** ** | ** **                                                                                                                                                                                 | ** ** | ** **                           |
| **32-a**                 | ** ** | **Cinergy  Corp. CG&E PSI ULH&P** | ** ** | **Certification  by James E. Rogers pursuant to 18 U.S.C. Section 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002.**                                           | ** ** | ** **                           |
| ** **               | ** ** | ** **                                | ** ** | ** **                                                                                                                                                                                 | ** ** | ** **                           |
| 32-b                     |       | **Cinergy Corp. CG&E PSI  ULH&P** | ** ** | Certification by James L. Turner pursuant to 18  U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002.                                               |       |                                 |
|                     |       |                                      | ** ** |                                                                                                                                                                                       |       |                                 |

 

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## **SIGNATURES**

 

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

 
| CINERGY CORP.                              |
|--------------------------------------------|
| THE CINCINNATI  GAS & ELECTRIC COMPANY |
| PSI ENERGY, INC.                           |
| THE UNION LIGHT,  HEAT AND POWER COMPANY   |
| Registrants                                |

 

 
|       Date:  November 5, 2004 |     /s/                                  | Lynn J. Good |   |
|-------------------------------------------------------------|--------------------------------------------------------------|--------------|--------|
|                                                        |                                                         | Lynn J. Good |   |
|                                                        | (duly authorized officer  and  principal accounting officer) |         |
|                                                             |                                                              |              |        |  |

 

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