**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

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

** **

**FORM 10-Q**

**(Mark One)**
| **x** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|--------------------------------------------------------------------------------------------------------|

 

**For thequarterly period ended March 31, 2006**

 

**or**

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

 

**For thetransition period from                       to                      **

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

 

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

 

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

 

Indicate by checkmark whether each registrant is a large accelerated filer, an acceleratedfiler, or a non-accelerated filer. See definition of “accelerated filer andlarge accelerated filer” in Rule 12b-2 of the Exchange Act.

 

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

 

Indicate by checkmark whether the registrant is a shell (as defined in Rule 12b-2 ofthe Exchange Act). Yes o   No x

 

This combined Form 10-Qis separately filed by **Cinergy Corp.**,**The Cincinnati Gas & ElectricCompany**, and **PSI Energy, Inc.**Information contained herein relating to any individual registrantis filed by such registrant on its own behalf. Each registrant makes norepresentation as to information relating to the other registrants.

 

**CinergyCorp.**, **The Cincinnati Gas & Electric Company**,**and PSIEnergy, Inc.**meet the conditions set forth in GeneralInstruction H(1)(a) and (b) of Form 10-Q and are thereforefiling their company specific information with the reduced disclosure formatspecified in General Instruction H(2) of Form 10-Q. 

 

As of April 30,2006, shares of common stock outstanding for each registrant were as listed:

 
| Registrant                                         | ** ** | **Description**                                | ** ** | **Shares** |
|----------------------------------------------------|------------|------------------------------------------------|------------|------------|
|                                               |       |                                           |       |       |
| **Cinergy Corp.**                                  |       | Par value $.01 per share                       |       | —     |
| ** **                                         |       |                                           |       |       |
| **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 |

 

ULH&P, whichpreviously was a separate Securities and Exchange Commission (SEC) reportingentity, has filed a Form 15 with the SEC to suspend its reportingobligations under the Securities Exchange Act of 1934.

 

----

**TABLE OF CONTENTS**
| Item  Number | ** ** | ** **                                                                                             | ** ** | ** ** |
|--------------|------------|--------------------------------------------------------------------------------------------------------|------------|------------|
|         |       | **PART I.  FINANCIAL INFORMATION**                                                                |       |       |
|         |       |                                                                                                   |       |       |
| 1            |       | **Financial Statements**                                                                               |       |       |
|         |       | **Cinergy Corp. and Subsidiary Companies**                                                             |       |       |
|         |       | Condensed Consolidated Statements of Income                                                            |       |       |
|         |       | Condensed Consolidated Balance Sheets                                                                  |       |       |
|         |       | Condensed Consolidated Statements of Changes in Common  Stock Equity                                   |       |       |
|         |       | Condensed Consolidated Statements of Cash Flows                                                        |       |       |
|         |       |                                                                                                   |       |       |
|         |       | **The Cincinnati Gas & Electric Company and  Subsidiary Companies**                           |       |       |
|         |       | Condensed Consolidated Statements of Income and  Comprehensive Income                                  |       |       |
|         |       | Condensed Consolidated Balance Sheets                                                                  |       |       |
|         |       | Condensed Consolidated Statements of Cash Flows                                                        |       |       |
|         |       |                                                                                                   |       |       |
|         |       | **PSI Energy, Inc. and Subsidiary Company**                                                       |       |       |
|         |       | Condensed Consolidated Statements of Income and  Comprehensive Income                                  |       |       |
|         |       | Condensed Consolidated Balance Sheets                                                                  |       |       |
|         |       | Condensed Consolidated Statements of Cash Flows                                                        |       |       |
|         |       |                                                                                                   |       |       |
|         |       | **Notes to Condensed Financial Statements**                                                            |       |       |
|         |       |                                                                                                   |       |       |
|         |       | **Cautionary Statements Regarding Forward-Looking  Information**                                       |       |       |
|         |       |                                                                                                   |       |       |
| 2            |       | **Management’s Discussion and Analysis of Financial  Condition and Results of Operations Merger** |       |       |
|         |       | 2006 Quarterly Results of Operations - Cinergy                                                         |       |       |
|         |       | 2006 Quarterly Results of Operations - CG&E                                                        |       |       |
|         |       | 2006 Quarterly Results of Operations - PSI                                                             |       |       |
|         |       |                                                                                                   |       |       |
| 4            |       | **Controls  and Procedures**                                                                           |       |       |
|         |       |                                                                                                   |       |       |
|         |       | **PART II.  OTHER INFORMATION**                                                                   |       |       |
|         |       |                                                                                                   |       |       |
| 1            |       | **Legal  Proceedings**                                                                                 |       |       |
|         |       | ** **                                                                                             |       |       |
| 1A           |       | **Risk Factors**                                                                                       |       |       |
|         |       | ** **                                                                                             |       |       |
| 6            |       | **Exhibits**                                                                                           |       |       |
|         |       | ** **                                                                                             |       |       |
|         |       | **Signatures**                                                                                         |       |       |

 

2

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** **

**CINERGY CORP.**AND SUBSIDIARYCOMPANIES

 

3

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**CINERGY CORP.CONDENSED CONSOLIDATED STATEMENTS OF INCOME**
| ** **                                                                                            | ** ** | **Quarter Ended**                                                  | ** **    |
|-------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------|---------------|
| ** **                                                                                            | ** ** | **March 31**                                                       | ** **    |
| ** **                                                                                            | ** ** | **2006**                                                                | ** **    | **2005** | ** ** |
| ** **                                                                                            | ** ** | **(in thousands, except per   share amounts)** | ** **    |
| ** **                                                                                            | ** ** | **(unaudited)**                                                         | ** **    |
| **Operating Revenues**                                                                                |       |                                                                    |          |   |   |
| Electric                                                                                              |       | **$**                                                                   | **1,137,062** |   | $ | 914,359 |   |
| Gas                                                                                                   |       | **355,556**                                                             |          | 313,096 |   |
| Other                                                                                                 |       | **155,920**                                                             |          | 98,656 |   |
| **Total Operating Revenues**                                                                          |       | **1,648,538**                                                           |          | 1,326,111 |   |
|                                                                                                  |       | ** **                                                              |          |   |   |
| **Operating Expenses**                                                                                |       | ** **                                                              |          |   |   |
| Fuel, emission allowances, and purchased power                                                        |       | **425,896**                                                             |          | 300,619 |   |
| Gas purchased                                                                                         |       | **232,006**                                                             |          | 208,600 |   |
| Costs of fuel resold                                                                                  |       | **146,298**                                                             |          | 85,762 |   |
| Operation and maintenance                                                                             |       | **422,658**                                                             |          | 296,695 |   |
| Depreciation and amortization                                                                         |       | **163,758**                                                             |          | 151,449 |   |
| Taxes other than income taxes                                                                         |       | **87,278**                                                              |          | 78,932 |   |
| **Total Operating Expenses**                                                                          |       | **1,477,894**                                                           |          | 1,122,057 |   |
|                                                                                                  |       | ** **                                                              |          |   |   |
| **Operating  Income**                                                                                 |       | **170,644**                                                             |          | 204,054 |   |
|                                                                                                  |       | ** **                                                              |          |   |   |
| **Equity  in Earnings of Unconsolidated Subsidiaries**                                                |       | **4,095**                                                               |          | 4,836 |   |
| **Miscellaneous  Income — Net**                                                                  |       | **18,648**                                                              |          | 2,950 |   |
| **Interest  Expense**                                                                                 |       | **84,894**                                                              |          | 64,003 |   |
| **Preferred  Dividend Requirements of Subsidiaries**                                                  |       | **277**                                                                 |          | 858 |   |
| ** **                                                                                            |       | ** **                                                              |          |   |   |
| **Income  Before Taxes**                                                                              |       | **108,216**                                                             |          | 146,979 |   |
| ** **                                                                                            |       | ** **                                                              |          |   |   |
| **Income Taxes**                                                                                      |       | **21,302**                                                              |          | 32,100 |   |
| ** **                                                                                            |       | ** **                                                              |          |   |   |
| **Income  Before Discontinued Operations and Cumulative Effect of a Change in  Accounting Principle** |       | **86,914**                                                              |          | 114,879 |   |
|                                                                                                  |       | ** **                                                              |          |   |   |
| Discontinued operations, net of tax (Note 8)                                                          |       | **(4,057**                                                              | )             | 2,477 |   |
| Cumulative effect of a change in accounting  principle, net of tax (Note 1(e)(*i*))                   |       | **(3,493**                                                              | )             | — |   |
| **Net  Income**                                                                                       |       | **$**                                                                   | **79,364**    |   | $ | 117,356 |   |
|                                                                                                  |       | ** **                                                              |          |   |   |
| **Average  Common Shares Outstanding — Basic**                                                   |       | **200,286**                                                             |          | 195,647 |   |
|                                                                                                  |       | ** **                                                              |          |   |   |
| **Earnings Per Common Share —  Basic****(Note 10)**                                              |       | ** **                                                              |          |   |   |
| Income before discontinued operations and cumulative  effect of a change in accounting principle      |       | **$**                                                                   | **0.43**      |   | $ | 0.59 |   |
| Discontinued operations, net of tax                                                                   |       | **(0.02**                                                               | )             | 0.01 |   |
| Cumulative effect of a change in accounting  principle, net of tax                                    |       | **(0.01**                                                               | )             | — |   |
| Net Income                                                                                            |       | **$**                                                                   | **0.40**      |   | $ | 0.60 |   |
|                                                                                                  |       | ** **                                                              |          |   |   |
| **Average  Common Shares Outstanding — Diluted**                                                 |       | **201,161**                                                             |          | 196,712 |   |
|                                                                                                  |       | ** **                                                              |          |   |   |
| **Earnings Per Common Share —  Diluted****(Note 10)**                                            |       | ** **                                                              |          |   |   |
| Income before discontinued operations and cumulative  effect of a change in accounting principle      |       | **$**                                                                   | **0.43**      |   | $ | 0.59 |   |
| Discontinued operations, net of tax                                                                   |       | **(0.02**                                                               | )             | 0.01 |   |
| Cumulative effect of a change in accounting  principle, net of tax                                    |       | **(0.02**                                                               | )             | — |   |
| Net Income                                                                                            |       | **$**                                                                   | **0.39**      |   | $ | 0.60 |   |
|                                                                                                  |       | ** **                                                              |          |   |   |
| **Cash Dividends Declared Per  Common Share**                                                         |       | **$**                                                                   | **0.64**      |   | $ | 0.48 |   |

 

**The accompanying notes as theyrelate to Cinergy Corp. are an integral part of these condensed consolidatedfinancial statements**.

4

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**CINERGY CORP.CONDENSED CONSOLIDATED BALANCE SHEETS**

**ASSETS**
| ** **                                                                                                                            | ** ** | **March 31**                    | ** **     | **December 31** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|----------------|----------------------|------------|
| ** **                                                                                                                            | ** ** | **2006**                             | ** **     | **2005**             | ** ** |
| ** **                                                                                                                            | ** ** | **(dollars in thousands)** | ** **     |
| ** **                                                                                                                            | ** ** | **(unaudited)**                      | ** **     |
|                                                                                                                                  |       | ** **                           |           |                 |       |
| **Current Assets**                                                                                                                    |       | ** **                           |           |                 |       |
| Cash and cash equivalents                                                                                                             |       | **$**                                | **147,557**    |                 | $          | 146,056 |   |
| Receivables less accumulated provision for doubtful  accounts of $7,351 at March 31, 2006, and $4,767 at December 31,  2005 |       | **1,163,713**                        |           | 1,659,411            |       |
| Fuel, emission allowances, and supplies                                                                                               |       | **521,516**                          |           | 589,152              |       |
| Energy risk management current assets                                                                                                 |       | **595,292**                          |           | 991,252              |       |
| Prepayments and other                                                                                                                 |       | **410,443**                          |           | 408,975              |       |
| **Total Current Assets**                                                                                                              |       | **2,838,521**                        |           | 3,794,846            |       |
|                                                                                                                                  |       | ** **                           |           |                 |       |
| **Property, Plant, and Equipment  — at Cost**                                                                                    |       | ** **                           |           |                 |       |
| Property, plant, and equipment                                                                                                        |       | **16,249,269**                       |           | 15,990,864           |       |
| Accumulated depreciation                                                                                                              |       | **5,563,590**                        |           | 5,477,782            |       |
| **Net Property, Plant, and Equipment**                                                                                                |       | **10,685,679**                       |           | 10,513,082           |       |
|                                                                                                                                  |       | ** **                           |           |                 |       |
| **Other Assets**                                                                                                                      |       | ** **                           |           |                 |       |
| Regulatory assets                                                                                                                     |       | **1,045,511**                        |           | 1,069,854            |       |
| Investments in unconsolidated subsidiaries                                                                                            |       | **481,807**                          |           | 479,466              |       |
| Energy risk management non-current assets                                                                                             |       | **302,904**                          |           | 306,959              |       |
| Notes receivable, non-current                                                                                                         |       | **165,191**                          |           | 171,325              |       |
| Goodwill and other intangible assets                                                                                                  |       | **176,193**                          |           | 169,081              |       |
| Other                                                                                                                                 |       | **637,337**                          |           | 615,012              |       |
| **Total Other Assets**                                                                                                                |       | **2,808,943**                        |           | 2,811,697            |       |
|                                                                                                                                  |       | ** **                           |           |                 |       |
| **Assets  of Discontinued Operations**(Note 8)                                                                                        |       | **22,491**                           |           | 34,215               |       |
|                                                                                                                                  |       | ** **                           |           |                 |       |
| **Total Assets**                                                                                                                      |       | **$**                                | **16,355,634** |                 | $          | 17,153,840 |   |

 

**The accompanying notes as theyrelate to Cinergy Corp. are an integral part of these condensed consolidatedfinancial statements.**

5

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**CINERGYCORP.CONDENSED CONSOLIDATED BALANCE SHEETS**

**LIABILITIES ANDSHAREHOLDERS’ EQUITY**
| ** **                                                                                                                                                                                                                                                                          | ** ** | **March 31**                    | ** **     | **December 31** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|----------------|----------------------|------------|
| ** **                                                                                                                                                                                                                                                                          | ** ** | **2006**                             | ** **     | **2005**             | ** ** |
| ** **                                                                                                                                                                                                                                                                          | ** ** | **(dollars in thousands)** | ** **     |
| ** **                                                                                                                                                                                                                                                                          | ** ** | **(unaudited)**                      | ** **     |
| **Current Liabilities**                                                                                                                                                                                                                                                             |       |                                 |           |                 |       |
| Accounts payable                                                                                                                                                                                                                                                                    |       | **$**                                | **1,347,350**  |                 | $          | 1,879,528 |   |
| Accrued taxes                                                                                                                                                                                                                                                                       |       | **156,688**                          |           | 219,469              |       |
| Accrued interest                                                                                                                                                                                                                                                                    |       | **86,034**                           |           | 64,725               |       |
| Notes payable and other short-term obligations (Note  4)                                                                                                                                                                                                                            |       | **1,090,765**                        |           | 923,600              |       |
| Long-term debt due within one year                                                                                                                                                                                                                                                  |       | **704,850**                          |           | 360,730              |       |
| Energy risk management current liabilities                                                                                                                                                                                                                                          |       | **464,358**                          |           | 1,010,585            |       |
| Other                                                                                                                                                                                                                                                                               |       | **158,093**                          |           | 185,221              |       |
| **Total Current Liabilities**                                                                                                                                                                                                                                                       |       | **4,008,138**                        |           | 4,643,858            |       |
|                                                                                                                                                                                                                                                                                |       | ** **                           |           |                 |       |
|                                                                                                                                                                                                                                                                                |       | ** **                           |           |                 |       |
| **Non-Current Liabilities**                                                                                                                                                                                                                                                         |       | ** **                           |           |                 |       |
| Long-term debt                                                                                                                                                                                                                                                                      |       | **4,285,611**                        |           | 4,459,695            |       |
| Deferred income taxes                                                                                                                                                                                                                                                               |       | **1,502,784**                        |           | 1,523,070            |       |
| Unamortized investment tax credits                                                                                                                                                                                                                                                  |       | **88,677**                           |           | 90,852               |       |
| Accrued pension and other postretirement benefit  costs                                                                                                                                                                                                                             |       | **719,347**                          |           | 729,221              |       |
| Regulatory liabilities                                                                                                                                                                                                                                                              |       | **565,481**                          |           | 546,047              |       |
| Energy risk management non-current liabilities                                                                                                                                                                                                                                      |       | **330,061**                          |           | 338,514              |       |
| Other                                                                                                                                                                                                                                                                               |       | **244,287**                          |           | 184,569              |       |
| **Total Non-Current Liabilities**                                                                                                                                                                                                                                                   |       | **7,736,248**                        |           | 7,871,968            |       |
|                                                                                                                                                                                                                                                                                |       | ** **                           |           |                 |       |
|                                                                                                                                                                                                                                                                                |       | ** **                           |           |                 |       |
| **Liabilities  of Discontinued Operations**(Note 8)                                                                                                                                                                                                                                 |       | **25,727**                           |           | 28,876               |       |
|                                                                                                                                                                                                                                                                                |       | ** **                           |           |                 |       |
| **Commitments and Contingencies**                                                                                                                                                                                                                                                   |       | ** **                           |           |                 |       |
|                                                                                                                                                                                                                                                                                |       | ** **                           |           |                 |       |
| **Total  Liabilities**                                                                                                                                                                                                                                                              |       | **11,770,113**                       |           | 12,544,702           |       |
|                                                                                                                                                                                                                                                                                |       | ** **                           |           |                 |       |
|                                                                                                                                                                                                                                                                                |       | ** **                           |           |                 |       |
| **Cumulative Preferred Stock of  Subsidiaries**                                                                                                                                                                                                                                     |       | ** **                           |           |                 |       |
| Not subject to mandatory redemption                                                                                                                                                                                                                                                 |       | **11,258**                           |           | 31,743               |       |
|                                                                                                                                                                                                                                                                                |       | ** **                           |           |                 |       |
|                                                                                                                                                                                                                                                                                |       | ** **                           |           |                 |       |
| **Common Stock Equity**                                                                                                                                                                                                                                                             |       | ** **                           |           |                 |       |
| Common stock - $.01 par value; authorized shares —  600,000,000; issued shares — 200,653,988 at March 31, 2006, and  199,707,338 at December 31, 2005; outstanding shares — 200,507,375 at  March 31, 2006, and 199,565,684 at December 31, 2005 |       | **2,007**                            |           | 1,997                |       |
| Paid-in capital                                                                                                                                                                                                                                                                     |       | **3,017,579**                        |           | 2,982,625            |       |
| Retained earnings                                                                                                                                                                                                                                                                   |       | **1,673,739**                        |           | 1,721,716            |       |
| Treasury shares at cost — 146,613 shares at  March 31, 2006, and 141,654 shares at December 31, 2005                                                                                                                                                                 |       | **(5,047**                           | **)**          | (4,823               | )          |
| Accumulated other comprehensive loss                                                                                                                                                                                                                                                |       | **(114,015**                         | **)**          | (124,120             | )          |
| **Total Common Stock Equity**                                                                                                                                                                                                                                                       |       | **4,574,263**                        |           | 4,577,395            |       |
|                                                                                                                                                                                                                                                                                |       | ** **                           |           |                 |       |
|                                                                                                                                                                                                                                                                                |       | ** **                           |           |                 |       |
| **Total  Liabilities and Shareholders’ Equity**                                                                                                                                                                                                                                |       | **$**                                | **16,355,634** |                 | $          | 17,153,840 |   |

 

**The accompanying notes as theyrelate to Cinergy Corp. are an integral part of these condensed consolidatedfinancial statements.**

6

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**CINERGYCORP.CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCK EQUITY**
| ** **                                                      | ** ** | ** **                                                                         | ** ** | ** **  | ** ** | ** **    | ** ** | ** **   | ** **    | **Accumulated**        | ** ** | **Total**    | ** ** |
|-----------------------------------------------------------------|------------|------------------------------------------------------------------------------------|------------|-------------|------------|---------------|------------|--------------|---------------|------------------------|------------|--------------|------------|
| ** **                                                      | ** ** | ** **                                                                         | ** ** | ** **  | ** ** | ** **    | ** ** | ** **   | ** **    | **Other**              | ** ** | **Common**   | ** ** |
| ** **                                                      | ** ** | **Common**                                                                         | ** ** | **Paid-in** | ** ** | **Retained**  | ** ** | **Treasury** | ** **    | **Comprehensive**      | ** ** | **Stock**    | ** ** |
| ** **                                                      | ** ** | **Stock**                                                                          | ** ** | **Capital** | ** ** | **Earnings**  | ** ** | **Stock**    | ** **    | **Income (Loss)** | ** ** | **Equity**   | ** ** |
| ** **                                                      | ** ** | **(dollars in thousands, except per share amounts)** | ** ** |
| ** **                                                      | ** ** | **(unaudited)**                                                                    | ** ** |
| ** **                                                      | ** ** | ** **                                                                         | ** ** | ** **  | ** ** | ** **    | ** ** | ** **   | ** **    | ** **             | ** ** | ** **   | ** ** |
| **Quarter Ended March 31,  2006**                          | ** ** | ** **                                                                         | ** ** | ** **  | ** ** | ** **    | ** ** | ** **   | ** **    | ** **             | ** ** | ** **   | ** ** |
| ** **                                                      | ** ** | ** **                                                                         | ** ** | ** **  | ** ** | ** **    | ** ** | ** **   | ** **    | ** **             | ** ** | ** **   | ** ** |
| **Balance at January 1, 2006 (199,565,684  shares)**       | ** ** | **$**                                                                              | **1,997**  | ** **  | **$**      | **2,982,625** | ** ** | **$**        | **1,721,716** | ** **             | **$**      | **(4,823**   | **)**      | **$** | **(124,120** | **)** | **$** | **4,577,395** | ** ** |
| **Comprehensive income:**                                       | ** ** | ** **                                                                         | ** ** | ** **  | ** ** | ** **    | ** ** | ** **   | ** **    | ** **             | ** ** | ** **   | ** ** |
| **Net income**                                                  | ** ** | ** **                                                                         | ** ** | ** **  | ** ** | **79,364**    | ** ** | ** **   | ** **    | ** **             | ** ** | **79,364**   | ** ** |
| **Other comprehensive income, net of tax effect of  $(5,413)**  | ** ** | ** **                                                                         | ** ** | ** **  | ** ** | ** **    | ** ** | ** **   | ** **    | ** **             | ** ** | ** **   | ** ** |
| **Foreign currency translation adjustment**                     | ** ** | ** **                                                                         | ** ** | ** **  | ** ** | ** **    | ** ** | ** **   | ** **    | **120**                | ** ** | **120**      | ** ** |
| **Unrealized gain on investment trusts**                        | ** ** | ** **                                                                         | ** ** | ** **  | ** ** | ** **    | ** ** | ** **   | ** **    | **1,530**              | ** ** | **1,530**    | ** ** |
| **Minimum pension liability adjustment**                        | ** ** | ** **                                                                         | ** ** | ** **  | ** ** | ** **    | ** ** | ** **   | ** **    | **916**                | ** ** | **916**      | ** ** |
| **Cash flow hedges**                                            | ** ** | ** **                                                                         | ** ** | ** **  | ** ** | ** **    | ** ** | ** **   | ** **    | **7,539**              | ** ** | **7,539**    | ** ** |
| **Total comprehensive income**                                  | ** ** | ** **                                                                         | ** ** | ** **  | ** ** | ** **    | ** ** | ** **   | ** **    | ** **             | ** ** | **89,469**   | ** ** |
| ** **                                                      | ** ** | ** **                                                                         | ** ** | ** **  | ** ** | ** **    | ** ** | ** **   | ** **    | ** **             | ** ** | ** **   | ** ** |
| **Issuance of common stock — net (946,650  shares)**  | ** ** | **10**                                                                             | ** ** | **28,862**  | ** ** | ** **    | ** ** | ** **   | ** **    | ** **             | ** ** | **28,872**   | ** ** |
| **Treasury shares purchased (4,959 shares)**                    | ** ** | ** **                                                                         | ** ** | ** **  | ** ** | ** **    | ** ** | **(224**     | **)**         | ** **             | ** ** | **(224**     | **)**      |
| **Dividends on common stock ($0.64 per share)**                 | ** ** | ** **                                                                         | ** ** | ** **  | ** ** | **(127,314**  | **)**      | ** **   | ** **    | ** **             | ** ** | **(127,314** | **)**      |
| **Other**                                                       | ** ** | ** **                                                                         | ** ** | **6,092**   | ** ** | **(27**       | **)**      | ** **   | ** **    | ** **             | ** ** | **6,065**    | ** ** |
| ** **                                                      | ** ** | ** **                                                                         | ** ** | ** **  | ** ** | ** **    | ** ** | ** **   | ** **    | ** **             | ** ** | ** **   | ** ** |
| **Ending balance at March 31, 2006  (200,507,375 shares)** | ** ** | **$**                                                                              | **2,007**  | ** **  | **$**      | **3,017,579** | ** ** | **$**        | **1,673,739** | ** **             | **$**      | **(5,047**   | **)**      | **$** | **(114,015** | **)** | **$** | **4,574,263** | ** ** |
| ** **                                                      | ** ** | ** **                                                                         | ** ** | ** **  | ** ** | ** **    | ** ** | ** **   | ** **    | ** **             | ** ** | ** **   | ** ** |
|                                                            |       |                                                                               |       |        |       |          |       |         |          |                   |       |         |       |
| Quarter Ended  March 31, 2005                              |       |                                                                               |       |        |       |          |       |         |          |                   |       |         |       |
| ** **                                                      |       |                                                                               |       |        |       |          |       |         |          |                   |       |         |       |
| Balance at January 1, 2005 (187,524,229 shares)            |       | $                                                                                  | 1,877      |        | $          | 2,559,715     |       | $            | 1,613,340     |                   | $          | (4,336       | )          | $ | (54,674 | ) | $ | 4,115,922 |   |
| Comprehensive income:                                           |       |                                                                               |       |        |       |          |       |         |          |                   |       |         |       |
| Net income                                                      |       |                                                                               |       |        |       | 117,356       |       |         |          |                   |       | 117,356      |       |
| Other  comprehensive income (loss), net of tax effect of $2,431 |       |                                                                               |       |        |       |          |       |         |          |                   |       |         |       |
| Foreign currency translation adjustment                    |       |                                                                               |       |        |       |          |       |         |          | (5,838                 | )          | (5,838       | )          |
| Unrealized loss on investment trusts                            |       |                                                                               |       |        |       |          |       |         |          | (1,175                 | )          | (1,175       | )          |
| Cash flow hedges                                                |       |                                                                               |       |        |       |          |       |         |          | 1,856                  |       | 1,856        |       |
| Total comprehensive income                                      |       |                                                                               |       |        |       |          |       |         |          |                   |       | 112,199      |       |
| ** **                                                      |       |                                                                               |       |        |       |          |       |         |          |                   |       |         |       |
| Issuance of common stock — net (10,475,010  shares)   |       | 104                                                                                |       | 353,753     |       |          |       |         |          |                   |       | 353,857      |       |
| Treasury shares purchased (9,585 shares)                        |       |                                                                               |       |        |       |          |       | (299         | )             |                   |       | (299         | )          |
| Dividends on common stock ($0.48 per share)                     |       |                                                                               |       |        |       | (91,879       | )          |         |          |                   |       | (91,879      | )          |
| Other                                                           |       |                                                                               |       | 6,290       |       | (113          | )          |         |          |                   |       | 6,177        |       |
| ** **                                                      |       |                                                                               |       |        |       |          |       |         |          |                   |       |         |       |
| Ending balance at  March 31, 2005 (197,989,654 shares)     |       | $                                                                                  | 1,981      |        | $          | 2,919,758     |       | $            | 1,638,704     |                   | $          | (4,635       | )          | $ | (59,831 | ) | $ | 4,495,977 |   |

** **

**The accompanying notes as theyrelate to Cinergy Corp. are an integral part of these condensed consolidatedfinancial statements.**

7

----

**CINERGYCORP.**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
| ** **                                                                            | ** ** | **Quarter Ended**                                                                       | ** **  |
|---------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------|-------------|
| ** **                                                                            | ** ** | **March 31**                                                                            | ** **  |
| ** **                                                                            | ** ** | **       2006       ** | ** **  | **       2005       ** | ** ** |
| ** **                                                                            | ** ** | **(dollars in thousands)**                                                         | ** **  |
| ** **                                                                            | ** ** | **(unaudited)**                                                                              | ** **  |
| **Cash Flows from Operations**                                                        | ** ** | ** **                                                                                   | ** **  | ** ** | ** ** |
| Operating  Activities                                                                 |       |                                                                                         |        |   |   |
| Net income                                                                            |       | **$**                                                                                        | **79,364**  |   | $ | 117,356 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities:    |       | ** **                                                                                   |        |   |   |
| Depreciation and amortization                                                         |       | **163,793**                                                                                  |        | 153,419 |   |
| Loss on impairment or disposal of subsidiaries and  investments, net                  |       | **7,398**                                                                                    |        | 6,818 |   |
| Cumulative effect of a change in accounting  principle, net of tax                    |       | **3,493**                                                                                    |        | — |   |
| Change in net position of energy risk management  activities                          |       | **(154,665**                                                                                 | )           | 66,342 |   |
| Deferred income taxes and investment tax credits —  net                          |       | **(14,309**                                                                                  | )           | (20,258 | ) |
| Equity in earnings of unconsolidated subsidiaries                                     |       | **(4,095**                                                                                   | )           | (4,836 | ) |
| Return on equity investments                                                          |       | **4,857**                                                                                    |        | — |   |
| Allowance for equity funds used during construction                                   |       | **(3,065**                                                                                   | )           | (1,987 | ) |
| Regulatory asset/liability deferrals                                                  |       | **(21,465**                                                                                  | )           | (27,514 | ) |
| Regulatory asset amortization                                                         |       | **13,367**                                                                                   |        | 8,028 |   |
| Accrued pension and other postretirement benefit  costs                               |       | **(20,177**                                                                                  | )           | 22,511 |   |
| Cost of removal                                                                       |       | **(5,481**                                                                                   | )           | (5,475 | ) |
| Changes in  current assets and current liabilities:                                   |       | ** **                                                                                   |        |   |   |
| Accounts and notes receivable                                                         |       | **503,549**                                                                                  |        | 159,607 |   |
| Fuel, emission allowances, and supplies                                               |       | **67,636**                                                                                   |        | 54,408 |   |
| Prepayments                                                                           |       | **8,498**                                                                                    |        | (65,218 | ) |
| Accounts payable                                                                      |       | **(529,943**                                                                                 | )           | (75,935 | ) |
| Accrued taxes and interest                                                            |       | **(39,267**                                                                                  | )           | 41,216 |   |
| Other assets                                                                          |       | **(13,562**                                                                                  | )           | (16,737 | ) |
| Other liabilities                                                                     |       | **38,393**                                                                                   |        | (33,627 | ) |
|                                                                                  |       | ** **                                                                                   |        |   |   |
| **Net cash provided by operating activities**                                         |       | **84,319**                                                                                   |        | 378,118 |   |
|                                                                                  |       | ** **                                                                                   |        |   |   |
| **Investing  Activities**                                                             | ** ** | ** **                                                                                   | ** **  | ** ** | ** ** |
| Construction expenditures (less allowance for equity  funds used during construction) |       | **(298,117**                                                                                 | )           | (242,511 | ) |
| Proceeds from notes receivable                                                        |       | **5,466**                                                                                    |        | 4,852 |   |
| Withdrawal of restricted cash held in trust                                           |       | **47,585**                                                                                   |        | 35,631 |   |
| Other investments                                                                     |       | **(50,646**                                                                                  | )           | (2,155 | ) |
| Proceeds from distributions by investments and sale  of investments and subsidiaries  |       | **1,480**                                                                                    |        | 32,071 |   |
|                                                                                  |       | ** **                                                                                   |        |   |   |
| **Net cash used in investing activities**                                             |       | **(294,232**                                                                                 | )           | (172,112 | ) |
|                                                                                  |       | ** **                                                                                   |        |   |   |
| **Financing  Activities**                                                             | ** ** | ** **                                                                                   | ** **  | ** ** | ** ** |
| Change in short-term debt                                                             |       | **166,891**                                                                                  |        | (509,066 | ) |
| Issuance of long-term debt                                                            |       | **174,069**                                                                                  |        | 4,165 |   |
| Redemption of long-term debt                                                          |       | **(13,612**                                                                                  | )           | (3,516 | ) |
| Retirement of preferred stock of subsidiaries                                         |       | **(20,485**                                                                                  | )           | — |   |
| Issuance of common stock                                                              |       | **28,872**                                                                                   |        | 353,857 |   |
| Dividends on common stock                                                             |       | **(127,314**                                                                                 | )           | (91,879 | ) |
| Excess tax benefits from stock options                                                |       | **2,993**                                                                                    |        | — |   |
|                                                                                  |       | ** **                                                                                   |        |   |   |
| **Net cash provided by (used in) financing  activities**                              |       | **211,414**                                                                                  |        | (246,439 | ) |
| ** **                                                                            | ** ** | ** **                                                                                   | ** **  | ** ** | ** ** |
| **Net  increase (decrease) in cash and cash equivalents**                             |       | **1,501**                                                                                    |        | (40,433 | ) |
| ** **                                                                            | ** ** | ** **                                                                                   | ** **  | ** ** | ** ** |
| **Cash  and cash equivalents at beginning of period**                                 |       | **146,056**                                                                                  |        | 164,541 |   |
| ** **                                                                            | ** ** | ** **                                                                                   | ** **  | ** ** | ** ** |
| **Cash  and cash equivalents at end of period**                                       |       | **$**                                                                                        | **147,557** |   | $ | 124,108 |   |
|                                                                                  |       | ** **                                                                                   |        |   |   |
| **Supplemental Disclosure of Cash  Flow Information**                                 | ** ** | ** **                                                                                   | ** **  | ** ** | ** ** |
| Cash paid during  the period for:                                                     |       | ** **                                                                                   |        |   |   |
| Interest (net of amount capitalized)                                                  |       | **$**                                                                                        | **65,279**  |   | $ | 60,902 |   |
| Income taxes                                                                          |       | **$**                                                                                        | **78,653**  |   | $ | 7,671 |   |

** **

**The accompanying notes as they relate to Cinergy Corp.are an integral part of these condensed consolidated financial statements.**

8

----

**THECINCINNATI GAS & ELECTRIC COMPANY**AND SUBSIDIARYCOMPANIES

9

----

**THE CINCINNATIGAS & ELECTRIC COMPANYCONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME**
| ** **                                     | ** ** | **Quarter Ended**                                                                       | ** **   |
|------------------------------------------------|------------|----------------------------------------------------------------------------------------------|--------------|
| ** **                                     | ** ** | **March 31**                                                                            | ** **   |
| ** **                                     | ** ** | **       2006       ** | ** **   | **       2005       ** | ** ** |
| ** **                                     | ** ** | **(dollars in thousands)**                                                         | ** **   |
| ** **                                     | ** ** | **(unaudited)**                                                                              | ** **   |
| * *                                       | * *   | *** ***                                                                                 | *** *** | * * | * * |
| **Operating Revenues**                         |       | ** **                                                                                   | ** **   |   |   |
| Electric                                       |       | **$**                                                                                        | **637,509**  | ** ** | $ | 464,331 |   |
| Gas                                            |       | **321,965**                                                                                  | ** **   | 306,354 |   |
| Other                                          |       | **47,633**                                                                                   | ** **   | 52,671 |   |
| **Total Operating Revenues**                   |       | **1,007,107**                                                                                | ** **   | 823,356 |   |
|                                           |       | ** **                                                                                   | ** **   |   |   |
| **Operating Expenses**                         | ** ** | ** **                                                                                   | ** **   | ** ** | ** ** |
| Fuel, emission allowances, and purchased power |       | **205,300**                                                                                  | ** **   | 145,702 |   |
| Gas purchased                                  |       | **232,006**                                                                                  | ** **   | 207,782 |   |
| Costs of fuel resold                           |       | **44,291**                                                                                   | ** **   | 40,986 |   |
| Operation and maintenance                      |       | **185,126**                                                                                  | ** **   | 142,072 |   |
| Depreciation and amortization                  |       | **67,918**                                                                                   | ** **   | 65,240 |   |
| Taxes other than income taxes                  |       | **68,192**                                                                                   | ** **   | 59,434 |   |
| **Total Operating Expenses**                   |       | **802,833**                                                                                  | ** **   | 661,216 |   |
| ** **                                     |       | ** **                                                                                   | ** **   |   |   |
| **Operating  Income**                          |       | **204,274**                                                                                  | ** **   | 162,140 |   |
| ** **                                     |       | ** **                                                                                   | ** **   |   |   |
| **Miscellaneous  Income — Net**           |       | **8,487**                                                                                    | ** **   | 3,523 |   |
| **Interest  Expense**                          |       | **29,680**                                                                                   | ** **   | 22,950 |   |
| ** **                                     |       | ** **                                                                                   | ** **   |   |   |
| **Income  Before Taxes**                       |       | **183,081**                                                                                  | ** **   | 142,713 |   |
| ** **                                     |       | ** **                                                                                   | ** **   |   |   |
| **Income  Taxes**                              |       | **66,718**                                                                                   | ** **   | 58,047 |   |
| ** **                                     |       | ** **                                                                                   | ** **   |   |   |
| **Net  Income**                                |       | **$**                                                                                        | **116,363**  | ** ** | $ | 84,666 |   |
| ** **                                     | ** ** | ** **                                                                                   | ** **   | ** ** | ** ** |
| **Preferred  Dividend Requirement**            |       | **164**                                                                                      | ** **   | 211 |   |
| ** **                                     |       | ** **                                                                                   | ** **   |   |   |
| **Net  Income Applicable to Common Stock**     |       | **$**                                                                                        | **116,199**  | ** ** | $ | 84,455 |   |
| ** **                                     |       | ** **                                                                                   | ** **   |   |   |
| **Net  Income**                                |       | **$**                                                                                        | **116,363**  | ** ** | $ | 84,666 |   |
| ** **                                     | ** ** | ** **                                                                                   | ** **   | ** ** | ** ** |
| **Other  Comprehensive Income, Net of Tax**    |       | **1,751**                                                                                    | ** **   | 1,718 |   |
| ** **                                     | ** ** | ** **                                                                                   | ** **   | ** ** | ** ** |
| **Comprehensive Income**                       |       | **$**                                                                                        | **118,114**  | ** ** | $ | 86,384 |   |

 

**The accompanying notes as theyrelate to The Cincinnati Gas & Electric Company are an integral partof these condensed consolidated financial statements.**

10

----

**THE CINCINNATIGAS & ELECTRIC COMPANYCONDENSED CONSOLIDATED BALANCE SHEETS**

**ASSETS**
| ** **                                                    | ** ** | **March 31**                                                                            | ** **    | **December 31**                                                                         | ** ** |
|---------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------|---------------|----------------------------------------------------------------------------------------------|------------|
| ** **                                                    | ** ** | **       2006       ** | ** **    | **       2005       ** | ** ** |
| ** **                                                    | ** ** | **(dollars in thousands)**                                                         | ** **    |
| ** **                                                    | ** ** | **(unaudited)**                                                                              | ** **    |
| ** **                                                    | ** ** | ** **                                                                                   | ** **    | ** **                                                                                   | ** ** |
| **Current Assets**                                            | ** ** | ** **                                                                                   | ** **    | ** **                                                                                   | ** ** |
| Cash and cash equivalents                                     |       | **$**                                                                                        | **8,027**     | ** **                                                                                   | $          | 9,674 |   |
| Receivables less accumulated provision for doubtful  accounts |       | **307,790**                                                                                  | ** **    | 384,444                                                                                      |       |
| Accounts receivable from affiliated companies                 |       | **104,279**                                                                                  | ** **    | 37,718                                                                                       |       |
| Fuel, emission allowances, and supplies                       |       | **210,905**                                                                                  | ** **    | 225,982                                                                                      |       |
| Energy risk management current assets                         |       | **271,236**                                                                                  | ** **    | 543,787                                                                                      |       |
| Prepayments and other                                         |       | **109,757**                                                                                  | ** **    | 177,417                                                                                      |       |
| **Total Current Assets**                                      |       | **1,011,994**                                                                                | ** **    | 1,379,022                                                                                    |       |
|                                                          |       | ** **                                                                                   | ** **    |                                                                                         |       |
| **Property, Plant, and Equipment  — at Cost**            | ** ** | ** **                                                                                   | ** **    | ** **                                                                                   | ** ** |
| Property, plant, and equipment                                |       | **7,902,076**                                                                                | ** **    | 7,775,765                                                                                    |       |
| Accumulated depreciation                                      |       | **2,851,729**                                                                                | ** **    | 2,815,852                                                                                    |       |
| **Net Property, Plant, and Equipment**                        |       | **5,050,347**                                                                                | ** **    | 4,959,913                                                                                    |       |
|                                                          |       | ** **                                                                                   | ** **    |                                                                                         |       |
| **Other Assets**                                              | ** ** | ** **                                                                                   | ** **    | ** **                                                                                   | ** ** |
| Regulatory assets                                             |       | **532,503**                                                                                  | ** **    | 555,798                                                                                      |       |
| Energy risk management non-current assets                     |       | **115,780**                                                                                  | ** **    | 180,197                                                                                      |       |
| Other                                                         |       | **175,645**                                                                                  | ** **    | 158,913                                                                                      |       |
| **Total Other Assets**                                        |       | **823,928**                                                                                  | ** **    | 894,908                                                                                      |       |
|                                                          |       | ** **                                                                                   | ** **    |                                                                                         |       |
| **Total Assets**                                              |       | **$**                                                                                        | **6,886,269** | ** **                                                                                   | $          | 7,233,843 |   |

** **

**Theaccompanying notes as they relate to The Cincinnati Gas & ElectricCompany are an integral part of these condensed consolidated financialstatements.**

11

----

**THECINCINNATI GAS & ELECTRIC COMPANYCONDENSED CONSOLIDATED BALANCE SHEETS**

**LIABILITIESAND SHAREHOLDERS’ EQUITY**
| ** **                                                                                                                                                           | ** ** | **March 31**                                                                            | ** **    | **December 31**                                                                         | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------|---------------|----------------------------------------------------------------------------------------------|------------|
| ** **                                                                                                                                                           | ** ** | **       2006       ** | ** **    | **       2005       ** | ** ** |
| ** **                                                                                                                                                           | ** ** | **(dollars in thousands)**                                                         | ** **    |
| ** **                                                                                                                                                           | ** ** | **(unaudited)**                                                                              | ** **    |
| ** **                                                                                                                                                           | ** ** | ** **                                                                                   | ** **    | ** **                                                                                   | ** ** |
| **Current Liabilities**                                                                                                                                              |       |                                                                                         |          |                                                                                         |       |
| Accounts payable                                                                                                                                                     |       | **$**                                                                                        | **426,617**   | ** **                                                                                   | $          | 562,887 |   |
| Accounts payable to affiliated companies                                                                                                                             |       | **82,280**                                                                                   | ** **    | 243,793                                                                                      |       |
| Accrued taxes                                                                                                                                                        |       | **227,286**                                                                                  | ** **    | 177,551                                                                                      |       |
| Accrued interest                                                                                                                                                     |       | **32,039**                                                                                   | ** **    | 24,438                                                                                       |       |
| Notes payable and other short-term obligations (Note  4)                                                                                                             |       | **112,100**                                                                                  | ** **    | 112,100                                                                                      |       |
| Notes payable to affiliated companies (Note 4)                                                                                                                       |       | **222,371**                                                                                  | ** **    | 114,252                                                                                      |       |
| Long-term debt due within one year                                                                                                                                   |       | **5,111**                                                                                    | ** **    | 5,042                                                                                        |       |
| Energy risk management current liabilities                                                                                                                           |       | **242,393**                                                                                  | ** **    | 552,105                                                                                      |       |
| Other                                                                                                                                                                |       | **33,500**                                                                                   | ** **    | 35,795                                                                                       |       |
| **Total Current Liabilities**                                                                                                                                        |       | **1,383,697**                                                                                | ** **    | 1,827,963                                                                                    |       |
| ** **                                                                                                                                                           |       | ** **                                                                                   | ** **    |                                                                                         |       |
| **Non-Current Liabilities**                                                                                                                                          |       | ** **                                                                                   | ** **    |                                                                                         |       |
| Long-term debt                                                                                                                                                       |       | **1,777,872**                                                                                | ** **    | 1,638,028                                                                                    |       |
| Deferred income taxes                                                                                                                                                |       | **1,058,062**                                                                                | ** **    | 1,055,093                                                                                    |       |
| Unamortized investment tax credits                                                                                                                                   |       | **65,771**                                                                                   | ** **    | 67,229                                                                                       |       |
| Accrued pension and other postretirement benefit  costs                                                                                                              |       | **252,130**                                                                                  | ** **    | 245,950                                                                                      |       |
| Regulatory liabilities                                                                                                                                               |       | **161,695**                                                                                  | ** **    | 151,670                                                                                      |       |
| Energy risk management non-current liabilities                                                                                                                       |       | **127,121**                                                                                  | ** **    | 183,678                                                                                      |       |
| Other                                                                                                                                                                |       | **68,795**                                                                                   | ** **    | 68,315                                                                                       |       |
| **Total Non-Current Liabilities**                                                                                                                                    |       | **3,511,446**                                                                                | ** **    | 3,409,963                                                                                    |       |
| ** **                                                                                                                                                           |       | ** **                                                                                   | ** **    |                                                                                         |       |
| **Commitments and Contingencies**                                                                                                                                    |       | ** **                                                                                   | ** **    |                                                                                         |       |
| ** **                                                                                                                                                           |       | ** **                                                                                   | ** **    |                                                                                         |       |
| **Total  Liabilities**                                                                                                                                               |       | **4,895,143**                                                                                | ** **    | 5,237,926                                                                                    |       |
|                                                                                                                                                                 |       | ** **                                                                                   | ** **    |                                                                                         |       |
| **Cumulative Preferred Stock**                                                                                                                                       |       | ** **                                                                                   | ** **    |                                                                                         |       |
| Not subject to mandatory redemption                                                                                                                                  |       | **—**                                                                                   | ** **    | 20,485                                                                                       |       |
|                                                                                                                                                                 |       | ** **                                                                                   | ** **    |                                                                                         |       |
| **Common Stock Equity**                                                                                                                                              |       | ** **                                                                                   | ** **    |                                                                                         |       |
| Common stock — $8.50 par value; authorized shares —  120,000,000; outstanding shares — 89,663,086 at March 31, 2006, and  December 31, 2005 |       | **762,136**                                                                                  | ** **    | 762,136                                                                                      |       |
| Paid-in capital                                                                                                                                                      |       | **603,249**                                                                                  | ** **    | 603,249                                                                                      |       |
| Retained earnings                                                                                                                                                    |       | **671,196**                                                                                  | ** **    | 657,254                                                                                      |       |
| Accumulated other comprehensive loss                                                                                                                                 |       | **(45,455**                                                                                  | **)**         | (47,207                                                                                      | )          |
| **Total Common Stock Equity**                                                                                                                                        |       | **1,991,126**                                                                                | ** **    | 1,975,432                                                                                    |       |
| ** **                                                                                                                                                           |       | ** **                                                                                   | ** **    |                                                                                         |       |
| **Total Liabilities and  Shareholders’ Equity**                                                                                                                 |       | **$**                                                                                        | **6,886,269** | ** **                                                                                   | $          | 7,233,843 |   |

 

**The accompanying notes as theyrelate to The Cincinnati Gas & Electric Company are an integral partof these condensed consolidated financial statements.**

12

----

**THE CINCINNATI GAS & ELECTRIC COMPANYCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**
| ** **                                                                            | ** **   | **Quarter Ended**                                                                       | ** **   |
|---------------------------------------------------------------------------------------|--------------|----------------------------------------------------------------------------------------------|--------------|
| ** **                                                                            | ** **   | **March 31**                                                                            | ** **   |
| ** **                                                                            | ** **   | **       2006       ** | ** **   | **       2005       ** | ** ** |
| ** **                                                                            | ** **   | **(dollars in thousands)**                                                         | ** **   |
| ** **                                                                            | ** **   | **(unaudited)**                                                                              | ** **   |
| *** ***                                                                          | *** *** | *** ***                                                                                 | *** *** | *** *** | *** *** |
| **Operating Activities**                                                              | ** **   | ** **                                                                                   | ** **   | ** ** | ** ** |
| Net income                                                                            |         | **$**                                                                                        | **116,363**  | ** ** | $ | 84,666 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities:    |         | ** **                                                                                   | ** **   |   |   |
| Depreciation and amortization                                                         |         | **67,918**                                                                                   | ** **   | 65,240 |   |
| Deferred income taxes and investment tax credits —  net                          |         | **6,793**                                                                                    | ** **   | (13,253 | ) |
| Change in net position of energy risk management  activities                          |         | **(29,301**                                                                                  | **)**        | 19,869 |   |
| Allowance for equity funds used during construction                                   |         | **(570**                                                                                     | **)**        | (130 | ) |
| Regulatory asset/liability deferrals                                                  |         | **(799**                                                                                     | **)**        | 950 |   |
| Regulatory asset amortization                                                         |         | **6,903**                                                                                    | ** **   | 3,773 |   |
| Accrued pension and other postretirement benefit  costs                               |         | **6,180**                                                                                    | ** **   | 5,746 |   |
| Cost of removal                                                                       |         | **(1,695**                                                                                   | **)**        | (1,294 | ) |
| Changes in  current assets and current liabilities:                                   |         | ** **                                                                                   | ** **   |   |   |
| Accounts and notes receivable                                                         |         | **12,038**                                                                                   | ** **   | 14,775 |   |
| Fuel, emission allowances, and supplies                                               |         | **15,077**                                                                                   | ** **   | 14,169 |   |
| Prepayments                                                                           |         | **67,659**                                                                                   | ** **   | (24,688 | ) |
| Accounts payable                                                                      |         | **(240,236**                                                                                 | **)**        | 8,983 |   |
| Accrued taxes and interest                                                            |         | **57,336**                                                                                   | ** **   | 52,063 |   |
| Other assets                                                                          |         | **(23,232**                                                                                  | **)**        | (801 | ) |
| Other liabilities                                                                     |         | **(135**                                                                                     | **)**        | 7,346 |   |
|                                                                                  |         | ** **                                                                                   | ** **   |   |   |
| **Net cash provided by operating activities**                                         |         | **60,299**                                                                                   | ** **   | 237,414 |   |
| ** **                                                                            |         | ** **                                                                                   | ** **   |   |   |
| **Investing Activities**                                                              | ** **   | ** **                                                                                   | ** **   | ** ** | ** ** |
| Construction expenditures (less allowance for equity  funds used during construction) |         | **(134,356**                                                                                 | **)**        | (98,580 | ) |
| Withdrawal of restricted funds held in trust                                          |         | **8,137**                                                                                    | ** **   | 7,822 |   |
| Other investments                                                                     |         | **—**                                                                                   | ** **   | 103 |   |
|                                                                                  |         | ** **                                                                                   | ** **   |   |   |
| **Net cash used in investing activities**                                             |         | **(126,219**                                                                                 | **)**        | (90,655 | ) |
| ** **                                                                            |         | ** **                                                                                   | ** **   |   |   |
| **Financing Activities**                                                              | ** **   | ** **                                                                                   | ** **   | ** ** | ** ** |
| Change in short-term debt, including net affiliate  notes                             |         | **48,627**                                                                                   | ** **   | (103,297 | ) |
| Issuance of long-term debt                                                            |         | **139,806**                                                                                  | ** **   | — |   |
| Redemption of long-term debt                                                          |         | **(1,255**                                                                                   | **)**        | — |   |
| Retirement of preferred stock                                                         |         | **(20,485**                                                                                  | **)**        | — |   |
| Dividends on preferred stock                                                          |         | **(164**                                                                                     | **)**        | — |   |
| Dividends on common stock                                                             |         | **(102,256**                                                                                 | **)**        | (38,296 | ) |
|                                                                                  |         | ** **                                                                                   | ** **   |   |   |
| **Net cash provided by (used in) financing  activities**                              |         | **64,273**                                                                                   | ** **   | (141,593 | ) |
| ** **                                                                            |         | ** **                                                                                   | ** **   |   |   |
| **Net  increase (decrease) in cash and cash equivalents**                             |         | **(1,647**                                                                                   | **)**        | 5,166 |   |
| ** **                                                                            | ** **   | ** **                                                                                   | ** **   | ** ** | ** ** |
| **Cash  and cash equivalents at beginning of period**                                 |         | **9,674**                                                                                    | ** **   | 4,154 |   |
| ** **                                                                            | ** **   | ** **                                                                                   | ** **   | ** ** | ** ** |
| **Cash  and cash equivalents at end of period**                                       |         | **$**                                                                                        | **8,027**    | ** ** | $ | 9,320 |   |
| ** **                                                                            |         | ** **                                                                                   | ** **   |   |   |
| **Supplemental Disclosure of Cash  Flow Information**                                 | ** **   | ** **                                                                                   | ** **   | ** ** | ** ** |
| Cash paid during  the period for:                                                     |         | ** **                                                                                   | ** **   |   |   |
| Interest (net of amount capitalized)                                                  |         | **$**                                                                                        | **20,505**   | ** ** | $ | 20,187 |   |
| Income taxes                                                                          |         | **$**                                                                                        | **454**      | ** ** | $ | 8,891 |   |

 

**The accompanying notes as theyrelate to The Cincinnati Gas & Electric Company are an integral partof these condensed consolidated financial statements.**

13

----

**PSI ENERGY,INC.AND SUBSIDIARY COMPANY**

14

----

**PSI ENERGY, INC.CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME**
| ** **                                         | ** ** | **Quarter Ended**                                                                       | ** **   |
|----------------------------------------------------|------------|----------------------------------------------------------------------------------------------|--------------|
| ** **                                         | ** ** | **March 31**                                                                            | ** **   |
| ** **                                         | ** ** | **       2006       ** | ** **   | **       2005       ** | ** ** |
| ** **                                         | ** ** | **(dollars in thousands)**                                                         | ** **   |
| ** **                                         | ** ** | **(unaudited)**                                                                              | ** **   |
| * *                                           | * *   | *** ***                                                                                 | *** *** | * * | * * |
| **Operating Revenues**                             |       | ** **                                                                                   | ** **   |   |   |
| Electric                                           |       | **$**                                                                                        | **485,711**  | ** ** | $ | 425,408 |   |
|                                               |       | ** **                                                                                   | ** **   |   |   |
| **Operating Expenses**                             | ** ** | ** **                                                                                   | ** **   | ** ** | ** ** |
| Fuel, emission allowances, and purchased power     |       | **201,068**                                                                                  | ** **   | 132,036 |   |
| Operation and maintenance                          |       | **136,862**                                                                                  | ** **   | 113,713 |   |
| Depreciation and amortization                      |       | **74,369**                                                                                   | ** **   | 73,704 |   |
| Taxes other than income taxes                      |       | **15,504**                                                                                   | ** **   | 15,661 |   |
| **Total Operating Expenses**                       |       | **427,803**                                                                                  | ** **   | 335,114 |   |
| ** **                                         |       | ** **                                                                                   | ** **   |   |   |
| **Operating  Income**                              |       | **57,908**                                                                                   | ** **   | 90,294 |   |
| ** **                                         |       | ** **                                                                                   | ** **   |   |   |
| **Miscellaneous  Income — Net**               |       | **8,450**                                                                                    | ** **   | 3,377 |   |
| **Interest  Expense**                              |       | **34,929**                                                                                   | ** **   | 24,765 |   |
| ** **                                         |       | ** **                                                                                   | ** **   |   |   |
| **Income  Before Taxes**                           |       | **31,429**                                                                                   | ** **   | 68,906 |   |
| ** **                                         |       | ** **                                                                                   | ** **   |   |   |
| **Income  Taxes**                                  |       | **12,682**                                                                                   | ** **   | 26,561 |   |
| ** **                                         |       | ** **                                                                                   | ** **   |   |   |
| **Net  Income**                                    |       | **$**                                                                                        | **18,747**   | ** ** | $ | 42,345 |   |
| ** **                                         | ** ** | ** **                                                                                   | ** **   | ** ** | ** ** |
| **Preferred  Dividend Requirement**                |       | **113**                                                                                      | ** **   | 647 |   |
| ** **                                         | ** ** | ** **                                                                                   | ** **   | ** ** | ** ** |
| **Net  Income Applicable to Common Stock**         |       | **$**                                                                                        | **18,634**   | ** ** | $ | 41,698 |   |
| ** **                                         |       | ** **                                                                                   | ** **   |   |   |
| **Net  Income**                                    |       | **$**                                                                                        | **18,747**   | ** ** | $ | 42,345 |   |
| ** **                                         | ** ** | ** **                                                                                   | ** **   | ** ** | ** ** |
| **Other  Comprehensive Income (Loss), Net of Tax** |       | **8,004**                                                                                    | ** **   | (1,195 | ) |
| ** **                                         | ** ** | ** **                                                                                   | ** **   | ** ** | ** ** |
| **Comprehensive Income**                           |       | **$**                                                                                        | **26,751**   | ** ** | $ | 41,150 |   |

 

**The accompanying notes as theyrelate to PSI Energy, Inc. are an integral part of these condensedconsolidated financial statements.**

15

----

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

**ASSETS**
| ** **                                                    | ** ** | **March 31**                                                                            | ** **    | **December 31**                                                                         | ** ** |
|---------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------|---------------|----------------------------------------------------------------------------------------------|------------|
| ** **                                                    | ** ** | **       2006       ** | ** **    | **       2005       ** | ** ** |
| ** **                                                    | ** ** | **(dollars in thousands)**                                                         | ** **    |
| ** **                                                    | ** ** | **(unaudited)**                                                                              | ** **    |
| * *                                                      | * *   | * *                                                                                     | * *      | * *                                                                                     | * *   |
| **Current Assets**                                            | ** ** | ** **                                                                                   | ** **    | ** **                                                                                   | ** ** |
| Cash and cash equivalents                                     | ** ** | **$**                                                                                        | **28,506**    | ** **                                                                                   | $          | 31,860 |   |
| Restricted deposits                                           | ** ** | **35,284**                                                                                   | ** **    | 32,649                                                                                       |       |
| Receivables less accumulated provision for doubtful  accounts | ** ** | **77,435**                                                                                   | ** **    | 142,280                                                                                      |       |
| Accounts receivable from affiliated companies                 | ** ** | **24,296**                                                                                   | ** **    | 75,698                                                                                       |       |
| Fuel, emission allowances, and supplies                       | ** ** | **182,114**                                                                                  | ** **    | 170,345                                                                                      |       |
| Prepayments and other                                         | ** ** | **47,895**                                                                                   | ** **    | 42,415                                                                                       |       |
| **Total Current Assets**                                      | ** ** | **395,530**                                                                                  | ** **    | 495,247                                                                                      |       |
| ** **                                                    | ** ** | ** **                                                                                   | ** **    |                                                                                         |       |
| **Property, Plant, and Equipment  — at Cost**            | ** ** | ** **                                                                                   | ** **    | ** **                                                                                   | ** ** |
| Property, plant, and equipment                                | ** ** | **7,384,372**                                                                                | ** **    | 7,289,552                                                                                    |       |
| Accumulated depreciation                                      | ** ** | **2,484,665**                                                                                | ** **    | 2,456,183                                                                                    |       |
| **Net Property, Plant, and Equipment**                        | ** ** | **4,899,707**                                                                                | ** **    | 4,833,369                                                                                    |       |
| ** **                                                    | ** ** | ** **                                                                                   | ** **    |                                                                                         |       |
| **Other Assets**                                              | ** ** | ** **                                                                                   | ** **    | ** **                                                                                   | ** ** |
| Regulatory assets                                             | ** ** | **513,008**                                                                                  | ** **    | 514,056                                                                                      |       |
| Other                                                         | ** ** | **366,215**                                                                                  | ** **    | 399,510                                                                                      |       |
| **Total Other Assets**                                        | ** ** | **879,223**                                                                                  | ** **    | 913,566                                                                                      |       |
| ** **                                                    | ** ** | ** **                                                                                   | ** **    |                                                                                         |       |
| **Total  Assets**                                             | ** ** | **$**                                                                                        | **6,174,460** | ** **                                                                                   | $          | 6,242,182 |   |
| ** **                                                    | ** ** | ** **                                                                                   | ** **    | ** **                                                                                   | ** ** |

 

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

 

16

----

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

** **

**LIABILITIES AND SHAREHOLDERS’ EQUITY**
| ** **                                                                                                                                                                               | ** ** | ** **                           | ** **    | ** **           | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|---------------|----------------------|------------|
| ** **                                                                                                                                                                               | ** ** | **March 31**                    | ** **    | **December 31** | ** ** |
| ** **                                                                                                                                                                               | ** ** | **2006**                             | ** **    | **2005**             | ** ** |
| ** **                                                                                                                                                                               | ** ** | **(dollars in thousands)** | ** **    |
| ** **                                                                                                                                                                               | ** ** | **(unaudited)**                      | ** **    |
| **Current Liabilities**                                                                                                                                                                  |       |                                 |          |                 |       |
| Accounts payable                                                                                                                                                                         |       | **$**                                | **92,854**    |                 | $          | 116,994 |   |
| Accounts payable to affiliated companies                                                                                                                                                 |       | **34,168**                           |          | 53,455               |       |
| Accrued taxes                                                                                                                                                                            |       | **63,412**                           |          | 33,713               |       |
| Accrued interest                                                                                                                                                                         |       | **42,413**                           |          | 34,530               |       |
| Notes payable and other short-term obligations (Note  4)                                                                                                                                 |       | **185,500**                          |          | 185,500              |       |
| Notes payable to affiliated companies (Note 4)                                                                                                                                           |       | **195,878**                          |          | 249,712              |       |
| Long-term debt due within one year                                                                                                                                                       |       | **329,428**                          |          | 328,149              |       |
| Other                                                                                                                                                                                    |       | **63,663**                           |          | 56,271               |       |
| **Total Current Liabilities**                                                                                                                                                            |       | **1,007,316**                        |          | 1,058,324            |       |
|                                                                                                                                                                                     |       | ** **                           |          |                 |       |
| **Non-Current Liabilities**                                                                                                                                                              |       | ** **                           |          |                 |       |
| Long-term debt                                                                                                                                                                           |       | **1,889,827**                        |          | 1,891,713            |       |
| Deferred income taxes                                                                                                                                                                    |       | **578,683**                          |          | 609,569              |       |
| Unamortized investment tax credits                                                                                                                                                       |       | **22,906**                           |          | 23,624               |       |
| Accrued pension and other postretirement benefit  costs                                                                                                                                  |       | **233,485**                          |          | 227,435              |       |
| Regulatory liabilities                                                                                                                                                                   |       | **403,786**                          |          | 394,377              |       |
| Other                                                                                                                                                                                    |       | **63,598**                           | ** **    | 63,919               |       |
| **Total Non-Current Liabilities**                                                                                                                                                        |       | **3,192,285**                        | ** **    | 3,210,637            |       |
|                                                                                                                                                                                     |       | ** **                           | ** **    |                 |       |
| **Commitments and Contingencies**                                                                                                                                                        |       | ** **                           | ** **    |                 |       |
| ** **                                                                                                                                                                               |       | ** **                           | ** **    |                 |       |
| **Total  Liabilities**                                                                                                                                                                   |       | **4,199,601**                        | ** **    | 4,268,961            |       |
|                                                                                                                                                                                     |       | ** **                           | ** **    |                 |       |
| **Cumulative Preferred Stock**                                                                                                                                                           |       | ** **                           | ** **    |                 |       |
| Not subject to mandatory redemption                                                                                                                                                      |       | **11,258**                           | ** **    | 11,258               |       |
|                                                                                                                                                                                     |       | ** **                           | ** **    |                 |       |
| **Common Stock Equity**                                                                                                                                                                  |       | ** **                           | ** **    |                 |       |
| Common stock — without par value; $.01 stated value;  authorized shares — 60,000,000; outstanding shares — 53,913,701 at  March 31, 2006, and December 31, 2005 |       | **539**                              | ** **    | 539                  |       |
| Paid-in capital                                                                                                                                                                          |       | **840,692**                          | ** **    | 840,692              |       |
| Retained earnings                                                                                                                                                                        |       | **1,141,826**                        | ** **    | 1,148,192            |       |
| Accumulated other comprehensive loss                                                                                                                                                     |       | **(19,456**                          | **)**         | (27,460              | )          |
| **Total Common Stock Equity**                                                                                                                                                            |       | **1,963,601**                        | ** **    | 1,961,963            |       |
|                                                                                                                                                                                     |       | ** **                           |          |                 |       |
| **Total Liabilities and  Shareholders’ Equity**                                                                                                                                     |       | **$**                                | **6,174,460** |                 | $          | 6,242,182 |   |

** **

**The accompanying notes as theyrelate to PSI Energy, Inc. are an integral part of these condensedconsolidated financial statements.**

17

----

**PSI ENERGY, INC.CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**
| ** **                                                                            | ** ** | **Quarter Ended**               | ** ** |
|---------------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                            | ** ** | **March 31**                    | ** ** |
| ** **                                                                            | ** ** | **2006**                             | ** ** | **2005** | ** ** |
| ** **                                                                            | ** ** | **(dollars in thousands)** | ** ** |
| ** **                                                                            | ** ** | **(unaudited)**                      | ** ** |
| ** **                                                                            |       |                                 |       |   |   |
| **Operating Activities**                                                              |       |                                 |       |   |   |
| Net income                                                                            |       | **$**                                | **18,747** |   | $ | 42,345 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities:    |       | ** **                           | ** ** |   |   |
| Depreciation and amortization                                                         |       | **74,369**                           | ** ** | 73,704 |   |
| Deferred income taxes and investment tax credits —  net                          |       | **(24,601**                          | **)**      | 10,158 |   |
| Allowance for equity funds used during construction                                   |       | **(2,494**                           | **)**      | (1,857 | ) |
| Regulatory asset/liability deferrals                                                  |       | **(20,666**                          | **)**      | (28,464 | ) |
| Regulatory asset amortization                                                         |       | **6,464**                            | ** ** | 4,256 |   |
| Accrued pension and other postretirement benefit  costs                               |       | **6,054**                            | ** ** | 6,078 |   |
| Cost of removal                                                                       |       | **(3,786**                           | **)**      | (4,181 | ) |
| Changes in  current assets and current liabilities:                                   |       | ** **                           | ** ** |   |   |
| Accounts and notes receivable                                                         |       | **116,247**                          | ** ** | 44,102 |   |
| Fuel, emission allowances, and supplies                                               |       | **(11,769**                          | **)**      | (3,293 | ) |
| Prepayments                                                                           |       | **(213**                             | **)**      | 1,929 |   |
| Accounts payable                                                                      |       | **(43,428**                          | **)**      | (41,126 | ) |
| Accrued taxes and interest                                                            |       | **37,582**                           | ** ** | 20,272 |   |
| Other assets                                                                          |       | **(2,234**                           | **)**      | (3,877 | ) |
| Other liabilities                                                                     |       | **8,418**                            | ** ** | (330 | ) |
| **Net cash provided by operating activities**                                         |       | **158,690**                          | ** ** | 119,716 |   |
|                                                                                  |       | ** **                           | ** ** |   |   |
| **Investing Activities**                                                              |       | ** **                           | ** ** |   |   |
| Construction expenditures (less allowance for equity  funds used during construction) |       | **(119,180**                         | **)**      | (113,801 | ) |
| Withdrawal of restricted funds held in trust                                          |       | **37,869**                           | ** ** | 25,276 |   |
| Other investments                                                                     |       | **(1,028**                           | **)**      | (125 | ) |
| **Net cash used in investing activities**                                             |       | **(82,339**                          | **)**      | (88,650 | ) |
|                                                                                  |       | ** **                           | ** ** |   |   |
| **Financing Activities**                                                              |       | ** **                           | ** ** |   |   |
| Change in short-term debt, including net affiliate notes                              |       | **(53,834**                          | **)**      | 13,794 |   |
| Redemption of long-term debt                                                          |       | **(759**                             | **)**      | — |   |
| Dividends on preferred stock                                                          |       | **(112**                             | **)**      | (647 | ) |
| Dividends on common stock                                                             |       | **(25,000**                          | **)**      | (51,853 | ) |
| **Net cash used in financing activities**                                             |       | **(79,705**                          | **)**      | (38,706 | ) |
| ** **                                                                            |       | ** **                           | ** ** |   |   |
| **Net  decrease in cash and cash equivalents**                                        |       | **(3,354**                           | **)**      | (7,640 | ) |
| ** **                                                                            |       | ** **                           | ** ** |   |   |
| **Cash  and cash equivalents at beginning of period**                                 |       | **31,860**                           | ** ** | 10,794 |   |
| ** **                                                                            |       | ** **                           | ** ** |   |   |
| **Cash  and cash equivalents at end of period**                                       |       | **$**                                | **28,506** | ** ** | $ | 3,154 |   |
| ** **                                                                            |       | ** **                           | ** ** |   |   |
| **Supplemental Disclosure of Cash  Flow Information**                                 |       | ** **                           | ** ** |   |   |
| Cash paid during  the period for:                                                     |       | ** **                           | ** ** |   |   |
| Interest (net of amount capitalized)                                                  |       | **$**                                | **29,297** | ** ** | $ | 29,435 |   |
| Income taxes                                                                          |       | **$**                                | **12,495** | ** ** | $ | 9,850 |   |

 

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

18

----

**INDEX**

**NOTESTO CONDENSED FINANCIAL STATEMENTS**
| Note  Number | ** ** | ** **                                                   | ** ** | ** ** | ** ** |
|--------------|------------|--------------------------------------------------------------|------------|------------|------------|
| ** **   | ** ** | ** **                                                   | ** ** | ** ** | ** ** |
| 1            |       | Organization and Summary of Significant Accounting  Policies |       |       |       |
|         |       |                                                         |       |       |       |
| 2            |       | Common  Stock                                                |       |       |       |
|         |       |                                                         |       |       |       |
| 3            |       | Cumulative  Preferred Stock                                  |       |       |       |
|         |       |                                                         |       |       |       |
| 4            |       | Notes Payable and Other Short-term Obligations               |       |       |       |
|         |       |                                                         |       |       |       |
| 5            |       | Energy  Trading Credit Risk                                  |       |       |       |
|         |       |                                                         |       |       |       |
| 6            |       | Pension and Other Postretirement Benefits                    |       |       |       |
|         |       |                                                         |       |       |       |
| 7            |       | Commitments and Contingencies                                |       |       |       |
|         |       |                                                         |       |       |       |
| 8            |       | Discontinued  Operations                                     |       |       |       |
|         |       |                                                         |       |       |       |
| 9            |       | Financial Information by Business Segment                    |       |       |       |
|         |       |                                                         |       |       |       |
| 10           |       | Earnings Per Common Share (EPS)                              |       |       |       |
|         |       |                                                         |       |       |       |
| 11           |       | Acquisition and Transfer of Generating Assets                |       |       |       |
|         |       |                                                         |       |       |       |

 

19

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**NOTES TO CONDENSEDFINANCIAL STATEMENTS**

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

**1.   Organization and Summary of SignificantAccounting Policies**

***(a)***                                  Mergerwith Duke

In March 2006, **Cinergy** and Duke, a North Carolina corporation, receivedfinal approvals in connection with the merger from Duke and **Cinergy** shareholders, the North Carolina UtilitiesCommission (NCUC), and the Indiana Utility Regulatory Commission (IURC) andeffective April 3, 2006, **Cinergy Corp.**consummated the merger with Duke. Under the merger agreement, each share of **Cinergy** common stock was converted into 1.56 shares of thenewly formed company, Duke Energy Holding Corp., a Delaware Corporation (DukeEnergy Holding) (subsequently renamed Duke Energy Corporation).

Duke and **Cinergy** believe that the combination will providesubstantial strategic and financial benefits to their shareholders, employeesand customers, including:

·                  increasedfinancial strength and flexibility;

·                  stronger utilitybusiness platform;

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

·                  broadenedelectric distribution platform;

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

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

·                  complementarypositions in the midwest;

·                  greater customerdiversity;

·                  combinedexpertise; and

·                  significantcost savings synergies.

As a condition to themerger approval, the Public Utilities Commission of Ohio (PUCO) and theKentucky Public Service Commission (KPSC) required that certain merger relatedsavings be refunded to customers in each service territory and providedadditional conditions that the new company would have to meet. While the mergeritself was not subject to approval by the IURC, the IURC approved, subject tosimilar conditions, certain affiliate agreements in connection with the merger.Key elements of these provisions were:

·                  **CG&E** will provide a rate credit ofapproximately $15 million for one year to facilitate economic development in atime of increasing rates and a credit of approximately $21 million to **CG&E’s** gas and electric customers inOhio for one year, with both credits beginning January 1, 2006.

InApril 2006, The Office of the Ohio Consumers’ Counsel (OCC) filed a Noticeof Appeal with the Supreme Court of Ohio, requesting the Court remand the PUCO’smerger approval for a full evidentiary hearing. The Office of the OhioConsumers’ Counsel alleges that the PUCO committed reversible error on bothprocedural and substantive grounds, in among other things, failing to set thematter for a full evidentiary hearing, failing to consider evidence regardingthe transfer of the Duke Energy North America (DENA) assets to **CG&E**, and failing to lift the stay ondiscovery. **CG&E** and the OCChave resolved this matter through settlement and we expect the OCC to withdrawits appeal.

·                  **PSI** will provide a rate credit of $40 million to **PSI** customers over a one year period and $5 million forlow-income energy assistance and clean coal technology. In April 2006, Interveners, Citizens Action Coalition of Indiana, Inc., filed a VerifiedPetition for Rehearing and Reconsideration claiming that **PSI**

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should be ordered toprovide an additional $5 million in rate credits to customers to be consistentwith the NCUC order. An order on the Petition is expected in the second quarterof 2006.

·                  ULH&Pwill provide $7.6 million in rate credits to ULH&P customers over fiveyears, ending when new rates are established in the next rate case afterJanuary 1, 2008.

In addition, the FederalEnergy Regulatory Commission (FERC) approved the merger without conditions. OnJanuary 19, 2006, Public Citizen’s Energy Program, Citizen’s Action Coalitionof Indiana, Ohio Partners for Affordable Energy and Southern Alliance for CleanEnergy requested rehearing of the FERC approval. On February 21, 2006, the FERCissued an order granting rehearing of FERC’s order for further consideration.

The consummation of themerger triggered certain “change in control” provisions that provided enhanced,and/or accelerated benefits to management level employees in the event of aqualifying transaction. See Note 2(b)(*iii*) foradditional information on these payments.

*Purchaseprice allocation and goodwill*

Duke has been determinedto be the acquirer and **Cinergy** theacquiree under generally accepted accounting principles. The merger is beingrecorded using the purchase method of accounting whereby the total purchaseprice of approximately $9 billion is being allocated to **Cinergy’s**identifiable tangible and intangible assets acquired and liabilities assumedbased on their fair values. **Cinergy Corp.’s**results of operations will be included in Duke Energy Holding’s resultsbeginning April 2006.

The allocation of thepurchase price to the net assets of **Cinergy** and theresulting goodwill determination are not yet complete. However, preliminaryindications are that the acquisition will result in approximately $4 billion ofgoodwill.

Based on management’sreview and analysis of relevant Securities and Exchange Commission (SEC)regulations, **Cinergy** expects the impacts ofpurchase accounting, including goodwill, to be pushed down and recorded on thefinancial statements of **Cinergy**. Managementalso expects that a portion of the purchase price will be pushed down andrecorded on the financial statements of **CG&E**. Sincethe merger did not occur until April 2006, all impacts of push-downaccounting will be implemented in the second quarter financial statements of **Cinergy** and **CG&E**.   Our review of SEC regulations has indicatedthat **PSI’s** financial statements are notrequired to use push-down accounting and management does not anticipateelecting to do so.

***(b)***                                  Presentation

*FinancialStatements*

Our Condensed FinancialStatements reflect all adjustments (which include normal, recurringadjustments) necessary in the opinion of the registrants for a fairpresentation of the interim results. These results are not necessarilyindicative of results for a full year. These statements should be read inconjunction with the Financial Statements and the notes thereto included in theregistrants’ combined Form 10-K for the year ended December 31,2005 (2005 10-K). We have restated certain prior-year amounts in **Cinergy’s** financial statements, including cash flows, toreflect the impact of discontinued operations in 2005 and 2006. For a furtherdiscussion of discontinued operations, see Note 8. Also, certain amounts in the2005 Condensed Financial Statements have been reclassified to conform to the2006 presentation.

Management makesestimates and assumptions when preparing financial statements under generallyaccepted 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;and

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

These estimates andjudgments are discussed more fully in “Critical Accounting Estimates” in our2005 10-K. Actual results could differ, as these estimates andassumptions involve judgment about future events or performance.

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***(c)***                                  RevenueRecognition

*UtilityRevenues*

**CG&E**,and **PSI** (collectively, our utilityoperating companies) record *OperatingRevenues* for electric and gas service when delivered to customers. Customersare billed throughout the month as both gas and electric meters are read. Werecognize revenues for retail energy sales that have not yet been billed, butwhere gas or electricity has been consumed. This is termed “unbilled revenues”and is a widely recognized and accepted practice for utilities. In making ourestimates of unbilled revenues, we use systems that consider various factors,including weather, in our calculation of retail customer consumption at the endof each month. Given the use of these systems and the fact that customers arebilled monthly, we believe it is unlikely that materially different resultswill occur in future periods when these amounts are subsequently billed.

Unbilled revenues for **Cinergy**, **CG&E**,and **PSI** as of March 31, 2006and 2005, were as follows:

 

|              | ** ** | **2006**               | ** ** | **2005** | ** ** |
|--------------|------------|------------------------|------------|----------|------------|
| ** **   | ** ** | **(in millions)** | ** ** |
|         |       |                   |       |     |       |
| **Cinergy**  |       | **$**                  | **172**    |     | $          | 143 |   |
| **CG&E** |       | **105**                |       | 86       |       |
| **PSI**      |       | **67**                 |       | 57       |       |
|              |            |                        |            |          |            |  |  |

 

***(d)***                                  Derivatives

*(i)   Hedges ofNatural Gas held in Storage*

**Cinergy**designates derivatives as fair value hedges for certain volumes of our naturalgas held in storage. Under this accounting election, changes in the fair valueof both the derivative as well as the hedged item (the specified gas held instorage) are included in *Gas Operating Revenues*in**Cinergy’s** Condensed ConsolidatedStatements of Income. We assess the effectiveness of the derivatives inoffsetting the change in fair value of the gas held in storage on a quarterlybasis. Selected information on **Cinergy’s** hedgeaccounting activities for the quarters ended March 31, 2006 and 2005 wereas follows:

 

|                                                                                                                       | ** ** | **2006**               | ** ** | **2005** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|----------|------------|
| ** **                                                                                                            | ** ** | **(in millions)** | ** ** |
| * *                                                                                                              | * *   | * *               | * *   | * * | * *   |
| Portion of loss  on hedging instruments determined to be ineffective                                                  |       | **$**                  | **(5**     | **)**    | $          | (4 | ) |
| Portion of gain  on hedging instruments related to changes in time value excluded from  assessment of ineffectiveness |       | **36**                 | ** ** | 4        |       |
| Total included  in*Gas operating revenues*                                                                            |       | **$**                  | **31**     |     | $          | — |   |

* *

*(ii)  GenerationPortfolio Optimization*

**CG&E**attempts to optimize the value of its non-regulated generation portfolio, whichincludes generation assets, fuel, and emission allowances. When power is soldforward, we typically purchase the fuel and emission allowances required toproduce the power to lock in our eventual margin at the time of delivery. Themarket values of these commodities change independently over time and wheneconomic, **CG&E** may purchase forward power tobe used to deliver against the forward power sales, and in turn sell the fueland/or emission allowances.

Emission allowances andthe majority of fuel contracts typically follow the accrual method ofaccounting. However, generally accepted accounting principles (GAAP) requiresthat certain forward purchases of coal and forward sales of power (thoseclassified as derivatives) use the mark-to-market (MTM) method of accounting. Thisdiffering accounting treatment for the various components of the generationportfolio can lead to volatility in reported earnings. A hypothetical$1.00 per megawatt hour (MWh) change consistently applied to all forward powerprices would have resulted in a change in fair value of these contracts, andtherefore unrealized gains or losses, of approximately $7.4 million as of March 31,2006. A hypothetical $1.00 per ton change consistently

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applied to all forwardcoal prices would have resulted in a change in fair value of these contracts ofapproximately $3.5 million as of March 31, 2006.

*(iii) Trading& Marketing*

**Cinergy** and **CG&E** measure the market risk inherent in the tradingportfolio employing value at risk (VaR) analysis, as discussed in the 200510-K. The change in VaR from the 2005 10-K was not material to our financialposition or results of operations.

***(e)***                                  AccountingChanges

*(i)   Share-BasedPayment*

In December 2004,the FASB issued a replacement of SFAS No. 123, *Accountingfor Stock-Based Compensation*, as amended by SFAS No. 148, *Accounting for Stock-Based Compensation — Transition and Disclosure*,(Statement 148), (Statement 123), *SFAS No. 123 (revised2004), Share-Based Payment* (Statement 123R). This standard requires,among other things, accounting for all stock-based compensation arrangementsunder the fair value method. The standard also requires compensation awardsthat involve the achievement of a certain company stock price (or similarmeasure) to have the likelihood of reaching those targets incorporated into thefair value of the award. The number of awards paid out under **Cinergy’s** performance-based share awards under the CinergyCorp. 1996 Long-Term Incentive Compensation Plan (LTIP) is based on **Cinergy’s** expected total shareholder return (TSR) asmeasured against a pre-defined peer group. Therefore, these awards wererequired to be re-valued at fair value upon adoption.

We adopted Statement 123Ron January 1, 2006 using the modified prospective application. **Cinergy** recognized a loss of approximately $3.5 million, netof tax, for the cumulative effect of this change in accounting principle. Thecumulative effect is due to the use of a new model that incorporates theexpected TSR into the fair value of **Cinergy’s**performance-based share awards under the LTIP. This model is used to value allperformance-based share awards under the LTIP, beginning January 1, 2006.

In 2003, we prospectivelyadopted accounting for our stock-based compensation plans using the fair valuerecognition provisions of Statement 123, as amended by Statement 148, for allemployee awards granted or with terms modified on or after January 1, 2003.Therefore, the impact of implementation of Statement 123R on stock options andremaining awards, other than the aforementioned performance-based share awards,within our stock-based compensation plans was not material. See additionaldetail regarding **Cinergy’s** stock-based compensationplans in Note 2(b).

*(ii)  Accountingfor Servicing of Financial Assets*

In March 2006, theFASB issued SFAS No. 156, *Accounting for Servicingof Financial Assets*(Statement**156) anamendment of SFAS No. 140, *Accounting for Transfersand Servicing of Financial Assets and**Extinguishmentsof Liabilities*. Statement 156 establishes new standards for howentities that service financial assets account for their servicing rights. **CG&E** retains servicing responsibilities for its role ascollection agent for receivables sold to Cinergy Receivables Company, LLC. Weare in the process of evaluating the impact of adopting this new standard on **Cinergy’s** accounts receivable sales program. Currently, weare unable to predict whether the implementation of this accounting standardwill be material to our financial position or results of operations. We****will adopt Statement 156 on January 1, 2007.

*(iii) DeterminingVariability in Application of FASB Interpretation No. 46(R) (FIN46(R)-6)*

In April 2006, the FASB staff issued FASBInterpretation No. 46(R)-6 (FIN 46(R)-6) to address how todetermine the variability to be considered in applying FIN 46(R),*Consolidation of VariableInterest Entities*. The variability that is considered inapplying FIN 46(R) affects the determination of whether the entity is avariable interest entity (VIE), which interests are variable interests in theentity, and which party, if any, is the primary beneficiary of the VIE. Thevariability affects the calculation of expected losses and expected residualreturns. This Statement is effective July 1, 2006. **Cinergy**does not anticipate that the adoption of FIN 46(R)-6 will have a materialimpact on our financial position or results of operations.

 

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**2.*  *CommonStock**

***(a)***                                  ChangesIn Common Stock Outstanding

**Cinergy**issues new **CinergyCorp.** common stock shares to satisfy obligations under certain ofits employee stock plans and the Cinergy Corp. Direct Stock Purchase andDividend Reinvestment Plan. During the three months ended March 31, 2006, **Cinergy** issued 1.7 million sharesunder these plans.

Cash dividends declared for the quarter ended March 31, 2006included dividends of $0.48 per share which were declared by the board ofdirectors on January 16, 2006 and partial dividends of $0.1564 per sharewhich were declared on March 10, 2006.

In April 2006, **CG&E** filed a petition with the FERC for a declaratoryruling that **CG&E’s** payment of dividendsout of its paid-in capital account****,********using the balance transferred from the retainedearnings account, resulting from purchase accounting arising from the Duke/**Cinergy******merger,****would not violate section 305(a) of the Federal Power Act, which generallyprecludes dividends out of paid-in capital.  Such a ruling isnecessary because purchase/push-down accounting will reset retained earnings tozero as of April 3, 2006, thus precluding **CG&E** fromusing pre-merger retained earnings to pay dividends.  Until thisapproval is received, **CG&E’s**ability to pay dividends will be constrained to earnings since April 3,2006. The FERC has approved such dividend payments in proceedingsinvolving other mergers.  At this time, **CG&E**cannot predict the outcome of this proceeding.

**CinergyCorp.** owns all of the common stock of **CG&E** and **PSI**. Effective April 3, 2006, 100 percent of **Cinergy’s** outstanding stock was converted into 1.56 sharesof Duke Energy Holding stock. See Note 1(a) for additional information.

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

We currently have thefollowing stock-based compensation plans:

·                  LTIP;

·                  SOP;

·                  Employee StockPurchase and Savings Plan;

·                  Retirement Planfor Directors;

·                  Directors’Equity Compensation Plan;

·                  Directors’Deferred Compensation Plan;

·                  401(k) Plans;and

·                  401(k) ExcessPlan.

The LTIP and SOP arediscussed below. The activity in 2006 and 2005 for the remaining stock-basedcompensation plans was not significant.

In 2003, we prospectively adopted accounting for ourstock-based compensation plans using the fair value recognition provisions ofStatement 123, as amended by Statement 148, for all employee awards granted orwith terms modified on or after January 1, 2003. Effective January 1,2006, **Cinergy** adopted Statement 123R. SeeNote 1(e)(*i*) for additional informationregarding this new accounting standard.

For the three months ended March 31, 2006 and2005, total compensation cost for the above plans was $22 million and $12million, respectively. The total income tax benefit recognized for share-basedcompensation arrangements was $9 million in 2006 and $5 million in 2005. Costsassociated with the immediate vesting of shares and options in conjunction withthe consummation of the merger with Duke as discussed below, will be accountedfor as part of purchase accounting.

*(i)   LTIP*

Under this plan, certainkey employees may be granted incentive and non-qualified stock options, stockappreciation rights (SARs), non-vested stock awards, dividend equivalents,phantom stock, the opportunity to earn performance-based shares and certainother stock-based awards. Stock options are granted to participants with anoption price equal to or greater than the fair market value on the grant date,and generally with a vesting period of three years. The vesting period beginson the grant date and all options expire within 10 years from that date. Expensefor stock options granted to retirement eligible employees is recognizedimmediately as these employees are deemed to immediately vest in their stockoptions. There are 14,500,000 shares authorized for issuance under the LTIPplan.

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Most options grantedprior to May 8, 2005 were immediately vested upon consummation of the April 3,2006 merger with Duke. Options granted after May 8, 2005 were converted toDuke Energy Corporation options on April 3, 2006 at the 1.56 conversionrate and will continue to be expensed over the remaining portion of thethree-year vesting period, unless granted to retirement eligible employees. DukeEnergy Corporation plans to issue new Duke Energy Corporation common shares whenthe above options are exercised.

Previously,performance-based share awards were paid 50 percent in common stock and 50percent in cash. As of December 31, 2005, all performance shares wereclassified as liabilities as management intends to pay all outstanding awardsin cash. As a result, the expected cash payout portion of the performanceshares were reported in *Current Liabilities- Other* and *Non-CurrentLiabilities - Other*. Total cash paid for the performance-based shareliabilities were $5 million and $14 million for the quarters endedMarch 31, 2006 and 2005, respectively.

Entitlement toperformance-based share awards is based on **Cinergy’s**TSR over designated Cycles as measured against a pre-defined peer group ofutility companies (Relative TSR). Target grants of performance-based shareswere made for the following Cycles:

|            | ** ** | **Grant**  | ** ** | **Performance** | ** ** | **Target**                    | ** ** |
|------------|------------|------------|------------|-----------------|------------|-------------------------------|------------|
| **Cycle**  | ** ** | **Date**   | ** ** | **Period**      | ** ** | **Grant of Shares** | ** ** |
| ** ** | ** ** | ** ** | ** ** | ** **      | ** ** | **(in thousands)**       | ** ** |
|       |       |       |       |            |       |                          |       |
| VIII       |       | 1/2004     |       | 2004-2006       |       | 367                           |       |
| IX         |       | 1/2005     |       | 2005-2007       |       | 342                           |       |
| X          |       | 1/2006     |       | 2006-2008       |       | 351                           |       |

 

The target award isearned if **Cinergy’s** Relative TSR ranking is atthe 55th percentile at the end of the performanceperiod. The maximum payout is equal to 200 percent of the target and theminimum payout is zero, depending on **Cinergy’s**ranking above or below the 55th percentile target.

We use a path-dependentmodel that incorporates expected Relative TSR into the fair value determinationof **Cinergy’s** performance-based shareawards with the adoption of Statement 123R. The model uses three yearhistorical volatilities and correlations for all companies in the pre-definedpeer group, including **Cinergy**, tosimulate **Cinergy’s** Relative TSR as of the end ofeach Cycle. For each simulation, **Cinergy’s**Relative TSR associated with the simulated stock price at the end of the cycleperiod plus expected dividends within the period results in a value per sharefor the award portfolio.  The average ofthese simulations is the expected portfolio value per share. Actual life todate results of **Cinergy’s** Relative TSR for eachCycle is incorporated within the model.

All performance sharesunder Cycles VIII and IX vested immediately at 200 percent of target with the April 3,2006 consummation of the merger. Cycle X performance shares vested on apro-rata basis also at 200 percent of target at the consummation of the merger.

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*(ii)  StockOption Activity*

Stock option activity forthe three months ended March 31, 2006 is summarized as follows:

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

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(1)             Optionshave not been granted under the SOP since 2001.

(2)             475,867options exercisable pertain to the SOP.

For the three months ended March 31, 2006, wereceived $29 million in cash from the exercise of outstanding stock options. Thetax benefit realized from these exercised options was $14 million. The totalcompensation expense related to unvested options at March 31, 2006 was $3million which will be recognized over a weighted average period of 2.24 years. Thetotal fair-value of options granted during the quarters ended March 31,2006 and 2005 were $6.66 per share and $5.65 per share, respectively. The totalintrinsic value of options exercised was $16 million and $2 million for thethree months ended March 31, 2006 and 2005, respectively.

The fair values ofoptions granted were estimated as of the grant date using the Black-Scholesoption-pricing model using the assumptions listed in the following table forthe three months ended March 31:

|                             | ** ** | **LTIP**  | ** ** | ** ** |
|-----------------------------|------------|-----------|------------|------------|
| ** **                  | ** ** | **2006**  | ** ** | **2005**   | ** ** | ** ** |
| Risk-free  interest rate(1) |       | **4.33**  | **%**      | 3.62       | % |   |
| Expected  dividend yield(2) |       | **4.41**  | **%**      | 4.52       | % |   |
| Expected life(3)            |       | **5.01**  | **yrs.**   | 4.99       | yrs. |   |
| Expected  volatility(4)     |       | **22.43** | **%**      | 21.28      | % |   |

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(1)             Therisk free rate is based upon the U.S. Treasury zero-coupon issues with aremaining term equal to the expected term of the options.

(2)             Theexpected dividend yield is based upon annualized dividends and the closingstock price on the grant date.

(3)             Theexpected term of options is derived from historical data.

(4)             Volatilityis based upon the historical volatility with a look back period equal to theexpected term of the options.

*(iii)Merger-Related Obligations*

Several of the Company’sbenefit plans contain “change-in-control” clauses that provide enhanced, and/oraccelerated benefits to management level employees in the event of a qualifyingtransaction such as occurred with the consummation of the merger with Duke asdiscussed in Note 1(a) in April 2006. These include benefits paidpursuant to the LTIP and certain payments under **Cinergy’s**Annual Incentive Plan. Certain employees are also entitled to additionalseverance and benefits in the event they are involuntarily terminated without “cause”or voluntarily terminate for “good reason” (as such terms are defined in theiremployment agreements) in connection with or following the merger.

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On December 30,2005, **Cinergy**entered into agreements with 28employees to accelerate the payment of a portion of the amounts discussedabove, otherwise expected to be paid after December 31, 2005, in order tomitigate the Company’s taxes and related expenses. Payments totaling $70million were made in December pursuant to these agreements. The agreementsamend the employees’ employment agreements, and benefit plans in which theyparticipate, to accelerate into 2005 the payment of certain amounts that theyhave previously earned or are expected to earn after December 31, 2005. Amongother things, the Company prepaid performance shares under the LTIP andseverance payments for certain individuals. In the event an employee who receivedsuch amounts voluntarily terminated his employment prior to the closing of themerger, the employee would have been obligated to repay all of the payments,and if the merger did not close on or prior to December 15, 2006, theemployee would have been obligated to repay half of the payments, to reflecthis or her estimated tax liability upon receipt of the accelerated payments; ineach case, less any amounts that the employee has already earned through suchdate. None of the 28 employees invoked this payback provision. By acceleratingthese payments, the Company will mitigate taxes and related expenses that itwould otherwise incur if it had waited until after 2005 to make these payments.

The majority of thesepayments were recorded as prepaid compensation in *Prepayments**and other*. Approximately half of thesepayments were accounted for as a retention bonus and expensed over the periodbetween January 1, 2006 and the closing of the merger with Duke. Theremainder, representing the half that executives must repay if the merger wasnever consummated, remained in *Prepayments**and other* until the merger closed and were accounted for aspart of purchase/push-down accounting.

In addition to paymentsmade in December, based on certain assumptions and using our current bestestimates, the Company’s remaining contractual obligations that were triggeredupon merger consummation, including severance payments for those executivesthat have indicated their intention to terminate for “good reason”, wasapproximately $100 million and these amounts were accounted for in April whenthe merger closed. These payments only included amounts payable pursuant toexisting benefit arrangements, employment contracts, and voluntary severanceaccepted by employees and contingent on the merger closing. These payments donot include the value of accelerated stock options and retirement benefitsearned prior to the merger.

**3.     CumulativePreferred Stock**

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

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

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

**CinergyCorp.’s**short-term borrowings consist primarily of unsecuredrevolving lines of credit and the sale of commercial paper. **Cinergy Corp.’s** revolving credit facilityand commercial paper program also support the short-term borrowing needs of **CG&E**, and **PSI**. In addition, **CinergyCorp.**, **CG&E**, and **PSI** maintain uncommitted lines of credit. Thesefacilities are not firm sources of capital but rather informal agreements tolend money, subject to availability, with pricing determined at the time ofadvance. The following table summarizes our *Notes payable and othershort-term obligations* and *Notes payable toaffiliated companies*:
| ** **                   | ** ** | **March 31, 2006**        | ** ** | **December 31, 2005** | ** ** |
|------------------------------|------------|-------------------------------------|------------|---------------------------------|------------|
| ** **                   | ** ** | ** **                          | ** ** | ** **                      | ** ** | **Weighted** | ** ** | ** ** | ** ** | ** ** | ** ** | **Weighted** | ** ** |
| ** **                   | ** ** | **Established**                     | ** ** | ** **                      | ** ** | **Average** | ** ** | **Established** | ** ** | ** ** | ** ** | **Average** | ** ** |
| ** **                   | ** ** | **Lines**                           | ** ** | **Outstanding**                 | ** ** | **Rate** | ** ** | **Lines** | ** ** | **Outstanding** | ** ** | **Rate** | ** ** |
| ** **                   | ** ** | **(dollars in millions)** | ** ** |
| * *                     | * *   | * *                            | * *   | * *                        | * *   | * * | * * | * * | * * | * * | * * | * * | * * |
| **Cinergy**                  | ** ** | ** **                          | ** ** | ** **                      | ** ** | ** ** | ** ** |   |   |   |   |   |   |
| **Cinergy  Corp.**           | ** ** | ** **                          | ** ** | ** **                      | ** ** | ** ** | ** ** |   |   |   |   |   |   |
| Revolving line(1)            |       | **$**                               | **2,000**  | ** **                      | **$**      | **—** | ** ** | **—** | **%** | $ | 2,000 |   | $ | — |   | — | % |
| Uncommitted lines            |       | **40**                              | ** ** | **—**                      | ** ** | **—** | ** ** | 40 |   | — |   | — |   |
| Commercial paper(2)          |       | ** **                          | ** ** | **697**                         | ** ** | **4.86** | ** ** |   |   | 515 |   | 4.43 |   |
|                         |       | ** **                          | ** ** | ** **                      | ** ** | ** ** | ** ** |   |   |   |   |   |   |
| Utility  operating companies |       | ** **                          | ** ** | ** **                      | ** ** | ** ** | ** ** |   |   |   |   |   |   |
| Uncommitted lines            |       | **75**                              | ** ** | **—**                      | ** ** | **—** | ** ** | 75 |   | — |   | — |   |
| Pollution control notes      |       | ** **                          | ** ** | **298**                         | ** ** | **3.68** | ** ** |   |   | 298 |   | 4.00 |   |
|                         |       | ** **                          | ** ** | ** **                      | ** ** | ** ** | ** ** |   |   |   |   |   |   |
| Non-regulated subsidiaries   |       | ** **                          | ** ** | ** **                      | ** ** | ** ** | ** ** |   |   |   |   |   |   |
| Revolving lines(3)           |       | **150**                             | ** ** | **60**                          | ** ** | **5.33** | ** ** | 150 |   | 77 |   | 4.95 |   |
| Short-term debt              |       | ** **                          | ** ** | **11**                          | ** ** | **9.97** | ** ** |   |   | 9 |   | 9.96 |   |
| Pollution control notes      |       | ** **                          | ** ** | **25**                          | ** ** | **3.53** | ** ** |   |   | 25 |   | 3.90 |   |
|                         |       | ** **                          | ** ** | ** **                      | ** ** | ** ** | ** ** |   |   |   |   |   |   |
| **Cinergy  Total**           | ** ** | ** **                          | ** ** | **$**                           | **1,091**  | ** ** | **4.59** | **%** |   |   | $ | 924 |   | 4.37 | % |
| ** **                   | ** ** | ** **                          | ** ** | ** **                      | ** ** | ** ** | ** ** |   |   |   |   |   |   |
| **CG&E**                 | ** ** | ** **                          | ** ** | ** **                      | ** ** | ** ** | ** ** |   |   |   |   |   |   |
| Uncommitted lines            |       | **$**                               | **15**     | ** **                      | **$**      | **—** | ** ** | **—** | **%** | $ | 15 |   | $ | — |   | — | % |
| Pollution control notes      |       | ** **                          | ** ** | **112**                         | ** ** | **3.56** | ** ** |   |   | 112 |   | 3.86 |   |
| Money pool                   |       | ** **                          | ** ** | **222**                         | ** ** | **4.84** | ** ** |   |   | 114 |   | 4.41 |   |
|                         |       | ** **                          | ** ** | ** **                      | ** ** | ** ** | ** ** |   |   |   |   |   |   |
| **CG&E  Total**          | ** ** | ** **                          | ** ** | **$**                           | **334**    | ** ** | **4.41** | **%** |   |   | $ | 226 |   | 4.14 | % |
| ** **                   | ** ** | ** **                          | ** ** | ** **                      | ** ** | ** ** | ** ** |   |   |   |   |   |   |
| **PSI**                      | ** ** | ** **                          | ** ** | ** **                      | ** ** | ** ** | ** ** |   |   |   |   |   |   |
| Uncommitted lines            |       | **$**                               | **60**     | ** **                      | **$**      | **—** | ** ** | **—** | **%** | $ | 60 |   | $ | — |   | — | % |
| Pollution control notes      |       | ** **                          | ** ** | **186**                         | ** ** | **3.76** | ** ** |   |   | 186 |   | 4.07 |   |
| Money pool                   |       | ** **                          | ** ** | **196**                         | ** ** | **4.84** | ** ** |   |   | 250 |   | 4.41 |   |
|                         |       | ** **                          | ** ** | ** **                      | ** ** | ** ** | ** ** |   |   |   |   |   |   |
| **PSI Total**                | ** ** | ** **                          | ** ** | **$**                           | **382**    | ** ** | **4.32** | **%** |   |   | $ | 436 |   | 4.27 | % |

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(1)             Consists of afive-year facility which was entered into in September 2005, matures inSeptember 2010, and contains $500 million sublimits each for **CG&E**and **PSI**.

(2)             **CinergyCorp.’s** commercial paper program limit is $1.5 billion. Thecommercial paper program is supported by **CinergyCorp.’s** revolving line of credit.

(3)             Relatesto a Cinergy Canada, Inc. three-year senior revolving credit facility thatmatures in December 2007.

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

At March 31, 2006, **Cinergy Corp.**had $1.1 billion remaining unused and available capacity relating to its $2 billionrevolving credit facility.  The revolvingcredit facility includes the following: 

                            
| **Credit Facility**    | ** ** | **Expiration** | ** ** | **Established  Lines** | ** ** | **Outstanding and  Committed** | ** ** | **Unused and  Available** | ** ** |
|-----------------------------|------------|----------------|------------|------------------------|------------|-------------------------------------|------------|--------------------------------|------------|
| ** **                  | ** ** | ** **     | ** ** | **(in millions)** | ** ** |
| Five-year senior  revolving |       | September 2010 |       |                   |       |                                |       |                           |       |
| Commercial paper support    |       |           |       |                   |       | $                                   | 697        |                           |       |   |
| Letter of credit support    |       |           |       |                   |       | 165                                 |       |                           |       |
| Total five-year  facility   |       |           |       | $                      | 2,000      |                                | 862        |                           | $          | 1,138 |   |
|                             |            |                |            |                        |            |                                     |            |                                |            |  |  |  |

 

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

 

·                  a consolidated net worth of $2billion; and

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

 

As part of **CG&E’s** $500million sublimit under the $2 billion five-year credit facility, **CG&E** has covenanted to maintain:

 

·                  a consolidated net worth of $1billion; and

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

 

As part of **PSI’s** $500million sublimit under the $2 billion five-year credit facility, **PSI** has covenanted to maintain:

 

·                  a consolidated net worth of $900million; and

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

 

A breach of these covenants could result in the termination of thecredit facility 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;

·                  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.  As of March 31, 2006, **Cinergy**, **CG&E**, and **PSI** are in compliance with all of their debt covenants.

** **

**5.   Energy Trading 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 March 31, 2006, 93percent of **Cinergy’s** credit exposure and 88percent of **CG&E’s** credit expense, net ofcredit collateral, related to energy trading and marketing activity was withcounterparties rated investment grade or the counterparties’ obligations wereguaranteed or secured by an investment grade entity.  The majority of these investment gradecounterparties are externally rated.  Ifa counterparty has an external rating, the lower of Standard & Poor’sRatings Services or Moody’s Investors Service is used; otherwise, **Cinergy’s** internal rating of the counterpartyis used.  **Cinergy’s**remaining seven percent represents credit exposure of $72 million and **CG&E’s** remaining 12 percent represents credit exposureof $25 million with counterparties rated non-investment grade. 

 

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As of March 31, 2006, **CG&E**had a concentration of trading credit exposure of $75 million with twocounterparties 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 financial status orpublic debt ratings.

 

**6.   Pension and Other Postretirement Benefits**

As discussed in the 2005 10-K, **CinergyCorp.** sponsors both pension and other postretirement benefitsplans.  Our qualified defined benefitpension plans cover substantially all United States employees meeting certainminimum age and service requirements. Funding for the qualified defined benefit pension plans is based onactuarially determined contributions, the maximum of which is generally theamount deductible for tax purposes and the minimum being that required by theEmployee Retirement Income Security Act of 1974, as amended.  The pension plans’ assets consist ofinvestments in equity and debt securities. In addition, we sponsor non-qualified pension plans (plans that do notmeet the criteria for certain tax benefits) that cover officers, certain otherkey employees, and non-employee directors. We also provide certain health care and life insurance benefits toretired United States employees and their eligible dependents.  These benefits are subject to minimum age andservice requirements.  The health carebenefits include medical coverage, dental coverage, and prescription drugcoverage and are subject to certain limitations, such as deductibles andco-payments. 

 

There were no qualified pension benefit contributions for the firstthree months of 2006.  **Cinergy** expects to make approximately $120 million inqualified pension contributions during the remainder of 2006. 

 

Our benefit plans’ costs for the quarters ended March 31, 2006 and2005, included the following components:

 
| ** **                                     | ** ** | **Qualified  Pension Benefits** | ** ** | **Non-Qualified  Pension Benefits** | ** ** | **Other Postretirement  Benefits** | ** ** |
|------------------------------------------------|------------|--------------------------------------|------------|------------------------------------------|------------|-----------------------------------------|------------|
| **Quarter Ended March 31**      | ** ** | **2006**                             | ** ** | **2005**                                 | ** ** | **2006**                                | ** ** | **2005** | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                     | ** ** | **(in millions)**               | ** ** |
| Service cost                                   |       | **$**                                | **10.9**   |                                     | $          | 9.6                                     |       | **$** | **1.4** |   | $ | 1.4 |   | **$** | **1.6** |   | $ | 1.6 |   |
| Interest cost                                  |       | **24.7**                             |       | 24.1                                     |       | **2.1**                                 |       | 1.8 |   | **5.6** |   | 5.7 |   |
| Expected return  on plans’ assets         |       | **(23.4**                            | )          | (22.0                                    | )          | **—**                              |       | — |   | **—** |   | — |   |
| Amortization of  transition (asset) obligation |       | **—**                           |       | —                                   |       | **—**                              |       | — |   | **—** |   | 0.1 |   |
| Amortization of  prior service cost            |       | **0.9**                              |       | 1.1                                      |       | **0.6**                                 |       | 0.5 |   | **(0.2** | ) | (0.1 | ) |
| Amortization of  actuarial losses              |       | **4.6**                              |       | 1.9                                      |       | **1.0**                                 |       | 0.6 |   | **2.5** |   | 2.7 |   |
| Net periodic benefit  cost                     |       | **$**                                | **17.7**   |                                     | $          | 14.7                                    |       | **$** | **5.1** |   | $ | 4.3 |   | **$** | **9.5** |   | $ | 10.0 |   |

 

The net periodic benefit costs by registrant for thequarter and year to date ended March 31, 2006 and 2005, were as follows:

 
| ** **                                | ** ** | **Qualified  Pension Benefits** | ** ** | **Non-Qualified  Pension Benefits** | ** ** | **Other Postretirement  Benefits** | ** ** |
|-------------------------------------------|------------|--------------------------------------|------------|------------------------------------------|------------|-----------------------------------------|------------|
| **Quarter Ended March 31** | ** ** | **2006**                             | ** ** | **2005**                                 | ** ** | **2006**                                | ** ** | **2005** | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                | ** ** | **(in millions)**               | ** ** |
| **Cinergy**(1)                            |       | **$**                                | **17.7**   |                                     | $          | 14.7                                    |       | **$** | **5.1** |   | $ | 4.3 |   | **$** | **9.5** |   | $ | 10.0 |   |
| **CG&E**and subsidiaries              |       | **5.5**                              |       | 4.4                                      |       | **0.2**                                 |       | 0.2 |   | **2.5** |   | 2.6 |   |
| **PSI**                                   |       | **4.4**                              |       | 3.8                                      |       | **0.2**                                 |       | 0.2 |   | **4.6** |   | 4.9 |   |
|                                           |            |                                      |            |                                          |            |                                         |            |  |  |  |  |  |  |  |  |  |  |  |  |

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(1)             Theresults of **Cinergy** also include amountsrelated to non-registrants.

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**7.     Commitmentsand Contingencies**

***(a)***                                  Environmental

*(i)         EmissionReduction Rulemakings*

In October 1998, theEnvironmental Protection Agency (EPA) finalized its ozone transport rule, alsoknown as the nitrogen oxides (NOX) State Implementation Plan (SIP) Call,which addresses wind-blown ozone and ozone precursors that impact air qualityin downwind states. The EPA’s final rule, which applies to 22 states in theeastern United States including the three states in which our electricutilities operate, required states to develop rules to reduce NOX emissions from utility and industrial sources.In a related matter, in response to petitions filed by several states allegingair quality impacts from upwind sources located in other states, the EPA issueda rule pursuant to Section 126 of the Clean Air Act (CAA) thatrequired reductions similar to those required under the NOX SIP Call. Various states and industry groupschallenged the final rules in the Court of Appeals for the District ofColumbia Circuit, but the court upheld the key provisions of the rules.

The EPA has proposedwithdrawal of the Section 126 rule in states with approved rules underthe final NOX SIP Call, which includes Indiana, Kentucky,and Ohio. All three states have adopted a cap and trade program as themechanism to achieve the required reductions. **Cinergy**, **CG&E**,and **PSI** have installed selectivecatalytic reduction units (SCR) and other pollution controls and implementedcertain combustion improvements at various generating stations to comply withthe NOX SIP Call. **Cinergy**also utilizes the NOX emission allowance market to buy or sell NOX emission allowances as appropriate. As of March 31,2006, we have incurred approximately $823 million in capital costs to complywith this program and do not anticipate significant additional costs.

InMarch 2005, the EPA issued the Clean Air Interstate Rule (CAIR) whichwould require states to revise their SIP by September 2006 to addressalleged contributions to downwind non-attainment with the revised National AmbientAir Quality Standards for ozone and fine particulate matter. The rule establisheda two-phase, regional cap and trade program for sulfur dioxide (SO2) and NOX, affecting 28 states, including Ohio,Indiana, and Kentucky, and requires SO2 andNOX emissionsto be cut 70 percent and 65 percent, respectively, by 2015. SIPs must complywith the prescribed reduction levels under CAIR; however, the states have theability to introduce more stringent requirements if desired. Under CAIR,companies have flexible compliance options including installation of pollutioncontrols on large plants where such controls are particularly efficient andutilization of emission allowances for smaller plants where controls are notcost effective.

InAugust 2005, the EPA proposed a Federal Implementation Plan (FIP), whichwould implement phase 1 of CAIR by 2009 and 2010 for NOX andSO2, respectively, for any state that does notdevelop a CAIR SIP in a timely manner. On March 15, 2006, the EPAfinalized the FIP to insure timely CAIR emissions reductions. Numerous states,environmental organizations, industry groups, including some of which **Cinergy** is a member, and individual companies havechallenged various portions of the rules. Those challenges are currentlypending in the United States Circuit Court for the District of Columbia. In December 2005and again in January 2006, the EPA reconsidered portions of the CAIR, butdid not propose any regulatory changes. On March 15, 2006, the EPA tookfinal action on the issues being reconsidered and determined that its originaldecisions within the regulations were reasonable and should not be changed. Atthis time we cannot predict the outcome of these matters.

Alsoin March 2005, the EPA issued the Clean Air Mercury Rule (CAMR) whichrequires national reductions in mercury emissions from coal-fired power plantsbeginning in 2010. Accompanying the CAMR publication in the Federal Registerwas the EPA’s determination that it was not appropriate and necessary toregulate mercury emissions from utilities under Section 112 of the CAA,requiring maximum achievable control technology, so that it would be possibleto regulate those emissions under Section 111 of the CAA with the CAMR. Thefinal regulation also adopts a two-phase cap and trade approach that requiresmercury emissions to be cut by 70 percent by 2018. SIPs must comply with theprescribed reduction levels under CAMR; however, the states have the ability tointroduce more stringent requirements if desired. Under CAMR, companies haveflexible compliance options including installation of pollution controls onlarge plants where such controls are particularly efficient and utilization ofemission allowances for smaller plants where controls are not cost effective.

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Numerousstates, environmental organizations, industry groups, including some of which **Cinergy** is a member, and individual companies havechallenged various portions of the rules. Those challenges are currentlypending in the United States Circuit Court for the District of Columbia. On October 21,2005, the EPA agreed to reconsider certain aspects of the CAMR as well as thedetermination not to regulate mercury under Section 112 of the CAA. Atthis time we cannot predict the outcome of these matters.

Over the 2006-2010time period, we expect to spend approximately $1.5 billion to reduce mercury,SO2, and NOX emissions. These projected expendituresinclude estimated costs to comply at plants that we own but do not operate andcould change when taking into consideration compliance plans of co-owners oroperators involved. Moreover, as market conditions change, additionalcompliance options may become available and our plans will be adjustedaccordingly. Approximately 55 percent of these estimated environmental costswould be incurred at **PSI’s**coal-fired plants, for which recovery would be pursued in accordance withregulatory statutes governing environmental cost recovery. See (b)(*i*) for more details. **CG&E** receives partial recovery of depreciation andfinancing costs related to environmental compliance projects for 2005-2008through its rate stabilization plan (RSP). See (b)(*ii*) for more details.

TheEPA made final state non-attainment area designations to implement the revisedozone standard and to implement the new fine particulate standard in June 2004and April 2005, respectively. Several counties in which we operate havebeen designated as being in non-attainment with the new ozone standard and/orfine particulate standard. States with counties that are designated as being innon-attainment with the new ozone and/or fine particulate standards arerequired to develop a plan of compliance by June 2007 and April 2008,respectively. Industrial sources in or near those counties are potentiallysubject to requirements for installation of additional pollution controls. In March 2005,various states, local governments, environmental groups, and industry groups,including some of which **Cinergy** is amember, filed petitions for review in the United States Court of Appeals forthe D.C. Circuit to challenge the EPA’s particulate matter non-attainmentdesignations. Although the EPA has attempted to structure CAIR to resolvepurported utility contributions to ozone and fine particulate non-attainment,at this time, **Cinergy** cannotpredict the effect of current or future non-attainment designations on itsfinancial position or results of operations.

InJuly 2005, the EPA issued its final regional haze rules andimplementing guidelines in response to a 2002 judicial ruling overturning keyprovisions of the original program. The regional haze program is aimedat reducing certain emissions impacting visibility in national parks andwilderness areas. The EPA has announced that it can foresee no circumstanceswhere the requirements of the regional haze rule would require utilitycontrols beyond those required under CAIR. The EPA also found that statesparticipating in the CAIR cap and trade program need not require electricgenerating units to adhere to best available retrofit technology requirements. Thestates have until December 2007 to finalize their SIPs addressingcompliance with EPA regulations. The states may choose to implement morestringent guidelines than promulgated by the EPA, and therefore it is notpossible to predict whether the regional haze rule will have a materialeffect on our financial position or results of operations.

*(ii)       Section 126Petitions*

In March 2004, thestate of North Carolina filed a petition under Section 126 of the CAA inwhich it alleges that sources in 13 upwind states including Ohio, Indiana, andKentucky, significantly contribute to North Carolina’s non-attainment withcertain ambient air quality standards. In August 2005, the EPA issued aproposed response to the petition. The EPA proposed to deny the ozone portionof the petition based upon a lack of contribution to air quality by the namedstates. The EPA also proposed to deny the particulate matter portion of thepetition based upon the CAIR FIP, described earlier, that would address the airquality concerns from neighboring states. In March 2006, the EPA deniedNorth Carolina’s petition based upon the final CAIR FIP described above. It isunclear at this time whether North Carolina will pursue legal action on thedenial.

*(iii)      CleanAir Act Lawsuit*

In November 1999, and through subsequent amendments,the United States brought a lawsuit in the United States Federal District Courtfor the Southern District of Indiana against **Cinergy**,**CG&E**, and **PSI** alleging various violations of the CAA.Specifically, the lawsuit alleges that we violated the CAA by not obtainingPrevention of Significant Deterioration (PSD), Non-Attainment New Source Review(NSR), and Ohio and Indiana SIP permits for

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various projects at our owned and co-owned generatingstations. Additionally, the suit claims that we violated an AdministrativeConsent Order entered into in 1998 between the EPA and **Cinergy** relating to alleged violations ofOhio’s SIP provisions governing particulate matter at Unit 1 at **CG&E’s** W.C. Beckjord Station. The suitseeks (1) injunctive relief to require installation of pollution controltechnology on various generating units at **CG&E’s**W.C. Beckjord and Miami Fort Stations, and **PSI’s**Cayuga, Gallagher, Wabash River, and Gibson Stations, and (2) civilpenalties in amounts of up to $27,500 per day for each violation. In addition,three northeast states and two environmental groups have intervened in the case.In August 2005, the district court issued a ruling regarding the emissionstest that it will apply to **Cinergy** at thetrial of the case. Contrary to **Cinergy’s**argument, the district court ruled that in determining whether a project wasprojected to increase annual emissions, it would not hold hours of operationconstant. However, the district court subsequently certified the matter for interlocutoryappeal to the Seventh Circuit Court of Appeals, which has accepted the appealand set oral arguments for June 2006. In February 2006, the districtcourt ruled that in carrying its burden of proof, the defendant can look toindustry practice in proving a particular project was routine. The districtcourt has removed the trial from the calendar and will reset a trial date, ifnecessary, after the Seventh Circuit rules. Notwithstanding the appeal, thereare a number of other legal issues currently before the district court judge.

In March 2000, the United States also filed in theUnited States District Court for the Southern District of Ohio an amendedcomplaint in a separate lawsuit alleging violations of the CAA relating to PSD,NSR, and Ohio SIP requirements regarding various generating stations, includinga generating station operated by Columbus Southern Power Company (CSP) andjointly-owned by CSP, The Dayton Power and Light Company (DP&L), and **CG&E**. The EPA is seeking injunctiverelief and civil penalties of up to $27,500 per day for each violation. Thissuit is being defended by CSP. In April 2001, the United States DistrictCourt for the Southern District of Ohio in that case ruled that the Governmentand the intervening plaintiff environmental groups cannot seek monetary damagesfor alleged violations that occurred prior to November 3, 1994; however,they are entitled to seek injunctive relief for such alleged violations. Neitherparty appealed that decision. This matter was heard in trial in July 2005.A decision is pending.

In addition, **Cinergy**and **CG&E** have been informed byDP&L that in June 2000, the EPA issued a Notice of Violation (NOV) toDP&L for alleged violations of PSD, NSR, and Ohio SIP requirements at astation operated by DP&L and jointly-owned by DP&L, CSP, and **CG&E**. The NOV indicated the EPA may (1) issuean order 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 September 2004, Marilyn Wall and the SierraClub brought a lawsuit against **CG&E**,DP&L and CSP for alleged violations of the CAA at this same generatingstation. This case is currently in discovery in front of the same judge who hasthe CSP case.

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

*(iv)       CarbonDioxide (CO*2)Lawsuit

In July 2004, thestates of Connecticut, New York, California, Iowa, New Jersey, Rhode Island,Vermont, Wisconsin, and the City of New York brought a lawsuit in the UnitedStates District Court for the Southern District of New York against **Cinergy**, American Electric Power Company, Inc., American ElectricPower Service Corporation, The Southern Company, Tennessee Valley Authority,and Xcel Energy Inc. That same day, a similar lawsuit was filed in the UnitedStates District Court for the Southern District of New York against the samecompanies by Open Space Institute, Inc., Open Space Conservancy, Inc.,and The Audubon Society of New Hampshire. These lawsuits allege that thedefendants’ emissions of CO2 from thecombustion of fossil fuels at electric generating facilities contribute toglobal warming and amount to a public nuisance. The complaints also allege thatthe defendants could generate the same amount of electricity while emittingsignificantly less CO2. Theplaintiffs are seeking an injunction requiring each defendant to cap its CO2 emissions and then reduce themby a specified percentage each year for at least a decade. In September 2005,the district court granted the defendants’ motion to dismiss the lawsuit. Theplaintiffs have appealed this ruling to the Second Circuit Court of Appeals,and oral argument is scheduled for June 2006. We are not able to predictwhether resolution of these matters would have a material effect on ourfinancial position or results of operations.

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*(v)        ZimmerGenerating Station (Zimmer Station) Lawsuit*

In November 2004, acitizen of the Village of Moscow, Ohio, the town adjacent to **CG&E’s** Zimmer Station, brought a purported class actionin the United States District Court for the Southern District of Ohio seekingmonetary damages and injunctive relief against **CG&E**for alleged violations of the CAA, the Ohio SIP, and Ohio laws against nuisanceand common law nuisance. The plaintiffs have filed a number of additionalnotices of intent to sue and two lawsuits raising claims similar to those in theoriginal claim. One lawsuit was dismissed on procedural grounds and theremaining two have been consolidated. The plaintiff filed a motion for classcertification, which is fully briefed and pending decision. At this time, wecannot predict whether the outcome of this matter will have a material impacton our financial position or results of operations. We intend to defend thislawsuit vigorously in court.

*(vi)       ManufacturedGas Plant (MGP) Sites*

Coaltar residues, related hydrocarbons, and various metals have been found in 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 being studied 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. Thus far, **PSI** has primary responsibility forinvestigating, monitoring and, if necessary, remediating nine of these sites. InDecember 2003, **PSI** enteredinto a voluntary remediation plan with the state of Indiana, providing a formalframework for the investigation and cleanup of the nine sites. The IndianaDepartment of Environmental Management oversees investigation and cleanup ofall of these sites.

In April 1998,**PSI** filed suit in Hendricks Countyin the state of Indiana against its general liability insurance carriers. **PSI** sought a declaratory judgment toobligate its insurance carriers to (1) defend MGP claims against **PSI** and compensate **PSI** for its costs of investigating,preventing, mitigating, and remediating damage to property and paying claimsrelated to MGP sites; or (2) pay **PSI’s**cost of defense. **PSI** settled, in principle, itsclaims with all but one of the insurance carriers in January 2005 prior tocommencement of the trial. With respect to the lone insurance carrier, a juryreturned a verdict against **PSI** in February 2005.**PSI** has appealed this decision. At thepresent time, **PSI** cannot predict the outcome ofthis litigation, including the outcome of the appeal.

**PSI**has accrued costs related to investigation, remediation, and groundwatermonitoring for those sites where such costs are probable and can be reasonablyestimated. We will continue to investigate and remediate the sites as outlinedin the voluntary remediation plan. As additional facts become known andinvestigation is completed, we will assess whether the likelihood of incurringadditional costs becomes probable. Until all investigation and remediation iscomplete, we are unable to determine the overall impact on our financialposition or results of operations.

**CG&E**has performed site assessments on certain of their sites where we believe MGPactivities have occurred at some point in the past and have found no imminentrisk to the environment. At the present time, **CG&E**cannot predict whether investigation and/or remediation will be required in thefuture at any of these sites.

*(vii)     AsbestosClaims Litigation*

**PSI**and **CG&E**,have been named as defendants or co-defendants in lawsuits related to asbestosat their electric generating stations. Currently, there are approximately 130pending lawsuits (the majority of which are **PSI**cases). In these lawsuits, plaintiffs claim to have been exposed toasbestos-containing products in the course of their work as outside contractorsin the construction and maintenance of **CG&E**and **PSI** generating stations. Theplaintiffs further claim that as the property owner of the generating stations,**CG&E** and **PSI** should be held liable for their injuries and illnessesbased on an alleged duty to warn and protect them from any asbestos exposure. Theimpact on **CG&E’s** and **PSI’s** financial position or results ofoperations of these cases to date has not been material.

Of these lawsuits, onecase filed against **PSI** has beentried to verdict. The jury returned a verdict against **PSI** on a negligence claim and a verdict for**PSI** on punitive damages. **PSI** appealed this decision up to theIndiana Supreme Court. In October 2005, the Indiana Supreme Court upheldthe jury’s verdict. **PSI** paid thejudgment of 

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approximately $630,000 inthe fourth quarter of 2005. In addition, **PSI**has settled over 150 other claims for amounts, which neither individually norin the aggregate, are material to **PSI’s**financial position or results of operations. Based on estimates under varyingassumptions, concerning such uncertainties, such as, among others:  (i) the number of contractorspotentially exposed to asbestos during construction or maintenance of **PSI** generating plants; (ii) the possible incidence ofvarious illnesses among exposed workers, and (iii) the potentialsettlement costs without federal or other legislation that addresses asbestostort actions, **PSI** estimates that the range ofreasonably possible exposure in existing and future suits over the next 50years could range from an immaterial amount to approximately $60 million,exclusive of costs to defend these cases. This estimated range of exposure maychange as additional settlements occur and claims are made in Indiana and morecase law is established.

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

*(viii)    DunavanWaste Superfund Site*

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

*(ix)       Ontario,Canada Lawsuit*

We understand that aclass action lawsuit was filed in Superior Court in Ontario, Canada against usand approximately 20 other utility and power generation companies allegingvarious claims relating to environmental emissions from coal-fired powergeneration facilities in the United States and Canada and damages ofapproximately $50 billion, with continuing damages in the amount of approximately$4 billion annually. We understand that the lawsuit also claims entitlement topunitive and exemplary damages in the amount of $1 billion. We have not yetbeen served in this lawsuit, however, if served, we intend to defend thislawsuit vigorously in court. We are not able to predict whether resolution ofthis matter would have a material effect on our financial position or resultsof operations.

On April 19, 2006, **Cinergy** wasnamed in the third amended complaint of a purported class action filed in theUnited States District Court for the Southern District of Mississippi. Plaintiffsclaim that **Cinergy**, along with numerous otherutilities, oil companies, coal companies and chemical companies, is liable fordamages relating to losses suffered by victims of Hurricane Katrina. Plaintiffsclaim that **Cinergy’s**, and others, greenhousegas emissions contributed to the frequency and intensity of storms such asHurricane Katrina.  **Cinergy**has not been served with this lawsuit. At this time, we are not able to predictwhether resolution of this matter would have a material effect on our financialposition or results of operations.

* *

*(x)        Hurricane Katrina Lawsuit*

On April 19, 2006, **Cinergy** was named in the third amended complaint of apurported class action filed in the United States District Court for the SouthernDistrict of Mississippi. Plaintiffs claim that **Cinergy**,along with numerous other utilities, oil companies, coal companies and chemicalcompanies, is liable for damages relating to losses suffered by victims ofHurricane Katrina. Plaintiffs claim that **Cinergy’s**, andothers, greenhouse gas emissions contributed to the frequency and intensity ofstorms such as Hurricane Katrina.  **Cinergy** has not been served with this lawsuit. At this time,we are not able to predict whether resolution of this matter would have amaterial effect on our financial position or results of operations.

***(b)***                                  Regulatory

*(i)         PSIEnvironmental Compliance Case*

In November 2004,******PSI**filed a compliance plan case with the IURCseeking approval of**PSI’s** plan forcomplying with SO2,NOX, and mercuryemission reduction requirements discussed previously in (a)(*i*), including approval of cost recovery and an overall rateof return of eight percent related to certain projects. **PSI**requested approval to recover the financing, depreciation, and operation andmaintenance costs, among others, related to $1.08 billion in capital projectsdesigned to reduce emissions of SO2,NOX, and mercuryat **PSI’s** coal-burning generating stations.An evidentiary hearing was held in May 2005. In December 2005, **PSI**, the Indiana Office of the Utility Consumer Counselor,and the PSI Industrial Group filed a settlement agreement providing forapproval of **PSI’s** compliance plan, andapproval of financing, depreciation, and operation and maintenance costrecovery. The settlement agreement provides for 20-year depreciation inlieu of **PSI’s** originally requested 18-yeardepreciation, the use of **PSI’s** thenweighted cost of capital to determine the overall rate of return rather thaneight percent as originally requested, caps the amount of cost recovery for theGallagher Generating Station baghouse projects, and removes the ActivatedCarbon Injection component of those projects. A final IURC Order is expected inthe first half of 2006.

*(ii)       CG&E Electric Rate Filings*

**CG&E**operates under an RSP which was approved by the PUCO in November 2004, andwhich expires December 31, 2008.

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One of the components of **CG&E’s** RSP is a fuel clause recovery mechanism, whichwas recently audited by the PUCO’s auditor. The auditor recommended alternatemethodologies for administration of the fuel clause recovery mechanism thatvaries from **CG&E’s** current practice. Ahearing before PUCO examiners was held in early November at which the PUCOstaff took positions contrary to **CG&E’s**current practice. **CG&E**officials also testified at the hearing concerning our current practices. In January 2006,**CG&E** signed a settlement on the RSPwith the PUCO staff. The two intervening parties have agreed not to oppose the settlement.In February 2006, the PUCO issued an order approving the settlementagreement. We do not expect the agreement to have a material impact on **CG&E’s** or **Cinergy’s**results of operations.

In March 2005, theOhio Consumers’ Counsel appealed the Commission’s approval of the RSP to theSupreme Court of Ohio. The Supreme Court of Ohio recently ruled on the ratestabilization plan for another Ohio utility, and in that ruling, upheld themarket prices charged by the utility to its consumers as approved by theCommission but overturned the competitive bid process approved by theCommission on the basis that the Commission rejected the bid price on behalf onconsumers and the applicable statute requires customer involvement. **CG&E’s** RSP does not contain a competitive bid processpursuant to a statutory exception. **CG&E** doesnot expect a significant, if any, change to its RSP as a result of this casebut cannot predict the outcome of its case. We expect the court to decide thecase in 2006.

**CG&E**hasalso filed a distribution rate case to recover certain distribution costs withrates becoming effective on January 1, 2006 and **CG&E**has deferred certain costs in 2004 and 2005 pursuant to its RSP. The parties tothe proceeding agreed upon and filed a settlement setting the recommendedannual revenue increase at approximately $51 million. In December 2005,the PUCO issued an order approving the settlement agreement.

*(iii)      ULH&PGas Rate Case*

In 2002, the KPSC approved ULH&P’s gas base rate case requesting, among other things,recovery of costs associated with an accelerated gas main replacement programof up to $112 million over ten years. The approval allowed the costs to berecovered through a tracking mechanism for an initial three-year periodexpiring on September 30, 2005, with the possibility of renewal for up toten years. The tracking mechanism allows ULH&P to recover depreciation costs and rate of returnannually over the life of the assets. As of March 31, 2006, we havecapitalized $64.5 million in costs associated with the accelerated gas mainreplacement program through this tracking mechanism, of which ULH&P has recovered $8.9 million. TheKentucky Attorney General has appealed to the Franklin Circuit Court the KPSC’sapproval of the tracking mechanism and the tracking mechanism rates. In October 2005,both the Company and the KPSC filed with the Franklin Circuit Court, requestingdismissal of the case for failure to prosecute by the Kentucky Attorney General.At the present time, ULH&Pcannot predict the timing or outcome of this litigation.

In February 2005, ULH&P filed a gas base rate case with the KPSC requestingapproval to continue the tracking mechanism in addition to its request for a$14 million annual increase in base rates. A portion of the increase is attributableto including recovery of the current cost of the accelerated main replacementprogram in base rates. The KPSC did not rule on the base rate case requestor the request to continue the tracking mechanism by October 1, 2005;consequently the initial tracking mechanism expired on September 30, 2005.In accordance with Kentucky law, ULH&P implemented the full amount of therequested rate increase on October 1, 2005. In December 2005, theKPSC approved an annual rate increase of $8.1 million and reapproved thetracking mechanism through 2011. Pursuant to the KPSC’s order, ULH&P fileda refund plan in January 2006 for the excess revenues collected since October 1,2005. In February 2006, the KPSC issued an additional order responding toa rehearing request made by the Attorney General. Its rehearing order approvedthe Company’s refund plan, which resulted in refunds being provided tocustomers beginning in March 2006. In February 2006, the AttorneyGeneral appealed the KPSC’s order to the Franklin Circuit Court, claiming thatthe order improperly allows ULH&P to increase its rates for gas mainreplacement costs in between general rate cases, and also claiming that theorder improperly allows ULH&P to earn a return on investment for the costsrecovered under the tracking mechanism which permits ULH&P to recover itsgas main replacement costs. At this time, ULH&P cannot predict the outcomeof this litigation.

*(iv)       GasDistribution Plant*

In June 2003, thePUCO approved an amended settlement agreement between **CG&E** and the PUCO staff in a gasdistribution safety case arising out of a gas leak at a service head-adapter(SHA) style riser on **CG&E’s**distribution system. The amended settlement agreement required **CG&E** to expend a minimum of $700,000 toreplace SHA risers by December 31, 2003, and to file a comprehensive planaddressing all SHA risers on its distribution system. **CG&E**filed a comprehensive plan with the PUCO in December 2004 providing forreplacement of approximately 5,000 risers in 2005 with continued monitoringthereafter. **CG&E** estimates the replacementcost of these risers will not be material. In April 2005, the PUCO issuedan order closing this case. The PUCO issued a separate order 

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opening a statewideinvestigation into riser leaks in gas pipeline systems throughout Ohio. At thistime, **Cinergy** and**CG&E**cannotpredict the outcome or the impact of the statewide investigation.

*(v)        PUCOMerger Approval Appeal to the Supreme Court*

In April 2006, TheOffice of the Ohio Consumers’ Counsel filed a Notice of Appeal with the SupremeCourt of Ohio, requesting the Court remand the Commission’s merger approval fora full evidentiary hearing. The Office of the Ohio Consumers’ Counsel allegesthat the Commission committed reversible error on both procedural and substantivegrounds, in among other things, failing to set the matter for a fullevidentiary hearing, failing to consider evidence regarding the transfer of theDENA assets to **CG&E**, and failing to lift thestay on discovery. While **CG&E** cannotpredict the outcome of this matter, it is unlikely that the Court’s decisionwill affect the consummation of the merger.

*(vi)       IURCMerger Approval Request for Rehearing and Reconsideration*

In April 2006, Interveners,Citizens Action Coalition of Indiana, Inc., filed a Verified Petition forRehearing and Reconsideration claiming that **PSI**should be ordered to provide an additional $5 million in rate credits tocustomers to be consistent with the NCUC order. An order on the Petition isexpected in the second quarter of 2006.

***(c)***                                  Other

*(i)         SyntheticFuel Production*

**Cinergy** producessynthetic fuel from two facilities that qualify for tax credits (through 2007)in accordance with Section 29/45K of the Internal RevenueCode if certain requirements are satisfied.  These credits reduce******Cinergy’s** income taxliability and therefore******Cinergy’s**effective tax rate. ******Cinergy’s**sale of synthetic fuel has generated $339 million in tax credits throughDecember 31, 2005 and an additional $18 million, after reducing for phase-out,through March 31, 2006.  Section 29/45K provides for a phase-out of thecredit if the average price of crude oil during a calendar year exceeds aspecified threshold.  The phase-out is based on a prescribed calculationand definition of crude oil prices.  Based on current crude oil prices, webelieve that for 2006 and 2007 the amount of the tax credits will be reduced,perhaps significantly.  If oil prices are high enough, we may idlethe plants, as the value of the credits would not exceed the net costs toproduce the synthetic fuel.  During the first quarter of 2006, anagreement was in place with the plant operator which would indemnify******Cinergy** in the event thattax credits are insufficient to support operating expenses. ******Cinergy’s** net investment inthe plants at March 31, 2006 was approximately $37 million. 

TheInternal Revenue Service (IRS) is currently auditing******Cinergy** for the 2002,2003, and 2004 tax years.  We expect the IRS will evaluate the variouskey requirements for claiming our Section 29/45K credits related to syntheticfuel.  If the IRS challenges our Section 29/45K tax credits related tosynthetic fuel, and such challenges are successful, this could result in thedisallowance of up to all $357 million in previously claimed credits forsynthetic fuel produced by the applicable******Cinergy**facilities and a loss of our ability to claim future credits for synthetic fuelproduced by such facilities.  We believe that we operate in conformitywith all the necessary requirements to be allowed such tax credits under Section29/45K.    

*(ii)       FirstEnergyLawsuit*

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

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*(iii)      Guarantees*

In the ordinary course ofbusiness, **Cinergy**enters intovarious agreements providing financial or performance assurances to thirdparties on behalf of certain unconsolidated subsidiaries and joint ventures. Theseagreements are entered into primarily to support or enhance thecreditworthiness otherwise attributed to these entities****on a stand-alone basis, therebyfacilitating the extension of sufficient credit to accomplish their intendedcommercial purposes. The guarantees have various termination dates, fromshort-term (less than one year) to open-ended.

In many cases, themaximum potential amount of an outstanding guarantee is an express term, setforth in the guarantee agreement, representing the maximum potential obligationof **Cinergy**under that guarantee(excluding, at times, certain legal fees to which a guaranty beneficiary may beentitled). In those cases where there is no maximum potential amount expresslyset forth in the guarantee agreement, we calculate the maximum potential amountby considering the terms of the guaranteed transactions, to the extent suchamount is estimable.

**Cinergy Corp.** has also providedperformance guarantees on behalf of certain unconsolidated subsidiaries andjoint ventures. These guarantees support performance under various agreementsand instruments (such as construction contracts, operation and maintenanceagreements, and energy service agreements). **CinergyCorp.**may be liable in the event of an unexcused breach of aguaranteed performance obligation by an unconsolidated subsidiary. **Cinergy Corp.** has estimated its maximumpotential liability to be $52 million under these guarantees as of March 31,2006. **Cinergy Corp.** may also haverecourse to third parties for claims required to be paid under certain of theseguarantees. The majority of these guarantees expire at the completion of theunderlying performance agreement, the majority of which expire from 2016 to2019.

**Cinergy**hasentered into contracts that include indemnification provisions as a routinepart of its business activities. Examples of these****contracts include purchase and sale agreements and operatingagreements. In general, these provisions indemnify the counterparty for matterssuch as breaches of representations and warranties and covenants contained inthe contract. In some cases, particularly with respect to purchase and saleagreements, the potential liability for certain indemnification obligations iscapped, in whole or in part (generally at an aggregate amount not exceeding thesale price), and subject to a deductible amount before****any payments would become due. In other cases(such as indemnifications for willful misconduct of employees in a jointventure), the maximum potential liability is not estimable given that themagnitude of any claims under those indemnifications would be a function of theextent of damages actually incurred. **Cinergy**has estimated the maximum potential liability, where estimable, to be $137million under these indemnification provisions. The termination period for themajority of matters provided by indemnification provisions in these types ofagreements generally ranges from 2006 to 2010.

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

**8.     DiscontinuedOperations**

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

In December 2005, **Cinergy** began taking steps to sell its wholly-owned NorthAmerican energy management and energy performance contracting business. In December 2005,**Cinergy** recognized a $17 millionpre-tax impairment charge to value this business to its estimated fair valueless cost to sell in accordance with being deemed held for sale. In April 2006,**Cinergy** completed the sale of thisbusiness. The net, after tax, loss on the sale was approximately $19 million(including the $17 million impairment charge recognized in December 2005).

These consolidatedentities have been presented as *Discontinuedoperations*, *net of tax*in **Cinergy’s** CondensedConsolidated Statements of Income and as *Assets/Liabilitiesof Discontinued Operations* in **Cinergy’s**Condensed Consolidated Balance Sheets. The discontinued operations were part ofCommercial Business Unit (Commercial).

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The accompanyingfinancial statements and prior year financial statements have been reclassifiedto account for these entities as such.

The following tablereflects the assets and liabilities, the results of operations, and the income(loss) on disposal related to investments accounted for as discontinuedoperations for the quarters ended March 31, 2006 and 2005.

|                                                                | ** ** | **March 31**                                                                            | ** ** |
|----------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|
| ** **                                                     | ** ** | **       2006       ** | ** ** | **       2005       ** | ** ** |
| ** **                                                     | ** ** | **(in millions)**                                                                       | ** ** |
| * *                                                       | * *   | * *                                                                                     | * *   | * * | * * |
| **Revenues(1)**                                                |       | **$**                                                                                        | **5**      | ** ** | $ | 18 |   |
| ** **                                                     | ** ** | ** **                                                                                   | ** ** | ** ** | ** ** |
| **Income  (Loss) Before Taxes**                                |       | **$**                                                                                        | **(3**     | **)** | $ | 3 |   |
| ** **                                                     | ** ** | ** **                                                                                   | ** ** | ** ** | ** ** |
| **Income  Taxes Expense (Benefit)**                            |       | **$**                                                                                        | **(1**     | **)** | $ | 1 |   |
| ** **                                                     | ** ** | ** **                                                                                   | ** ** | ** ** | ** ** |
| **Income (Loss) from Discontinued  Operations**                | ** ** | ** **                                                                                   | ** ** | ** ** | ** ** |
| Income (Loss) from operations, net of tax                      |       | **$**                                                                                        | **(2**     | **)** | $ | 2 |   |
| Loss on disposal, net of tax                                   |       | **(2**                                                                                       | **)**      | — |   |
| ** **                                                     | ** ** | ** **                                                                                   | ** ** | ** ** | ** ** |
| **Total Income (Loss) from Discontinued Operations**           |       | **$**                                                                                        | **(4**     | **)** | $ | 2 |   |
|                                                           |       | ** **                                                                                   | ** ** |   |   |
| **Assets**                                                     | ** ** | ** **                                                                                   | ** ** | ** ** | ** ** |
| Current assets                                                 |       | **$**                                                                                        | **9**      | ** ** | $ | 34 |   |
| Property, plant, and equipment-net                             |       | **—**                                                                                   | ** ** | 120 |   |
| Other assets                                                   |       | **13**                                                                                       | ** ** | 29 |   |
|                                                           |       | ** **                                                                                   | ** ** |   |   |
| **Total Assets**                                               |       | **$**                                                                                        | **22**     | ** ** | $ | 183 |   |
|                                                           |       | ** **                                                                                   | ** ** |   |   |
| **Liabilities**                                                | ** ** | ** **                                                                                   | ** ** | ** ** | ** ** |
| Current liabilities                                            |       | **$**                                                                                        | **8**      | ** ** | $ | 7 |   |
| Long-term debt (including Long-term debt due within  one year) |       | **13**                                                                                       | ** ** | 17 |   |
| Other                                                          |       | **5**                                                                                        | ** ** | 16 |   |
| ** **                                                     | ** ** | ** **                                                                                   | ** ** | ** ** | ** ** |
| **Total Liabilities**                                          |       | **$**                                                                                        | **26**     | ** ** | $ | 40 |   |
|                                                           |       | ** **                                                                                   | ** ** |   |   |
| **Cash Flows**                                                 | ** ** | ** **                                                                                   | ** ** | ** ** | ** ** |
| Operating Activities                                           |       | **$**                                                                                        | **3**      | ** ** | $ | 10 |   |
| Investing Activities                                           |       | **2**                                                                                        | ** ** | 3 |   |
| Financing Activities                                           |       | **(5**                                                                                       | **)**      | (8 | ) |
| ** **                                                     | ** ** | ** **                                                                                   | ** ** | ** ** | ** ** |
| **Total  Cash Flows**                                          |       | **$**                                                                                        | **—** | ** ** | $ | 5 |   |

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(1)             Presentedfor informational purposes only. All results of operations are reported net inour Statements of Income.

**9.   Financial Information by Business Segment**

As discussed in the 200510-K, we conduct operations through our subsidiaries and manage ourbusinesses through the following three reportable segments:

·                  RegulatedBusiness Unit (Regulated);

·                  Commercial; and

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

Regulated consists of **PSI’s** regulated generation and transmissionand distribution operations, and **CG&E**andits subsidiaries’ regulated electric and gas transmission and distributionsystems and its subsidiaries’ regulated electric generation. Regulated plans,constructs, operates, and maintains **Cinergy’s**transmission and distribution systems and delivers gas and electric energy toconsumers. Regulated also earns revenues from wholesale customers primarily bythese customers transmitting electric power through **Cinergy’s** transmission system. These businesses are subject tocost of service rate making where rates to be charged to customers are based onprudently incurred costs over a test period plus a reasonable rate of return.

Commercial manages ourwholesale generation and energy marketing and trading activities. Commercialalso performs energy risk management activities, provides customized energysolutions and is responsible for all of our international operations.

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Power Technology andInfrastructure primarily manages Cinergy Ventures, LLC (Ventures), **Cinergy’s** venture capital subsidiary. Venturesidentifies, invests in, and integrates new energy technologies into **Cinergy’s** existing businesses, focusedprimarily on operational efficiencies and clean energy technologies. Inaddition, Power Technology and Infrastructure manages our investments in otherenergy infrastructure and telecommunication service providers.

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

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Financial results bybusiness unit for the quarters ended March 31, 2006, and March 31,2005, are as indicated below.
| ** **                                                                    | ** ** | **Cinergy Business Units** | ** ** | ** **     | ** ** | ** **                                         | ** ** |
|-------------------------------------------------------------------------------|------------|--------------------------------------|------------|----------------|------------|----------------------------------------------------|------------|
| ** **                                                                    | ** ** | **Regulated**                        | ** ** | **Commercial** | ** ** | **Power Technology  and Infrastructure** | ** ** | **Total** | ** ** | **Reconciling  Eliminations**(1) | ** ** | **Consolidated** | ** ** |
| ** **                                                                    | ** ** | **(in millions)**               | ** ** |
| ** **                                                                    | ** ** | ** **                           | ** ** | ** **     | ** ** | ** **                                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Quarter ended March 31,  2006**                                        | ** ** | ** **                           | ** ** | ** **     | ** ** | ** **                                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                    | ** ** | ** **                           | ** ** | ** **     | ** ** | ** **                                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   |
| **Operating revenues**                                                        | ** ** | ** **                           | ** ** | ** **     | ** ** | ** **                                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **External customers**                                                        | ** ** | **$**                                | **1,026**  | ** **     | **$**      | **623**                                            | ** ** | **$** | **—** | ** ** | **$** | **1,649** | ** ** | **$** | **—** | ** ** | **$** | **1,649** | ** ** |
| **Intersegment revenues**                                                     | ** ** | **—**                           | ** ** | **1**          | ** ** | **—**                                         | ** ** | **1** | ** ** | **(1** | **)** | **—** | ** ** |
| ** **                                                                    | ** ** | ** **                           | ** ** | ** **     | ** ** | ** **                                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   |
| **Gross margins**                                                             | ** ** | ** **                           | ** ** | ** **     | ** ** | ** **                                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Electric****(2)**                                                           | ** ** | **478**                              | ** ** | **233**        | ** ** | **—**                                         | ** ** | **711** | ** ** | **—** | ** ** | **711** |   |
| **Gas****(3)**                                                                | ** ** | **90**                               | ** ** | **34**         | ** ** | **—**                                         | ** ** | **124** | ** ** | **—** | ** ** | **124** |   |
| ** **                                                                    | ** ** | ** **                           | ** ** | ** **     | ** ** | ** **                                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   |
| **Discontinued operations, net of tax****(4)**                                | ** ** | **—**                           | ** ** | **(4**         | **)**      | **—**                                         | ** ** | **(4** | **)** | **—** | ** ** | **(4** | **)** |
| **Cumulative effect of a change in accounting  principle, net of tax****(5)** | ** ** | **(2**                               | **)**      | **(1**         | **)**      | **—**                                         | ** ** | **(3** | **)** | **—** | ** ** | **(3** | **)** |
| ** **                                                                    | ** ** | ** **                           | ** ** | ** **     | ** ** | ** **                                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   |
| **Net income (loss)**                                                         | ** ** | **34**                               | ** ** | **50**         | ** ** | **(5**                                             | **)**      | **79** | ** ** | **—** | ** ** | **79** | ** ** |
| ** **                                                                    | ** ** | ** **                           | ** ** | ** **     | ** ** | ** **                                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Quarter ended  March 31, 2005                                            |       |                                 |       |           |       |                                               |       |   |   |   |   |   |   |
| ** **                                                                    | ** ** | ** **                           | ** ** | ** **     | ** ** | ** **                                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Operating revenues                                                            |       |                                 |       |           |       |                                               |       |   |   |   |   |   |   |
| External customers                                                            |       | $                                    | 912        |           | $          | 414                                                |       | $ | — |   | $ | 1,326 |   | $ | — |   | $ | 1,326 |   |
| Intersegment revenues                                                         |       | 12                                   |       | 45             |       | —                                             |       | 57 |   | (57 | ) | — |   |
|                                                                          |       |                                 |       |           |       |                                               |       |   |   |   |   |   |   |
| Gross margins                                                                 |       |                                 |       |           |       |                                               |       |   |   |   |   |   |   |
| Electric(2)                                                                   |       | 442                                  |       | 172            |       | —                                             |       | 614 |   | — |   | 614 |   |
| Gas(3)                                                                        |       | 98                                   |       | 6              |       | —                                             |       | 104 |   | — |   | 104 |   |
|                                                                          |       |                                 |       |           |       |                                               |       |   |   |   |   |   |   |
| Discontinued operations, net of tax(4)                                        |       | —                               |       | 2              |       | —                                             |       | 2 |   | — |   | 2 |   |
|                                                                          |       |                                 |       |           |       |                                               |       |   |   |   |   |   |   |
| Net income (loss)                                                             |       | 76                                   |       | 45             |       | (4                                                 | )          | 117 |   | — |   | 117 |   |

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(1)            The Reconciling Eliminations category eliminates theintersegment revenues of Commercial and Regulated.

(2)            Electric gross margins are calculated as *Electric operating revenues* less *Fuel, emission allowances, and purchased power*expense from the Condensed Consolidated Statements of Income.

(3)            Gas gross margins are calculated as *Gas operating revenues* less *Gas purchased* expense from the CondensedConsolidated Statements of Income.

(4)            See Note 8 for additional information.

(5)            See Note 1(e)(*i*) foradditional information.

41

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Total segment assets atMarch 31, 2006 and December 31, 2005, are as indicated below:
| ** **                                      | ** ** | **Cinergy Business Units** | ** ** |
|-------------------------------------------------|------------|----------------------------|------------|
| ** **                                      | ** ** | **Regulated**              | ** ** | **Commercial**(1) | ** ** | **Power Technology and  Infrastructure** | ** ** | **Total** | ** ** |
| ** **                                      | ** ** | **(in millions)**          | ** ** |
| ** **                                      | ** ** | ** **                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Segment assets from continuing operations**   | ** ** | **$**                      | **10,285** | ** ** | **$** | **5,927** | ** ** | **$** | **122** | ** ** | **$** | **16,334** | ** ** |
| **Segment assets from discontinued operations** | ** ** | **—**                 | ** ** | **22** | ** ** | **—** | ** ** | **22** | ** ** |
| **Total segment assets at March 31, 2006** | ** ** | **$**                      | **10,285** | ** ** | **$** | **5,949** | ** ** | **$** | **122** | ** ** | **$** | **16,356** | ** ** |
| ** **                                      | ** ** | ** **                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Segment assets from continuing operations       |       | $                          | 9,963      |   | $ | 7,025 |   | $ | 132 |   | $ | 17,120 |   |
| Segment assets from discontinued operations     |       | —                     |       | 34 |   | — |   | 34 |   |
| Total segment  assets at December 31, 2005 |       | $                          | 9,963      |   | $ | 7,059 |   | $ | 132 |   | $ | 17,154 |   |

----

(1)      The decrease in Commercial’s assets was primarily dueto decreases in energy risk management assets and decreases in tradereceivables.

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**10.  Earnings PerCommon Share (EPS)**

A reconciliation of EPS —basic to EPS — diluted from continuing operations is presented below for thequarters ended March 31, 2006 and 2005:
| ** **                                            | ** ** | **Income**                                                            | ** ** | **Shares** | ** **  | **EPS**    | ** ** |
|-------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|------------|-------------|------------|------------|
| ** **                                            | ** ** | **(in thousands, except per share amounts)** | ** ** |
| **Quarter Ended March 31,  2006**                | ** ** | ** **                                                            | ** ** | ** ** | ** **  | ** ** | ** ** |
|                                                  |       |                                                                  |       |       |        |       |       |
| **EPS — basic:**                                 | ** ** | ** **                                                            | ** ** | ** ** | ** **  | ** ** | ** ** |
| ** **                                            | ** ** | ** **                                                            | ** ** | ** ** | ** **  | ** ** | ** ** |
| **Income  from continuing operations — basic**   | ** ** | **$**                                                                 | **86,914** | ** ** | **200,286** | ** ** | **$**      | **0.43** | ** ** |
| ** **                                            | ** ** | ** **                                                            | ** ** | ** ** | ** **  | ** ** | ** ** |
| **EPS — diluted:**                               | ** ** | ** **                                                            | ** ** | ** ** | ** **  | ** ** | ** ** |
| **Common stock options**                              | ** ** | ** **                                                            | ** ** | **713**    | ** **  | ** ** | ** ** |
| **Directors’ compensation plans**                | ** ** | ** **                                                            | ** ** | **162**    | ** **  | ** ** | ** ** |
|                                                  |       |                                                                  |       |       |        |       |       |
| **Income  from continuing operations — diluted** | ** ** | **$**                                                                 | **86,914** | ** ** | **201,161** | ** ** | **$**      | **0.43** | ** ** |
| ** **                                            | ** ** | ** **                                                            | ** ** | ** ** | ** **  | ** ** | ** ** |
| Quarter Ended  March 31, 2005                    |       |                                                                  |       |       |        |       |       |
|                                                  |       |                                                                  |       |       |        |       |       |
| EPS — basic:                                     |       |                                                                  |       |       |        |       |       |
|                                                  |       |                                                                  |       |       |        |       |       |
| Income from  continuing operations — basic       |       | $                                                                     | 114,879    |       | 195,647     |       | $          | 0.59 |   |
|                                                  |       |                                                                  |       |       |        |       |       |
| EPS — diluted:                                   |       |                                                                  |       |       |        |       |       |
| Common stock options                                  |       |                                                                  |       | 627        |        |       |       |
| Directors’ compensation plans                    |       |                                                                  |       | 148        |        |       |       |
| Stock purchase contracts                              |       |                                                                  |       | 290        |        |       |       |
|                                                  |       |                                                                  |       |       |        |       |       |
| Income from continuing  operations — diluted     |       | $                                                                     | 114,879    |       | 196,712     |       | $          | 0.59 |   |

 

Options to purchaseshares of common stock are excluded from the calculation of EPS — diluted, ifthey are considered to be anti-dilutive. Share amounts of 1.3 million and 1.5million were excluded from the EPS — diluted calculation for the quarters endedMarch 31, 2006 and 2005, respectively.

**11.  Acquisitionand Transfer of Generating Assets**

***(a)***                                  Transferof Duke Generating Assets to CG&E — Subsequent Event

In April 2006, Dukecontributed to **CG&E** its ownership interest infive plants, representing a mix of combined cycle and peaking plants, with acombined capacity of 3,760 megawatts (MWs), as follows:

| Generating Plant | ** ** | **Location**                  | ** ** | **Ownership  Interest** | ** ** | **Fuel Type** | ** ** | **Owned  MW Capacity** | ** ** |
|-----------------------|------------|-------------------------------|------------|-------------------------|------------|--------------------|------------|-----------------------------|------------|
|                  |       |                          |       |                    |       |               |       |                        |       |
| Fayette               |       | Fayette County,  Pennsylvania |       | 100                     | %          | Gas                |       | 620                         |       |
| Hanging Rock          |       | Lawrence County,  Ohio        |       | 100                     |       | Gas                |       | 1,240                       |       |
| Lee                   |       | Lee County,  Illinois         |       | 100                     |       | Gas                |       | 640                         |       |
| Vermillion            |       | Vermillion  County, Indiana   |       | 75                      |       | Gas                |       | 640                         |       |
| Washington            |       | Washington  County, Ohio      |       | 100                     |       | Gas                |       | 620                         |       |
|                  |       |                          |       |                    |       |               |       | 3,760                       |       |

 

The transaction waseffective in April 2006 and was accounted for at Duke’s net book value forthese assets. The LLCs holding these generating plants, which were indirectsubsidiaries of Duke, were first distributed to Duke, which then contributedthem to **Cinergy** which, in turn, contributedthem to **CG&E**. In the final step, these LLCswere then merged into **CG&E**.

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In connection with thecontribution of these assets, **CG&E**assumed certain related liabilities. In particular, **CG&E**assumed from Duke all payment, performance, and other obligations of Duke, withrespect to certain deferred tax liabilities related to the assets. Thefollowing table summarizes this transaction for **CG&E**:

|                                    | ** ** | **(in millions)** | ** ** |
|------------------------------------|------------|------------------------|------------|
|                               |       |                   |       |
| Assets Received                    |       |                   |       |
| Generating Assets                  |       | $                      | 1,563      |   |
| Other Assets                       |       | 15                     |       |
| **Total Assets Received**          |       | $                      | 1,578      |   |
|                               |       |                   |       |
| Liabilities Assumed                |       |                   |       |
| Deferred Tax Liabilities           |       | $                      | 181        |   |
| Other                              |       | 11                     |       |
| **Total Liabilities Assumed**      |       | $                      | 192        |   |
|                               |       |                   |       |
| **Contributed  Capital from Duke** |       | $                      | 1,386      |   |

 

As part of thistransaction, Duke Capital LLC, a subsidiary of Duke, agreed to reimburse **CG&E** through April 2016 in the event of certaincash shortfalls that may result from **CG&E’s**ownership of the five stations.

***(b)***                                  Transferof Generating Assets from CG&E to ULH&P

In January 2006, **CG&E** contributed 100 percent of its ownership interestin one generating unit and one peaking plant with a combined capacity of 727MWs and its 69 percent interest in another generating station with an ownedcapacity of 414 MWs to ULH&P, its wholly owned subsidiary. The transactionwas effective as of January 1, 2006 at a net book value of approximately$140 million.

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

**CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKINGINFORMATION**

This document includesforward-looking statements within the meaning of Section 27A of theSecurities Act of 1933 and Section 21E of the Securities Exchange Act of1934. Forward-looking statements are based on management’s beliefs andassumptions. These forward-looking statements are identified by terms andphrases such as “anticipate”, “believe”, “intend”, “estimate”, “expect”, “continue”,“should”, “could”, “may”, “plan”, “project”, “predict”, “will”, and similarexpressions.

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

·                  Factorsaffecting operations, such as:

(1)          unanticipated weatherconditions;

(2)          unscheduled generationoutages;

(3)          unusual maintenance orrepairs;

(4)          unanticipated changes incosts;

(5)          environmental incidents;and

(6)          electric transmission orgas pipeline system constraints.

·                  Legislativeand regulatory initiatives and legal developments including costs of compliancewith existing and future environmental requirements.

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

·                  Financialor regulatory accounting principles.

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

·                  Theperformance of projects undertaken by our non-regulated businesses and thesuccess of efforts to invest in and develop new opportunities.

·                  Availabilityof, or cost of, capital.

·                  Employeeworkforce factors.

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

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

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

We undertake no obligation to update the informationcontained herein.

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**ITEM2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS**

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

The following discussionshould be read in conjunction with the accompanying financial statements andrelated notes included elsewhere in this report and the combined Form 10-Kfor the year ended December 31, 2005 (2005 10-K). We have reclassifiedcertain prior-year amounts in the financial statements of **Cinergy**,The Cincinnati Gas & Electric Company (**CG&E**)and PSI Energy, Inc. (**PSI**) to conformto current presentation. The following discussions of results are notnecessarily indicative of the results to be expected in any future period.

**MERGER**

In March 2006, **Cinergy** and Duke, a North Carolina corporation, receivedfinal approvals in connection with the merger from Duke and **Cinergy** shareholders, the North Carolina UtilitiesCommission (NCUC), and the Indiana Utility Regulatory Commission (IURC) andeffective April 3, 2006, **Cinergy Corp.**consummated the merger with Duke. Under the merger agreement, each share of **Cinergy** common stock was converted into 1.56 shares of thenewly formed company, Duke Energy Holding Corp., a Delaware Corporation (DukeEnergy Holding) (subsequently renamed Duke Energy Corporation).

Duke and **Cinergy** believe that the combination will providesubstantial strategic and financial benefits to their shareholders, employeesand customers, including:

·                  increasedfinancial strength and flexibility;

·                  stronger utilitybusiness platform;

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

·                  broadenedelectric distribution platform;

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

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

·                  complementarypositions in the midwest;

·                  greater customerdiversity;

·                  combinedexpertise; and

·                  significantcost savings synergies.

As a condition to themerger approval, the Public Utilities Commission of Ohio (PUCO) and theKentucky Public Service Commission (KPSC) required that certain merger relatedsavings be refunded to customers in each service territory and providedadditional conditions that the new company would have to meet. While the mergeritself was not subject to approval by the IURC, the IURC approved, subject tosimilar conditions, certain affiliate agreements in connection with the merger.Key elements of these provisions were:

·                  **CG&E** will provide a rate credit ofapproximately $15 million for one year to facilitate economic development in atime of increasing rates and a credit of approximately $21 million to **CG&E’s** gas and electric customers inOhio for one year, with both credits beginning January 1, 2006.

InApril 2006, The Office of the Ohio Consumers’ Counsel (OCC) filed a Noticeof Appeal with the Supreme Court of Ohio, requesting the Court remand the PUCO’smerger approval for a full evidentiary hearing. The Office of the OhioConsumers’ Counsel alleges that the PUCO committed reversible error on bothprocedural and substantive grounds, in among other things, failing to set thematter for a full evidentiary hearing, failing to consider evidence regardingthe transfer of the Duke Energy North America (DENA) assets to **CG&E**, and failing to lift the stay ondiscovery. **CG&E** and the OCChave resolved this matter through settlement and we expect the OCC to withdrawits appeal.

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·                  **PSI** will provide a rate credit of $40 million to **PSI** customers over a one year period and $5 million forlow-income energy assistance and clean coal technology. In April 2006, Interveners, Citizens Action Coalition of Indiana, Inc., filed a VerifiedPetition for Rehearing and Reconsideration claiming that **PSI**should be ordered to provide an additional $5 million in rate credits tocustomers to be consistent with the NCUC order. An order on the Petition isexpected in the second quarter of 2006.

·                  ULH&Pwill provide $7.6 million in rate credits to ULH&P customers over fiveyears, ending when new rates are established in the next rate case afterJanuary 1, 2008.

In addition, the FederalEnergy Regulatory Commission (FERC) approved the merger without conditions. OnJanuary 19, 2006, Public Citizen’s Energy Program, Citizen’s Action Coalitionof Indiana, Ohio Partners for Affordable Energy and Southern Alliance for CleanEnergy requested rehearing of the FERC approval. On February 21, 2006, the FERCissued an order granting rehearing of FERC’s order for further consideration.

The consummation of themerger triggered certain change in control provisions that provided enhanced,and/or accelerated benefits to management level employees in the event of aqualifying transaction. See Note 2(b)(*iii*) ofthe “Notes to Condensed Financial Statements” in “Item 1. Financial Information”for additional information on these payments.

*Purchaseprice allocation and goodwill*

Duke has been determinedto be the acquirer and **Cinergy** theacquiree under generally accepted accounting principles. The merger is beingrecorded using the purchase method of accounting whereby the total purchaseprice of approximately $9 billion is being allocated to **Cinergy’s**identifiable tangible and intangible assets acquired and liabilities assumedbased on their fair values. **Cinergy Corp.’s**results of operations will be included in Duke Energy Holding’s resultsbeginning April 3, 2006.

The allocation of thepurchase price to the net assets of **Cinergy** and theresulting goodwill determination are not yet complete. However, preliminaryindications are that the acquisition will result in approximately $4 billion ofgoodwill.

Based on management’sreview and analysis of relevant Securities and Exchange Commission (SEC)regulations, **Cinergy** expects the impacts ofpurchase accounting, including goodwill, to be pushed down and recorded on thefinancial statements of **Cinergy**. Managementalso expects that a portion of the purchase price will be pushed down andrecorded on the financial statements of **CG&E**. Sincethe merger did not occur until April 2006, all impacts of push-downaccounting will be implemented in the second quarter financial statements of **Cinergy** and **CG&E**. Ourreview of SEC regulations has indicated that **PSI’s**financial statements are not required to use push-down accounting andmanagement does not anticipate electing to do so.

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### **2006 qUARTERLY RESULTS OF OPERATIONS— CINERGY**

#### **Summaryof Results**

The Results of Operationsdiscussion for **Cinergy** is presented in a reduceddisclosure format in accordance with General Instruction H(2)(a) of Form 10-Q.

Given the dynamics of ourbusiness, which include regulatory revenues with directly offsetting expensesand commodity trading operations for which results are primarily reported on anet basis, we have concluded that a discussion of our results on a gross marginbasis is most appropriate. Electric gross margins represent electric operatingrevenues less the related direct costs of fuel, emission allowances, andpurchased power. Gas gross margins represent gas operating revenues less therelated direct cost of gas purchased. Within each of these areas, we willdiscuss the key drivers of our results.

Electric and gas grossmargins and net income for **Cinergy**for thequarters ended March 31, 2006 and 2005 were as follows:
|                          | ** ** | **Cinergy**            | ** ** |
|--------------------------|------------|------------------------|------------|
| ** **               | ** ** | **2006**               | ** ** | **2005** | ** ** | **Change** | ** ** | **% Change** | ** ** |
| ** **               | ** ** | **(in millions)** | ** ** |
| ** **               | ** ** | ** **             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Electric gross margin(1) |       | **$**                  | **711**    | ** ** | $ | 614 |   | $ | 97 |   | 16 | % |
| Gas gross  margin(2)     |       | **124**                | ** ** | 104 |   | 20 |   | 19 |   |
| Net income               |       | **79**                 | ** ** | 117 |   | (38 | ) | (32 | ) |
|                          |            |                        |            |  |  |  |  |  |  |  |  |  |

 

----

(1)             Electric gross marginis calculated as *Electric operating revenues* less *Fuel, emission allowances, and purchased power* expense fromthe Condensed Statements of Income.

(2)             Gasgross margin is calculated as *Gas operating revenues*less *Gas purchased* expense from the CondensedStatements of Income.

***Gross Margins***

The 16 percent increasein electric gross margins was primarily due to the following factors:

·                  An increase inretail margins from **CG&E’s** ratestabilization plan (RSP), primarily due to its implementation for residentialcustomers in January 2006 and increased margins from non-residentialcustomers related to the timing of collection of fuel, purchased power, andemission allowance costs;

·                  An increase dueto timing differences in revenue recognition between certain components of ourgeneration portfolio, some of which are accounted for on a mark-to-market basisand some on an accrual basis; and

·                  An increase inthe average price received per megawatt hour (MWh), due to the return ofcertain **CG&E** retail customers to fullelectric service and a **CG&E** retaildistribution base rate increase implemented in January 2006.

Partiallyoffsetting these increases were:

·                  A decline inmargins from power marketing and trading contracts, primarily due to strongresults in the first quarter of 2005;

·                  A decline in **PSI’s** non-retail margins, primarily driven by an adverseruling from the IURC on a fuel-related matter; and

·                  A decline due tomilder weather in the first quarter of 2006, as compared to 2005.

The 19 percent increasein gas gross margins was primarily due to timing differences in revenuerecognition between physical storage activities (which are accounted for on anaccrual basis) and the associated derivative contracts that hedge the physicalstorage (which are accounted for on a mark-to-market basis).

48

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***Net Income***

The 32 percent decreasein net income was primarily due to the following factors:

·                  An increase in *Operation and maintenance* expense resultingprimarily from:

·                  Significantmerger related costs incurred in the first quarter of 2006, see Note 2(b)(*iii*) of the “Notes to CondensedFinancial Statements” in “Item 1. Financial Information” for furtherinformation;

·                  An increase inhealth care costs and incentive compensation; and

·                  Increased costsat our synthetic fuel facilities primarily related to production costs at afacility purchased in the second quarter of 2005.

·                  An increase in *Interest Expense*, primarily due to anincrease in interest expense related to a tax contingency and an increase inaverage long-term debt outstanding.

Partially offsettingthese increased expenses were increases in electric and gas gross margins aspreviously discussed and an increase in *Miscellaneous Income — Net*primarily due to impairment and disposal charges recognized in 2005 on certaininvestments.

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**2006 QUARTERLYRESULTS OF OPERATIONS - CG&E**

#### **Summaryof Results**

The Results of Operationsdiscussion for **CG&E** is presented in a reduceddisclosure format in accordance with General Instruction H(2)(a) of Form 10-Q.

Electric and gas grossmargins and net income for **CG&E**for the quarters ended March 31, 2006 and 2005 were as follows:
|                          | ** ** | **CG&E**           | ** ** |
|--------------------------|------------|------------------------|------------|
| ** **               | ** ** | **2006**               | ** ** | **2005** | ** ** | **Change** | ** ** | **% Change** | ** ** |
| ** **               | ** ** | **(in millions)** | ** ** |
| ** **               | ** ** | ** **             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Electric gross margin(1) |       | **$**                  | **432**    |   | $ | 319 |   | $ | 113 |   | 35 | % |
| Gas gross  margin(2)     |       | **90**                 |       | 99 |   | (9 | ) | (9 | ) |
| Net income               |       | **116**                |       | 85 |   | 31 |   | 36 |   |
|                          |            |                        |            |  |  |  |  |  |  |  |  |  |

 

----

(1)     Electric gross margin iscalculated as *Electric operating revenues*less *Fuel, emission allowances, and purchased power* expense fromthe Condensed Statements of Income.

(2)     Gas gross margin iscalculated as *Gas operating revenues* less *Gas purchased* expense from the Condensed Statements ofIncome.

***Gross Margins***

The 35 percent increasein electric gross margins was primarily due to the following factors:

·                  An increase inretail margins from the RSP, primarily due to its implementation forresidential customers in January 2006 and increased margins fromnon-residential customers related to the timing of collection of fuel,purchased power, and emission allowance costs;

·                  An increase dueto timing differences in revenue recognition between certain components of ourgeneration portfolio, some of which are accounted for on a mark-to-market basisand some on an accrual basis; and

·                  An increase inthe average price received per MWh, due to the return of certain retailcustomers to full electric service and a retail distribution base rate increaseimplemented in January 2006.

Partiallyoffsetting these increases were:

·                  A decline inmargins from power marketing and trading contracts, primarily due to strongresults in the first quarter of 2005; and

·                  A decline due tomilder weather in the first quarter of 2006, as compared to 2005.

The nine percent decreasein gas gross margins was primarily due to milder weather in the first quarterof 2006, as compared to 2005, and a decline in non-weather related demand. Partiallyoffsetting these declines was a ULH&P base rate increase implemented in October 2005.

***Net Income***

The 36 percent increasein net income was primarily due to the increase in electric gross margins, aspreviously discussed.

Partiallyoffsetting the increased margins was an increase in *Operationand maintenance* expenses associated with various increases inoperating expenses, including significant merger related costs in the firstquarter of 2006, see Note 2(b)(*iii*) ofthe “Notes to Condensed Financial Statements” in “Item 1. Financial Information”for further information.

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### **2006QUARTERLY RESULTS OF OPERATIONS - PSI**

#### **Summaryof Results**

The Results of Operationsdiscussion for **PSI** is presented in a reduceddisclosure format in accordance with General Instruction H(2)(a) of Form 10-Q.

Electric gross marginsand net income for **PSI** for thequarters ended March 31, 2006 and 2005 was as follows:
|                          | ** ** | **PSI**                | ** ** |
|--------------------------|------------|------------------------|------------|
| ** **               | ** ** | **2006**               | ** ** | **2005** | ** ** | **Change** | ** ** | **% Change** | ** ** |
| ** **               | ** ** | **(in millions)** | ** ** |
| * *                 | * *   | * *               | * *   | * * | * * | * * | * * | * * | * * |
| Electric gross margin(1) |       | **$**                  | **285**    |   | $ | 293 |   | $ | (8 | ) | (3 | )% |
| Net income               |       | **19**                 |       | 42 |   | (23 | ) | (55 | ) |
|                          |            |                        |            |  |  |  |  |  |  |  |  |  |

 

----

(1)    Electric gross margin iscalculated as *Electric operating revenues*less *Fuel, emission allowances, and purchased power* expense fromthe Condensed Statements of Income.

 

***Gross Margins***

The three percentdecrease in electric gross margins was primarily due to the following factors:

·                  A decline innon-retail margins, primarily driven by an adverse ruling from the IURC on afuel-related matter; and

·                  A decline due tomilder weather in the first quarter of 2006, as compared to 2005.

Partially offsettingthese declines was growth in non-weather related demand.

***Net Income***

The 55 percent decreasein net income was primarily due to the following factors:

·                  An increase in *Operation and maintenance* expense due inpart to significant merger related costs in the first quarter of 2006, see Note2(b)(*iii*) of the “Notes toCondensed Financial Statements” in “Item 1. Financial Information” for furtherinformation.

·                  The decrease inelectric gross margins, as previously discussed; and

·                  An increase in *Interest Expense*, primarily due to anincrease in average long-term debt outstanding and an increase in interestexpense related to a tax contingency.

Partially offsettingthese increased expenses and decreased margins was an increase in *Miscellaneous Income — Net*.

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**ITEM4. CONTROLS AND PROCEDURES**

**Evaluation ofDisclosure Controls and Procedures**

Disclosure controls and procedures are our controlsand other procedures that are designed to provide reasonable assurance thatinformation required to be disclosed by us in the reports that we file orsubmit under the Securities Exchange Act of 1934 (Exchange Act) is recorded,processed, summarized, and reported, within the time periods specified by theSecurities and Exchange Commission’s (SEC) rules and forms. Disclosurecontrols and procedures include, without limitation, controls and proceduresdesigned to provide reasonable assurance that information required to bedisclosed by us in the reports that we file under the Exchange Act isaccumulated and communicated to our management, including our chief executiveofficer and chief financial officer, as appropriate to allow timely decisionsregarding 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 such term is defined in Rule 13a-15(e) and 15d-15(e) underthe Exchange Act) as of March 31, 2006, and, based upon this evaluation,our chief executive officer and chief financial officer have concluded thatthese controls and procedures are effective in providing reasonable assurancethat information 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 changes in our internal controlover financial reporting (as such term is defined in Rules 13a-15(f) and15d-15(f) under the Exchange Act) during the fiscal quarter ended March 31,2006 and found no change that has materially affected, or is reasonably likelyto materially affect, our internal control over financial reporting.

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## **PART II. OTHER INFORMATION**

## **ITEM 1. LEGAL PROCEEDINGS**

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

In November 1999, and through subsequent amendments,the United States brought a lawsuit in the United States Federal District Courtfor the Southern District of Indiana against **Cinergy**,The Cincinnati Gas & Electric Company (**CG&E**), andPSI Energy, Inc. (**PSI**) alleging various violations of theCAA. Specifically, the lawsuit alleges that we violated the CAA by notobtaining Prevention of Significant Deterioration (PSD), Non-Attainment NewSource Review (NSR), and Ohio and Indiana state implementation plan (SIP)permits for various projects at our owned and co-owned generating stations. Additionally,the suit claims that we violated an Administrative Consent Order entered intoin 1998 between the Environmental Protection Agency (EPA) and **Cinergy** relating to alleged violations ofOhio’s SIP provisions governing particulate matter at Unit 1 at **CG&E’s** W.C. Beckjord Station. The suitseeks (1) injunctive relief to require installation of pollution controltechnology on various generating units at **CG&E’s**W.C. Beckjord and Miami Fort Stations, and **PSI’s**Cayuga, Gallagher, Wabash River, and Gibson Stations, and (2) civilpenalties in amounts of up to $27,500 per day for each violation. In addition,three northeast states and two environmental groups have intervened in the case.In August 2005, the district court issued a ruling regarding the emissionstest that it will apply to **Cinergy** at thetrial of the case. Contrary to **Cinergy’s**argument, the district court ruled that in determining whether a project wasprojected to increase annual emissions, it would not hold hours of operationconstant. However, the district court subsequently certified the matter forinterlocutory appeal to the Seventh Circuit Court of Appeals, which hasaccepted the appeal and set oral arguments for June 2006. In February 2006,the district court ruled that in carrying its burden of proof, the defendantcan look to industry practice in proving a particular project was routine. Thedistrict court has removed the trial from the calendar and will reset a trialdate, if necessary, after the Seventh Circuit rules. Notwithstanding theappeal, there are a number of other legal issues currently before the districtcourt judge.

In March 2000, the United States also filed in theUnited States District Court for the Southern District of Ohio an amendedcomplaint in a separate lawsuit alleging violations of the CAA relating to PSD,NSR, and Ohio SIP requirements regarding various generating stations, includinga generating station operated by Columbus Southern Power Company (CSP) andjointly-owned by CSP, The Dayton Power and Light Company (DP&L), and **CG&E**. The EPA is seeking injunctiverelief and civil penalties of up to $27,500 per day for each violation. Thissuit is being defended by CSP. In April 2001, the United States DistrictCourt for the Southern District of Ohio in that case ruled that the Governmentand the intervening plaintiff environmental groups cannot seek monetary damagesfor alleged violations that occurred prior to November 3, 1994; however,they are entitled to seek injunctive relief for such alleged violations. Neitherparty appealed that decision. This matter was heard in trial in July 2005.A decision is pending.

In addition, **Cinergy**and **CG&E** have been informed byDP&L that in June 2000, the EPA issued a Notice of Violation (NOV) toDP&L for alleged violations of PSD, NSR, and Ohio SIP requirements at astation operated by DP&L and jointly-owned by DP&L, CSP, and **CG&E**. The NOV indicated the EPA may (1) issuean order 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 September 2004, Marilyn Wall and the SierraClub brought a lawsuit against **CG&E**,DP&L and CSP for alleged violations of the CAA at this same generatingstation. This case is currently in discovery in front of the same judge who hasthe CSP case.

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

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

In July 2004, thestates of Connecticut, New York, California, Iowa, New Jersey, Rhode Island,Vermont, Wisconsin, and the City of New York brought a lawsuit in the UnitedStates District Court for the Southern District of New York against **Cinergy**, American Electric Power Company, Inc., American ElectricPower Service Corporation, The Southern Company, Tennessee Valley Authority,and Xcel Energy Inc. That same day, a similar 

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lawsuit was filed in theUnited States District Court for the Southern District of New York against thesame companies by Open Space Institute, Inc., Open Space Conservancy, Inc.,and The Audubon Society of New Hampshire. These lawsuits allege that thedefendants’ emissions of CO2 from thecombustion of fossil fuels at electric generating facilities contribute toglobal warming and amount to a public nuisance. The complaints also allege thatthe defendants could generate the same amount of electricity while emittingsignificantly less CO2. Theplaintiffs are seeking an injunction requiring each defendant to cap its CO2 emissions and then reduce themby a specified percentage each year for at least a decade. In September 2005,the district court granted the defendants’ motion to dismiss the lawsuit. Theplaintiffs have appealed this ruling to the Second Circuit Court of Appeals,and oral argument is scheduled for June 2006. We are not able to predictwhether resolution of these matters would have a material effect on ourfinancial position or results of operations.

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

In November 2004, acitizen of the Village of Moscow, Ohio, the town adjacent to **CG&E’s** Zimmer Station, brought a purported class actionin the United States District Court for the Southern District of Ohio seekingmonetary damages and injunctive relief against **CG&E**for alleged violations of the CAA, the Ohio SIP, and Ohio laws against nuisanceand common law nuisance. The plaintiffs have filed a number of additionalnotices of intent to sue and two lawsuits raising claims similar to those inthe original claim. One lawsuit was dismissed on procedural grounds and theremaining two have been consolidated. The plaintiff filed a motion for classcertification, which is fully briefed and pending decision. At this time, wecannot predict whether the outcome of this matter will have a material impacton our financial position or results of operations. We intend to defend thislawsuit vigorously in court.

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

Coaltar residues, related hydrocarbons, and various metals have been found in 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 being studied 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. Thus far, **PSI** has primary responsibility forinvestigating, monitoring and, if necessary, remediating nine of these sites. InDecember 2003, **PSI** enteredinto a voluntary remediation plan with the state of Indiana, providing a formalframework for the investigation and cleanup of the nine sites. The IndianaDepartment of Environmental Management oversees investigation and cleanup ofall of these sites.

In April 1998,**PSI** filed suit in Hendricks Countyin the state of Indiana against its general liability insurance carriers. **PSI** sought a declaratory judgment toobligate its insurance carriers to (1) defend MGP claims against **PSI** and compensate **PSI** for its costs of investigating,preventing, mitigating, and remediating damage to property and paying claimsrelated to MGP sites; or (2) pay **PSI’s**cost of defense. **PSI** settled, in principle, itsclaims with all but one of the insurance carriers in January 2005 prior tocommencement of the trial. With respect to the lone insurance carrier, a juryreturned a verdict against **PSI** in February 2005.**PSI** has appealed this decision. At thepresent time, **PSI** cannot predict the outcome ofthis litigation, including the outcome of the appeal.

**PSI**has accrued costs related to investigation, remediation, and groundwatermonitoring for those sites where such costs are probable and can be reasonablyestimated. We will continue to investigate and remediate the sites as outlinedin the voluntary remediation plan. As additional facts become known andinvestigation is completed, we will assess whether the likelihood of incurringadditional costs becomes probable. Until all investigation and remediation iscomplete, we are unable to determine the overall impact on our financialposition or results of operations.

**CG&E**has performed site assessments on certain of their sites where we believe MGPactivities have occurred at some point in the past and have found no imminentrisk to the environment. At the present time, **CG&E**cannot predict whether investigation and/or remediation will be required in thefuture at any of these sites.

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### **Asbestos claims litigation**

**PSI**and **CG&E**,have been named as defendants or co-defendants in lawsuits related to asbestosat their electric generating stations. Currently, there are approximately 130pending lawsuits (the majority of which are **PSI**cases). In these lawsuits, plaintiffs claim to have been exposed to asbestos-containingproducts in the course of their work as outside contractors in the constructionand maintenance of **CG&E** and **PSI** generating stations. The plaintiffsfurther claim that as the property owner of the generating stations,**CG&E** and **PSI** should be held liable for their injuries and illnessesbased on an alleged duty to warn and protect them from any asbestos exposure. Theimpact on **CG&E’s** and **PSI’s** financial position or results ofoperations of these cases to date has not been material.

Of these lawsuits, onecase filed against **PSI** has beentried to verdict. The jury returned a verdict against **PSI** on a negligence claim and a verdict for**PSI** on punitive damages. **PSI** appealed this decision up to theIndiana Supreme Court. In October 2005, the Indiana Supreme Court upheldthe jury’s verdict. **PSI** paid thejudgment of approximately $630,000 in the fourth quarter of 2005. In addition, **PSI** has settled over 150 other claims foramounts, which neither individually nor in the aggregate, are material to **PSI’s** financial position or results ofoperations. Based on estimates under varying assumptions, concerning suchuncertainties, such as, among others:  (i) thenumber of contractors potentially exposed to asbestos during construction ormaintenance of **PSI** generating plants; (ii) thepossible incidence of various illnesses among exposed workers, and (iii) thepotential settlement costs without federal or other legislation that addressesasbestos tort actions, **PSI** estimatesthat the range of reasonably possible exposure in existing and future suitsover the next 50 years could range from an immaterial amount to approximately$60 million, exclusive of costs to defend these cases. This estimated range ofexposure may change as additional settlements occur and claims are made inIndiana and more case law is established.

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

**DUNAVAN WASTE SUPERFUNDSITE**

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

**ONTARIO, CANADALAWSUIT**

We understand that aclass action lawsuit was filed in Superior Court in Ontario, Canada against usand approximately 20 other utility and power generation companies allegingvarious claims relating to environmental emissions from coal-fired powergeneration facilities in the United States and Canada and damages ofapproximately $50 billion, with continuing damages in the amount ofapproximately $4 billion annually. We understand that the lawsuit also claimsentitlement to punitive and exemplary damages in the amount of $1 billion. Wehave not yet been served in this lawsuit, however, if served, we intend todefend this lawsuit vigorously in court. We are not able to predict whetherresolution of this matter would have a material effect on our financialposition or results of operations.

**HURRICANE KATRINALAWSUIT**

On April 19, 2006, **Cinergy** was named in the third amended complaint of apurported class action filed in the United States District Court for the SouthernDistrict of Mississippi. Plaintiffs claim that **Cinergy**,along with numerous other utilities, oil companies, coal companies and chemicalcompanies, is liable for damages relating to losses suffered by victims ofHurricane Katrina. Plaintiffs claim that **Cinergy’s**, andothers, greenhouse gas emissions contributed to the frequency and intensity ofstorms such as Hurricane Katrina. **Cinergy** has notbeen served with this lawsuit. At this time, we are not able to predict whetherresolution of this matter would have a material effect on our financialposition or results of operations.

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**ITEM 1A.RISK FACTORS**

In addition to the otherinformation set forth in this report, you should carefully consider the factorsdiscussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-Kfor the year ended December 31, 2005, which could materially affect ourbusiness, financial condition or future results. The risks described in ourAnnual Report on Form 10-K are not the only risks facing our Company.Additional risks and uncertainties not currently known to us or that wecurrently deem to be immaterial also may materially adversely affect ourbusiness, financial condition and/or operating results.

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**ITEM 6. EXHIBITS**

The documents listedbelow are being filed, or have previously been filed, on behalf of **Cinergy Corp.**, The Cincinnati Gas &Electric Company (**CG&E**), andPSI Energy, Inc. (**PSI**) andare incorporated herein by reference from the documents indicated and made apart hereof. Exhibits not identified as previously filed are filed herewith:
| **Exhibit  Designation** | ** ** | **Registrant**         | ** ** | **Nature of Exhibit**                                                                                                                                                                         | ** ** | **Previously Filed as  Exhibit to:**                        | ** ** |
|--------------------------|------------|------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------|------------|
|                     |       |                   |       |                                                                                                                                                                                                    |       |                                                                       |       |
| 10.1                     | ** ** | **Cinergy Corp.** | ** ** | Consulting Agreement,  dated March 31, 2006, between Michael J. Cyrus and **Cinergy  Corp.**                                                                                                       | ** ** | **Cinergy Corp. **Form 8-K,  filed  April 6, 2006 | ** ** |
|                     | ** ** | ** **             |       |                                                                                                                                                                                                    | ** ** | ** **                                                                 | ** ** |
| 10.2                     | ** ** | **Cinergy  Corp.**     |       | Summary of Amendment to  Employment Agreement of James E. Rogers, Michael J. Cyrus, Marc E. Manly,  Lynn J. Good and James L. Turner.                                                                   | ** ** | **Cinergy  Corp.**Form 8-K, filed  April 6, 2006            | ** ** |
|                     | ** ** | ** **             |       |                                                                                                                                                                                                    | ** ** | ** **                                                                 | ** ** |
| 10.3                     | ** ** | **Cinergy  Corp.**     | ** ** | Agreement, dated  March 31, 2006, between James E. Rogers and **Cinergy  Corp.**                                                                                                                   | ** ** | **Cinergy  Corp.**Form 8-K, filed  April 6, 2006            | ** ** |
|                     | ** ** | ** **             |       |                                                                                                                                                                                                    | ** ** | ** **                                                                 | ** ** |
| 10.4                     | ** ** | **CG&E**           | ** ** | Keepwell Agreement,  dated April 10, 2006, between Duke Capital LLC and **CG&E.**                                                                                                              | ** ** | **CG&E**Form 8-K, filed  April 14, 2006                 | ** ** |
|                     | ** ** | ** **             |       |                                                                                                                                                                                                    |       |                                                                       |       |
| **Certificates**         | ** ** | ** **             |       |                                                                                                                                                                                                    |       |                                                                       |       |
|                     | ** ** | ** **             |       |                                                                                                                                                                                                    |       |                                                                       |       |
| 31-a                     | ** ** | **Cinergy  Corp.**     |       | Certification by David  L. Hauser pursuant to Rule 13a-14(a)/15d-14(a) of the  Securities Exchange Act of 1934, as adopted pursuant to Section 302 of  the Sarbanes-Oxley Act of 2002.   | ** ** | ** **                                                                 | ** ** |
|                     | ** ** | ** **             |       |                                                                                                                                                                                                    |       |                                                                       |       |
| 31-b                     | ** ** | **Cinergy  Corp.**     |       | Certification by Steven  K. Young pursuant to Rule 13a-14(a)/15d-14(a) of the  Securities Exchange Act of 1934, as adopted pursuant to Section 302 of  the Sarbanes-Oxley Act of 2002.   | ** ** | ** **                                                                 | ** ** |
|                     | ** ** | ** **             |       |                                                                                                                                                                                                    |       |                                                                       |       |
| 31-c                     | ** ** | **CG&E  PSI**      |       | Certification by James  L. Turner pursuant to Rule 13a-14(a)/15d-14(a) of the  Securities Exchange Act of 1934, as adopted pursuant to Section 302 of  the Sarbanes-Oxley Act of 2002.   | ** ** | ** **                                                                 | ** ** |
|                     | ** ** | ** **             |       |                                                                                                                                                                                                    |       |                                                                       |       |
| 31-d                     | ** ** | **CG&E  PSI**      |       | Certification by Myron  L. Caldwell pursuant to Rule 13a-14(a)/15d-14(a) of the  Securities Exchange Act of 1934, as adopted pursuant to Section 302 of  the Sarbanes-Oxley Act of 2002. | ** ** | ** **                                                                 | ** ** |
|                     | ** ** | ** **             |       |                                                                                                                                                                                                    |       |                                                                       |       |
| 32-a                     | ** ** | **Cinergy  Corp.**     |       | Certification by David  L. Hauser pursuant to 18 U.S.C. Section 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002.                                                  | ** ** | ** **                                                                 | ** ** |
|                     | ** ** | ** **             |       |                                                                                                                                                                                                    |       |                                                                       |       |
| 32-b                     | ** ** | **Cinergy.  Corp.**    |       | Certification by Steven  K. Young pursuant to 18 U.S.C. Section 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002.                                                  | ** ** | ** **                                                                 | ** ** |
|                     | ** ** | ** **             |       |                                                                                                                                                                                                    |       |                                                                       |       |
| 32-c                     | ** ** | **CG&E  PSI**      |       | Certification by James  L. Turner pursuant to 18 U.S.C. Section 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002.                                                  | ** ** | ** **                                                                 | ** ** |
|                     | ** ** | ** **             |       |                                                                                                                                                                                                    |       |                                                                       |       |
| 32-d                     | ** ** | **CG&E  PSI**      |       | Certification by Myron  L. Caldwell pursuant to 18 U.S.C. Section 1350, as adopted pursuant  to Section 906 of the Sarbanes-Oxley Act of 2002.                                           |       |                                                                       |       |

 

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**SIGNATURES**

Pursuant to therequirements of Section 13 or 15(d) of the Cinergy Corp., TheCincinnati Gas & Electric Company, and PSI Energy, Inc. eachSecurities Exchange Act of 1934, has duly caused this report to be signed onits behalf by the undersigned, thereunto duly authorized.
|                        |   | CINERGY CORP.  Registrants                                                 |   |   |
|------------------------|--------|----------------------------------------------------------------------------|--------|--------|
|                   |   |                                                                       |   |   |
| Date: May 9, 2006 |   | /s/ David L.  Hauser                                                       |   |   |
|                   |   | David L. Hauser                                                            |   |   |
|                   |   | (duly authorized  officer                                                  |   |   |
|                   |   | and                                                                        |   |   |
|                   |   | principal  executive officer)                                              |   |   |
|                   |   |                                                                       |   |   |
| Date: May 9, 2006 |   | /s/ Steven K.  Young                                                       |   |   |
|                   |   | Steven K. Young                                                            |   |   |
|                   |   | (duly authorized  officer                                                  |   |   |
|                   |   | and                                                                        |   |   |
|                   |   | principal  financial officer)                                              |   |   |
|                   |   |                                                                       |   |   |
|                   |   | THE CINCINNATI  GAS & ELECTRIC COMPANYPSI ENERGY, INC.Registrants |   |   |
|                   |   |                                                                       |   |   |
| Date: May 9, 2006 |   | /s/ Myron L.  Caldwell                                                     |   |   |
|                   |   | Myron L. Caldwell                                                          |   |   |
|                   |   | (duly authorized  officer                                                  |   |   |
|                   |   | and                                                                        |   |   |
|                   |   | principal  financial officer)                                              |   |   |
|                   |   |                                                                       |   |   |
| Date: May 9, 2006 |   | /s/ Dwight L.  Jacobs                                                      |   |   |
|                   |   | Dwight L. Jacobs                                                           |   |   |
|                   |   | (duly authorized  officer                                                  |   |   |
|                   |   | and                                                                        |   |   |
|                   |   | chief accounting  officer)                                                 |   |   |

 

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