**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

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

** **

**FORM 10-Q**

 

**(MarkOne)**

**ý**   QUARTERLY REPORTPURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

**For the quarterly period ended September 30, 2005**

 

**or**

 

**o**   TRANSITION REPORTPURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

** **

**For the transition period from                    to                   **

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

**(A Delaware Corporation)  139 East Fourth Street  Cincinnati, Ohio 45202  (513) 421-9500**                            | ** ** | **31-1385023**                          |
| ** **                  | ** ** | ** **                                                                                                                                 | ** ** | ** **                              |
|                        |       |                                                                                                                                       |       |                                    |
| **1-1232**                  | ** ** | **THE CINCINNATI GAS  & ELECTRIC COMPANY**

**(An Ohio Corporation)  139 East Fourth Street  Cincinnati, Ohio 45202  (513) 421-9500**  | ** ** | **31-0240030**                          |
|                        |       |                                                                                                                                       |       |                                    |
| **1-3543**                  | ** ** | **PSI ENERGY, INC.**

**(An Indiana  Corporation)  1000 East Main Street  Plainfield, Indiana 46168  (513) 421-9500**                      | ** ** | **35-0594457**                          |
|                        |       |                                                                                                                                       |       |                                    |
| **2-7793**                  | ** ** | **THE UNION LIGHT, HEAT  AND POWER COMPANY**

**(A Kentucky Corporation)  139 East Fourth Street  Cincinnati, Ohio 45202  (513) 421-9500** | ** ** | **31-0473080**                          |

 

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

Yes ý  No o

 

 

----

 

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

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

 

----

 

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

 

----

 

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

 

**TheUnion Light, Heat and Power Company** meets the conditions setforth in General Instruction H(1)(a) and (b) of Form 10-Q and is thereforefiling its company specific information with the reduced disclosure formatspecified in General Instruction H(2) of Form 10-Q.

 

----

 

As of October 31, 2005,shares of common stock outstanding for each registrant were as listed:

 
| **Registrant**                                 | ** ** | **Description**                                 | ** ** | **Shares**  | ** ** |
|------------------------------------------------|------------|-------------------------------------------------|------------|-------------|------------|
|                                           |       |                                            |       |        |       |
| **Cinergy  Corp.**                             |       | Par value $.01  per share                       |       | 199,435,602 |       |
| ** **                                     |       |                                            |       |        |       |
| **The  Cincinnati Gas & Electric Company** |       | Par value $8.50  per share                      |       | 89,663,086  |       |
| ** **                                     |       |                                            |       |        |       |
| **PSI  Energy, Inc.**                          |       | Without par  value, stated value $.01 per share |       | 53,913,701  |       |
| ** **                                     |       |                                            |       |        |       |
| **The  Union Light, Heat and Power Company**   |       | Par value $15.00  per share                     |       | 585,333     |       |

 

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2

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**TABLE OF CONTENTS**

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

 

3

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**CINERGY CORP.**

**ANDSUBSIDIARY COMPANIES**

 

4

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**CINERGY CORP.**

**CONDENSED CONSOLIDATED STATEMENTSOF INCOME**

 
| ** **                                              | ** **   | **Quarter Ended**                             | ** **    | **Year to Date** | ** ** |
|---------------------------------------------------------|--------------|-----------------------------------------------|---------------|------------------|------------|
| ** **                                              | ** **   | **September 30**                              | ** **    | **September 30** | ** ** |
| ** **                                              | ** **   | **2005**                                      | ** **    | **2004**         | ** ** | **2005** | ** ** | **2004** | ** ** |
| *** ***                                            | *** *** | **(in thousands, except per share  amounts)** | *** ***  |
| *** ***                                            | *** *** | **(unaudited)**                               | *** ***  |
| **Operating  Revenues**                                 |         |                                          |          |             |       |   |   |   |   |
| Electric                                                |         | **$**                                         | **1,134,494** | ** **       | $          | 952,406 |   | **$** | **2,975,129** | ** ** | $ | 2,681,078 |   |
| Gas                                                     |         | **84,073**                                    | ** **    | 65,298           |       | **476,767** | ** ** | 524,226 |   |
| Other                                                   |         | **146,712**                                   | ** **    | 110,879          |       | **371,895** | ** ** | 265,674 |   |
| **Total Operating Revenues**                            |         | **1,365,279**                                 | ** **    | 1,128,583        |       | **3,823,791** | ** ** | 3,470,978 |   |
|                                                    |         | ** **                                    | ** **    |             |       | ** ** | ** ** |   |   |
| **Operating  Expenses**                                 |         | ** **                                    | ** **    |             |       | ** ** | ** ** |   |   |
| Fuel, emission allowances, and purchased power          |         | **459,964**                                   | ** **    | 341,218          |       | **1,077,641** | ** ** | 933,864 |   |
| Gas purchased                                           |         | **30,446**                                    | ** **    | 19,792           |       | **295,135** | ** ** | 290,728 |   |
| Costs of fuel resold                                    |         | **118,619**                                   | ** **    | 86,917           |       | **297,469** | ** ** | 203,441 |   |
| Operation and maintenance                               |         | **342,221**                                   | ** **    | 325,787          |       | **1,025,131** | ** ** | 968,981 |   |
| Depreciation                                            |         | **129,597**                                   | ** **    | 114,668          |       | **386,537** | ** ** | 333,856 |   |
| Taxes other than income taxes                           |         | **65,101**                                    | ** **    | 57,001           |       | **209,115** | ** ** | 204,320 |   |
| **Total Operating Expenses**                            |         | **1,145,948**                                 | ** **    | 945,383          |       | **3,291,028** | ** ** | 2,935,190 |   |
|                                                    |         | ** **                                    | ** **    |             |       | ** ** | ** ** |   |   |
| **Operating  Income**                                   |         | **219,331**                                   | ** **    | 183,200          |       | **532,763** | ** ** | 535,788 |   |
|                                                    |         | ** **                                    | ** **    |             |       | ** ** | ** ** |   |   |
| **Equity  in Earnings of Unconsolidated Subsidiaries**  |         | **6,795**                                     | ** **    | 8,016            |       | **25,206** | ** ** | 18,095 |   |
| **Miscellaneous  Income (Expense) – Net**          |         | **17,012**                                    | ** **    | (944             | )          | **33,886** | ** ** | (11,419 | ) |
| **Interest  Expense**                                   |         | **76,932**                                    | ** **    | 71,775           |       | **209,644** | ** ** | 209,446 |   |
| **Preferred  Dividend Requirements of Subsidiaries**    |         | **603**                                       | ** **    | 858              |       | **2,319** | ** ** | 2,574 |   |
| ** **                                              |         | ** **                                    | ** **    |             |       | ** ** | ** ** |   |   |
| **Income  Before Taxes**                                |         | **165,603**                                   | ** **    | 117,639          |       | **379,892** | ** ** | 330,444 |   |
| ** **                                              |         | ** **                                    | ** **    |             |       | ** ** | ** ** |   |   |
| **Income  Taxes**                                       |         | **33,666**                                    | ** **    | 24,716           |       | **79,891** | ** ** | 76,002 |   |
| ** **                                              |         | ** **                                    | ** **    |             |       | ** ** | ** ** |   |   |
| **Net  Income**                                         |         | **$**                                         | **131,937**   | ** **       | $          | 92,923 |   | **$** | **300,001** | ** ** | $ | 254,442 |   |
| ** **                                              |         | ** **                                    | ** **    |             |       | ** ** | ** ** |   |   |
| **Average  Common Shares Outstanding – Basic**     |         | **199,069**                                   | ** **    | 180,881          |       | **197,741** | ** ** | 180,129 |   |
| ** **                                              |         | ** **                                    | ** **    |             |       | ** ** | ** ** |   |   |
| **Earnings  Per Common Share – Basic** (Note 11)   |         | **$**                                         | **0.67**      | ** **       | $          | 0.51 |   | **$** | **1.52** | ** ** | $ | 1.41 |   |
|                                                    |         | ** **                                    | ** **    |             |       | ** ** | ** ** |   |   |
| **Average  Common Shares Outstanding – Diluted**   |         | **200,167**                                   | ** **    | 183,478          |       | **198,777** | ** ** | 182,564 |   |
|                                                    |         | ** **                                    | ** **    |             |       | ** ** | ** ** |   |   |
| **Earnings  Per Common Share – Diluted** (Note 11) |         | **$**                                         | **0.66**      | ** **       | $          | 0.50 |   | **$** | **1.51** | ** ** | $ | 1.39 |   |
|                                                    |         | ** **                                    | ** **    |             |       | ** ** | ** ** |   |   |
| **Cash  Dividends Declared Per Common Share** (Note 2)  |         | **$**                                         | **0.96**      | ** **       | $          | 0.47 |   | **$** | **1.92** | ** ** | $ | 1.41 |   |

 

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

 

5

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**CINERGY CORP.**

**CONDENSED CONSOLIDATED BALANCESHEETS**

 
| ** **                                                                                                                              | ** **   | **September 30**           | ** **     | **December 31** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------|--------------|----------------------------|----------------|-----------------|------------|
| ** **                                                                                                                              | ** **   | **2005**                   | ** **     | **2004**        | ** ** |
| *** ***                                                                                                                            | *** *** | **(dollars in thousands)** | *** ***   |
| *** ***                                                                                                                            | *** *** | **(unaudited)**            | *** ***   |
| **ASSETS**                                                                                                                              |         |                       |           |            |       |
|                                                                                                                                    |         |                       |           |            |       |
| **Current  Assets**                                                                                                                     |         |                       |           |            |       |
| Cash and cash equivalents                                                                                                               |         | **$**                      | **165,831**    | ** **      | $          | 164,541 |   |
| Notes receivable, current                                                                                                               |         | **81,622**                 | ** **     | 214,513         |       |
| Accounts receivable less accumulated provision for  doubtful accounts of $4,489 at September 30, 2005, and $5,514 at December 31,  2004 |         | **1,482,068**              | ** **     | 1,061,140       |       |
| Fuel, emission allowances, and supplies                                                                                                 |         | **607,925**                | ** **     | 444,750         |       |
| Energy risk management current assets                                                                                                   |         | **1,260,255**              | ** **     | 381,146         |       |
| Prepayments and other                                                                                                                   |         | **567,113**                | ** **     | 174,624         |       |
| **Total Current Assets**                                                                                                                |         | **4,164,814**              | ** **     | 2,440,714       |       |
|                                                                                                                                    |         | ** **                 | ** **     |            |       |
| **Property,  Plant, and Equipment – at Cost**                                                                                      |         | ** **                 | ** **     |            |       |
| Utility plant in service                                                                                                                |         | **10,642,931**             | ** **     | 10,076,468      |       |
| Construction work in progress                                                                                                           |         | **398,130**                | ** **     | 333,687         |       |
| **Total Utility Plant**                                                                                                                 |         | **11,041,061**             | ** **     | 10,410,155      |       |
| Non-regulated property, plant, and equipment                                                                                            |         | **4,853,947**              | ** **     | 4,700,009       |       |
| Accumulated depreciation                                                                                                                |         | **5,447,931**              | ** **     | 5,180,699       |       |
| **Net Property, Plant, and Equipment**                                                                                                  |         | **10,447,077**             | ** **     | 9,929,465       |       |
|                                                                                                                                    |         | ** **                 | ** **     |            |       |
| **Other  Assets**                                                                                                                       |         | ** **                 | ** **     |            |       |
| Regulatory assets                                                                                                                       |         | **1,021,277**              | ** **     | 1,030,333       |       |
| Investments in unconsolidated subsidiaries                                                                                              |         | **486,795**                | ** **     | 513,675         |       |
| Energy risk management non-current assets                                                                                               |         | **397,471**                | ** **     | 138,787         |       |
| Notes receivable, non-current                                                                                                           |         | **177,127**                | ** **     | 193,857         |       |
| Other investments                                                                                                                       |         | **128,581**                | ** **     | 125,367         |       |
| Restricted funds held in trust                                                                                                          |         | **277,400**                | ** **     | 358,006         |       |
| Goodwill and other intangible assets                                                                                                    |         | **152,342**                | ** **     | 132,752         |       |
| Other                                                                                                                                   |         | **213,323**                | ** **     | 119,361         |       |
| **Total Other Assets**                                                                                                                  |         | **2,854,316**              | ** **     | 2,612,138       |       |
|                                                                                                                                    |         | ** **                 | ** **     |            |       |
| **Total  Assets**                                                                                                                       |         | **$**                      | **17,466,207** | ** **      | $          | 14,982,317 |   |

 

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

 

6

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**CINERGYCORP.**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

 
| ** **                                                                                                                                                                                                                                                              | ** **   | **September 30**           | ** **     | **December 31** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------|----------------------------|----------------|-----------------|------------|
| ** **                                                                                                                                                                                                                                                              | ** **   | **2005**                   | ** **     | **2004**        | ** ** |
| *** ***                                                                                                                                                                                                                                                            | *** *** | **(dollars in thousands)** | *** ***   |
| *** ***                                                                                                                                                                                                                                                            | *** *** | **(unaudited)**            | *** ***   |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                                                                                                                                                                                                                          |         |                       |           |            |       |
|                                                                                                                                                                                                                                                                    |         |                       |           |            |       |
| **Current  Liabilities**                                                                                                                                                                                                                                                |         |                       |           |            |       |
| Accounts payable                                                                                                                                                                                                                                                        |         | **$**                      | **2,142,077**  | ** **      | $          | 1,348,576 |   |
| Accrued taxes                                                                                                                                                                                                                                                           |         | **266,459**                | ** **     | 216,804         |       |
| Accrued interest                                                                                                                                                                                                                                                        |         | **69,504**                 | ** **     | 54,473          |       |
| Notes payable and other short-term obligations (Note  5)                                                                                                                                                                                                                |         | **1,198,670**              | ** **     | 958,910         |       |
| Long-term debt due within one year                                                                                                                                                                                                                                      |         | **349,012**                | ** **     | 219,967         |       |
| Energy risk management current liabilities                                                                                                                                                                                                                              |         | **1,419,332**              | ** **     | 310,741         |       |
| Other                                                                                                                                                                                                                                                                   |         | **141,448**                | ** **     | 171,188         |       |
| **Total Current Liabilities**                                                                                                                                                                                                                                           |         | **5,586,502**              | ** **     | 3,280,659       |       |
|                                                                                                                                                                                                                                                                    |         | ** **                 | ** **     |            |       |
| **Non-Current  Liabilities**                                                                                                                                                                                                                                            |         | ** **                 | ** **     |            |       |
| Long-term debt                                                                                                                                                                                                                                                          |         | **4,022,076**              | ** **     | 4,227,741       |       |
| Deferred income taxes                                                                                                                                                                                                                                                   |         | **1,445,371**              | ** **     | 1,597,120       |       |
| Unamortized investment tax credits                                                                                                                                                                                                                                      |         | **93,070**                 | ** **     | 99,723          |       |
| Accrued pension and other postretirement benefit  costs                                                                                                                                                                                                                 |         | **652,409**                | ** **     | 688,277         |       |
| Regulatory liabilities                                                                                                                                                                                                                                                  |         | **578,520**                | ** **     | 557,419         |       |
| Energy risk management non-current liabilities                                                                                                                                                                                                                          |         | **420,326**                | ** **     | 127,340         |       |
| Other                                                                                                                                                                                                                                                                   |         | **195,230**                | ** **     | 225,298         |       |
| **Total Non-Current Liabilities**                                                                                                                                                                                                                                       |         | **7,407,002**              | ** **     | 7,522,918       |       |
|                                                                                                                                                                                                                                                                    |         | ** **                 | ** **     |            |       |
| **Commitments  and Contingencies**                                                                                                                                                                                                                                      |         | ** **                 | ** **     |            |       |
| ** **                                                                                                                                                                                                                                                              |         | ** **                 | ** **     |            |       |
| **Total  Liabilities**                                                                                                                                                                                                                                                  |         | **12,993,504**             | ** **     | 10,803,577      |       |
|                                                                                                                                                                                                                                                                    |         | ** **                 | ** **     |            |       |
| **Cumulative  Preferred Stock of Subsidiaries**                                                                                                                                                                                                                         |         | ** **                 | ** **     |            |       |
| Not subject to mandatory redemption                                                                                                                                                                                                                                     |         | **31,743**                 | ** **     | 62,818          |       |
|                                                                                                                                                                                                                                                                    |         | ** **                 | ** **     |            |       |
| **Common  Stock Equity**                                                                                                                                                                                                                                                |         | ** **                 | ** **     |            |       |
| Common stock - $.01 par value; authorized shares –  600,000,000; issued shares – 199,280,386 at September 30, 2005, and  187,653,506 at December 31, 2004; outstanding shares – 199,139,968 at  September 30, 2005, and 187,524,229 at December 31, 2004 |         | **1,993**                  | ** **     | 1,877           |       |
| Paid-in capital                                                                                                                                                                                                                                                         |         | **2,969,103**              | ** **     | 2,559,715       |       |
| Retained earnings                                                                                                                                                                                                                                                       |         | **1,534,752**              | ** **     | 1,613,340       |       |
| Treasury shares at cost – 140,418 shares at  September 30, 2005, and 129,277 shares at December 31, 2004                                                                                                                                                           |         | **(4,776**                 | **)**          | (4,336          | )          |
| Accumulated other comprehensive loss                                                                                                                                                                                                                                    |         | **(60,112**                | **)**          | (54,674         | )          |
| **Total Common Stock Equity**                                                                                                                                                                                                                                           |         | **4,440,960**              | ** **     | 4,115,922       |       |
|                                                                                                                                                                                                                                                                    |         | ** **                 | ** **     |            |       |
| **Total  Liabilities and Shareholders’ Equity**                                                                                                                                                                                                                    |         | **$**                      | **17,466,207** | ** **      | $          | 14,982,317 |   |

 

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

 

7

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**CINERGY CORP.**

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

 
|                                                                  |       |                                                 |       |        |       |          |       |         |          | **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 September 30, 2005**                                  | ** ** | ** **                                           | ** ** | ** **  | ** ** | ** **    | ** ** | ** **   | ** **    | ** **        | ** ** | ** **   | ** ** |
| ** **                                                            | ** ** | ** **                                           | ** ** | ** **  | ** ** | ** **    | ** ** | ** **   | ** **    | ** **        | ** ** | ** **   | ** ** |
| **Balance at July 1, 2005 (198,528,683 shares)**                      | ** ** | **$**                                                | **1,987**  | ** **  | **$**      | **2,941,747** | ** ** | **$**        | **1,594,053** | ** **        | **$**      | **(4,766**   | **)**      | **$** | **(67,634** | **)** | **$** | **4,465,387** | ** ** |
| **Comprehensive  income:**                                            | ** ** | ** **                                           | ** ** | ** **  | ** ** | ** **    | ** ** | ** **   | ** **    | ** **        | ** ** | ** **   | ** ** |
| **Net income**                                                        | ** ** | ** **                                           | ** ** | ** **  | ** ** | **131,937**   | ** ** | ** **   | ** **    | ** **        | ** ** | **131,937**  | ** ** |
| **Other comprehensive income (loss), net of tax  effect of $(6,194)** | ** ** | ** **                                           | ** ** | ** **  | ** ** | ** **    | ** ** | ** **   | ** **    | ** **        | ** ** | ** **   | ** ** |
| **Foreign currency translation adjustment**                           | ** ** | ** **                                           | ** ** | ** **  | ** ** | ** **    | ** ** | ** **   | ** **    | **(285**          | **)**      | **(285**     | **)**      |
| **Unrealized gain on investment trusts**                              | ** ** | ** **                                           | ** ** | ** **  | ** ** | ** **    | ** ** | ** **   | ** **    | **1,104**         | ** ** | **1,104**    | ** ** |
| **Minimum pension liability adjustment**                              | ** ** | ** **                                           | ** ** | ** **  | ** ** | ** **    | ** ** | ** **   | ** **    | **(571**          | **)**      | **(571**     | **)**      |
| **Cash flow hedges**                                                  | ** ** | ** **                                           | ** ** | ** **  | ** ** | ** **    | ** ** | ** **   | ** **    | **7,274**         | ** ** | **7,274**    | ** ** |
| **Total comprehensive income**                                        | ** ** | ** **                                           | ** ** | ** **  | ** ** | ** **    | ** ** | ** **   | ** **    | ** **        | ** ** | **139,459**  | ** ** |
| ** **                                                            | ** ** | ** **                                           | ** ** | ** **  | ** ** | ** **    | ** ** | ** **   | ** **    | ** **        | ** ** | ** **   | ** ** |
| **Issuance of common stock – net (611,574 shares)**              | ** ** | **6**                                                | ** ** | **25,861**  | ** ** | ** **    | ** ** | ** **   | ** **    | ** **        | ** ** | **25,867**   | ** ** |
| **Treasury shares purchased (289 shares)**                            | ** ** | ** **                                           | ** ** | ** **  | ** ** | ** **    | ** ** | **(10**      | **)**         | ** **        | ** ** | **(10**      | **)**      |
| **Dividends on common stock ($0.96 per share)****(Note 2)**           | ** ** | ** **                                           | ** ** | ** **  | ** ** | **(191,120**  | **)**      | ** **   | ** **    | ** **        | ** ** | **(191,120** | **)**      |
| **Other**                                                             | ** ** | ** **                                           | ** ** | **1,495**   | ** ** | **(118**      | **)**      | ** **   | ** **    | ** **        | ** ** | **1,377**    | ** ** |
| ** **                                                            | ** ** | ** **                                           | ** ** | ** **  | ** ** | ** **    | ** ** | ** **   | ** **    | ** **        | ** ** | ** **   | ** ** |
| **Ending balance at September 30, 2005  (199,139,968 shares)**        | ** ** | **$**                                                | **1,993**  | ** **  | **$**      | **2,969,103** | ** ** | **$**        | **1,534,752** | ** **        | **$**      | **(4,776**   | **)**      | **$** | **(60,112** | **)** | **$** | **4,440,960** | ** ** |
| ** **                                                            | ** ** | ** **                                           | ** ** | ** **  | ** ** | ** **    | ** ** | ** **   | ** **    | ** **        | ** ** | ** **   | ** ** |
| Quarter Ended September 30, 2004                                      |       |                                                 |       |        |       |          |       |         |          |              |       |         |       |
|                                                                  |       |                                                 |       |        |       |          |       |         |          |              |       |         |       |
| Balance at July 1, 2004 (180,323,246 shares)                          |       | $                                                    | 1,804      |        | $          | 2,248,084     |       | $            | 1,543,883     |              | $          | (3,966       | )          | $ | (39,804 | ) | $ | 3,750,001 |   |
| Comprehensive income:                                                 |       |                                                 |       |        |       |          |       |         |          |              |       |         |       |
| Net income                                                            |       |                                                 |       |        |       | 92,923        |       |         |          |              |       | 92,923       |       |
| Other comprehensive loss, net of tax effect of  $(1,162)              |       |                                                 |       |        |       |          |       |         |          |              |       |         |       |
| Foreign currency translation adjustment                               |       |                                                 |       |        |       |          |       |         |          | (741              | )          | (741         | )          |
| Unrealized loss on investment trusts                                  |       |                                                 |       |        |       |          |       |         |          | (662              | )          | (662         | )          |
| Cash flow hedges                                                      |       |                                                 |       |        |       |          |       |         |          | (138              | )          | (138         | )          |
| Total comprehensive income                                            |       |                                                 |       |        |       |          |       |         |          |              |       | 91,382       |       |
|                                                                  |       |                                                 |       |        |       |          |       |         |          |              |       |         |       |
| Issuance of common stock – net (675,273 shares)                  |       | 7                                                    |       | 20,989      |       |          |       |         |          |              |       | 20,996       |       |
| Treasury shares purchased (2,963 shares)                              |       |                                                 |       |        |       |          |       | (60          | )             |              |       | (60          | )          |
| Dividends on common stock ($0.47 per share)                           |       |                                                 |       |        |       | (84,873       | )          |         |          |              |       | (84,873      | )          |
| Other                                                                 |       |                                                 |       | 3,578       |       | (85           | )          |         |          |              |       | 3,493        |       |
|                                                                  |       |                                                 |       |        |       |          |       |         |          |              |       |         |       |
| Ending balance at September 30, 2004 (180,995,556  shares)            |       | $                                                    | 1,811      |        | $          | 2,272,651     |       | $            | 1,551,848     |              | $          | (4,026       | )          | $ | (41,345 | ) | $ | 3,780,939 |   |

 

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

 

8

----

 

**CINERGY CORP.**

**CONDENSED CONSOLIDATED STATEMENTS OF CHANGES INCOMMON STOCK EQUITY**

**(Continued)**

 
| ** **                                                        | ** ** | ** **                                            | ** ** | ** **  | ** ** | ** **    | ** ** | ** **   | ** **    | **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)**                                       | ** ** |
| ** **                                                        | ** ** | ** **                                            | ** ** | ** **  | ** ** | ** **    | ** ** | ** **   | ** **    | ** **        | ** ** | ** **   | ** ** |
| **Year to Date September 30, 2005**                               | ** ** | ** **                                            | ** ** | ** **  | ** ** | ** **    | ** ** | ** **   | ** **    | ** **        | ** ** | ** **   | ** ** |
| ** **                                                        | ** ** | ** **                                            | ** ** | ** **  | ** ** | ** **    | ** ** | ** **   | ** **    | ** **        | ** ** | ** **   | ** ** |
| **Balance at January 1, 2005 (187,524,229 shares)**               | ** ** | **$**                                                 | **1,877**  | ** **  | **$**      | **2,559,715** | ** ** | **$**        | **1,613,340** | ** **        | **$**      | **(4,336**   | **)**      | **$** | **(54,674** | **)** | **$** | **4,115,922** | ** ** |
| **Comprehensive income:**                                         | ** ** | ** **                                            | ** ** | ** **  | ** ** | ** **    | ** ** | ** **   | ** **    | ** **        | ** ** | ** **   | ** ** |
| **Net income**                                                    | ** ** | ** **                                            | ** ** | ** **  | ** ** | **300,001**   | ** ** | ** **   | ** **    | ** **        | ** ** | **300,001**  | ** ** |
| **Other comprehensive income (loss), net of tax  effect of $441** | ** ** | ** **                                            | ** ** | ** **  | ** ** | ** **    | ** ** | ** **   | ** **    | ** **        | ** ** | ** **   | ** ** |
| **Foreign currency translation adjustment**                       | ** ** | ** **                                            | ** ** | ** **  | ** ** | ** **    | ** ** | ** **   | ** **    | **(13,392**       | **)**      | **(13,392**  | **)**      |
| **Unrealized gain on investment trusts**                          | ** ** | ** **                                            | ** ** | ** **  | ** ** | ** **    | ** ** | ** **   | ** **    | **150**           | ** ** | **150**      | ** ** |
| **Minimum pension liability adjustment**                          | ** ** | ** **                                            | ** ** | ** **  | ** ** | ** **    | ** ** | ** **   | ** **    | **(571**          | **)**      | **(571**     | **)**      |
| **Cash flow hedges**                                              | ** ** | ** **                                            | ** ** | ** **  | ** ** | ** **    | ** ** | ** **   | ** **    | **8,375**         | ** ** | **8,375**    | ** ** |
| **Total comprehensive income**                                    | ** ** | ** **                                            | ** ** | ** **  | ** ** | ** **    | ** ** | ** **   | ** **    | ** **        | ** ** | **294,563**  | ** ** |
| ** **                                                        | ** ** | ** **                                            | ** ** | ** **  | ** ** | ** **    | ** ** | ** **   | ** **    | ** **        | ** ** | ** **   | ** ** |
| **Issuance of common stock – net (11,626,880  shares)**      | ** ** | **116**                                               | ** ** | **403,374** | ** ** | ** **    | ** ** | ** **   | ** **    | ** **        | ** ** | **403,490**  | ** ** |
| **Treasury shares purchased (11,141 shares)**                     | ** ** | ** **                                            | ** ** | ** **  | ** ** | ** **    | ** ** | **(440**     | **)**         | ** **        | ** ** | **(440**     | **)**      |
| **Dividends on common stock ($1.92 per share)**(Note  2)          | ** ** | ** **                                            | ** ** | ** **  | ** ** | **(378,196**  | **)**      | ** **   | ** **    | ** **        | ** ** | **(378,196** | **)**      |
| **Other**                                                         | ** ** | ** **                                            | ** ** | **6,014**   | ** ** | **(393**      | **)**      | ** **   | ** **    | ** **        | ** ** | **5,621**    | ** ** |
| ** **                                                        | ** ** | ** **                                            | ** ** | ** **  | ** ** | ** **    | ** ** | ** **   | ** **    | ** **        | ** ** | ** **   | ** ** |
| **Ending balance at September 30, 2005  (199,139,968 shares)**    | ** ** | **$**                                                 | **1,993**  | ** **  | **$**      | **2,969,103** | ** ** | **$**        | **1,534,752** | ** **        | **$**      | **(4,776**   | **)**      | **$** | **(60,112** | **)** | **$** | **4,440,960** | ** ** |
| ** **                                                        | ** ** | ** **                                            | ** ** | ** **  | ** ** | ** **    | ** ** | ** **   | ** **    | ** **        | ** ** | ** **   | ** ** |
| Year to Date September 30, 2004                                   |       |                                                  |       |        |       |          |       |         |          |              |       |         |       |
|                                                              |       |                                                  |       |        |       |          |       |         |          |              |       |         |       |
| Balance at January 1, 2004 (178,336,854 shares)                   |       | $                                                     | 1,784      |        | $          | 2,195,985     |       | $            | 1,551,003     |              | $          | (3,255       | )          | $ | (44,835 | ) | $ | 3,700,682 |   |
| Comprehensive income:                                             |       |                                                  |       |        |       |          |       |         |          |              |       |         |       |
| Net income                                                        |       |                                                  |       |        |       | 254,442       |       |         |          |              |       | 254,442      |       |
| Other comprehensive income (loss), net of tax effect  of $(1,928) |       |                                                  |       |        |       |          |       |         |          |              |       |         |       |
| Foreign currency translation adjustment                           |       |                                                  |       |        |       |          |       |         |          | 691               |       | 691          |       |
| Unrealized gain on investment trusts                              |       |                                                  |       |        |       |          |       |         |          | (166              | )          | (166         | )          |
| Cash flow hedges                                                  |       |                                                  |       |        |       |          |       |         |          | 2,965             |       | 2,965        |       |
| Total comprehensive income                                        |       |                                                  |       |        |       |          |       |         |          |              |       | 257,932      |       |
|                                                              |       |                                                  |       |        |       |          |       |         |          |              |       |         |       |
| Issuance of common stock – net (2,683,696 shares)            |       | 27                                                    |       | 67,200      |       |          |       |         |          |              |       | 67,227       |       |
| Treasury shares purchased (24,994 shares)                         |       |                                                  |       |        |       |          |       | (771         | )             |              |       | (771         | )          |
| Dividends on common stock ($1.41 per share)                       |       |                                                  |       |        |       | (253,418      | )          |         |          |              |       | (253,418     | )          |
| Other                                                             |       |                                                  |       | 9,466       |       | (179          | )          |         |          |              |       | 9,287        |       |
|                                                              |       |                                                  |       |        |       |          |       |         |          |              |       |         |       |
| Ending balance at September 30, 2004 (180,995,556  shares)        |       | $                                                     | 1,811      |        | $          | 2,272,651     |       | $            | 1,551,848     |              | $          | (4,026       | )          | $ | (41,345 | ) | $ | 3,780,939 |   |

 

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

 

9

----

 

**CINERGY CORP.**

**CONDENSED CONSOLIDATED STATEMENTSOF CASH FLOWS**

 
| ** **                                                                            | ** **   | **Year to Date**           | ** **   |
|---------------------------------------------------------------------------------------|--------------|----------------------------|--------------|
| ** **                                                                            | ** **   | **September 30**           | ** **   |
| ** **                                                                            | ** **   | **2005**                   | ** **   | **2004** | ** ** |
| *** ***                                                                          | *** *** | **(dollars in thousands)** | *** *** |
| *** ***                                                                          | *** *** | **(unaudited)**            | *** *** |
| **Cash Flows from Operations**                                                        |         |                       |         |   |   |
| Operating Activities                                                                  |         |                       |         |   |   |
| Net income                                                                            |         | **$**                      | **300,001**  | ** ** | $ | 254,442 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities:    |         | ** **                 | ** **   |   |   |
| Depreciation                                                                          |         | **386,537**                | ** **   | 333,856 |   |
| Loss on impairment or disposal of subsidiaries and  investments, net                  |         | **7,542**                  | ** **   | 38,268 |   |
| Change in net position of energy risk management  activities                          |         | **263,784**                | ** **   | (35,463 | ) |
| Deferred income taxes and investment tax credits –  net                          |         | **(16,249**                | **)**        | 81,649 |   |
| Equity in earnings of unconsolidated subsidiaries                                     |         | **(25,206**                | **)**        | (18,095 | ) |
| Return on equity investments                                                          |         | **25,081**                 | ** **   | — |   |
| Allowance for equity funds used during construction                                   |         | **(6,043**                 | **)**        | (1,122 | ) |
| Regulatory asset/liability deferrals                                                  |         | **(145,233**               | **)**        | (39,115 | ) |
| Regulatory assets amortization                                                        |         | **102,603**                | ** **   | 74,176 |   |
| Accrued pension and other postretirement benefit  costs                               |         | **(35,868**                | **)**        | (60,136 | ) |
| Cost of removal                                                                       |         | **(17,499**                | **)**        | (13,037 | ) |
| Changes in current assets and current liabilities:                                    |         | ** **                 | ** **   |   |   |
| Accounts and notes receivable                                                         |         | **(290,569**               | **)**        | 358,465 |   |
| Fuel, emission allowances, and supplies                                               |         | **(262,408**               | **)**        | (78,502 | ) |
| Prepayments                                                                           |         | **(381,515**               | **)**        | (70,124 | ) |
| Accounts payable                                                                      |         | **698,363**                | ** **   | (161,574 | ) |
| Accrued taxes and interest                                                            |         | **(13,630**                | **)**        | (88,347 | ) |
| Other assets                                                                          |         | **(36,224**                | **)**        | (7,295 | ) |
| Other liabilities                                                                     |         | **(56,363**                | **)**        | 68,087 |   |
|                                                                                  |         | ** **                 | ** **   |   |   |
| **Net cash provided by operating activities**                                         |         | **497,104**                | ** **   | 636,133 |   |
|                                                                                  |         | ** **                 | ** **   |   |   |
| Financing Activities                                                                  |         | ** **                 | ** **   |   |   |
| Change in short-term debt                                                             |         | **239,760**                | ** **   | 783,258 |   |
| Issuance of long-term debt                                                            |         | **54,183**                 | ** **   | — |   |
| Redemption of long-term debt                                                          |         | **(144,799**               | **)**        | (824,411 | ) |
| Retirement of preferred stock of subsidiaries                                         |         | **(31,075**                | **)**        | — |   |
| Issuance of common stock                                                              |         | **403,490**                | ** **   | 67,227 |   |
| Dividends on common stock                                                             |         | **(282,541**               | **)**        | (253,418 | ) |
|                                                                                  |         | ** **                 | ** **   |   |   |
| **Net cash provided by (used in) financing  activities**                              |         | **239,018**                | ** **   | (227,344 | ) |
|                                                                                  |         | ** **                 | ** **   |   |   |
| Investing Activities                                                                  |         | ** **                 | ** **   |   |   |
| Construction expenditures (less allowance for equity  funds used during construction) |         | **(777,382**               | **)**        | (473,354 | ) |
| Proceeds from notes receivable                                                        |         | **14,848**                 | ** **   | 12,966 |   |
| Withdrawal of restricted cash held in trust                                           |         | **104,473**                | ** **   | 14,861 |   |
| Acquisitions and other investments                                                    |         | **(107,147**               | **)**        | (9,734 | ) |
| Proceeds from distributions by investments and sale  of investments and subsidiaries  |         | **30,376**                 | ** **   | 29,726 |   |
|                                                                                  |         | ** **                 | ** **   |   |   |
| **Net cash used in investing activities**                                             |         | **(734,832**               | **)**        | (425,535 | ) |
|                                                                                  |         | ** **                 | ** **   |   |   |
| **Net increase (decrease) in cash and cash  equivalents**                             |         | **1,290**                  | ** **   | (16,746 | ) |
| **Cash and cash equivalents at beginning of period**                                  |         | **164,541**                | ** **   | 169,120 |   |
| **Cash and cash equivalents at end of period**                                        |         | **$**                      | **165,831**  | ** ** | $ | 152,374 |   |
|                                                                                  |         | ** **                 | ** **   |   |   |
| **Supplemental Disclosure of Cash Flow Information**                                  | ** **   | ** **                 | ** **   | ** ** | ** ** |
| Cash paid during the period for:                                                      |         | ** **                 | ** **   |   |   |
| Interest (net of amount capitalized)                                                  |         | **$**                      | **204,893**  | ** ** | $ | 219,100 |   |
| Income taxes                                                                          |         | **$**                      | **81,259**   | ** ** | $ | 46,272 |   |

 

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

 

10

----

 

 

**THE CINCINNATI GAS & ELECTRICCOMPANY**

**AND SUBSIDIARY COMPANIES**

 

11

----

 

**THE CINCINNATI GAS & ELECTRICCOMPANY**

**CONDENSED CONSOLIDATED STATEMENTSOF INCOME AND COMPREHENSIVE INCOME**

 
| ** **                                        | ** **   | **Quarter Ended**          | ** **   | **Year to Date** | ** ** |
|---------------------------------------------------|--------------|----------------------------|--------------|------------------|------------|
| ** **                                        | ** **   | **September 30**           | ** **   | **September 30** | ** ** |
| ** **                                        | ** **   | **2005**                   | ** **   | **2004**         | ** ** | **2005** | ** ** | **2004** | ** ** |
| *** ***                                      | *** *** | **(dollars in thousands)** | *** *** |
| *** ***                                      | *** *** | **(unaudited)**            | *** *** |
| * *                                          | * *     | * *                   | * *     | * *         | * *   | * * | * * | * * | * * |
| **Operating Revenues**                            |         |                       |         |             |       |   |   |   |   |
| Electric                                          |         | **$**                      | **547,990**  | ** **       | $          | 452,074 |   | **$** | **1,472,211** | ** ** | $ | 1,303,235 |   |
| Gas                                               |         | **69,147**                 | ** **   | 60,055           |       | **475,970** | ** ** | 478,358 |   |
| Other                                             |         | **61,481**                 | ** **   | 41,668           |       | **174,257** | ** ** | 83,390 |   |
| **Total  Operating Revenues**                     |         | **678,618**                | ** **   | 553,797          |       | **2,122,438** | ** ** | 1,864,983 |   |
|                                              |         | ** **                 | ** **   |             |       | ** ** | ** ** |   |   |
| **Operating Expenses**                            |         | ** **                 | ** **   |             |       | ** ** | ** ** |   |   |
| Fuel, emission  allowances, and purchased power   |         | **211,968**                | ** **   | 140,307          |       | **512,125** | ** ** | 389,462 |   |
| Gas purchased                                     |         | **31,264**                 | ** **   | 19,721           |       | **295,135** | ** ** | 290,656 |   |
| Costs of fuel  resold                             |         | **47,310**                 | ** **   | 28,953           |       | **137,528** | ** ** | 66,327 |   |
| Operation and  maintenance                        |         | **176,088**                | ** **   | 153,292          |       | **509,712** | ** ** | 453,213 |   |
| Depreciation                                      |         | **45,747**                 | ** **   | 45,943           |       | **136,117** | ** ** | 135,806 |   |
| Taxes other than  income taxes                    |         | **51,573**                 | ** **   | 45,316           |       | **163,448** | ** ** | 158,816 |   |
| **Total  Operating Expenses**                     |         | **563,950**                | ** **   | 433,532          |       | **1,754,065** | ** ** | 1,494,280 |   |
|                                              |         | ** **                 | ** **   |             |       | ** ** | ** ** |   |   |
| **Operating Income**                              |         | **114,668**                | ** **   | 120,265          |       | **368,373** | ** ** | 370,703 |   |
| ** **                                        |         | ** **                 | ** **   |             |       | ** ** | ** ** |   |   |
| **Miscellaneous Income – Net**               |         | **4,434**                  | ** **   | 7,204            |       | **11,587** | ** ** | 13,247 |   |
| **Interest Expense**                              |         | **26,830**                 | ** **   | 24,083           |       | **73,632** | ** ** | 68,934 |   |
| ** **                                        |         | ** **                 | ** **   |             |       | ** ** | ** ** |   |   |
| **Income Before Taxes**                           |         | **92,272**                 | ** **   | 103,386          |       | **306,328** | ** ** | 315,016 |   |
| ** **                                        |         | ** **                 | ** **   |             |       | ** ** | ** ** |   |   |
| **Income Taxes**                                  |         | **29,588**                 | ** **   | 39,313           |       | **105,354** | ** ** | 118,179 |   |
| ** **                                        |         | ** **                 | ** **   |             |       | ** ** | ** ** |   |   |
| **Net Income**                                    |         | **$**                      | **62,684**   | ** **       | $          | 64,073 |   | **$** | **200,974** | ** ** | $ | 196,837 |   |
| ** **                                        |         | ** **                 | ** **   |             |       | ** ** | ** ** |   |   |
| **Preferred Dividend Requirement**                |         | **211**                    | ** **   | 211              |       | **634** | ** ** | 634 |   |
| ** **                                        |         | ** **                 | ** **   |             |       | ** ** | ** ** |   |   |
| **Net Income Applicable to Common Stock**         |         | **$**                      | **62,473**   | ** **       | $          | 63,862 |   | **$** | **200,340** | ** ** | $ | 196,203 |   |
| ** **                                        |         | ** **                 | ** **   |             |       | ** ** | ** ** |   |   |
| **Net Income**                                    |         | **$**                      | **62,684**   | ** **       | $          | 64,073 |   | **$** | **200,974** | ** ** | $ | 196,837 |   |
| ** **                                        |         | ** **                 | ** **   |             |       | ** ** | ** ** |   |   |
| **Other Comprehensive Income (Loss), Net of Tax** |         | **1,772**                  | ** **   | (2               | )          | **3,501** | ** ** | 2,881 |   |
| ** **                                        |         | ** **                 | ** **   |             |       | ** ** | ** ** |   |   |
| **Comprehensive Income**                          |         | **$**                      | **64,456**   | ** **       | $          | 64,071 |   | **$** | **204,475** | ** ** | $ | 199,718 |   |

 

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

 

12

----

 

**THE CINCINNATI GAS & ELECTRICCOMPANY**

**CONDENSED CONSOLIDATED BALANCESHEETS**

 
| ** **                                                            | ** **   | **September 30**           | ** **    | **December 31** | ** ** |
|-----------------------------------------------------------------------|--------------|----------------------------|---------------|-----------------|------------|
| ** **                                                            | ** **   | **2005**                   | ** **    | **2004**        | ** ** |
| *** ***                                                          | *** *** | **(dollars in thousands)** | *** ***  |
| *** ***                                                          | *** *** | **(unaudited)**            | *** ***  |
| **ASSETS**                                                            |         |                       |          |            |       |
|                                                                  |         |                       |          |            |       |
| **Current Assets**                                                    |         |                       |          |            |       |
| Cash and cash  equivalents                                            |         | **$**                      | **8,353**     | ** **      | $          | 4,154 |   |
| Notes receivable  from affiliated companies                           |         | **32,748**                 | ** **    | 121,559         |       |
| Accounts  receivable less accumulated provision for doubtful accounts |         | **545,981**                | ** **    | 145,105         |       |
| Accounts  receivable from affiliated companies                        |         | **81,982**                 | ** **    | 30,916          |       |
| Fuel, emission  allowances, and supplies                              |         | **222,571**                | ** **    | 199,769         |       |
| Energy risk  management current assets                                |         | **669,897**                | ** **    | 148,866         |       |
| Prepayments and  other                                                |         | **263,541**                | ** **    | 54,650          |       |
| **Total Current Assets**                                              |         | **1,825,073**              | ** **    | 705,019         |       |
|                                                                  |         | ** **                 | ** **    |            |       |
| **Property, Plant, and Equipment – at Cost**                     |         | ** **                 | ** **    |            |       |
| Utility plant in  service                                             |         | ** **                 | ** **    |            |       |
| Electric                                                              |         | **2,305,398**              | ** **    | 2,249,352       |       |
| Gas                                                                   |         | **1,236,671**              | ** **    | 1,179,764       |       |
| Common                                                                |         | **254,138**                | ** **    | 249,576         |       |
| **Total  Utility Plant In Service**                                   |         | **3,796,207**              | ** **    | 3,678,692       |       |
| Construction  work in progress                                        |         | **81,306**                 | ** **    | 45,762          |       |
| **Total  Utility Plant**                                              |         | **3,877,513**              | ** **    | 3,724,454       |       |
| Non-regulated  property, plant, and equipment                         |         | **3,792,749**              | ** **    | 3,660,226       |       |
| Accumulated  depreciation                                             |         | **2,799,014**              | ** **    | 2,694,708       |       |
| **Net Property, Plant, and Equipment**                                |         | **4,871,248**              | ** **    | 4,689,972       |       |
|                                                                  |         | ** **                 | ** **    |            |       |
| **Other Assets**                                                      |         | ** **                 | ** **    |            |       |
| Regulatory  assets                                                    |         | **506,063**                | ** **    | 609,550         |       |
| Energy risk  management non-current assets                            |         | **207,759**                | ** **    | 47,276          |       |
| Restricted funds  held in trust                                       |         | **72,094**                 | ** **    | 93,671          |       |
| Other                                                                 |         | **136,857**                | ** **    | 86,871          |       |
| **Total Other Assets**                                                |         | **922,773**                | ** **    | 837,368         |       |
| ** **                                                            |         | ** **                 | ** **    |            |       |
| **Total Assets**                                                      |         | **$**                      | **7,619,094** | ** **      | $          | 6,232,359 |   |

 

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

 

13

----

 

**THE CINCINNATI GAS & ELECTRICCOMPANY**

**CONDENSED CONSOLIDATED BALANCESHEETS**

 
| ** **                                                                                                                                                     | ** **   | **September 30**           | ** **    | **December 31** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------|----------------------------|---------------|-----------------|------------|
| ** **                                                                                                                                                     | ** **   | **2005**                   | ** **    | **2004**        | ** ** |
| *** ***                                                                                                                                                   | *** *** | **(dollars in thousands)** | *** ***  |
| *** ***                                                                                                                                                   | *** *** | **(unaudited)**            | *** ***  |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                                                                  |         |                       |          |            |       |
|                                                                                                                                                           |         |                       |          |            |       |
| **Current Liabilities**                                                                                                                                        |         |                       |          |            |       |
| Accounts payable                                                                                                                                               |         | **$**                      | **873,633**   | ** **      | $          | 332,316 |   |
| Accounts payable  to affiliated companies                                                                                                                      |         | **119,164**                | ** **    | 85,127          |       |
| Accrued taxes                                                                                                                                                  |         | **292,459**                | ** **    | 149,010         |       |
| Accrued interest                                                                                                                                               |         | **26,173**                 | ** **    | 19,408          |       |
| Notes payable  and other short-term obligations (Note 5)                                                                                                       |         | **112,100**                | ** **    | 112,100         |       |
| Notes payable to  affiliated companies (Note 5)                                                                                                                |         | **204,519**                | ** **    | 180,116         |       |
| Long-term debt  due within one year                                                                                                                            |         | **—**                 | ** **    | 150,000         |       |
| Energy risk  management current liabilities                                                                                                                    |         | **740,692**                | ** **    | 120,204         |       |
| Other                                                                                                                                                          |         | **33,191**                 | ** **    | 33,712          |       |
| **Total Current Liabilities**                                                                                                                                  |         | **2,401,931**              | ** **    | 1,181,993       |       |
|                                                                                                                                                           |         | ** **                 | ** **    |            |       |
| **Non-Current Liabilities**                                                                                                                                    |         | ** **                 | ** **    |            |       |
| Long-term debt                                                                                                                                                 |         | **1,594,617**              | ** **    | 1,443,668       |       |
| Deferred income  taxes                                                                                                                                         |         | **972,421**                | ** **    | 1,090,897       |       |
| Unamortized  investment tax credits                                                                                                                            |         | **68,702**                 | ** **    | 73,120          |       |
| Accrued pension  and other postretirement benefit costs                                                                                                        |         | **226,858**                | ** **    | 228,058         |       |
| Regulatory  liabilities                                                                                                                                        |         | **186,228**                | ** **    | 164,846         |       |
| Energy risk  management non-current liabilities                                                                                                                |         | **216,727**                | ** **    | 40,184          |       |
| Other                                                                                                                                                          |         | **58,870**                 | ** **    | 70,395          |       |
| **Total Non-Current Liabilities**                                                                                                                              |         | **3,324,423**              | ** **    | 3,111,168       |       |
|                                                                                                                                                           |         | ** **                 | ** **    |            |       |
| **Commitments and Contingencies**                                                                                                                              |         | ** **                 | ** **    |            |       |
| ** **                                                                                                                                                     |         | ** **                 | ** **    |            |       |
| **Total Liabilities**                                                                                                                                          |         | **5,726,354**              | ** **    | 4,293,161       |       |
|                                                                                                                                                           |         | ** **                 | ** **    |            |       |
| **Cumulative Preferred Stock**                                                                                                                                 |         | ** **                 | ** **    |            |       |
| Not subject to  mandatory redemption                                                                                                                           |         | **20,485**                 | ** **    | 20,485          |       |
|                                                                                                                                                           |         | ** **                 | ** **    |            |       |
| **Common Stock Equity**                                                                                                                                        |         | ** **                 | ** **    |            |       |
| Common stock –  $8.50 par value; authorized shares – 120,000,000; outstanding shares –  89,663,086 at September 30, 2005, and December 31, 2004 |         | **762,136**                | ** **    | 762,136         |       |
| Paid-in capital                                                                                                                                                |         | **584,176**                | ** **    | 584,176         |       |
| Retained  earnings                                                                                                                                             |         | **560,274**                | ** **    | 610,232         |       |
| Accumulated  other comprehensive loss                                                                                                                          |         | **(34,331**                | **)**         | (37,831         | )          |
| **Total Common Stock Equity**                                                                                                                                  |         | **1,872,255**              | ** **    | 1,918,713       |       |
| ** **                                                                                                                                                     |         | ** **                 | ** **    |            |       |
| **Total Liabilities and Shareholders’ Equity**                                                                                                            |         | **$**                      | **7,619,094** | ** **      | $          | 6,232,359 |   |

 

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

 

14

----

 

**THE CINCINNATI GAS & ELECTRICCOMPANY**

**CONDENSED CONSOLIDATED STATEMENTSOF CASH FLOWS**

 
| ** **                                                                            | ** **   | **Year to Date**           | ** **   |
|---------------------------------------------------------------------------------------|--------------|----------------------------|--------------|
| ** **                                                                            | ** **   | **September 30**           | ** **   |
| ** **                                                                            | ** **   | **2005**                   | ** **   | **2004** | ** ** |
| *** ***                                                                          | *** *** | **(dollars in thousands)** | *** *** |
| *** ***                                                                          | *** *** | **(unaudited)**            | *** *** |
| * *                                                                              | * *     | * *                   | * *     | * * | * * |
| **Operating Activities**                                                              |         |                       |         |   |   |
| Net income                                                                            |         | **$**                      | **200,974**  | ** ** | $ | 196,837 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities:    |         | ** **                 | ** **   |   |   |
| Depreciation                                                                          |         | **136,117**                | ** **   | 135,806 |   |
| Deferred income  taxes and investment tax credits – net                          |         | **(32,449**                | **)**        | 47,546 |   |
| Change in net  position of energy risk management activities                          |         | **115,518**                | ** **   | (32,032 | ) |
| Allowance for  equity funds used during construction                                  |         | **(804**                   | **)**        | (699 | ) |
| Regulatory  asset/liability deferrals                                                 |         | **(1,342**                 | **)**        | (11,469 | ) |
| Regulatory  assets amortization                                                       |         | **69,501**                 | ** **   | 41,688 |   |
| Accrued pension  and other postretirement benefit costs                               |         | **(1,200**                 | **)**        | (20,287 | ) |
| Cost of removal                                                                       |         | **(4,969**                 | **)**        | (5,490 | ) |
| Changes in  current assets and current liabilities:                                   |         | ** **                 | ** **   |   |   |
| Accounts and  notes receivable                                                        |         | **(363,131**               | **)**        | (20,238 | ) |
| Fuel, emission  allowances, and supplies                                              |         | **(76,742**                | **)**        | (49,786 | ) |
| Prepayments                                                                           |         | **(208,887**               | **)**        | (36,751 | ) |
| Accounts payable                                                                      |         | **494,516**                | ** **   | 11,201 |   |
| Accrued taxes  and interest                                                           |         | **110,459**                | ** **   | 31,839 |   |
| Other assets                                                                          |         | **586**                    | ** **   | (14,009 | ) |
| Other  liabilities                                                                    |         | **(2,083**                 | **)**        | 5,973 |   |
|                                                                                  |         | ** **                 | ** **   |   |   |
| **Net cash provided by operating activities**                                         |         | **436,064**                | ** **   | 280,129 |   |
|                                                                                  |         | ** **                 | ** **   |   |   |
| **Financing Activities**                                                              |         | ** **                 | ** **   |   |   |
| Change in  short-term debt, including net affiliate notes                             |         | **24,403**                 | ** **   | 196,383 |   |
| Redemption of  long-term debt                                                         |         | **—**                 | ** **   | (110,000 | ) |
| Dividends on  preferred stock                                                         |         | **(634**                   | **)**        | (634 | ) |
| Dividends on  common stock                                                            |         | **(169,459**               | **)**        | (168,509 | ) |
|                                                                                  |         | ** **                 | ** **   |   |   |
| **Net cash used in financing activities**                                             |         | **(145,690**               | **)**        | (82,760 | ) |
| ** **                                                                            |         | ** **                 | ** **   |   |   |
| **Investing Activities**                                                              |         | ** **                 | ** **   |   |   |
| Construction  expenditures (less allowance for equity funds used during construction) |         | **(309,385**               | **)**        | (219,307 | ) |
| Withdrawal of  restricted funds held in trust                                         |         | **23,153**                 | ** **   | — |   |
| Other  investments                                                                    |         | **57**                     | ** **   | 15,321 |   |
|                                                                                  |         | ** **                 | ** **   |   |   |
| **Net cash used in investing activities**                                             |         | **(286,175**               | **)**        | (203,986 | ) |
|                                                                                  |         | ** **                 | ** **   |   |   |
| **Net increase (decrease) in cash and cash  equivalents**                             |         | **4,199**                  | ** **   | (6,617 | ) |
| ** **                                                                            |         | ** **                 | ** **   |   |   |
| **Cash and cash equivalents at beginning of period**                                  |         | **4,154**                  | ** **   | 15,842 |   |
| ** **                                                                            |         | ** **                 | ** **   |   |   |
| **Cash and cash equivalents at end of period**                                        |         | **$**                      | **8,353**    | ** ** | $ | 9,225 |   |
| ** **                                                                            |         | ** **                 | ** **   |   |   |
| **Supplemental Disclosure of Cash Flow Information**                                  |         | ** **                 | ** **   |   |   |
| Cash paid during  the period for:                                                     |         | ** **                 | ** **   |   |   |
| Interest (net of  amount capitalized)                                                 |         | **$**                      | **69,717**   | ** ** | $ | 65,629 |   |
| Income taxes                                                                          |         | **$**                      | **12,370**   | ** ** | $ | 16,646 |   |

 

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

 

15

----

 

**PSI ENERGY, INC.**

**AND SUBSIDIARY COMPANY**

 

16

----

 

**PSI ENERGY, INC.**

**CONDENSED CONSOLIDATED STATEMENTSOF INCOME AND COMPREHENSIVE INCOME**

 
| ** **                                        | ** ** | **Quarter Ended**          | ** **  | **Year to Date** | ** ** |
|---------------------------------------------------|------------|----------------------------|-------------|------------------|------------|
| ** **                                        | ** ** | **September 30**           | ** **  | **September 30** | ** ** |
| ** **                                        | ** ** | **2005**                   | ** **  | **2004**         | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                        | ** ** | **(dollars in thousands)** | ** **  |
| ** **                                        | ** ** | **(unaudited)**            | ** **  |
| * *                                          | * *   | * *                   | * *    | * *         | * *   | * * | * * | * * | * * |
| **Operating Revenues**                            |       |                       |        |             |       |   |   |   |   |
| Electric                                          |       | **$**                      | **572,930** |             | $          | 480,089 |   | **$** | **1,426,795** |   | $ | 1,310,812 |   |
|                                              |       | ** **                 |        |             |       | ** ** |   |   |   |
| **Operating Expenses**                            |       | ** **                 |        |             |       | ** ** |   |   |   |
| Fuel, emission  allowances, and purchased power   |       | **234,552**                |        | 183,644          |       | **500,668** |   | 493,689 |   |
| Operation and  maintenance                        |       | **113,006**                |        | 118,914          |       | **356,045** |   | 350,467 |   |
| Depreciation                                      |       | **65,860**                 |        | 54,675           |       | **199,155** |   | 158,565 |   |
| Taxes other than  income taxes                    |       | **12,126**                 |        | 10,481           |       | **38,059** |   | 41,014 |   |
| **Total  Operating Expenses**                     |       | **425,544**                |        | 367,714          |       | **1,093,927** |   | 1,043,735 |   |
| ** **                                        |       | ** **                 |        |             |       | ** ** |   |   |   |
| **Operating Income**                              |       | **147,386**                |        | 112,375          |       | **332,868** |   | 267,077 |   |
|                                              |       | ** **                 |        |             |       | ** ** |   |   |   |
| **Miscellaneous Income – Net**               |       | **5,481**                  |        | 2,213            |       | **15,973** |   | 5,777 |   |
| **Interest Expense**                              |       | **29,360**                 |        | 24,864           |       | **81,037** |   | 66,489 |   |
| ** **                                        |       | ** **                 |        |             |       | ** ** |   |   |   |
| **Income Before Taxes**                           |       | **123,507**                |        | 89,724           |       | **267,804** |   | 206,365 |   |
| ** **                                        |       | ** **                 |        |             |       | ** ** |   |   |   |
| **Income Taxes**                                  |       | **57,500**                 |        | 41,237           |       | **116,723** |   | 91,626 |   |
| ** **                                        |       | ** **                 |        |             |       | ** ** |   |   |   |
| **Net Income**                                    |       | **$**                      | **66,007**  |             | $          | 48,487 |   | **$** | **151,081** |   | $ | 114,739 |   |
| ** **                                        |       | ** **                 |        |             |       | ** ** |   |   |   |
| **Preferred Dividend Requirement**                |       | **391**                    |        | 647              |       | **1,685** |   | 1,940 |   |
| ** **                                        |       | ** **                 |        |             |       | ** ** |   |   |   |
| **Net Income Applicable to Common Stock**         |       | **$**                      | **65,616**  |             | $          | 47,840 |   | **$** | **149,396** |   | $ | 112,799 |   |
| ** **                                        |       | ** **                 |        |             |       | ** ** |   |   |   |
| **Net Income**                                    |       | **$**                      | **66,007**  |             | $          | 48,487 |   | **$** | **151,081** |   | $ | 114,739 |   |
| ** **                                        |       | ** **                 |        |             |       | ** ** |   |   |   |
| **Other Comprehensive Income (Loss), Net of Tax** |       | **6,676**                  |        | (614             | )          | **4,946** |   | (248 | ) |
| ** **                                        |       | ** **                 |        |             |       | ** ** |   |   |   |
| **Comprehensive Income**                          |       | **$**                      | **72,683**  |             | $          | 47,873 |   | **$** | **156,027** |   | $ | 114,491 |   |

 

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

 

17

----

 

**PSI ENERGY, INC.**

**CONDENSED CONSOLIDATED BALANCESHEETS**

 
| ** **                                                            | ** **   | **September 30**           | ** **    | **December 31** | ** ** |
|-----------------------------------------------------------------------|--------------|----------------------------|---------------|-----------------|------------|
| ** **                                                            | ** **   | **2005**                   | ** **    | **2004**        | ** ** |
| *** ***                                                          | *** *** | **(dollars in thousands)** | *** ***  |
| *** ***                                                          | *** *** | **(unaudited)**            | *** ***  |
| **ASSETS**                                                            |         |                       |          |            |       |
|                                                                  |         |                       |          |            |       |
| **Current Assets**                                                    |         |                       |          |            |       |
| Cash and cash  equivalents                                            |         | **$**                      | **30,540**    | ** **      | $          | 10,794 |   |
| Restricted  deposits                                                  |         | **28,926**                 | ** **    | 22,063          |       |
| Notes receivable  from affiliated companies                           |         | **26,996**                 | ** **    | 72,958          |       |
| Accounts  receivable less accumulated provision for doubtful accounts |         | **90,499**                 | ** **    | 31,177          |       |
| Accounts  receivable from affiliated companies                        |         | **9,777**                  | ** **    | 437             |       |
| Fuel, emission  allowances, and supplies                              |         | **173,836**                | ** **    | 108,793         |       |
| Prepayments and  other                                                |         | **19,445**                 | ** **    | 11,804          |       |
| **Total Current Assets**                                              |         | **380,019**                | ** **    | 258,026         |       |
|                                                                  |         | ** **                 | ** **    |            |       |
| **Property, Plant, and Equipment – at Cost**                     |         | ** **                 | ** **    |            |       |
| Utility plant in  service                                             |         | **6,846,723**              | ** **    | 6,397,776       |       |
| Construction  work in progress                                        |         | **316,401**                | ** **    | 287,925         |       |
| **Total  Utility Plant**                                              |         | **7,163,124**              | ** **    | 6,685,701       |       |
| Accumulated  depreciation                                             |         | **2,415,964**              | ** **    | 2,284,932       |       |
| **Net Property, Plant, and Equipment**                                |         | **4,747,160**              | ** **    | 4,400,769       |       |
|                                                                  |         | ** **                 | ** **    |            |       |
| **Other Assets**                                                      |         | ** **                 | ** **    |            |       |
| Regulatory  assets                                                    |         | **515,215**                | ** **    | 420,783         |       |
| Other  investments                                                    |         | **74,604**                 | ** **    | 73,396          |       |
| Restricted funds  held in trust                                       |         | **193,628**                | ** **    | 264,335         |       |
| Other                                                                 |         | **84,667**                 | ** **    | 32,587          |       |
| **Total Other Assets**                                                |         | **868,114**                | ** **    | 791,101         |       |
|                                                                  |         | ** **                 | ** **    |            |       |
| **Total Assets**                                                      |         | **$**                      | **5,995,293** | ** **      | $          | 5,449,896 |   |

 

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

 

18

----

 

**PSI ENERGY, INC.**

**CONDENSED CONSOLIDATED BALANCESHEETS**

 
| ** **                                                                                                                                                                         | ** **   | **September 30**           | ** **    | **December 31** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------|----------------------------|---------------|-----------------|------------|
| ** **                                                                                                                                                                         | ** **   | **2005**                   | ** **    | **2004**        | ** ** |
| *** ***                                                                                                                                                                       | *** *** | **(dollars in thousands)** | *** ***  |
| *** ***                                                                                                                                                                       | *** *** | **(unaudited)**            | *** ***  |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                                                                                      |         |                       |          |            |       |
|                                                                                                                                                                               |         |                       |          |            |       |
| **Current Liabilities**                                                                                                                                                            |         |                       |          |            |       |
| Accounts payable                                                                                                                                                                   |         | **$**                      | **126,725**   | ** **      | $          | 65,151 |   |
| Accounts payable  to affiliated companies                                                                                                                                          |         | **81,547**                 | ** **    | 38,292          |       |
| Accrued taxes                                                                                                                                                                      |         | **157,400**                | ** **    | 65,871          |       |
| Accrued interest                                                                                                                                                                   |         | **30,912**                 | ** **    | 27,532          |       |
| Notes payable  and other short-term obligations (Note 5)                                                                                                                           |         | **135,500**                | ** **    | 135,500         |       |
| Notes payable to  affiliated companies (Note 5)                                                                                                                                    |         | **373,682**                | ** **    | 130,580         |       |
| Long-term debt  due within one year                                                                                                                                                |         | **326,166**                | ** **    | 50,000          |       |
| Other                                                                                                                                                                              |         | **56,034**                 | ** **    | 33,326          |       |
| **Total Current Liabilities**                                                                                                                                                      |         | **1,287,966**              | ** **    | 546,252         |       |
|                                                                                                                                                                               |         | ** **                 | ** **    |            |       |
| **Non-Current Liabilities**                                                                                                                                                        |         | ** **                 | ** **    |            |       |
| Long-term debt                                                                                                                                                                     |         | **1,468,641**              | ** **    | 1,824,219       |       |
| Deferred income  taxes                                                                                                                                                             |         | **622,950**                | ** **    | 638,061         |       |
| Unamortized  investment tax credits                                                                                                                                                |         | **24,368**                 | ** **    | 26,603          |       |
| Accrued pension  and other postretirement benefit costs                                                                                                                            |         | **206,449**                | ** **    | 209,992         |       |
| Regulatory  liabilities                                                                                                                                                            |         | **392,292**                | ** **    | 392,573         |       |
| Other                                                                                                                                                                              |         | **72,364**                 | ** **    | 88,665          |       |
| **Total Non-Current Liabilities**                                                                                                                                                  |         | **2,787,064**              | ** **    | 3,180,113       |       |
| ** **                                                                                                                                                                         |         | ** **                 | ** **    |            |       |
| **Commitments and Contingencies**                                                                                                                                                  |         | ** **                 | ** **    |            |       |
| ** **                                                                                                                                                                         |         | ** **                 | ** **    |            |       |
| **Total Liabilities**                                                                                                                                                              |         | **4,075,030**              | ** **    | 3,726,365       |       |
|                                                                                                                                                                               |         | ** **                 | ** **    |            |       |
| **Cumulative Preferred Stock**                                                                                                                                                     |         | ** **                 | ** **    |            |       |
| Not subject to  mandatory redemption                                                                                                                                               |         | **11,258**                 | ** **    | 42,333          |       |
|                                                                                                                                                                               |         | ** **                 | ** **    |            |       |
| **Common Stock Equity**                                                                                                                                                            |         | ** **                 | ** **    |            |       |
| Common stock –  without par value; $.01 stated value; authorized shares – 60,000,000;  outstanding shares – 53,913,701 at September 30, 2005, and December 31, 2004 |         | **539**                    | ** **    | 539             |       |
| Paid-in capital                                                                                                                                                                    |         | **826,019**                | ** **    | 626,019         |       |
| Retained  earnings                                                                                                                                                                 |         | **1,101,479**              | ** **    | 1,078,617       |       |
| Accumulated  other comprehensive loss                                                                                                                                              |         | **(19,032**                | **)**         | (23,977         | )          |
| **Total Common Stock Equity**                                                                                                                                                      |         | **1,909,005**              | ** **    | 1,681,198       |       |
| ** **                                                                                                                                                                         |         | ** **                 | ** **    |            |       |
| **Total Liabilities and Shareholders’ Equity**                                                                                                                                |         | **$**                      | **5,995,293** | ** **      | $          | 5,449,896 |   |

 

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

 

19

----

 

**PSI ENERGY, INC.**

**CONDENSED CONSOLIDATED STATEMENTSOF CASH FLOWS**

 
| ** **                                                                            | ** **   | **Year to Date**           | ** **   |
|---------------------------------------------------------------------------------------|--------------|----------------------------|--------------|
| ** **                                                                            | ** **   | **September 30**           | ** **   |
| ** **                                                                            | ** **   | **2005**                   | ** **   | **2004** | ** ** |
| *** ***                                                                          | *** *** | **(dollars in thousands)** | *** *** |
| *** ***                                                                          | *** *** | **(unaudited)**            | *** *** |
| * *                                                                              | * *     | * *                   | * *     | * * | * * |
| **Operating Activities**                                                              |         |                       |         |   |   |
| Net income                                                                            |         | **$**                      | **151,081**  | ** ** | $ | 114,739 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities:    |         | ** **                 | ** **   |   |   |
| Depreciation                                                                          |         | **199,155**                | ** **   | 158,565 |   |
| Deferred income  taxes and investment tax credits – net                          |         | **13,225**                 | ** **   | 48,045 |   |
| Allowance for  equity funds used during construction                                  |         | **(5,238**                 | **)**        | (423 | ) |
| Regulatory  asset/liability deferrals                                                 |         | **(143,891**               | **)**        | (27,646 | ) |
| Regulatory  assets amortization                                                       |         | **33,102**                 | ** **   | 32,488 |   |
| Accrued pension  and other postretirement benefit costs                               |         | **(3,543**                 | **)**        | (7,493 | ) |
| Cost of removal                                                                       |         | **(12,530**                | **)**        | (7,547 | ) |
| Changes in  current assets and current liabilities:                                   |         | ** **                 | ** **   |   |   |
| Accounts and  notes receivable                                                        |         | **(22,700**                | **)**        | 25,120 |   |
| Fuel, emission  allowances, and supplies                                              |         | **(110,059**               | **)**        | 21,300 |   |
| Prepayments                                                                           |         | **253**                    | ** **   | (820 | ) |
| Accounts payable                                                                      |         | **89,716**                 | ** **   | (3,147 | ) |
| Accrued taxes  and interest                                                           |         | **56,346**                 | ** **   | 2,855 |   |
| Other assets                                                                          |         | **(38,164**                | **)**        | 2,856 |   |
| Other liabilities                                                                     |         | **18,733**                 | ** **   | (7,228 | ) |
|                                                                                  |         | ** **                 | ** **   |   |   |
| **Net cash provided by operating activities**                                         |         | **225,486**                | ** **   | 351,664 |   |
| ** **                                                                            |         | ** **                 | ** **   |   |   |
| **Financing Activities**                                                              |         | ** **                 | ** **   |   |   |
| Change in  short-term debt, including net affiliate notes                             |         | **243,102**                | ** **   | (34,857 | ) |
| Issuance of  long-term debt                                                           |         | **48,656**                 | ** **   | — |   |
| Redemption of  long-term debt                                                         |         | **(130,000**               | **)**        | — |   |
| Contribution  from parent                                                             |         | **200,000**                | ** **   | — |   |
| Retirement of  preferred stock                                                        |         | **(31,075**                | **)**        | — |   |
| Dividends on  preferred stock                                                         |         | **(1,862**                 | **)**        | (1,940 | ) |
| Dividends on  common stock                                                            |         | **(111,245**               | **)**        | (84,709 | ) |
|                                                                                  |         | ** **                 | ** **   |   |   |
| **Net cash provided by (used in) financing  activities**                              |         | **217,576**                | ** **   | (121,506 | ) |
| ** **                                                                            |         | ** **                 | ** **   |   |   |
| **Investing Activities**                                                              |         | ** **                 | ** **   |   |   |
| Construction  expenditures (less allowance for equity funds used during construction) |         | **(397,655**               | **)**        | (217,413 | ) |
| Withdrawal of  restricted funds held in trust                                         |         | **74,800**                 | ** **   | 14,861 |   |
| Acquisitions and  other investments                                                   |         | **(100,461**               | **)**        | (2,063 | ) |
|                                                                                  |         | ** **                 | ** **   |   |   |
| **Net cash used in investing activities**                                             |         | **(423,316**               | **)**        | (204,615 | ) |
| ** **                                                                            |         | ** **                 | ** **   |   |   |
| **Net increase in cash and cash equivalents**                                         |         | **19,746**                 | ** **   | 25,543 |   |
| ** **                                                                            |         | ** **                 | ** **   |   |   |
| **Cash and cash equivalents at beginning of period**                                  |         | **10,794**                 | ** **   | 6,565 |   |
| ** **                                                                            |         | ** **                 | ** **   |   |   |
| **Cash and cash equivalents at end of period**                                        |         | **$**                      | **30,540**   | ** ** | $ | 32,108 |   |
| ** **                                                                            |         | ** **                 | ** **   |   |   |
| **Supplemental Disclosure of Cash Flow Information**                                  |         | ** **                 | ** **   |   |   |
| Cash paid during  the period for:                                                     |         | ** **                 | ** **   |   |   |
| Interest (net of  amount capitalized)                                                 |         | **$**                      | **85,455**   | ** ** | $ | 74,245 |   |
| Income taxes                                                                          |         | **$**                      | **40,450**   | ** ** | $ | 28,302 |   |

 

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

 

20

----

 

 

**THE UNION LIGHT, HEAT ANDPOWER COMPANY**

 

21

----

 

**THE UNION LIGHT, HEAT AND POWERCOMPANY**

**CONDENSED STATEMENTS OF INCOMEAND COMPREHENSIVE INCOME**

 
| ** **                                            | ** **   | **Quarter Ended**          | ** **   | **Year to Date** | ** ** |
|-------------------------------------------------------|--------------|----------------------------|--------------|------------------|------------|
| ** **                                            | ** **   | **September 30**           | ** **   | **September 30** | ** ** |
| ** **                                            | ** **   | **2005**                   | ** **   | **2004**         | ** ** | **2005** | ** ** | **2004** | ** ** |
| *** ***                                          | *** *** | **(dollars in thousands)** | *** *** |
| *** ***                                          | *** *** | **(unaudited)**            | *** *** |
| * *                                              | * *     | * *                   | * *     | * *         | * *   | * * | * * | * * | * * |
| **Operating Revenues**                                |         |                       |         |             |       |   |   |   |   |
| Electric                                              |         | **$**                      | **71,994**   | ** **       | $          | 63,751 |   | **$** | **183,002** | ** ** | $ | 176,698 |   |
| Gas                                                   |         | **13,439**                 | ** **   | 11,119           |       | **89,887** | ** ** | 85,243 |   |
| **Total  Operating Revenues**                         |         | **85,433**                 | ** **   | 74,870           |       | **272,889** | ** ** | 261,941 |   |
|                                                  |         | ** **                 | ** **   |             |       | ** ** | ** ** |   |   |
| **Operating Expenses**                                |         | ** **                 | ** **   |             |       | ** ** | ** ** |   |   |
| Electricity  purchased from parent company for resale |         | **49,028**                 | ** **   | 45,461           |       | **128,464** | ** ** | 124,768 |   |
| Gas purchased                                         |         | **6,573**                  | ** **   | 5,214            |       | **57,397** | ** ** | 53,528 |   |
| Operation and  maintenance                            |         | **16,978**                 | ** **   | 14,893           |       | **50,182** | ** ** | 42,448 |   |
| Depreciation                                          |         | **5,260**                  | ** **   | 4,992            |       | **15,547** | ** ** | 14,944 |   |
| Taxes other than  income taxes                        |         | **534**                    | ** **   | (567             | )          | **3,618** | ** ** | 2,110 |   |
| **Total  Operating Expenses**                         |         | **78,373**                 | ** **   | 69,993           |       | **255,208** | ** ** | 237,798 |   |
| ** **                                            |         | ** **                 | ** **   |             |       | ** ** | ** ** |   |   |
| **Operating Income**                                  |         | **7,060**                  | ** **   | 4,877            |       | **17,681** | ** ** | 24,143 |   |
| ** **                                            |         | ** **                 | ** **   |             |       | ** ** | ** ** |   |   |
| **Miscellaneous Income – Net**                   |         | **656**                    | ** **   | 294              |       | **2,219** | ** ** | 1,035 |   |
| **Interest Expense**                                  |         | **1,703**                  | ** **   | 1,263            |       | **5,150** | ** ** | 3,760 |   |
| ** **                                            |         | ** **                 | ** **   |             |       | ** ** | ** ** |   |   |
| **Income Before Taxes**                               |         | **6,013**                  | ** **   | 3,908            |       | **14,750** | ** ** | 21,418 |   |
|                                                  |         | ** **                 | ** **   |             |       | ** ** | ** ** |   |   |
| **Income Taxes**                                      |         | **2,379**                  | ** **   | 1,608            |       | **5,409** | ** ** | 8,139 |   |
| ** **                                            |         | ** **                 | ** **   |             |       | ** ** | ** ** |   |   |
| **Net Income**                                        |         | **$**                      | **3,634**    | ** **       | $          | 2,300 |   | **$** | **9,341** | ** ** | $ | 13,279 |   |
| ** **                                            |         | ** **                 | ** **   |             |       | ** ** | ** ** |   |   |
| **Other Comprehensive Loss, Net of Tax**              |         | **(17**                    | **)**        | —           |       | **(17** | **)** | — |   |
| ** **                                            |         | ** **                 | ** **   |             |       | ** ** | ** ** |   |   |
| **Comprehensive Income**                              |         | **$**                      | **3,617**    | ** **       | $          | 2,300 |   | **$** | **9,324** | ** ** | $ | 13,279 |   |

 

**The accompanying notes as they relate to The UnionLight, Heat and Power Company are an integral part of these condensed financialstatements.**

 

22

----

 

**THE UNION LIGHT, HEAT AND POWERCOMPANY**

**CONDENSED BALANCE SHEETS**

** **
| ** **                                                            | ** ** | **September 30**           | ** **  | **December 31** | ** ** |
|-----------------------------------------------------------------------|------------|----------------------------|-------------|-----------------|------------|
| ** **                                                            | ** ** | **2005**                   | ** **  | **2004**        | ** ** |
| ** **                                                            | ** ** | **(dollars in thousands)** | ** **  |
| ** **                                                            | ** ** | **(unaudited)**            | ** **  |
|                                                                  |       |                       |        |
| **ASSETS**                                                            |       |                       |        |            |       |
|                                                                  |       |                       |        |            |       |
| **Current Assets**                                                    |       |                       |        |            |       |
| Cash and cash  equivalents                                            |       | **$**                      | **7,888**   | ** **      | $          | 4,197 |   |
| Notes receivable  from affiliated companies                           |       | **4,800**                  | ** **  | 20,675          |       |
| Accounts  receivable less accumulated provision for doubtful accounts |       | **1,388**                  | ** **  | 1,451           |       |
| Accounts  receivable from affiliated companies                        |       | **537**                    | ** **  | 5,671           |       |
| Inventory and  supplies                                               |       | **11,132**                 | ** **  | 8,500           |       |
| Prepayments and  other                                                |       | **883**                    | ** **  | 285             |       |
| **Total Current Assets**                                              |       | **26,628**                 | ** **  | 40,779          |       |
| ** **                                                            |       | ** **                 | ** **  |            |       |
| **Property, Plant, and Equipment – at Cost**                     |       | ** **                 | ** **  |            |       |
| Utility plant in  service                                             |       | ** **                 | ** **  |            |       |
| Electric                                                              |       | **293,347**                | ** **  | 285,828         |       |
| Gas                                                                   |       | **270,895**                | ** **  | 256,667         |       |
| Common                                                                |       | **42,071**                 | ** **  | 42,176          |       |
| **Total  Utility Plant In Service**                                   |       | **606,313**                | ** **  | 584,671         |       |
| Construction  work in progress                                        |       | **14,275**                 | ** **  | 6,070           |       |
| **Total  Utility Plant**                                              |       | **620,588**                | ** **  | 590,741         |       |
| Accumulated  depreciation                                             |       | **186,471**                | ** **  | 176,726         |       |
| **Net Property, Plant, and Equipment**                                |       | **434,117**                | ** **  | 414,015         |       |
| ** **                                                            |       | ** **                 | ** **  |            |       |
| **Other Assets**                                                      |       | ** **                 | ** **  |            |       |
| Regulatory  assets                                                    |       | **6,786**                  | ** **  | 10,070          |       |
| Other                                                                 |       | **2,628**                  | ** **  | 2,801           |       |
| **Total Other Assets**                                                |       | **9,414**                  | ** **  | 12,871          |       |
| ** **                                                            |       | ** **                 | ** **  |            |       |
| **Total Assets**                                                      |       | **$**                      | **470,159** | ** **      | $          | 467,665 |   |

 

**The accompanying notes as they relate to The UnionLight, Heat and Power Company are an integral part of these condensed financialstatements.**

 

23

----

 

**THE UNION LIGHT, HEAT AND POWERCOMPANY**

**CONDENSED BALANCE SHEETS**

** **
| ** **                                                                                                                                                 | ** ** | **September 30**           | ** **  | **December 31** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------|-------------|-----------------|------------|
| ** **                                                                                                                                                 | ** ** | **2005**                   | ** **  | **2004**        | ** ** |
| ** **                                                                                                                                                 | ** ** | **(dollars in thousands)** | ** **  |
| ** **                                                                                                                                                 | ** ** | **(unaudited)**            | ** **  |
|                                                                                                                                                       |       |                       |        |
| **LIABILITIES AND SHAREHOLDER’S EQUITY**                                                                                                              |       |                       |        |            |       |
|                                                                                                                                                       |       |                       |        |            |       |
| **Current Liabilities**                                                                                                                                    |       |                       |        |            |       |
| Accounts payable                                                                                                                                           |       | **$**                      | **5,441**   | ** **      | $          | 16,028 |   |
| Accounts payable  to affiliated companies                                                                                                                  |       | **19,537**                 | ** **  | 22,236          |       |
| Accrued interest                                                                                                                                           |       | **1,644**                  | ** **  | 1,370           |       |
| Notes payable to  affiliated companies (Note 5)                                                                                                            |       | **9,563**                  | ** **  | 11,246          |       |
| Other                                                                                                                                                      |       | **10,094**                 | ** **  | 7,009           |       |
| **Total Current Liabilities**                                                                                                                              |       | **46,279**                 | ** **  | 57,889          |       |
| ** **                                                                                                                                                 |       | ** **                 | ** **  |            |       |
| **Non-Current Liabilities**                                                                                                                                |       | ** **                 | ** **  |            |       |
| Long-term debt                                                                                                                                             |       | **94,392**                 | ** **  | 94,340          |       |
| Deferred income  taxes                                                                                                                                     |       | **60,592**                 | ** **  | 58,422          |       |
| Unamortized  investment tax credits                                                                                                                        |       | **2,436**                  | ** **  | 2,626           |       |
| Accrued pension  and other postretirement benefit costs                                                                                                    |       | **17,535**                 | ** **  | 17,762          |       |
| Regulatory  liabilities                                                                                                                                    |       | **34,392**                 | ** **  | 29,979          |       |
| Other                                                                                                                                                      |       | **12,696**                 | ** **  | 14,136          |       |
| **Total Non-Current Liabilities**                                                                                                                          |       | **222,043**                | ** **  | 217,265         |       |
| ** **                                                                                                                                                 |       | ** **                 | ** **  |            |       |
| **Commitments and Contingencies**                                                                                                                          |       | ** **                 | ** **  |            |       |
| ** **                                                                                                                                                 |       | ** **                 | ** **  |            |       |
| **Total Liabilities**                                                                                                                                      |       | **268,322**                | ** **  | 275,154         |       |
| ** **                                                                                                                                                 |       | ** **                 | ** **  |            |       |
| **Common Stock Equity**                                                                                                                                    |       | ** **                 | ** **  |            |       |
| Common stock –  $15.00 par value; authorized shares – 1,000,000; outstanding shares – 585,333  at September 30, 2005, and December 31, 2004 |       | **8,780**                  | ** **  | 8,780           |       |
| Paid-in capital                                                                                                                                            |       | **23,455**                 | ** **  | 23,455          |       |
| Retained  earnings                                                                                                                                         |       | **170,904**                | ** **  | 161,562         |       |
| Accumulated  other comprehensive loss                                                                                                                      |       | **(1,302**                 | **)**       | (1,286          | )          |
| **Total Common Stock Equity**                                                                                                                              |       | **201,837**                | ** **  | 192,511         |       |
| ** **                                                                                                                                                 |       | ** **                 | ** **  |            |       |
| **Total Liabilities and Shareholder’s Equity**                                                                                                        |       | **$**                      | **470,159** | ** **      | $          | 467,665 |   |

 

**The accompanying notes as they relate to The UnionLight, Heat and Power Company are an integral part of these condensed financialstatements.**

 

24

----

 

**THE UNION LIGHT, HEAT AND POWERCOMPANY**

**CONDENSED STATEMENTS OF CASHFLOWS**

** **
| ** **                                                                            | ** **   | **Year to Date**           | ** **   |
|---------------------------------------------------------------------------------------|--------------|----------------------------|--------------|
| ** **                                                                            | ** **   | **September 30**           | ** **   |
| ** **                                                                            | ** **   | **2005**                   | ** **   | **2004** | ** ** |
| *** ***                                                                          | *** *** | **(dollars in thousands)** | *** *** |
| *** ***                                                                          | *** *** | **(unaudited)**            | *** *** |
| * *                                                                              | * *     | * *                   | * *     | * * | * * |
| **Operating Activities**                                                              |         |                       |         |   |   |
| Net income                                                                            |         | **$**                      | **9,341**    | ** ** | $ | 13,279 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities:    |         | ** **                 | ** **   |   |   |
| Depreciation                                                                          |         | **15,547**                 | ** **   | 14,944 |   |
| Deferred income  taxes and investment tax credits – net                          |         | **4,296**                  | ** **   | 3,865 |   |
| Allowance for  equity funds used during construction                                  |         | **(445**                   | **)**        | 12 |   |
| Regulatory  asset/liability deferrals                                                 |         | **944**                    | ** **   | 2,851 |   |
| Regulatory  assets amortization                                                       |         | **2,697**                  | ** **   | 1,046 |   |
| Accrued pension  and other postretirement benefit costs                               |         | **(227**                   | **)**        | (2,124 | ) |
| Cost of removal                                                                       |         | **(858**                   | **)**        | (1,267 | ) |
| Changes in  current assets and current liabilities:                                   |         | ** **                 | ** **   |   |   |
| Accounts and  notes receivable                                                        |         | **21,072**                 | ** **   | 17,364 |   |
| Inventory and  supplies                                                               |         | **(2,632**                 | **)**        | (2,853 | ) |
| Prepayments                                                                           |         | **(598**                   | **)**        | (148 | ) |
| Accounts payable                                                                      |         | **(13,286**                | **)**        | (12,716 | ) |
| Accrued taxes  and interest                                                           |         | **3,398**                  | ** **   | 5,273 |   |
| Other assets                                                                          |         | **596**                    | ** **   | 409 |   |
| Other  liabilities                                                                    |         | **(2,221**                 | **)**        | (1,178 | ) |
|                                                                                  |         | ** **                 | ** **   |   |   |
| **Net cash provided by operating activities**                                         |         | **37,624**                 | ** **   | 38,757 |   |
| ** **                                                                            |         | ** **                 | ** **   |   |   |
| **Financing Activities**                                                              |         | ** **                 | ** **   |   |   |
| Change in short-term  debt, including net affiliate notes                             |         | **(1,683**                 | **)**        | (8,338 | ) |
|                                                                                  |         | ** **                 | ** **   |   |   |
| **Net cash used in financing activities**                                             |         | **(1,683**                 | **)**        | (8,338 | ) |
| ** **                                                                            |         | ** **                 | ** **   |   |   |
| **Investing Activities**                                                              |         | ** **                 | ** **   |   |   |
| Construction  expenditures (less allowance for equity funds used during construction) |         | **(32,250**                | **)**        | (24,619 | ) |
|                                                                                  |         | ** **                 | ** **   |   |   |
| **Net cash used in investing activities**                                             |         | **(32,250**                | **)**        | (24,619 | ) |
| ** **                                                                            |         | ** **                 | ** **   |   |   |
| **Net increase in cash and cash equivalents**                                         |         | **3,691**                  | ** **   | 5,800 |   |
| ** **                                                                            |         | ** **                 | ** **   |   |   |
| **Cash and cash equivalents at beginning of period**                                  |         | **4,197**                  | ** **   | 1,899 |   |
| ** **                                                                            |         | ** **                 | ** **   |   |   |
| **Cash and cash equivalents at end of period**                                        |         | **$**                      | **7,888**    | ** ** | $ | 7,699 |   |
| ** **                                                                            |         | ** **                 | ** **   |   |   |
| **Supplemental Disclosure of Cash Flow Information**                                  |         | ** **                 | ** **   |   |   |
| Cash paid during  the period for:                                                     |         | ** **                 | ** **   |   |   |
| Interest (net of  amount capitalized)                                                 |         | **$**                      | **4,638**    | ** ** | $ | 3,814 |   |
| Income taxes                                                                          |         | **$**                      | **—**   | ** ** | $ | 4 |   |

 

**The accompanying notes as they relate to The UnionLight, Heat and Power Company are an integral part of these condensed financialstatements.**

 

25

----

 

**INDEX**

** **

**NOTES TO CONDENSED FINANCIALSTATEMENTS**

 
| **Note**   | ** **                                                   | ** ** |
|------------|--------------------------------------------------------------|------------|
| **Number** | ** **                                                   | ** ** |
| ** ** | ** **                                                   | ** ** |
| 1          | Organization  and Summary of Significant Accounting Policies |       |
|       |                                                         |       |
| 2          | Common Stock                                                 |       |
|       |                                                         |       |
| 3          | Cumulative  Preferred Stock                                  |       |
|       |                                                         |       |
| 4          | Long-Term Debt                                               |       |
|       |                                                         |       |
| 5          | Notes  Payable and Other Short-term Obligations              |       |
|       |                                                         |       |
| 6          | Energy Trading  Credit Risk                                  |       |
|       |                                                         |       |
| 7          | Financial Instruments                                        |       |
|       |                                                         |       |
| 8          | Pension and  Other Postretirement Benefits                   |       |
|       |                                                         |       |
| 9          | Commitments  and Contingencies                               |       |
|       |                                                         |       |
| 10         | Financial  Information by Business Segment                   |       |
|       |                                                         |       |
| 11         | Earnings Per  Common Share                                   |       |
|       |                                                         |       |
| 12         | Transfer  and Acquisition of Generating Assets               |       |
|       |                                                         |       |
| 13         | Pending Merger                                               |       |
|       |                                                         |       |
| 14         | Subsequent Event                                             |       |

 

26

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**NOTES TOCONDENSED FINANCIAL STATEMENTS**

 

### **NOTES TO CONDENSEDFINANCIAL STATEMENTS**

 

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

 

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

 

***(a)***                                  PendingMerger

 

On May 8, 2005, **Cinergy Corp.**entered into an agreement and plan of merger with Duke Energy Corporation(Duke), a North Carolina corporation, whereby **CinergyCorp.** will be merged with Duke. Under the merger agreement, each share of **CinergyCorp.** common stock will be converted into 1.56 shares of commonstock of the newly formed company, Duke Energy Holding Corp.

 

The merger agreement has been approved by both companies’ Boards ofDirectors.  Consummation of the merger issubject to customary conditions, including, among others, the approval of theshareholders of both companies and the approvals of various regulatoryauthorities.  See Note 13 for further informationregarding the pending merger.

 

***(b)***                                  Presentation

 

Our Condensed Financial Statements reflect all adjustments (whichinclude normal, recurring adjustments) necessary in the opinion of theregistrants for a fair presentation of the interim results.  These results are not necessarily indicativeof results for a full year.  Thesestatements should be read in conjunction with the Financial Statements and thenotes thereto included in the registrants’ combined Form 10-K for the yearended December 31, 2004 (2004 10-K). Certain amounts in the 2004 Condensed Financial Statements have beenreclassified to conform to the 2005 presentation.

 

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

 

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

•                  Evaluatingthe regulatory 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 and judgments are discussed more fully in “CriticalAccounting Estimates” in our 2004 10-K. Actual results could differ, as these estimates and assumptions involvejudgment about future events or performance.

 

***(c)***                                  RevenueRecognition

 

*(i)          UtilityRevenues*

 

**CG&E**, **PSI**, and **ULH&P**(collectively, our utility operating companies) record *Operating Revenues* for electric and gasservice when delivered to customers. Customers are billed throughout the month as both gas and electricmeters are read.  We recognize revenuesfor retail energy sales that have not yet been billed, but where gas orelectricity has been consumed.  This istermed “unbilled revenues” and is a widely recognized and accepted practice forutilities.  In making our estimates ofunbilled revenues, we use systems that consider various factors, includingweather, in our calculation of retail customer consumption at the end of eachmonth.  Given the use of these systemsand the fact that customers are billed monthly, we believe it is unlikely thatmaterially different results will occur in future periods when these amountsare subsequently billed.

 

27

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Unbilled revenues for **Cinergy**,**CG&E**, **PSI**, and **ULH&P**as of September 30, 2005 and 2004, were as follows:

 
| ** **                   | ** ** | **2005**          | ** ** | **2004** | ** ** |
|------------------------------|------------|-------------------|------------|----------|------------|
| ** **                   | ** ** | **(in millions)** | ** ** |
|                         |       |              |       |     |       |
| **Cinergy**                  |       | **$**             | **152**    |     | $          | 137 |   |
| **CG&E**and subsidiaries |       | **80**            |       | 68       |       |
| **PSI**                      |       | **72**            |       | 69       |       |
| **ULH&P**                |       | **13**            |       | 12       |       |
|                              |            |                   |            |          |            |  |  |

 

*(ii)        Energy Marketing and Trading Revenues*

 

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

 

*(iii)       Other Operating Revenues*

 

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

 

***(d)***                                  Derivatives

** **

**Cinergy** designates derivativesas fair value hedges for certain volumes of our natural gas held instorage.  Under this accounting election,changes in the fair value of both the derivative as well as the hedged item(the specified gas held in storage) are included in *GasOperating Revenues*in **Cinergy’s**Condensed Consolidated Statements of Income. We assess the effectiveness of the derivatives in offsetting the changein fair value of the gas held in storage on a quarterly basis.  Selected information on **Cinergy’s**hedge accounting activities for the quarter and year to date ended September30, 2005 and 2004 were as follows:

 
| ** **                                                                                                                   | ** ** | **Quarter**       | ** ** | **Year to Date** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|------------------|------------|
| ** **                                                                                                                   | ** ** | **2005**          | ** ** | **2004**         | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                                                                   | ** ** | **(in millions)** | ** ** |
|                                                                                                                         |       |              |       |             |       |   |   |   |   |
| Portion of loss  on hedging instruments determined to be ineffective                                                         |       | **$**             | **(25**    | **)**            | $          | (3 | ) | $ | (24 | ) | $ | — |   |
| Portion of gain  (loss) on hedging instruments related to changes in time value excluded from  assessment of ineffectiveness |       | **28**            | ** ** | (6               | )          | 24 |   | (8 | ) |
|                                                                                                                         |       | ** **        | ** ** |             |       |   |   |   |   |
| Total included  in *Gas Operating Revenues*                                                                                  |       | **$**             | **3**      | ** **       | $          | (9 | ) | $ | — |   | $ | (8 | ) |

 

***(e)***                                  AccountingChanges

 

*(i)         *AssetRetirement Obligations

 

In March 2005, the Financial Accounting Standards Board (FASB) issuedInterpretation No. 47, *Accounting forConditional Asset Retirement Obligations* (Interpretation 47), aninterpretation of Statement of Financial Accounting Standards No. 143, *Accounting for Asset Retirement Obligations*(Statement143).  Statement 143 requires recognitionof legal obligations associated with the retirement or removal of long-livedassets at the time the obligations are incurred.  Interpretation 47 clarifies that a conditionalasset retirement obligation (which occurs when

 

28

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the timing and/or method of settlement are conditional on a futureevent that may or may not be within the control of the entity) is a legalobligation within the scope of Statement 143. As such, the fair value of a conditional asset retirement obligationmust be recognized as a liability when incurred if the liability’s fair valuecan be reasonably estimated. Interpretation 47 also clarifies when sufficient information exists toreasonably estimate the fair value of an asset retirement obligation.

 

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

 

*(ii)        Share-Based Payment*

 

In December 2004, the FASB issued a replacement of Statement ofFinancial Accounting Standards No. 123, *Accounting for Stock-BasedCompensation* (Statement 123), *Statement of FinancialAccounting Standards No. 123 (revised 2004), Share-Based Payment*(Statement 123R).  This standard willrequire, among other things, accounting for all stock-based compensationarrangements under the fair value method.

 

In 2003, we prospectively adopted accounting for our stock-basedcompensation plans using the fair value recognition provisions of Statement123, as amended by Statement of Financial Accounting Standards No. 148, *Accounting for Stock-Based Compensation-Transition and Disclosure*,for all employee awards granted or with terms modified on or after January 1,2003.  Therefore, the impact ofimplementation of Statement 123R on stock options within our stock-basedcompensation plans is not expected to be material.  Statement 123R contains certain provisionsthat will modify the accounting for various types of stock-based compensationother than stock options.  We are in theprocess of evaluating the impact of this new standard on our plans.  **Cinergy** willadopt Statement 123R on January 1, 2006.

 

*(iii)       Income Taxes*

 

In October 2004, the American Jobs Creation Act (AJCA) was signed intolaw.  The AJCA includes a one-timededuction of 85 percent of certain foreign earnings that are repatriated, asdefined in the AJCA.  Based on our analysis, repatriation pursuantto this provision will not have a material impact on our financial position orresults of operations.

 

**2.     CommonStock**

 

As discussed in the 2004 10-K, in January and February 2005, **Cinergy****Corp.** issued atotal of 9.2 million shares of common stock pursuant to certain stock purchasecontracts that were issued as a component of combined securities in December2001.  Net proceeds from the transactionof $316 million were used to reduce short-term debt.

 

**Cinergy** issues new **Cinergy Corp.** common stock shares tosatisfy obligations under certain of its employee stock plans and the CinergyCorp. Direct Stock Purchase and Dividend Reinvestment Plan.  During the nine months ended September 30,2005, **Cinergy** issued 2.5 millionshares under these plans.

 

In June 2005, **Cinergy Corp.**contributed $200 million in capital to **PSI**.  The capital contribution was used to repayshort-term indebtedness and is consistent with supporting **PSI’s**current credit ratings.

 

Cash dividends declaredfor the quarter ended September 30, 2005 include dividends of $0.48 per sharewhich were declared by the board of directors on July 21 and dividends of $0.48per share which were declared on September 30.

 

**3.     Cumulative Preferred Stock**

 

In August 2005, **PSI** redeemedall of its $31.075 million notional amount 6.875% Cumulative Preferred Stock.

 

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**4.**              Long-Term Debt

 

In August 2005, **PSI**redeemed all of its $50 million 6.50% Synthetic Putable Yield Securities dueAugust 1, 2026 through the exercise of call provisions within the securities.

 

In August 2005, **PSI** redeemedall of its $50 million principal amount Series ZZ First Mortgage secured 5 3⁄4%Series 1993B Environmental Revenue Refunding Bonds, due February 15,2028.  **PSI** redeemed these bonds with theproceeds from the issuance by the Indiana Finance Authority of $50 millionprincipal amount of its Environmental Revenue Refunding Bonds, Series 2005A,due July 1, 2035.  The bonds bear a fixed rate of interest through 2035 of4.50 percent.

 

****In September 2005,********PSI********redeemed all of its$30 million principal amount 7.125% Series AAA First Mortgage Bonds, due 2024.****

 

In October 2005, **PSI** borrowedthe proceeds from the Indiana Finance Authority’s issuance of $50 millionprincipal amount of its Environmental Revenue Bonds, Series 2005C, due October 1,2040.  The initial interest rate forSeries 2005C Bonds was 2.75%. This rate will initially reset on December 2,2005 and then every 35 days by auction thereafter.  Because the holders cannot tender the Series 2005CBonds for purchase by the issuer while the Series 2005C Bonds are in theauction rate mode, these debt obligations are classified as *Long-term debt. ***PSI** is using the proceeds from these borrowings to assist inthe acquisition and construction of solid waste disposal facilities located atvarious generating stations in Indiana.

 

Also in October 2005, **PSI** issued $350million principal amount of its 6.12% Debentures due October 15, 2035. Proceedsfrom this issuance were used for general corporate purposes and the repaymentof outstanding short-term indebtedness.

 

30

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**5.**              Notes Payable andOther Short-term Obligations

 

**Cinergy Corp.’s**short-termborrowings consist primarily of unsecured revolving lines of credit and thesale of commercial paper.  **Cinergy Corp.’s** revolving credit facility andcommercial paper program also support the short-term borrowing needs of **CG&E**, **PSI**,and **ULH&P**.  In addition, **Cinergy Corp.**, **CG&E**,and **PSI** maintain uncommitted linesof credit.  These facilities are not firmsources of capital but rather informal agreements to lend money, subject toavailability, with pricing determined at the time of advance.  The following table summarizes our *Notes payable and other short-term obligations* and *Notes payable to affiliated companies*:

 

| ** **                         | ** ** | **September 30, 2005**    | ** ** | **December 31, 2004** | ** ** |
|------------------------------------|------------|---------------------------|------------|-----------------------|------------|
| ** **                         | ** ** | ** **                | ** ** | ** **            | ** ** | **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)               |       | ** **                | ** ** | **874**               | ** ** | **3.88** | ** ** |   |   | 676 |   | 2.45 |   |
|                               |       | ** **                | ** ** | ** **            | ** ** | ** ** | ** ** |   |   |   |   |   |   |
| Utility  operating companies       |       | ** **                | ** ** | ** **            | ** ** | ** ** | ** ** |   |   |   |   |   |   |
| Uncommitted  lines                 |       | **75**                    | ** ** | **—**            | ** ** | **—** | ** ** | 75 |   | — |   | — |   |
| Pollution  control notes           |       | ** **                | ** ** | **248**               | ** ** | **3.20** | ** ** |   |   | 248 |   | 2.43 |   |
|                               |       | ** **                | ** ** | ** **            | ** ** | ** ** | ** ** |   |   |   |   |   |   |
| Non-regulated  subsidiaries        |       | ** **                | ** ** | ** **            | ** ** | ** ** | ** ** |   |   |   |   |   |   |
| Revolving  lines(3)                |       | **162**                   | ** ** | **45**                | ** ** | **4.29** | ** ** | 158 |   | 8 |   | 5.67 |   |
| Short-term debt                    |       | ** **                | ** ** | **7**                 | ** ** | **9.39** | ** ** |   |   | 2 |   | 4.50 |   |
| Pollution  control notes           |       | ** **                | ** ** | **25**                | ** ** | **3.10** | ** ** |   |   | 25 |   | 2.30 |   |
|                               |       | ** **                | ** ** | ** **            | ** ** | ** ** | ** ** |   |   |   |   |   |   |
| **Cinergy  Total**                 |       | ** **                | ** ** | **$**                 | **1,199**  | ** ** | **3.77** | **%** |   |   | $ | 959 |   | 2.47 | % |
| ** **                         |       | ** **                | ** ** | ** **            | ** ** | ** ** | ** ** |   |   |   |   |   |   |
| **CG&E **and subsidiaries |       | ** **                | ** ** | ** **            | ** ** | ** ** | ** ** |   |   |   |   |   |   |
| Uncommitted  lines                 |       | **$**                     | **15**     | ** **            | **$**      | **—** | ** ** | **—** | **%** | $ | 15 |   | $ | — |   | — | % |
| Pollution  control notes           |       | ** **                | ** ** | **112**               | ** ** | **3.11** | ** ** |   |   | 112 |   | 2.34 |   |
| Money pool                         |       | ** **                | ** ** | **205**               | ** ** | **3.87** | ** ** |   |   | 180 |   | 2.38 |   |
|                               |       | ** **                | ** ** | ** **            | ** ** | ** ** | ** ** |   |   |   |   |   |   |
| **CG&E  Total**                |       | ** **                | ** ** | **$**                 | **317**    | ** ** | **3.60** | **%** |   |   | $ | 292 |   | 2.36 | % |
| ** **                         |       | ** **                | ** ** | ** **            | ** ** | ** ** | ** ** |   |   |   |   |   |   |
| **PSI**                            |       | ** **                | ** ** | ** **            | ** ** | ** ** | ** ** |   |   |   |   |   |   |
| Uncommitted  lines                 |       | **$**                     | **60**     | ** **            | **$**      | **—** | ** ** | **—** | **%** | $ | 60 |   | $ | — |   | — | % |
| Pollution  control notes           |       | ** **                | ** ** | **136**               | ** ** | **3.28** | ** ** |   |   | 136 |   | 2.49 |   |
| Money pool                         |       | ** **                | ** ** | **373**               | ** ** | **3.87** | ** ** |   |   | 130 |   | 2.38 |   |
|                               |       | ** **                | ** ** | ** **            | ** ** | ** ** | ** ** |   |   |   |   |   |   |
| **PSI  Total**                     |       | ** **                | ** ** | **$**                 | **509**    | ** ** | **3.71** | **%** |   |   | $ | 266 |   | 2.44 | % |
| ** **                         |       | ** **                | ** ** | ** **            | ** ** | ** ** | ** ** |   |   |   |   |   |   |
| **ULH&P**                      |       | ** **                | ** ** | ** **            | ** ** | ** ** | ** ** |   |   |   |   |   |   |
| Money pool                         |       | ** **                | ** ** | **$**                 | **10**     | ** ** | **3.87** | **%** |   |   | $ | 11 |   | 2.38 | % |
|                               |       | ** **                | ** ** | ** **            | ** ** | ** ** | ** ** |   |   |   |   |   |   |
| **ULH&P  Total**               |       | ** **                | ** ** | **$**                 | **10**     | ** ** | **3.87** | **%** |   |   | $ | 11 |   | 2.38 | % |

 

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(1)   Consistsof a five-year facility which was entered into in September 2005, matures inSeptember 2010, and contains $500 million sublimits each for **CG&E**and **PSI**,and a $65 million sublimit for **ULH&P**(which may be increased to $100 million upon the completion of its pendingtransaction with **CG&E** in which **ULH&P** will acquire interests in three of **CG&E’s** electric generating stations.  See Note 12(a) for further informationregarding this transaction.)

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

(3)   Ofthe $162 million and $158 million, in 2005 and 2004, respectively, $150 millionrelates to a three-year senior revolving credit facility that Cinergy Canada,Inc. entered into in December 2004 that matures in December 2007.

 

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##### ***Short-term Notes***

 

In September 2005, **Cinergy Corp**., **CG&E**, **PSI,** and **ULH&P** entered into a five-year revolving credit facilitywith a termination date of  September2010 which can be extended twice, each extension for an additional one-yearperiod.  The new credit agreementreplaces two existing credit agreements, one dated April 2004 and one datedDecember 2004.

 

The new credit agreement provides that the pending merger between Dukeand **Cinergy Corp.** will not be considered afundamental change or a “Change of Control” for purposes of the creditagreement.

 

For purposes of making borrowings the new credit agreement does notrequire certain environmental, litigation or material adverse changerepresentations and warranties that were in the credit agreements it replaced.

 

At September 30, 2005, **Cinergy Corp.**had $898 million remaining unused and available capacity relating to its $2billion revolving credit facility.  Therevolving credit 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  |       |           |       |                   |       | $                               | 874        |                      |       |   |
| Letter of credit  support  |       |           |       |                   |       | 228                             |       |                      |       |
| Total(1)                   |       |           |       | $                      | 2,000      |                            | 1,102      |                      | $          | 898 |   |
|                            |            |                |            |                        |            |                                 |            |                           |            |  |  |  |

 

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(1)   In September 2005, **CinergyCorp.** successfully placed a $2 billion senior unsecured revolvingcredit facility which replaced the $1 billion five-year facility, set to expirein December 2009, and the $1 billion three-year facility, set to expire inApril 2007. ** CG&E** and **PSI**each have $500 million borrowing sublimits on this facility, and **ULH&P** has a $65 million borrowing sublimit on thisfacility (which may be increased to $100 million upon the completion of itspending transaction with **CG&E** inwhich **ULH&P** will acquire interests inthree of **CG&E’s** electric generatingstations.  See Note 12(a) for furtherinformation regarding this transaction.)

 

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

 

•                  aconsolidated net worth of $2 billion; and

•                  aratio of consolidated indebtedness to consolidated total capitalization not inexcess 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:

 

•                  aconsolidated net worth of $1 billion; and

•                  aratio of consolidated indebtedness to consolidated total capitalization not inexcess of 65 percent.

 

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

 

•                  aconsolidated net worth of $900 million; and

•                  aratio of consolidated indebtedness to consolidated total capitalization not inexcess of 65 percent.

 

As part of **ULH&P’s** $65million sublimit under the $2 billion five-year credit facility, **ULH&P** has covenanted to maintain:

 

•                  aconsolidated net worth of $150 million, provided that in the event that thesublimit has been increased to $100 million the consolidated net worth would be$200 million; and

•                  aratio of consolidated indebtedness to consolidated total capitalization not inexcess 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;

•                  defaultsin the payment 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 September 30, 2005, **Cinergy**, **CG&E**, **PSI,**and**ULH&P** arein compliance with all of their debt covenants.

 

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##### ***Variable Rate Pollution Control Notes***

 

In October 2005, **PSI** borrowedthe proceeds from the Indiana Finance Authority’s issuance of $50 millionprincipal amount of its Environmental Revenue Bonds, Series 2005B, due October 1,2040. Holders of the Series 2005B Bonds are entitled to credit enhancement inthe form of a standby letter of credit, which if drawn upon, provides for thepayment of both interest and principal on the Series 2005B Bonds.  The initial interest rate for the Series 2005BBonds was 2.75% and is reset weekly. Because the holders have the right to havetheir Bonds redeemed on a weekly basis, they are classified as *Notes payable and other short-term obligations. ***PSI**is using the proceeds from these borrowings to assist in the acquisition and constructionof solid waste disposal facilities located at various generating stations inIndiana.

 

**6.**              Energy TradingCredit Risk

** **

**Cinergy’s** extensionof credit for energy marketing and trading is governed by a Corporate CreditPolicy.  Written guidelines approved by **Cinergy’s** Risk Policy Committee documentthe management approval levels for credit limits, evaluation ofcreditworthiness, and credit risk mitigation procedures.  Exposures to credit risks are monitored dailyby the Corporate Credit Risk function, which is independent of all tradingoperations.  As of September 30, 2005, 92percent of the credit exposure, net of credit collateral, related to energytrading and marketing activity was with counterparties rated investment gradeor the counterparties’ obligations were guaranteed or secured by an investmentgrade entity.  The majority of theseinvestment grade counterparties are externally rated.  If a counterparty has an external rating, thelower of Standard & Poor’s Ratings Services or Moody’s Investors Service isused; otherwise, **Cinergy’s**internal rating of the counterparty is used. The remaining eight percent represents credit exposure of $99 millionwith counterparties rated non-investment grade.

 

As of September 30, 2005, **CG&E**had a concentration of trading credit exposure of $54 million with one counterpartyaccounting for greater than ten percent of **CG&E’s**total trading credit exposure.  This counterpartyis rated investment 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. When appropriate, we adjust our credit reserves to attempt to compensatefor increased credit risk within the industry. Counterparty credit limits may be adjusted on a daily basis in responseto changes in a counterparty’s financial status or public debt ratings.

 

**7.**              FinancialInstruments

 

We enter into financial derivative contracts for the purpose ofmanaging financial instrument risk. Forward starting swaps are a type of financial derivative that mitigatesvolatility associated with fluctuations in interest rates between the time ofexecution of the swap and the date of an expected debt issuance.

 

In June 2005, **PSI** executedtwo forward starting swaps with a combined notional amount of $325million.  The forward starting swapseffectively fix the benchmark interest rate of an anticipated issuance offixed-rate debt from June 2005 through June 2006, the expected date of issuanceof the debt securities.  Both forwardstarting swaps have been designated as cash flow hedges under the provisions ofStatement 133.  As the terms of theseswap agreements mirror the terms of the forecasted debt issuance, we anticipatethey will be highly effective hedges. Changes in the fair value of these swaps are recorded in *Accumulated other comprehensive income (loss)*.

 

**8.**              Pension and OtherPostretirement Benefits

 

As discussed in the 2004 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 income tax purposes and the minimum being that requiredby the Employee Retirement Income Security Act of 1974, as amended.  The

 

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pension plans’ assets consist of investments in equity and debtsecurities.  In addition, we sponsornon-qualified pension plans that cover officers, certain other key employees,and non-employee directors.  We providecertain health care and life insurance benefits to retired United Statesemployees and their eligible dependents. These benefits are subject to minimum age and service requirements.  The health care benefits include medicalcoverage, dental coverage, and prescription drug coverage and are subject tocertain limitations, such as deductibles and co-payments.

 

Qualified pension benefit contributions for the first nine months of2005 were $102 million, which is an increase from the $72 million disclosed inthe 2004 10-K.  This $30 million increaseis primarily the result of a change in the retirement age assumption which increasedthe near-term funding estimates.  Noadditional contributions are expected for the remainder of 2005.

 

Our benefit plans’ costs for the quarter and year to date ended September30, 2005 and 2004, included the following components:

 
| ** **                                     | ** **   | **Qualified  Pension Benefits** | ** **   | **Non-Qualified  Pension Benefits** | ** ** | **Other Postretirement  Benefits** | ** ** |
|------------------------------------------------|--------------|---------------------------------|--------------|-------------------------------------|------------|------------------------------------|------------|
| ** **                                     | ** **   | **2005**                        | ** **   | **2004**                            | ** ** | **2005**                           | ** ** | **2004** | ** ** | **2005** | ** ** | **2004** | ** ** |
| *** ***                                   | *** *** | **(in millions)**               | *** *** |
| * *                                       | * *     | * *                        | * *     | * *                            | * *   | * *                           | * *   | * * | * * | * * | * * | * * | * * |
| **Quarter Ended September 30**                 |         |                            |         |                                |       |                               |       |   |   |   |   |   |   |
|                                           |         |                            |         |                                |       |                               |       |   |   |   |   |   |   |
| Service cost                                   |         | **$**                           | **9.6**      | ** **                          | $          | 8.8                                |       | **$** | **1.4** | ** ** | $ | 1.2 |   | **$** | **1.6** | ** ** | $ | 1.2 |   |
| Interest cost                                  |         | **24.1**                        | ** **   | 22.1                                |       | **1.8**                            | ** ** | 1.7 |   | **5.7** | ** ** | 5.4 |   |
| Expected return  on plans’ assets         |         | **(22.0**                       | **)**        | (20.1                               | )          | **—**                         | ** ** | — |   | **—** | ** ** | — |   |
| Amortization of  transition (asset) obligation |         | **(0.1**                        | **)**        | (0.1                                | )          | **—**                         | ** ** | — |   | **0.1** | ** ** | 0.1 |   |
| Amortization of  prior service cost            |         | **1.1**                         | ** **   | 1.1                                 |       | **0.5**                            | ** ** | 0.5 |   | **(0.1** | **)** | — |   |
| Recognized  actuarial (gain) loss              |         | **2.0**                         | ** **   | 0.5                                 |       | **0.6**                            | ** ** | 0.7 |   | **2.7** | ** ** | 1.9 |   |
| Net periodic  benefit cost                     |         | **$**                           | **14.7**     | ** **                          | $          | 12.3                               |       | **$** | **4.3** | ** ** | $ | 4.1 |   | **$** | **10.0** | ** ** | $ | 8.6 |   |
|                                           |         | ** **                      | ** **   |                                |       | ** **                         | ** ** |   |   | ** ** | ** ** |   |   |
| **Year to  Date September 30**                 |         | ** **                      | ** **   |                                |       | ** **                         | ** ** |   |   | ** ** | ** ** |   |   |
|                                           |         | ** **                      | ** **   |                                |       | ** **                         | ** ** |   |   | ** ** | ** ** |   |   |
| Service cost                                   |         | **$**                           | **28.8**     | ** **                          | $          | 26.4                               |       | **$** | **4.2** | ** ** | $ | 3.6 |   | **$** | **4.8** | ** ** | $ | 3.8 |   |
| Interest cost                                  |         | **72.2**                        | ** **   | 66.3                                |       | **5.4**                            | ** ** | 5.1 |   | **17.1** | ** ** | 16.8 |   |
| Expected return  on plans’ assets         |         | **(66.1**                       | **)**        | (60.3                               | )          | **—**                         | ** ** | — |   | **—** | ** ** | — |   |
| Amortization of  transition (asset) obligation |         | **(0.2**                        | **)**        | (0.3                                | )          | **—**                         | ** ** | — |   | **0.3** | ** ** | 1.0 |   |
| Amortization of  prior service cost            |         | **3.4**                         | ** **   | 3.3                                 |       | **1.5**                            | ** ** | 1.5 |   | **(0.5** | **)** | — |   |
| Recognized  actuarial (gain) loss              |         | **5.9**                         | ** **   | 1.5                                 |       | **1.8**                            | ** ** | 2.1 |   | **8.2** | ** ** | 5.9 |   |
| Net periodic  benefit cost                     |         | **$**                           | **44.0**     | ** **                          | $          | 36.9                               |       | **$** | **12.9** | ** ** | $ | 12.3 |   | **$** | **29.9** | ** ** | $ | 27.5 |   |

 

The net periodic benefit costs by registrant for thequarter and year to date ended September 30, 2005 and 2004, were as follows:

 
| ** **                     | ** ** | **Qualified  Pension Benefits** | ** ** | **Non-Qualified  Pension Benefits** | ** ** | **Other Postretirement  Benefits** | ** ** |
|--------------------------------|------------|---------------------------------|------------|-------------------------------------|------------|------------------------------------|------------|
| ** **                     | ** ** | **2005**                        | ** ** | **2004**                            | ** ** | **2005**                           | ** ** | **2004** | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                     | ** ** | **(in millions)**               | ** ** |
| * *                       | * *   | * *                        | * *   | * *                            | * *   | * *                           | * *   | * * | * * | * * | * * | * * | * * |
| **Quarter Ended September 30** |       |                            |       |                                |       |                               |       |   |   |   |   |   |   |
|                           |       |                            |       |                                |       |                               |       |   |   |   |   |   |   |
| **Cinergy(1)**                 |       | **$**                           | **14.7**   |                                | $          | 12.3                               |       | **$** | **4.3** |   | $ | 4.1 |   | **$** | **10.0** |   | $ | 8.6 |   |
| **CG&E**and subsidiaries   |       | **4.4**                         |       | 3.7                                 |       | **0.1**                            |       | 0.2 |   | **2.6** |   | 2.0 |   |
| **PSI**                        |       | **3.8**                         |       | 3.2                                 |       | **0.3**                            |       | 0.2 |   | **4.8** |   | 4.7 |   |
| **ULH&P**                  |       | **0.4**                         |       | 0.4                                 |       | **—**                         |       | — |   | **0.3** |   | 0.2 |   |
|                           |       | ** **                      |       |                                |       | ** **                         |       |   |   | ** ** |   |   |   |
| **Year to Date September 30**  |       | ** **                      |       |                                |       | ** **                         |       |   |   | ** ** |   |   |   |
|                           |       | ** **                      |       |                                |       | ** **                         |       |   |   | ** ** |   |   |   |
| **Cinergy(1)**                 |       | **$**                           | **44.0**   |                                | $          | 36.9                               |       | **$** | **12.9** |   | $ | 12.3 |   | **$** | **29.9** |   | $ | 27.5 |   |
| **CG&E**and subsidiaries   |       | **13.1**                        |       | 11.1                                |       | **0.5**                            |       | 0.6 |   | **7.8** |   | 6.6 |   |
| **PSI**                        |       | **11.3**                        |       | 9.6                                 |       | **0.6**                            |       | 0.6 |   | **14.7** |   | 14.7 |   |
| **ULH&P**                  |       | **1.2**                         |       | 1.2                                 |       | **—**                         |       | — |   | **0.8** |   | 0.6 |   |

 

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

 

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**9.**              Commitments andContingencies

 

***(a)***                                  Environmental

* *

*(i)          Emission Reduction Rulemakings*

 

In October 1998, the Environmental Protection Agency (EPA) finalizedits ozone transport rule, also known as the nitrogen oxides (NOX)State Implementation Plan (SIP) Call, which addresses wind-blown ozone andozone precursors that impact air quality in downwind states.  The EPA’s final rule, which applies to 22states in the eastern United States including the three states in which ourelectric utilities operate, required states to develop rules to reduce NOXemissions from utility and industrial sources. In a related matter, in response to petitions filed by several statesalleging air quality impacts from upwind sources located in other states, theEPA issued a rule pursuant to Section 126 of the Clean Air Act (CAA) thatrequired reductions similar to those required under the NOX SIPCall.  Various states and industry groupschallenged the final rules in the Court of Appeals for the District of ColumbiaCircuit, but the court upheld the key provisions of the rules.

 

The EPA has proposed withdrawal of the Section 126 rule in states withapproved rules under the final NOX SIP Call, which includes Indiana,Kentucky, and Ohio.** **All three states have adopted acap and trade program as the mechanism 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 NOXemission allowance market to buy or sell NOX emission allowances asappropriate.  We currently estimate thatwe will incur capital costs of approximately $4 million in addition to $820 millionalready incurred to comply with this program.

 

In March 2005, the EPA issued the Clean AirInterstate Rule (CAIR) which would require states to revise their SIP bySeptember 2006 to address alleged contributions to downwind non-attainment withthe revised National Ambient Air Quality Standards for ozone and fineparticulate 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 and NOX emissionsto be cut 70 percent and 65 percent, respectively, by 2015.  At the same time, the EPA issued the CleanAir Mercury Rule (CAMR) which requires reductions in mercury emissions fromcoal-fired power plants beginning in 2010. The final regulation also adopts a two-phase cap and trade approach thatrequires mercury emissions to be cut by 70 percent by 2018.  SIPs must comply with the prescribedreduction levels under CAIR and CAMR; however, the states have the ability tointroduce more stringent requirements if desired.  Under both CAIR and 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.  In August 2005, the EPA proposed a FederalImplementation Plan (FIP) to act as a backstop to ensure that states implementthe CAIR in a timely manner.  If a statefails to develop a CAIR SIP, the EPA intends to finalize the FIP in time to implementphase 1 of CAIR for the state by 2009 and 2010 for NOX and SO2,respectively.  Numerous states,environmental organizations, industry groups, including some of which **Cinergy** is a member, and individual companies have challengedvarious portions of both rules.  Thosechallenges are currently pending in the Federal Circuit Court for the Districtof Columbia.  On October 21, 2005, theEPA agreed to reconsider certain aspects of the CAMR and the determination notto regulate mercury under Section 112 of the CAA.  At this time we cannot predict the outcome ofthese matters.

 

Over the 2005-2009 time period, we expect tospend approximately $1.8 billion to reduce mercury, SO2, and NOXemissions.  These estimates includeestimated costs to comply at plants that we own but do not operate and couldchange when taking into consideration compliance plans of co-owners oroperators involved.  Moreover, as marketconditions change, additional compliance options may become available and ourplans will be adjusted accordingly.  Approximately60 percent of these estimated environmental costs would be incurred at **PSI’s** coal-fired plants, for which recoverywould be pursued in accordance with regulatory statutes governing environmentalcost recovery.  See (b)(*i*) for more details.  **CG&E** wouldreceive partial recovery of depreciation and financing costs related toenvironmental compliance projects for 2005-2008 through its recently approvedrate stabilization plan (RSP).  See (b)(*ii*) for more details.

 

The EPA made final state non-attainment areadesignations to implement the revised ozone standard and to implement the newfine particulate standard in June 2004 and April 2005, respectively.  Several counties in which

 

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

 

In July 2005, the EPA issued its finalregional haze rules and implementing guidelines in response to a 2002 judicialruling overturning key provisions of the original program.  The regional haze program is aimed atreducing certain emissions impacting visibility in national parks andwilderness areas.  The EPA has announcedthat it can foresee no circumstances where the requirements of the regionalhaze rule would require utility controls beyond those required under CAIR.  The EPA also found that states participatingin the CAIR cap and trade program need not require electric generating units toadhere to best available retrofit technology requirements.  The states have until December 2007 tofinalize their SIPs addressing compliance with EPA regulations.  The states may choose to implement morestringent guidelines than promulgated by the EPA, and therefore it is notpossible to predict whether the regional haze rule will have a material effecton our financial position or results of operations.

 

*(ii)        Section 126 Petitions*

 

In March 2004, the state of North Carolina filed a petition underSection 126 of the CAA in which it alleges that sources in 13 upwind statesincluding Ohio, Indiana, and Kentucky, significantly contribute to NorthCarolina’s non-attainment with certain ambient air quality standards.  In August 2005, the EPA issued a proposedresponse to the petition.  The EPAproposed to deny the ozone portion of the petition based upon a lack ofcontribution to air quality by the named states.  The EPA also proposed to deny the particulatematter portion of the petition based upon the CAIR FIP, described earlier, thatwould address the air quality concerns from neighboring states.  We expect a final FIP and ruling from the EPAon this matter by March 2006.  It isunclear at this time whether any additional reductions would be necessarybeyond those required under the CAIR.

 

*(iii)       Clean Air Act Lawsuit*

 

In November 1999, andthrough subsequent amendments, the United States brought a lawsuit in theUnited States Federal District Court for the Southern District of Indianaagainst **Cinergy**, **CG&E**, and **PSI** alleging various violations of the CAA.  Specifically, the lawsuit alleges that weviolated the CAA by not obtaining Prevention of Significant Deterioration(PSD), Non-Attainment New Source Review (NSR), and Ohio and Indiana SIP permitsfor various projects at our owned and co-owned generating stations.  Additionally, the suit claims that we violatedan Administrative Consent 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 suit seeks (1) injunctive relief torequire installation of pollution control technology on various generatingunits at **CG&E’s** W.C. Beckjordand Miami Fort Stations, and **PSI’s**Cayuga, Gallagher, Wabash River, and Gibson Stations, and (2) civil penaltiesin amounts of up to $27,500 per day for each violation.  In addition, three northeast states and twoenvironmental groups have intervened in the case.  In August 2005, the district court issued aruling regarding the emissions test that it will apply to **Cinergy**at the trial of the case.  Contrary to **Cinergy’s** argument, the district court ruled that indetermining whether a project was projected to increase annual emissions, itwould not hold hours of operation constant. However, the district court subsequently certified the matter forinterlocutory appeal to the Seventh Circuit Court of Appeals, which has thediscretion to accept or not accept the appeal at this time.  There are a number of other legal issuescurrently before the district court judge, and the case is currently set fortrial by jury commencing in February 2006.

 

In March 2000, the UnitedStates also filed in the United States District Court for the Southern Districtof Ohio an amended complaint in a separate lawsuit alleging violations of theCAA relating to PSD, NSR, and Ohio SIP requirements regarding variousgenerating stations, including a generating station operated by ColumbusSouthern Power Company (CSP) and jointly-owned by CSP, The Dayton Power andLight Company (DP&L), and **CG&E**.  The EPA is seeking injunctive relief andcivil penalties of up to $27,500 per day for each violation.  This suit is

 

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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, theyare entitled to seek injunctive relief for such alleged violations.  Neither party appealed that decision.  This matter was heard in trial in July2005.  A decision is expected by the endof 2005.

 

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

 

We are unable to predictwhether resolution of these matters would have a material effect on ourfinancial position or results of operations.  We intend to vigorously defend against theseallegations.

 

*(iv)        Carbon Dioxide (CO2) Lawsuit*

 

In July 2004, the states of Connecticut, New York, California, Iowa,New Jersey, Rhode Island, Vermont, Wisconsin, and the City of New York broughta lawsuit in the United States District Court for the Southern District of NewYork against **Cinergy**, American Electric Power Company,Inc., American Electric Power Service Corporation, The Southern Company,Tennessee Valley Authority, and Xcel Energy Inc.  That same day, a similar lawsuit was filed inthe United States District Court for the Southern District of New York againstthe same companies by Open Space Institute, Inc., Open Space Conservancy, Inc.,and The Audubon Society of New Hampshire. These lawsuits allege that the defendants’ emissions of CO2from the combustion of fossil fuels at electric generating facilities contributeto global warming and amount to a public nuisance.  The complaints also allege that thedefendants could generate the same amount of electricity while emittingsignificantly less CO2.  Theplaintiffs are seeking an injunction requiring each defendant to cap its CO2emissions and then reduce them by a specified percentage each year for atleast a decade.  In September 2005, thedistrict court granted the defendants’ motion to dismiss the lawsuit.  The plaintiffs have appealed this ruling tothe Second Circuit Court of Appeals.  Weare not able to predict whether resolution of these matters would have amaterial effect on our financial position or results of operations.

 

*(v)*                           SelectiveCatalytic Reduction Units at Gibson Station

 

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

 

In April 2005, we completed the installation of a permanent controlsystem to address this issue.  The newcontrol system will support all five Gibson generating units.  We will seek recovery of any related capitalas well as increased emission allowance expenditures through the regulatoryprocess.  We do not believe costs related to resolving this matterwill have a material impact on our financial position or results of operations.

 

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*(vi)        Zimmer Station Lawsuit*

 

In November 2004, a citizen of the Village ofMoscow, Ohio, the town adjacent to **CG&E****’****s** Zimmer Station, brought a purported classaction in the United States District Court for the Southern District of Ohioseeking monetary damages and injunctive relief against **CG&E**for alleged violations of the CAA, the Ohio SIP, and Ohio laws against nuisanceand common law nuisance.  The plaintiffs have filed a number of additionalnotices of intent to sue and two lawsuits raising claims similar to those inthe original claim.  One lawsuit wasdismissed on procedural grounds and the remaining two have been consolidated.  At this time, we cannot predict whether theoutcome of this matter will have a material impact on our financial position orresults of operations.  We intend todefend this lawsuit vigorously in court.

 

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

 

Coal tar residues, related hydrocarbons, and variousmetals have been found in at least 22 sites that **PSI** or its predecessors previously owned and sold in a seriesof transactions with Northern Indiana Public Service Company (NIPSCO) andIndiana Gas Company, Inc. (IGC).  The 22sites are in the process of being studied and will be remediated, ifnecessary.  In 1998 NIPSCO, IGC, and **PSI** entered into Site Participation andCost Sharing Agreements to allocate liability and responsibilities betweenthem.  Thus far, **PSI** has primary responsibility for investigating,monitoring and, if necessary, remediating nine of these sites.  In December 2003, **PSI** entered into a voluntary remediation plan with the stateof Indiana, providing a formal framework for the investigation and cleanup ofthe sites.  The IDEM overseesinvestigation and cleanup of all of these sites.

 

In April 1998, **PSI**filed suit in Hendricks County in the state of Indiana against its generalliability 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, its claims with all but one of the insurance carriers inJanuary 2005 prior to commencement of the trial.  With respect to the lone insurance carrier, ajury returned a verdict against **PSI** in February2005.  **PSI**has appealed this decision.  At thepresent time, **PSI** cannot predict the outcome ofthis litigation, including the outcome of the appeal.

 

**PSI** has accruedcosts related to investigation, remediation, and groundwater monitoring forthose sites where such costs are probable and can be reasonably estimated.  We will continue to investigate and remediatethe sites as outlined in the voluntary remediation plan.  As additional facts become known andinvestigation is completed, we will assess whether the likelihood of incurringadditional costs becomes probable.  Untilall investigation and remediation is complete, we are unable to determine theoverall impact on our financial position or results of operations.

 

**CG&E** and **ULH&P**have performed site assessments on certain of their sites where we believe MGPactivities have occurred at some point in the past and have found no imminentrisk to the environment.  At the presenttime, **CG&E** and **ULH&P** cannot predict whetherinvestigation and/or remediation will be required in the future at any of thesesites.

 

*(viii)     Asbestos Claims Litigation*

** **

**CG&E** and **PSI** have been named as defendants orco-defendants in lawsuits related to asbestos at their electric generatingstations.  Currently, there areapproximately 130 pending lawsuits.  Inthese lawsuits, plaintiffs claim to have been exposed to asbestos-containingproducts in the course of their work at the **CG&E**and **PSI** generating stations.  The plaintiffs further claim that as theproperty owner of the generating stations,**CG&E** and **PSI** shouldbe held liable for their injuries and illnesses based on an alleged duty towarn and protect them from any asbestos exposure.  A majority of the lawsuits to date have beenbrought against **PSI**.  The impact on **CG&E’s** and **PSI’s**financial position or results of operations of these cases to date has not beenmaterial.

 

Of these lawsuits, one case filed against **PSI** has been tried to verdict. The jury returned a verdict against **PSI**in the amount of approximately $500,000 on a negligence claim and a verdict for**PSI** on punitive damages.  **PSI**appealed this decision up to the Indiana Supreme Court.  In July 2005, the Indiana Supreme Court upheldthe jury’s verdict.  In addition, **PSI** has settled a number of other lawsuitsfor amounts, which neither individually nor in the aggregate,

 

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are material to **PSI’s**financial position or results of operations. We are currently evaluating the effect of the Indiana Supreme Court’sruling on our existing docket of cases.

 

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

 

*(ix)        Dunavan Waste Superfund Site*

 

In July and October 2005, **PSI** receivednotices from the EPA that it has been identified as a de minimus potentiallyresponsible party under the Comprehensive Environmental Response, Compensation,and Liability Act at the Dunavan 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.

 

*(x)         Ontario, Canada Lawsuit*

 

We understand through newspaper reports that a class action lawsuit wasfiled in Superior Court in Ontario, Canada against us and approximately 20other utility and power generation companies alleging various claims relatingto environmental emissions from coal-fired power generation facilities in theUnited States and Canada and damages of approximately $50 billion, withcontinuing damages in the amount of approximately $4 billion annually.  We understand that the lawsuit also claimsentitlement to punitive and exemplary damages in the amount of $1 billion.  We have not yet been served in this lawsuit,however, if served, we intend to defend this lawsuit vigorously in court.  We are not able to predict whether resolutionof this matter would have a material effect on our financial position orresults of operations.

 

***(b)***                                  Regulatory

* *

*(i)          PSI Environmental Compliance Case*

 

In November 2004,******PSI**filed acompliance plan case with the Indiana Utility Regulatory Commission (IURC)seeking approval of**PSI’s** plan forcomplying with SO2, NOX, and mercury emission reductionrequirements discussed previously in (a)(*i*), includingapproval of cost recovery and an overall rate of return of eight percentrelated to certain projects.  **PSI** requested approval to recover the financing,depreciation, and operation and maintenance costs, among others, related to$1.08 billion in capital projects designed to reduce emissions of SO2,NOX, and mercury at **PSI’s** coal-burninggenerating stations.  An evidentiaryhearing was held in May 2005 and a final IURC Order is expected in the fourthquarter of 2005.

 

*(ii)        CG&EElectric Rate Filings*

 

In response to the Public Utilities Commission of Ohio (PUCO’s) requestthat **CG&E** propose a RSP tomitigate the potential for significant rate increases when the marketdevelopment period comes to an end, **CG&E** fileda proposed RSP which was approved by the PUCO in November 2004.  The major features of the RSP are as follows:

 

**•****                  Provider of LastResort (POLR) Charge:**  **CG&E** began collecting a POLR charge from non-residentialcustomers effective January 1, 2005, and will begin to collect a POLR chargefrom residential customers effective January 1, 2006.  The POLR charge includes several discretecharges, the most significant being an annually adjusted component (AAC)intended to provide cost recovery primarily for environmental complianceexpenditures; an infrastructure maintenance fund charge (IMF) intended toprovide  compensation to **CG&E** forcommitting its physical capacity to meet its POLR obligation; and********asystem reliability tracker (SRT) intended to provide cost recovery for capacitypurchases, purchased power, reserve capacity, and related market costs forpurchases to meet capacity needs.  Weanticipate the collection of the AAC and IMF will result in an approximate $36million increase in revenues in 2005 and an additional $50 million in2006.  The SRT will be billed based ondollar-for-dollar costs incurred.  Aportion of these charges is avoidable by certain customers who switch to analternative generation supplier and provide notice to **CG&E**that they will remain switched through December 31, 2008.  Therefore, these estimates are subject tochange, depending on the level of switching that occurs in future periods.  **CG&E**hasfiled an application for approval of its SRT (2005 actual and 2006 estimated)with the PUCO.  In October, a settlementagreement unopposed by any party to the case was filed with the PUCO providingfor implementation of the 2006 SRT at a 15 percent reserve margin and approvalof the 2005 SRT price.  A Commissiondecision is expected on this matter in the fourth quarter of 2005.  In 2007 and 2008, **CG&E**could seek additional increases in the AAC component of the POLR based on **CG&E’s** actual net costs for the specifiedexpenditures.  

 

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**•****                  Generation Ratesand Fuel Recovery: **A new rate hasbeen established for generation service after the market development periodends.  In addition, a fuel cost recovery mechanism that is adjustedquarterly has been established to recover costs for fuel, emission allowances,and certain purchased power costs, that exceed the amount originally includedin the rates frozen in the **CG&E**transition plan.  These new rates were applied to non-residentialcustomers beginning January 1, 2005 and will be applied to residentialcustomers beginning January 1, 2006.  The fuel clause recovery mechanismwas recently audited by the PUCO’s auditor.  The audit recommendedalternate methodologies for administration of the fuel clause recoverymechanism that vary from **CG&E’s**current practice.  A hearing before PUCO hearing examinerswas 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. An order from the PUCO on these matters is expected in the fourthquarter of this year.  While we cannot predict the outcome of these proceedings,an outcome resulting in administrative methodologies substantially differentfrom those being employed by **CG&E** couldhave a material impact on **CG&E** and **Cinergy’s** results of operations.

**•****                  Generation RateReduction: **The existing five percentgeneration rate reduction required by statute for residential customersimplemented under **CG&E’s** 2000plan will end on December 31, 2005.

**•****                  TransmissionCost Recovery: **A transmission costrecovery mechanism was established beginning January 1, 2005 for non-residentialcustomers and will be established beginning January 1, 2006 for residentialcustomers.  The transmission costrecovery mechanism is designed to permit **CG&E** torecover Midwest Independent Transmission System Operator, Inc. charges, allFederal Energy Regulatory Commission (FERC) approved transmission costs, andall congestion costs allocable to retail ratepayers that are provided serviceby **CG&E**.  

**•****                  DistributionCost Recovery:  CG&E** will havethe ability to defer certain capital-related distribution costs from July 1,2004 through December 31, 2005 with recovery from non-residential customers tobe provided through a rider beginning January 1, 2006 through December 31,2010. 

 

**CG&E** had alsofiled an electric distribution base rate case for residential andnon-residential customers to be effective January 1, 2005.  Under the terms of the RSP describedpreviously, **CG&E** withdrew thisbase rate case and, in February 2005, **CG&E** fileda new distribution base rate case with rates to become effective January 1,2006.  The originally requested amount ofthe increase was $78 million, which was subsequently updated to $69.5million.  On September 9, 2005, the PUCOissued its Staff Report recommending a revenue increase range betweenapproximately $43 million and $49 million. The hearing for this case is set to begin December 12, 2005.  

 

In March 2005, the Ohio Consumers’ Counsel asked the Ohio Supreme Courtto overturn the RSP.  We expect the courtto decide the case in 2006; however, at this time we cannot predict the outcomeof this matter.

 

*(iii)       ULH&P Gas Rate Case*

 

In 2002, theKentucky Public Service Commission (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 be recovered through a trackingmechanism for an initial three year period expiring on September 30, 2005, withthe possibility of renewal up to ten years. The tracking mechanism allows **ULH&P**to recover depreciation costs and rate of return annually over the life of thedeferred assets.  As of September 30,2005 we have capitalized $60 million in costs associated with the acceleratedgas main replacement program through this tracking mechanism of which **ULH&P** has recovered $8.6 million.  The Kentucky Attorney General has appealed tothe Franklin Circuit Court the KPSC’s approval of the tracking mechanism andthe tracking mechanism rates.  In October2005, both the Company and the KPSC filed with the Franklin Circuit Court,requesting dismissal of the case for failure to prosecute by the AttorneyGeneral.  At the present time, **ULH&P** cannot predict the timing oroutcome of this litigation.

 

In February 2005, **ULH&P** filed a gas base rate case withthe KPSC requesting approval to continue the tracking mechanism in addition toits request for a $14 million increase in base rates.  The KPSC did not rule on this request byOctober 1, 2005 causing the initial tracking mechanism to expire.  In accordance with Kentucky law, **ULH&P** implemented the full amount of the requested rateincrease on October 1, 2005.  Any revenuecollected pursuant to the rate increase will be subject to refund if the KPSCdoes not approve the full requested amount. **ULH&P** expects that theKPSC will issue its decision during the fourth quarter of 2005.

 

40

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*(iv)        Gas Distribution Plant*

 

In June 2003, the PUCO approved an amended settlement agreement between**CG&E** and the PUCO Staff in agas distribution safety case arising out of a gas leak at a servicehead-adapter (SHA) style riser on **CG&E’s**distribution system.  The amendedsettlement agreement required **CG&E**to expend a minimum of $700,000 to replace SHA risers by December 31, 2003, andto file a comprehensive plan addressing all SHA risers on its distributionsystem.  **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 replacement cost of these risers will not be material.  In April 2005, the PUCO issued an orderclosing this case.  The PUCO issued aseparate order opening a statewide investigation into riser leaks in gaspipeline systems throughout Ohio.  Atthis time, **Cinergy** and**CG&E**cannotpredict the outcome or the impact of the statewide investigation.

 

***(c)***                                  Other

* *

*(i)          Energy Market Investigations*

 

In August 2003, **Cinergy**,along with Cinergy Marketing & Trading, LP (Marketing & Trading) and 37other companies, were named as defendants in civil litigation filed as apurported class action on behalf of all persons who purchased and/or sold NewYork Mercantile Exchange natural gas futures and options contracts betweenJanuary 1, 2000, and December 31, 2002. The complaint alleges that improper price reporting caused damages tothe class.  Two similar lawsuits havesubsequently been filed, and these three lawsuits have been consolidated forpretrial purposes.  The plaintiffs fileda consolidated class action complaint in January 2004.  **Cinergy’s**motion to dismiss was granted in September 2004 leaving only Marketing &Trading in the lawsuit.  We intend todefend this lawsuit vigorously in court.

 

**Cinergy**continues to providevarious Assistant United States Attorneys with information with respect totheir investigations into energy market practices.

 

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

 

*(ii)        Synthetic Fuel Production*

** **

**Cinergy** produces from twofacilities synthetic fuel that qualifies for tax credits (through 2007) inaccordance with Section 29 of the Internal Revenue Code (IRC) if certainrequirements are satisfied.

 

**Cinergy’s**sale of synthetic fuel has generated $306 million in tax credits through September30, 2005 of which $27 million related to the new facility purchased in thesecond quarter of 2005.  The InternalRevenue Service (IRS) is currently auditing **Cinergy**for the 2002 and 2003 tax years and has recently challenged certain othertaxpayers’ Section 29 tax credits.  Weexpect the IRS will evaluate the various key requirements for claiming ourSection 29 credits related to synthetic fuel. If the IRS challenges our Section 29 tax credits related to syntheticfuel, and such challenges were successful, this could result in thedisallowance of up to all $306 million in previously claimed Section 29 taxcredits for synthetic fuel produced by the applicable **Cinergy**facilities and a loss of our ability to claim future Section 29 tax credits forsynthetic fuel produced by such facilities. We believe that we operate in conformity with all the necessaryrequirements to be allowed such tax credits under Section 29.  Upon consummation of the pending merger ofDuke and **Cinergy**, the synthetic fuel produced by**Cinergy’s** new facility pursuant to theexisting commercial arrangement would cease to qualify for the Section 29credit.  **Cinergy**is evaluating transactions for the disposition of a portion of the affectedfacility that **Cinergy** believes would enable thefuel produced by the facility to continue to qualify for credit under IRCSection 29. In the event a suitable transaction is not achieved, **Cinergy** anticipates that its production of synthetic fuel atthe affected facility would be suspended upon consummation of the pendingmerger with Duke.

 

Section 29 also provides for a phase-out of the credit based on theaverage price of crude oil during a calendar year.  The phase-out is based on a prescribedcalculation and definition of crude oil prices. Based on current crude oil prices and the recent volatility of suchprices, we believe it is possible that for 2006 and 2007, the amount of the taxcredits could be reduced.  If oil prices are high enough, we may idle theplants, as the value of the credits would not

 

41

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exceed the net costs to produce the synthetic fuel.  Net income related to these facilities for thenine months ended ****September 30, 2005 was approximately $30 million.  The net bookvalue of our plants at September 30, 2005 was approximately $50 million.****

 

*(iii)       FirstEnergy Lawsuit*

 

FirstEnergy has filed a lawsuit in the Court of Common Pleas in SummitCounty, Ohio against **Cinergy** withrespect to a transaction between **Cinergy** and asubsidiary of FirstEnergy, relating to a joint venture company, Avon EnergyPartners Holdings (Avon).  In 1999, theFirstEnergy subsidiary acquired **Cinergy’s** shareof Avon which it subsequently sold to a third party.  The original transaction documents includedan indemnity by **Cinergy** with respect to a certaininvestment owned by Avon.  FirstEnergyclaims that this indemnity was triggered by its sale of Avon to a third party,and is seeking to recover $15 million from **Cinergy**.  Both parties have filed motions for summaryjudgment.  **Cinergy**intends to defend this lawsuit vigorously in court.  At this time, we cannot predict the outcome of this matter.

 

*(iv)        Guarantees*

 

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

 

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

 

**Cinergy**hadguaranteed borrowings by individuals under the Director, Officer, and KeyEmployee Stock Purchase Program.  Underthese guarantees, **Cinergy**wouldhave been obligated to pay the debt’s principal and any related interest in theevent of an unexcused breach of a guaranteed payment obligation by certaindirectors, officers, and key employees. This program terminated pursuant to its terms during the first quarterof 2005 and as of March 31, 2005, all borrowings had been repaid by theparticipants.

 

**Cinergy Corp.** hasalso provided performance guarantees on behalf of certain unconsolidatedsubsidiaries and joint ventures.  Theseguarantees support performance under various agreements and instruments (suchas construction contracts, operation and maintenance agreements, and energyservice agreements).  **Cinergy Corp.**may be liable in the event ofan unexcused breach of a guaranteed performance obligation by an unconsolidatedsubsidiary.  **Cinergy Corp.** has estimated its maximum potential liability tobe $52 million under these guarantees as of September 30, 2005.  **CinergyCorp.** may also have recourse to third parties for claims required tobe paid under certain of these guarantees. The majority of these guarantees expire at the completion of theunderlying performance agreement, the majority of which expire from 2016 to2019.

 

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

 

42

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be $103 million under these indemnification provisions.  The termination period for the majority ofmatters provided by indemnification provisions in these types of agreementsgenerally ranges from 2005 to 2009.

 

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

 

**10.**       Financial Information byBusiness Segment

 

As discussed in the 2004 10-K, we conduct operations through oursubsidiaries, and manage through the following three reportable segments:

 

•                  RegulatedBusiness Unit (Regulated);

•                  CommercialBusiness Unit (Commercial); and

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

 

Regulated consists of **PSI’s**regulated generation and transmission and distribution operations, and **CG&E**and its subsidiaries’ regulated electric and gastransmission and distribution systems. Regulated plans, constructs, operates, and maintains **Cinergy’s** transmission and distributionsystems and delivers gas and electric energy to consumers.  Regulated also earns revenues from wholesalecustomers primarily by these customers transmitting electric power through **Cinergy’s** transmission system.  These businesses are subject to cost ofservice 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 our wholesale generation and energy marketing andtrading activities.  Commercial alsoperforms energy risk management activities, provides customized energysolutions and is responsible for all of our international operations.

 

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

 

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

 

43

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Financial results by business unit for the quarters ended September 30,2005, and September 30, 2004, are as indicated below.

 
| ** **                            | ** ** | **Cinergy Business Units** | ** ** | ** **     | ** ** | ** **                               | ** ** |
|---------------------------------------|------------|----------------------------|------------|----------------|------------|------------------------------------------|------------|
| ** **                            | ** ** | **Regulated**              | ** ** | **Commercial** | ** ** | **Power Technology  and Infrastructure** | ** ** | **Total** | ** ** | **Reconciling  Eliminations(1)** | ** ** | **Consolidated** | ** ** |
| ** **                            | ** ** | **(in millions)**          | ** ** |
|                                  |       |                       |       |           |       |                                     |       |   |   |   |   |   |   |
| **Quarter  ended September 30, 2005** |       |                       |       |           |       |                                     |       |   |   |   |   |   |   |
|                                  |       |                       |       |           |       |                                     |       |   |   |   |   |   |   |
| **Operating revenues**                |       |                       |       |           |       |                                     |       |   |   |   |   |   |   |
| **External  customers**               | ** ** | **$**                      | **853**    | ** **     | **$**      | **512**                                  | ** ** | **$** | **—** | ** ** | **$** | **1,365** | ** ** | **$** | **—** | ** ** | **$** | **1,365** | ** ** |
| **Intersegment  revenues**            | ** ** | **10**                     | ** ** | **54**         | ** ** | **—**                               | ** ** | **64** | ** ** | **(64** | **)** | **—** | ** ** |
| ** **                            | ** ** | ** **                 | ** ** | ** **     | ** ** | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Gross margins**                     | ** ** | ** **                 | ** ** | ** **     | ** ** | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Electric**                          | ** ** | **512**                    | ** ** | **163**        | ** ** | **—**                               | ** ** | **675** | ** ** | **—** |   | **675** | **(2)** |
| **Gas**                               | ** ** | **37**                     | ** ** | **17**         | ** ** | **—**                               | ** ** | **54** | ** ** | **—** |   | **54** | **(3)** |
| ** **                            | ** ** | ** **                 | ** ** | ** **     | ** ** | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Segment profit (loss)**             | ** ** | **92**                     | ** ** | **41**         | ** ** | **(1**                                   | **)**      | **132** | ** ** | **—** | ** ** | **132** | ** ** |
| ** **                            | ** ** | ** **                 | ** ** | ** **     | ** ** | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Quarter ended  September 30, 2004     | ** ** | ** **                 | ** ** | ** **     | ** ** | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                            | ** ** | ** **                 | ** ** | ** **     | ** ** | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Operating revenues                    |       |                       |       |           |       |                                     |       |   |   |   |   |   |   |
| External  customers                   |       | $                          | 727        |           | $          | 402                                      |       | $ | — |   | $ | 1,129 |   | $ | — |   | $ | 1,129 |   |
| Intersegment  revenues                |       | 18                         |       | 63             |       | —                                   |       | 81 |   | (81 | ) | — |   |
|                                  |       |                       |       |           |       |                                     |       |   |   |   |   |   |   |
| Gross margins                         |       |                       |       |           |       |                                     |       |   |   |   |   |   |   |
| Electric                              |       | 441                        |       | 170            |       | —                                   |       | 611 |   | — |   | 611 | (2) |
| Gas                                   |       | 40                         |       | 6              |       | —                                   |       | 46 |   | — |   | 46 | (3) |
|                                  |       |                       |       |           |       |                                     |       |   |   |   |   |   |   |
| Segment profit (loss)                 |       | 59                         |       | 45             |       | (11                                      | )          | 93 |   | — |   | 93 |   |

 

----

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

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

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

 

44

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Financial results by business unit for year to date September 30, 2005,and September 30, 2004, are as indicated below.

 
| ** **                           | ** ** | **Cinergy Business Units** | ** ** | ** **     | ** ** | ** **                               | ** ** |
|--------------------------------------|------------|----------------------------|------------|----------------|------------|------------------------------------------|------------|
| ** **                           | ** ** | **Regulated**              | ** ** | **Commercial** | ** ** | **Power Technology  and Infrastructure** | ** ** | **Total** | ** ** | **Reconciling Eliminations(1)** | ** ** | **Consolidated** | ** ** |
| ** **                           | ** ** | **(in millions)**          | ** ** |
| * *                             | * *   | * *                   | * *   | * *       | * *   | * *                                 | * *   | * * | * * | * * | * * | * * | * * |
| **Year to  Date September 30, 2005** |       |                       |       |           |       |                                     |       |   |   |   |   |   |   |
|                                 |       |                       |       |           |       |                                     |       |   |   |   |   |   |   |
| **Operating revenues**               |       |                       |       |           |       |                                     |       |   |   |   |   |   |   |
| **External  customers**              | ** ** | **$**                      | **2,471**  | ** **     | **$**      | **1,353**                                | ** ** | **$** | **—** | ** ** | **$** | **3,824** | ** ** | **$** | **—** | ** ** | **$** | **3,824** | ** ** |
| **Intersegment  revenues**           | ** ** | **24**                     | ** ** | **137**        | ** ** | **—**                               | ** ** | **161** | ** ** | **(161** | **)** | **—** | ** ** |
| ** **                           | ** ** | ** **                 | ** ** | ** **     | ** ** | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Gross margins**                    | ** ** | ** **                 | ** ** | ** **     | ** ** | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Electric**                         | ** ** | **1,388**                  | ** ** | **509**        | ** ** | **—**                               | ** ** | **1,897** | ** ** | **—** |   | **1,897** | **(2)** |
| **Gas**                              | ** ** | **179**                    | ** ** | **3**          | ** ** | **—**                               | ** ** | **182** | ** ** | **—** |   | **182** | **(3)** |
| ** **                           | ** ** | ** **                 | ** ** | ** **     | ** ** | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Segment profit (loss)**            | ** ** | **217**                    | ** ** | **90**         | ** ** | **(7**                                   | **)**      | **300** | ** ** | **—** | ** ** | **300** | ** ** |
| ** **                           | ** ** | ** **                 | ** ** | ** **     | ** ** | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Year to Date  September 30, 2004     | ** ** | ** **                 | ** ** | ** **     | ** ** | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                           | ** ** | ** **                 | ** ** | ** **     | ** ** | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Operating revenues                   |       |                       |       |           |       |                                     |       |   |   |   |   |   |   |
| External  customers                  |       | $                          | 2,327      |           | $          | 1,144                                    |       | $ | — |   | $ | 3,471 |   | $ | — |   | $ | 3,471 |   |
| Intersegment  revenues               |       | 49                         |       | 165            |       | —                                   |       | 214 |   | (214 | ) | — |   |
|                                 |       |                       |       |           |       |                                     |       |   |   |   |   |   |   |
| Gross margins                        |       |                       |       |           |       |                                     |       |   |   |   |   |   |   |
| Electric                             |       | 1,243                      |       | 504            |       | —                                   |       | 1,747 |   | — |   | 1,747 | (2) |
| Gas                                  |       | 188                        |       | 45             |       | —                                   |       | 233 |   | — |   | 233 | (3) |
|                                 |       |                       |       |           |       |                                     |       |   |   |   |   |   |   |
| Segment profit (loss)                |       | 173                        |       | 121            |       | (40                                      | )          | 254 |   | — |   | 254 |   |

 

----

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

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

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

 

45

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 Total segment assets at September30, 2005, and December 31, 2004, are as indicated below:

 
| ** **                                      | ** ** | **Cinergy Business Units** | ** ** | ** **     | ** ** |
|-------------------------------------------------|------------|----------------------------|------------|----------------|------------|
| ** **                                      | ** ** | **Regulated**              | ** ** | **Commercial** | ** ** | **Power Technology  and Infrastructure** | ** ** | **Total** | ** ** | **Consolidated** | ** ** |
| ** **                                      | ** ** | **(in millions)**          | ** ** | ** **     | ** ** |
| **Total  segment assets at September 30, 2005** | ** ** | **$**                      | **9,503**  | ** **     | **$**      | **7,830** | ** ** | **$** | **133** | ** ** | **$** | **17,466** | ** ** | **$** | **17,466** | ** ** |
|                                            |       |                       |       |           |       |   |   |   |   |   |   |
| Total segment  assets at December 31, 2004      |       | $                          | 9,097      |           | $          | 5,746 |   | $ | 139 |   | $ | 14,982 |   | $ | 14,982 |   |

 

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

 

A reconciliation of EPS – basic to EPS – diluted is presented below forthe quarters ended September 30, 2005 and 2004:

 
| ** **                              | ** **   | **Income**                                   | ** **   | **Shares** | ** **  | **EPS**    | ** ** |
|-----------------------------------------|--------------|----------------------------------------------|--------------|------------|-------------|------------|------------|
| *** ***                            | *** *** | **(in thousands, except per share amounts)** | *** *** |
| **Quarter Ended September 30, 2005**    |         |                                         |         |       |        |       |       |
| **EPS – basic:**                   | ** **   | **$**                                        | **131,937**  | ** ** | **199,069** | ** ** | **$**      | **0.67** | ** ** |
| ** **                              | ** **   | ** **                                   | ** **   | ** ** | ** **  | ** ** | ** ** |
| **Effect of dilutive securities:**      | ** **   | ** **                                   | ** **   | ** ** | ** **  | ** ** | ** ** |
| **Common  stock options**               | ** **   | ** **                                   | ** **   | **828**    | ** **  | ** ** | ** ** |
| **Directors’  compensation plans** | ** **   | ** **                                   | ** **   | **150**    | ** **  | ** ** | ** ** |
| **Contingently  issuable common stock** | ** **   | ** **                                   | ** **   | **120**    | ** **  | ** ** | ** ** |
| ** **                              | ** **   | ** **                                   | ** **   | ** ** | ** **  | ** ** | ** ** |
| **EPS – diluted:**                 | ** **   | **$**                                        | **131,937**  | ** ** | **200,167** | ** ** | **$**      | **0.66** | ** ** |
| ** **                              | ** **   | ** **                                   | ** **   | ** ** | ** **  | ** ** | ** ** |
| Quarter Ended September 30, 2004        |         |                                         |         |       |        |       |       |
| EPS – basic:                       |         | $                                            | 92,923       |       | 180,881     |       | $          | 0.51 |   |
|                                    |         |                                         |         |       |        |       |       |
| Effect of dilutive securities:          |         |                                         |         |       |        |       |       |
| Common stock  options                   |         |                                         |         | 616        |        |       |       |
| Directors’  compensation plans     |         |                                         |         | 148        |        |       |       |
| Contingently  issuable common stock     |         |                                         |         | 710        |        |       |       |
| Stock purchase  contracts               |         |                                         |         | 1,123      |        |       |       |
|                                    |         |                                         |         |       |        |       |       |
| EPS – diluted:                     |         | $                                            | 92,923       |       | 183,478     |       | $          | 0.50 |   |

 

Options to purchase shares of common stock are excluded from thecalculation of EPS – diluted, if they are considered to be anti-dilutive.  Share amounts of 0.7 million and 0.9 millionwere excluded from the EPS – diluted calculation for the quarters ended September30, 2005 and 2004, respectively.

 

Also excluded from the EPS – diluted calculation for the quarter ended September30, 2004 are 9.7 million shares, issuable pursuant to the stock purchasecontracts issued by **Cinergy Corp.**in December 2001 associated with the preferred trust securitiestransaction.  As discussed in the 200410-K, in January and February 2005, **Cinergy Corp.**issued a total of 9.2 million shares of common stock associated with thesepreferred stock securities.

 

A reconciliation of EPS – basic to EPS – diluted is presented below forthe year to date September 30, 2005 and 2004:

 
| ** **                              | ** **   | **Income**                                   | ** **   | **Shares** | ** **  | **EPS**    | ** ** |
|-----------------------------------------|--------------|----------------------------------------------|--------------|------------|-------------|------------|------------|
| *** ***                            | *** *** | **(in thousands, except per share amounts)** | *** *** |
| **Year to Date September 30, 2005**     |         |                                         |         |       |        |       |       |
| **EPS – basic:**                   | ** **   | **$**                                        | **300,001**  | ** ** | **197,741** | ** ** | **$**      | **1.52** | ** ** |
| ** **                              | ** **   | ** **                                   | ** **   | ** ** | ** **  | ** ** | ** ** |
| **Effect of dilutive securities:**      | ** **   | ** **                                   | ** **   | ** ** | ** **  | ** ** | ** ** |
| **Common  stock options**               | ** **   | ** **                                   | ** **   | **706**    | ** **  | ** ** | ** ** |
| **Directors’  compensation plans** | ** **   | ** **                                   | ** **   | **149**    | ** **  | ** ** | ** ** |
| **Contingently  issuable common stock** | ** **   | ** **                                   | ** **   | **84**     | ** **  | ** ** | ** ** |
| **Stock  purchase contracts**           | ** **   | ** **                                   | ** **   | **97**     | ** **  | ** ** | ** ** |
| ** **                              | ** **   | ** **                                   | ** **   | ** ** | ** **  | ** ** | ** ** |
| **EPS – diluted:**                 | ** **   | **$**                                        | **300,001**  | ** ** | **198,777** | ** ** | **$**      | **1.51** | ** ** |
| ** **                              | ** **   | ** **                                   | ** **   | ** ** | ** **  | ** ** | ** ** |
| Year to Date September 30, 2004         |         |                                         |         |       |        |       |       |
| EPS – basic:                       |         | $                                            | 254,442      |       | 180,129     |       | $          | 1.41 |   |
|                                    |         |                                         |         |       |        |       |       |
| Effect of dilutive securities:          |         |                                         |         |       |        |       |       |
| Common stock  options                   |         |                                         |         | 675        |        |       |       |
| Directors’  compensation plans     |         |                                         |         | 148        |        |       |       |
| Contingently  issuable common stock     |         |                                         |         | 585        |        |       |       |
| Stock purchase  contracts               |         |                                         |         | 1,027      |        |       |       |
|                                    |         |                                         |         |       |        |       |       |
| EPS – diluted:                     |         | $                                            | 254,442      |       | 182,564     |       | $          | 1.39 |   |

 

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Options to purchase shares of common stock are excluded from thecalculation of EPS – diluted, if they are considered to be anti-dilutive.  Share amounts of 0.8 million and 0.9 millionwere excluded from the EPS – diluted calculation for the year to date September30, 2005 and 2004, respectively.

 

Also excluded from the EPS – diluted calculation for the year to date September30, 2004 are 9.8 million shares issuable pursuant to the stock purchasecontracts issued by **Cinergy Corp.**in December 2001 associated with the preferred trust securitiestransaction.  As discussed in the 200410-K, in January and February 2005, **Cinergy Corp.**issued a total of 9.2 million shares of common stock associated with thesepreferred stock securities.

 

**12.**       Transfer and Acquisition ofGenerating Assets

 

***(a)***                                  Transfer of Generating Assets to ULH&P

 

The KPSC and the FERC have approved **ULH&P’s**planned acquisition of **CG&E’s** approximately 69 percentownership interest in the East Bend Station, located in Boone County, Kentucky,the Woodsdale Station, located in Butler County, Ohio, and one generating unitat the four-unit Miami Fort Station, located in Hamilton County, Ohio, andassociated transactions.  **ULH&P** is currently seeking approval of the transaction ina proceeding before the Securities and Exchange Commission (SEC), wherein theOhio Consumers’ Counsel has intervened in opposition.  The transfer, which will be at net bookvalue, will not affect current electric rates for **ULH&P’s** customers, as power will be provided under thesame terms as under the current wholesale power contract with **CG&E** through December 31, 2006.  Assuming receipt of SEC approval, we wouldanticipate the transfer to take place in the first quarter of 2006.

 

***(b)***                                  Wheatland Generating Facility Acquisition

 

On May 6, 2005, we signed a definitive agreement with subsidiaries ofAllegheny Energy, Inc. whereby, subject to the terms and upon satisfaction ofthe conditions to closing provided in the purchase agreement, **PSI** and/or **CG&E** hadthe right to acquire the 512-megawatt Wheatland generating facility forapproximately $100 million.  TheWheatland facility, located in Knox County, Indiana, has four natural gas-firedsimple cycle combustion turbines and is directly connected to the **Cinergy** transmission system. In June and August 2005, respectively, the FERC and IURC approved theacquisition and the Department of Justice and Federal Trade Commissioncompleted their review of the transaction pursuant to the notificationrequirements of the Hart-Scott-Rodino Antitrust Improvements Act.  In August 2005, **PSI**acquired 100 percent of the Wheatland facility. Its output will be used to bolster the reserve margins on the **PSI** system.

 

**13.**       Pending Merger

 

On May 8, 2005, **Cinergy Corp.**entered into an agreement and plan of merger with Duke, a North Carolina corporation,whereby **Cinergy Corp.** will be merged withDuke.  Under the merger agreement, eachshare of **Cinergy Corp.** common stock will beconverted into 1.56 shares of the newly formed company, Duke Energy Holding Corp(Duke Energy Holding).

 

The merger agreement has been approved by both companies’ Boards ofDirectors.  Consummation of the merger issubject to customary conditions, including, among others, the approval of theshareholders of both companies and the approvals of various regulatoryauthorities.

 

Immediately following consummation of the merger, former **Cinergy** shareholders will own approximately 24 percent ofDuke Energy Holding’s common stock.  PaulAnderson, Duke’s CEO and Chairman of the Board will remain Chairman of thecombined company and Jim Rogers, **Cinergy’s** CEOand Chairman of the Board, will become the President and CEO of the combinedcompany.  The new Duke Energy Holdingboard will be comprised of 10 members appointed by Duke and five membersappointed by **Cinergy**.

 

The merger will be recorded using the purchase method of accountingwhereby the total purchase price of approximately $9 billion will be allocatedto **Cinergy’s** identifiable tangible andintangible assets acquired and liabilities assumed based on their fair valuesas of the closing of the merger.

 

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The merger is expected to close in the first half of 2006.  However, the actual timing is contingent onthe receipt of several approvals including: FERC, Federal Communications Commission (FCC), Nuclear RegulatoryCommission (NRC), state regulatory commissions of Ohio, Indiana, Kentucky,North Carolina, and South Carolina, and shareholders of each company.  The status of these matters is as follows:

 

•                  InJune 2005, Duke and **Cinergy** filedan application with the PUCO for approval of a change in control with respectto **CG&E** and to modify certainaccounting procedures to defer certain merger-related costs.  We expect that the PUCO will set a proceduralschedule in the fourth quarter of 2005. The PUCO issued a procedural order on October 26, 2005 ordering theStaff to issue recommendations no later than November 14, 2005.  A final order is expected in January 2006.

 

•                  InJune 2005, **PSI** filed a petition with the IURCconcerning, among other things, certain merger-related affiliate agreements,the sharing of merger-related benefits with customers, and deferred accountingof certain merger-related costs.  Anevidentiary hearing is scheduled for December 2005.

 

•                  InAugust 2005, Duke and **Cinergy** filedan application with the KPSC seeking approval of a transfer and acquisition ofcontrol of **ULH&P**.  In October 2005, Duke and **Cinergy** reached a settlement with the parties to the case,the Kentucky Attorney General and The Kroger Company.  The settlement was filed with the KPSC and ahearing was held before the KPSC in October 2005.  A final order is expected by December 2005.

 

•                  InJuly 2005, Duke and **Cinergy** filedan application with the FERC requesting approval of the merger and thesubsequent internal restructuring and consolidation of the merged company toestablish a more efficient corporate structure. A final order is expected in January 2006.

 

•                  InJuly 2005, Duke filed an application with the state utility regulatory agencyin North Carolina.  The applicationrequests both the authorization to enter into a business combinationtransaction and the approval of various affiliate agreements.  A hearing is scheduled for December 2005.

 

•                  InJuly 2005, Duke filed an application with the state utility regulatory agencyin South Carolina.  The applicationrequested authorization to enter into a business combination.  In November 2005, the Public Servie Commissionof South Carolina approved the application.

 

•                  OnAugust 11, 2005, the United States Department of Justice and the Federal TradeCommission granted early termination of the waiting period imposed by theHart-Scott-Rodino Antitrust Improvements Act of 1976.

 

•                  Inlight of the repeal of the Public Utility Holding Company Act, as amended (PUHCA),effective February 2006, the merger will no longer require SEC authorizationunder PUHCA.

 

•                  TheFCC merger filings were filed in October 2005 and a decision by the FCC isexpected by December 2005.

 

•                  Dukefiled for NRC merger approval in the third quarter of 2005 and a final order isexpected in January 2006.

 

•                  Aspecial meeting of shareholders for the purpose of voting on the merger isexpected to be held in the first quarter of 2006.

 

The merger agreement also provides that Duke and **Cinergy**will use their reasonable best efforts to transfer five generating stationslocated in the Midwest from Duke to **CG&E**.  This transfer will require regulatoryapproval by the FERC and the IURC.  Therecan be no guarantee that such approvals will be obtained or will be obtained onterms or with conditions acceptable to Duke, **Cinergy**,and Duke Energy Holding.  Duke intends toeffectuate the transfer as an equity infusion into **CG&E**at book value.  In conjunction with thetransfer, Duke and **CG&E** intendto enter into a financial arrangement over a multi-year period, to eliminateany potential cash shortfalls that may result from **CG&E**owning and operating the assets.  At thistime, we cannot predict the outcome of this matter.

 

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The merger agreement contains certaintermination rights for both Duke and **Cinergy**,and further provides that, upon termination of the merger agreement underspecified circumstances, a party would be required to pay the other party’sfees and expenses in an amount not to exceed $35 million and/or a terminationfee of $300 million in the case of a fee payable by **Cinergy** to Duke or a termination fee of $500 million in thecase of a fee payable by Duke to **Cinergy**. Any termination fee would be reduced by theamount of any fees and expenses previously reimbursed by the party required topay the termination fee.

 

In May, a purported shareholder class action was filed in the Court ofCommon Pleas in Hamilton County, Ohio against **Cinergy**and each of the members of the Board of Directors. The lawsuit alleges that thedefendants breached their duties of due care and loyalty to shareholders byagreeing to the merger agreement between Duke and **Cinergy**and is seeking to either enjoin or amend the terms of the merger.  **Cinergy** and theindividual defendants filed a motion to dismiss this lawsuit in July.  We believe this lawsuit is without merit and **Cinergy** intends to defend this lawsuit vigorously incourt.  We are unable to predict theoutcome of this matter, including whether resolution of this matter will impactour pending merger.

 

Although Management believes that the merger should close in the firsthalf of 2006, the actual timing of the transaction could be delayed or the mergercould be abandoned by the parties in the event of the inability to obtain oneor more of the required regulatory approvals on acceptable terms.

 

**14.**       SubsequentEvent

 

In October 2005, **Cinergy** enteredinto a definitive agreement to sell a wholly-owned subsidiary in Europe engagedin the generation and sale of heat and electricity.  We anticipate recognizing a gain on sale ofapproximately $15 million and expect the sale to close in December 2005,subject to certain regulatory approvals. As of September 30, 2005, this subsidiary had approximately $5 millionof current assets and $105 million of plant, property, and equipment.

 

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**CAUTIONARYSTATEMENTS**

 

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

 

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

 

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

 

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

 

•                  Factorsaffecting operations, such as:

 

(1)          unanticipatedweather conditions;

(2)          unscheduledgeneration outages;

(3)          unusualmaintenance or repairs;

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

(5)          environmentalincidents; and

(6)          electrictransmission or gas pipeline system constraints.

 

•                  Legislativeand regulatory initiatives and legal developments.

 

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

 

•                  Financialor regulatory accounting principles including costs of compliance with existingand future environmental requirements.

 

•                  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.

 

•                  TheRegulatory approval process for the Duke Energy Corporation and **Cinergy** pending merger could delay the consummation of thepending merger or impose conditions that could materially impact the combinedcompany.

 

•                  Businessuncertainties, contractual restrictions, and the potential inability to attractand retain key personnel due to the pending merger.

 

We undertake no obligation to update the information contained herein.

 

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**MD&A - PENDING MERGER**

 

## **ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIALCONDITION AND RESULTS OF OPERATIONS (MD&A)**

 

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

 

### **PENDING MERGER**

 

On May 8, 2005, **Cinergy Corp.**entered into an agreement and plan of merger with Duke Energy Corporation (Duke),a North Carolina corporation, whereby **Cinergy Corp.**will be merged with Duke.  Under themerger agreement, each share of **Cinergy Corp.** commonstock will be converted into 1.56 shares of the newly formed company, DukeEnergy Holding Corp (Duke Energy Holding).

 

The merger agreement has been approved by both companies’ Boards ofDirectors.  Consummation of the merger issubject to customary conditions, including, among others, the approval of theshareholders of both companies and the approvals of various regulatoryauthorities.

 

Immediately following consummation of the merger, former **Cinergy** shareholders will own approximately 24 percent ofDuke Energy Holding’s common stock.  PaulAnderson, Duke’s CEO and Chairman of the Board will remain Chairman of thecombined company and Jim Rogers, **Cinergy’s** CEOand Chairman of the Board, will become the President and CEO of the combinedcompany.  The new Duke Energy Holdingboard will be comprised of 10 members appointed by Duke and five members appointedby **Cinergy**.

 

The merger will be recorded using the purchase method of accountingwhereby the total purchase price of approximately $9 billion will be allocatedto **Cinergy’s** identifiable tangible andintangible assets acquired and liabilities assumed based on their fair valuesas of the closing of the merger.

 

The merger is expected to close in the first half of 2006.  However, the actual timing is contingent onthe receipt of several approvals including:  Federal Energy Regulatory Commission (FERC),Federal Communications Commission (FCC), Nuclear Regulatory Commission (NRC),state regulatory commissions of Ohio, Indiana, Kentucky, North Carolina, andSouth Carolina, and shareholders of each company.  The status of these matters is as follows:

 

•                  InJune 2005, Duke and **Cinergy** filedan application with the Public Utilities Commission of Ohio (PUCO) for approvalof a change in control with respect to **CG&E** and tomodify certain accounting procedures to defer certain merger-relatedcosts.  We expect that the PUCO will seta procedural schedule in the fourth quarter of 2005.  The PUCO issued a procedural order on October26, 2005 ordering the Staff to issue recommendations no later than November 14,2005.  A final order is expected inJanuary 2006.

 

•                  InJune 2005, **PSI** filed a petition with theIndiana Utility Regulatory Commission (IURC) concerning, among other things,certain merger-related affiliate agreements, the sharing of merger-relatedbenefits with customers, and deferred accounting of certain merger-relatedcosts.  An evidentiary hearing isscheduled for December 2005.

 

•                  InAugust 2005, Duke and **Cinergy** filedan application with the Kentucky Public Service Commission (KPSC) seekingapproval of a transfer and acquisition of control of **ULH&P**.  In October 2005, Duke and **Cinergy** reached a settlement with the parties to the case,the Kentucky Attorney General and The

 

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Kroger Company.  The settlement was filed with the KPSC and ahearing was held before the KPSC in October 2005.  A final order is expected by December 2005.

 

•                  InJuly 2005, Duke and **Cinergy** filedan application with the FERC requesting approval of the merger and thesubsequent internal restructuring and consolidation of the merged company toestablish a more efficient corporate structure. A final order is expected in January 2006.

 

•                  InJuly 2005, Duke filed an application with the state utility regulatory agencyin North Carolina.  The applicationrequests both the authorization to enter into a business combinationtransaction and the approval of various affiliate agreements.  A hearing is scheduled for December 2005.

 

•                  InJuly 2005, Duke filed an application with the state utility regulatory agencyin South Carolina.  The application requestedauthorization to enter into a business combination.  In November 2005, the Public ServieCommission of South Carolina approved the application.

 

•                  OnAugust 11, 2005, the United States Department of Justice and the Federal TradeCommission granted early termination of the waiting period imposed by theHart-Scott-Rodino Antitrust Improvements Act of 1976.

 

•                  Inlight of the repeal of the Public Utility Holding Company Act, as amended(PUHCA), effective February 2006, the merger will no longer require Securitiesand Exchange Commission (SEC) authorization under PUHCA.  For further details, see “Energy Bill” in “Liquidityand Capital Resources.”

 

•                  TheFCC merger filings were filed in October 2005 and a decision by the FCC isexpected by December 2005.

 

•                  Dukefiled for NRC merger approval in the third quarter of 2005 and a final order isexpected in January 2006.

 

•                  Aspecial meeting of shareholders for the purpose of voting on the merger isexpected to be held in the first quarter of 2006.

 

The merger agreement also provides that Duke and **Cinergy**will use their reasonable best efforts to transfer five generating stationslocated in the Midwest from Duke to **CG&E**.  This transfer will require regulatoryapproval by the FERC and the IURC.  Therecan be no guarantee that such approvals will be obtained or will be obtained onterms or with conditions acceptable to Duke, **Cinergy**,and Duke Energy Holding.  Duke intends toeffectuate the transfer as an equity infusion into **CG&E**at book value.  In conjunction with thetransfer, Duke and **CG&E** intendto enter into a financial arrangement over a multi-year period, to eliminateany potential cash shortfalls that may result from **CG&E**owning and operating the assets.  At thistime, we cannot predict the outcome of this matter.

 

The merger agreement contains certaintermination rights for both Duke and **Cinergy**,and further provides that, upon termination of the merger agreement underspecified circumstances, a party would be required to pay the other party’sfees and expenses in an amount not to exceed $35 million and/or a terminationfee of $300 million in the case of a fee payable by **Cinergy** to Duke or a termination fee of $500 million in thecase of a fee payable by Duke to **Cinergy**.  Any termination fee would be reduced by theamount of any fees and expenses previously reimbursed by the party required topay the termination fee.

 

Although Management believes that the merger should close in the firsthalf of 2006, the actual timing of the transaction could be delayed or themerger could be abandoned by the parties in the event of the inability toobtain one or more of the required regulatory approvals on acceptable terms.

 

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**MD&A - EXECUTIVE SUMMARY**

 

### **EXECUTIVE SUMMARY**

 

In MD&A, we explain our general operating environment, as well asour results of operations, liquidity, capital resources, futureexpectations/trends, market risk sensitive instruments, and accountingmatters.  Specifically, we discuss thefollowing:

 

•                  factorsaffecting current and future operations;

•                  whyresults changed from period to period;

•                  potentialsources of cash for future capital expenditures; and

•                  howthese items affect our overall financial condition.

 

#### **Organization**

 

**Cinergy Corp.**, aDelaware corporation organized in 1993, owns all outstanding common stock of **CG&E** and **PSI**, both of which are public utilities.  As a result of this ownership, we areconsidered a utility holding company. Because we are a holding company with material utility subsidiariesoperating in multiple states, we are registered with and are subject toregulation by the SEC under the PUHCA. For a discussion of the PUHCA Repeal, see “Energy Bill” in “Liquidityand Capital Resources.”  Our otherprincipal subsidiaries are Cinergy Services, Inc. (Services) and CinergyInvestments, Inc. (Investments).

 

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

 

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

 

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

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

 

----

(1)          See “Kentucky” in “FutureExpectations/Trends” for further discussion of the possible transfer ofgeneration assets.

 

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

 

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#### **Financial Highlights**

 

Net income for **Cinergy** forthe quarter and nine months ended September 30, 2005, and 2004 was as follows:

 

| ** **                         | ** **   | **Cinergy**       | ** **   |
|------------------------------------|--------------|-------------------|--------------|
| ** **                         | ** **   | **2005**          | ** **   | **2004** | ** ** | **Change** | ** ** | **% Change** | ** ** |
| *** ***                       | *** *** | **(in millions)** | *** *** |
| * *                           | * *     | * *          | * *     | * * | * * | * * | * * | * * | * * |
| **Quarter ended September 30**     |         | **$**             | **132**      | ** ** | $ | 93 |   | $ | 39 |   | 42 | % |
|                               |         | ** **        | ** **   |   |   |   |   |   |   |
| **Nine months ended September 30** |         | **$**             | **300**      | ** ** | $ | 254 |   | $ | 46 |   | 18 | % |

 

##### ***Quarterly Highlights***

 

The increase in net income was primarily due to an increase in electricgross margins as a result of warmer weather in the third quarter of 2005, ascompared to 2004.

 

These increases were partially offset by the following factors:

 

•                  Adecrease in Commercial Business Unit (Commercial) electric gross margins due totiming differences in revenue recognition between certain components of ourgeneration portfolio partially offset by sales of emission allowances; and

•                  Increasedfuel, emission allowances, and purchased power costs attributable to **CG&E’s** fixed price residential customers.

 

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

 

##### ***Year to Date Highlights***

 

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

 

•                  Increasedgross margins resulting from **PSI’s** 2004 baseretail electric rate increase and the implementation of **CG&E’s**rate stabilization plan (RSP) in January 2005; and

•                  Increasedgross margins due to warmer weather in the third quarter of 2005, as comparedto 2004.

 

These increases were partially offset by the following factors:

 

•                  Increasedfuel, emission allowances, and purchased power costs attributable to **CG&E’s** fixed price residential customers;

•                  Decreasesin Commercial gas gross margins from trading results in the second quarter of2005;

•                  Increased*Operation and maintenance* expenseprimarily due to regulatory asset amortization, synthetic fuel costs, andexpenses associated with the pending Duke-**Cinergy** merger;and

•                  Increased*Depreciation* expense due to increaseddepreciation rates and the addition of depreciable plant.

 

For further information, see “2005 Year to Date Results of Operations –**Cinergy**”.

 

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

 

##### ***Merger Challenges and Risks***

 

The pending merger between Duke and **Cinergy**presents significant challenges.  Theintegration of the two companies will be complex and time-consuming, due to thesize and complexity of each organization. The principal challenges will be integrating the combined regulatedelectric utility operations and combining each of the

 

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unregulated wholesale power generation businesses.  All of these businesses are complex, and someof the business units are dispersed. Such efforts could also divert management’s focus and resources fromother strategic opportunities during the integration process.   The pending merger is subject to approvalsof numerous governmental agencies and approval of the shareholders of bothcompanies, all of which are discussed in more detail in “Pending Merger.”  The approval process could delay consummationof the pending merger, impose conditions that could materially impact thecombined company, or cause the merger to be abandoned.  Both companies will incur significanttransaction and merger-related integration costs.  Additionally, we will be subject to businessuncertainties and contractual restrictions while the merger is pending whichcould adversely affect our businesses. Although both companies are taking steps to reduce any adverse effects,these uncertainties may impair our ability to attract and retain key personneluntil the merger is consummated and for a period of time thereafter, and couldcause customers, suppliers, and others to seek to change their existingbusiness relationships with us.

 

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

** **

**Cinergy** faces many uncertaintieswith regard to future environmental legislation and the impact of thislegislation on our generating assets and our decisions to construct newassets.  In March 2005, the EnvironmentalProtection Agency (EPA) finalized two rulemakings that will require significantreductions in sulfur dioxide (SO2), nitrogen oxides (NOX),and mercury emissions from power plants. Numerous states, environmentalorganizations, industry groups, including some of which **Cinergy**is a member, and individual companies have challenged various portions of bothrules.  Additionally,multi-emissions reductions legislation is still being discussed in the Senate,although the outcome of these discussions is still highly uncertain at thistime.  Presently, greenhouse gas (GHG)emissions, which principally consist of carbon dioxide (CO2), arenot regulated, and while several legislative proposals have been introduced inCongress to reduce utility GHG emissions, none have been passed.  Nevertheless, we anticipate a mandatoryprogram to reduce GHG emissions will exist in the future.  In 2004, **Cinergy’s**utility operating companies began an environmental construction program toreduce overall plant emissions that is estimated to cost approximately $1.8 billionover the next five years.  We believe thatour construction program optimally balances these uncertainties and provides alevel of emission reduction that will be required and/or economical to **Cinergy** under a variety of possible regulatoryoutcomes.  See “Environmental Issues” in “Liquidityand Capital Resources” for further information.

 

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

 

The prices of coal and SO2 emission allowances increaseddramatically in 2004, as compared to 2003, and have continued to increase in2005.  Contributing to the increases incoal and SO2 prices have been (1) increases in demand forelectricity, (2) environmental regulation, and (3) decreases in the number ofsuppliers of coal from prior years.  **CG&E’s** RSP allows for recovery of fuel and emissionallowance expenses effective January 1, 2005 for retail non-residentialcustomers in Ohio.  As part of the RSP,we will begin recovering these costs from residential customers in Ohioeffective January 1, 2006.  We continueto recover these costs from **PSI** retailcustomers through previously established rate recovery mechanisms.  To the extent that these increased fuel andSO2 prices are not offset by regulatory recovery or increases in themarket price of power for wholesale transactions, they will negatively impactongoing earnings.  The impact of theseprice increases on earnings in 2005 is discussed in more detail in “2005Quarterly Results of Operations” and “2005 Year to Date Results of Operations”.

 

##### ***Synthetic Fuel***

** **

**Cinergy** producessynthetic fuel that qualifies for tax credits (through 2007) in accordance withSection 29 of the Internal Revenue Code (IRC) if certain requirements aresatisfied.  **Cinergy** currently faces two majoruncertainties that could impact our ability to continue to recognize theprevious and/or future credits.  TheInternal Revenue Service (IRS) has recently challenged certain other taxpayers’Section 29 tax credits and could challenge **Cinergy’s**. If the IRS were to successfully challenge our credits, this could result in thedisallowance of up to all previously claimed and future Section 29 tax creditsfor **Cinergy’s** facilities.  We believe that we operate in conformity withall the necessary requirements to qualify for tax credits under Section 29.

 

Section 29 also provides for a phase-out of the tax credits based onthe average price of crude oil during a calendar year.  The phase-out isbased on a prescribed calculation and definition of crude oil prices.  Basedon current crude oil prices and the recent volatility of such prices, webelieve it is possible that for 2006 and 2007, the amount of the

 

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tax credits could be reduced.  If oil prices are high enough, wemay idle the plants, as the value of the credits would not exceed the net coststo produce the synthetic fuel. Net income related to these facilities for thenine months ended ****September 30, 2005 was approximately $30 million.  The net bookvalue of our plants at September 30, 2005 was approximately $50 million.****  See “Synthetic Fuel Production” in “FutureExpectations/Trends” for further information.

 

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**MD&A– 2005 QUARTERLY RESULTS OF OPERATIONS - CINERGY**

 

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

 

Given the dynamics of our business, which include regulatory revenueswith directly offsetting expenses and commodity trading operations for whichresults are primarily reported on a net basis, we have concluded that adiscussion of our results on a gross margin basis is most appropriate.  Electric gross margins represent electricoperating revenues less the related direct costs of fuel, emission allowances,and purchased power.  Gas gross marginsrepresent gas operating revenues less the related direct cost of gas purchased.  Within each of these areas, we will discussthe key drivers of our results.  Grossmargins for **Cinergy**for the Regulated BusinessUnit (Regulated) and Commercial for the quarters ended September 30, 2005, and2004 were as follows:

 
| ** **                | ** **   | **Cinergy**       | ** **   |
|---------------------------|--------------|-------------------|--------------|
| ** **                | ** **   | **Regulated**     | ** **   | **Commercial** | ** ** |
| ** **                | ** **   | **2005**          | ** **   | **2004** | ** ** | **Change** | ** ** | **%****Change** | ** ** | **2005** | ** ** | **2004** | ** ** | **Change** | ** ** | **%****Change** | ** ** |
| *** ***              | *** *** | **(in millions)** | *** *** |
| * *                  | * *     | * *          | * *     | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * |
| Electric gross  margin(1) |         | **$**             | **512**      |   | $ | 441 |   | $ | 71 |   | 16 | %  | **$** | **163** |   | $ | 170 |   | $ | (7 | ) | (4 | )% |
| Gas gross margin(2)       |         | **37**            |         | 40 |   | (3 | ) | (8 | ) | **17** |   | 6 |   | 11 |   | N/M |   |
|                           |              |                   |              |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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

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

N/M Not meaningfulto an understanding of the change.

 

Cooling degree days and heating degree days are metrics commonly usedin the utility industry as a measure of the impact weather has on results ofoperations.  Cooling degree days andheating degree days in **Cinergy’s**service territory for the quarters ended September 30, 2005, and 2004 were asfollows:

 
| ** **                | ** ** | **Cinergy** | ** ** |
|---------------------------|------------|-------------|------------|
| ** **                | ** ** | **2005**    | ** ** | **2004** | ** ** | **Change** | ** ** | **% Change** | ** ** |
|                      |       |        |       |   |   |   |   |   |   |
| Cooling degree days(1)    |       | **916**     |       | 544 |   | 372 |   | 68 | % |
| Heating degree days(2)(3) |       | **6**       |       | 5 |   | 1 |   | 20 |   |

 

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(1)                    Cooling degree days are the differences between the average temperaturefor each day and 65 degrees, assuming the average temperature is greater than65 degrees.

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

(3)                    Beginning in January 2005, we modified our heating degree days basetemperature from 65 degrees to 59 degrees to more accurately reflect currentconsumer behavior.  Prior year amountshave been updated to reflect this change.

 

#### **Regulated**

 

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

 

The 16 percent increase in Regulated’s electric gross margins wasprimarily due to the following factors:

 

•                  A$45 million increase resulting from warmer weather in the third quarter of2005, as compared to 2004;

•                  A$6 million increase resulting from growth in non-weather related demand; and

•                  A$5 million increase in **PSI’s**non-retail margins, primarily attributable to margins realized from wholesalesales from generation available after serving regulated retail customers.

 

58

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#### **Commercial**

 

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

 

The four percent decrease in Commercial’s electric gross margins wasprimarily due to:

 

•                  A$32 million decline in non-retail margins.  We actively manage our non-regulatedgeneration portfolio through a mix of real-time and forward sales of power andthe corresponding purchase of fuel (primarily coal) and emissionallowances.  When power is sold forward, we typically purchase the fueland emission allowances required to produce the power, thereby locking in oureventual margin at the time of delivery.  The market values of thesecommodities change independently over time. At times, the value of the fuel andemission allowances becomes greater than that of the output ofelectricity.  In these instances, we will purchase forward power to beused to deliver against forward power sales, and in turn sell the fuel and/oremission allowances.  Margins declined due to:

 

•                  Duringthe third quarter of 2005, we recognized margins of $69 million less than thecomparable period in 2004 due to timing differences in revenue recognitionbetween certain components of our generation portfolio.  Emission allowances and the majority of fuelcontracts typically follow the accrual method of accounting.  However, generally accepted accounting principles(GAAP) requires that certain forward purchases of coal and forward sales ofpower (those classified as derivatives) use the mark-to-market (MTM) method ofaccounting.  This differing accounting treatment for the variouscomponents of the generation portfolio can lead to volatility in reportedresults.  Our gross margins reflect $72 million of unrealized losses in2005 and $3 million of unrealized losses in 2004 (representing a $69 millionchange period to period) as a result of forward purchases of coal and forwardsales of power and the use of MTM accounting. A substantial portion of these unrealized losses are expected to reversein the fourth quarter of 2005 and the first quarter of 2006.

•                  Higher fuelcosts during the quarter.

 

Partially offsetting these declines were margins of $37million more than the comparable period in 2004 as a result of selling emissionallowances which were no longer needed to meet our non-retail forward powersales commitments.  This gain reflectssignificant increases in prices of SO2 emission allowancesthroughout much of 2004 and 2005.  Basedon projected generation, we have sufficient fuel and emission allowances tomeet our non-retail forward power sales commitments over the next severalyears, and we will continue to evaluate and optimize our generation resourcesto produce the best economic returns for these assets.

 

•                  A$22 million increase in margins from power marketing and trading contracts.

•                  Higher retail margins of $3 millionreflecting:

 

•                  A $14 million increase resulting fromimplementation of **CG&E’s** RSPin January 2005; and

•                  A $12 million increase resulting fromwarmer weather in the third quarter of 2005, as compared to 2004.

 

Partially offsettingthese increases was a $23 million increase in fuel, emission allowance, andpurchased power costs attributable to **CG&E’s** fixedprice residential customers.

 

The increase in Commercial’s gas gross margins was primarily due to thefollowing factors:

 

•                  A$14 million increase in physical trading margins resulting from favorable pricemovements in the third quarter of 2005; and

•                  A$7 million increase due to timing differences in revenue recognition betweenphysical storage activities and the associated derivative contracts that hedgethe physical storage. These agreements with pipelines to store natural gas anddeliver in a future period with higher prices (typically winter) follow theaccrual method of accounting.  However,the derivative contracts hedging the gas are required under GAAP to beaccounted for under the MTM method of accounting.  The differing accounting treatments can leadto volatility in reported results.  Ourquarter-to-date gross margins reflect $8 million of

 

59

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unrealized losses in 2005and $15 million of unrealized losses in 2004 (representing a $7 million changequarter on quarter) as a result of derivative contracts and the use of MTMaccounting.

 

Partially offsettingthese increases was an $8 million decline in financial trading margins.

 

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

 

The 32 percent increase in *Other Operating Revenues*was primarily due to the following factors:

 

•                  A$21 million increase in Commercial’s revenues from coal origination resultingfrom increases in coal prices and tons of coal sold; and

•                  A$16 million increase in Commercial’s revenues from the sale of synthetic fuel, duein part to revenues from a new facility purchased in the second quarter of 2005.

 

*Costs of fuel resold* includeCommercial’s costs of coal origination activities and the production ofsynthetic fuel.  These costs haveincreased in 2005, which is consistent with the increases in the associatedrevenues as previously discussed.

 

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

 

#### **Other Operating Expenses**

 
| ** **                    | ** **   | **Cinergy**       | ** **   |
|-------------------------------|--------------|-------------------|--------------|
| ** **                    | ** **   | **2005**          | ** **   | **2004** | ** ** | **Change** | ** ** | **%****Change** | ** ** |
| *** ***                  | *** *** | **(in millions)** | *** *** |
| * *                      | * *     | * *          | * *     | * * | * * | * * | * * | * * | * * |
| Operation and maintenance     | ** **   | **$**             | **342**      |   | $ | 326 |   | $ | 16 |   | 5 | % |
| Depreciation                  |         | **130**           |         | 115 |   | 15 |   | 13 |   |
| Taxes other than income taxes |         | **65**            |         | 57 |   | 8 |   | 14 |   |
|                               |              |                   |              |  |  |  |  |  |  |  |  |  |

 

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

 

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

 

•                  Increasedregulatory asset amortization of $15 million related to **CG&E’s**Regulatory Transition Charge (RTC).  Thisincrease reflects accelerated recovery of the regulatory asset due to both (a)the cessation of deferrals for non-residential customers due to the end of themarket development period for those customers at the end of 2004 and (b) a reductionin revenues lost from switched customers, which is also recovered through theRTC;

•                  Anincrease of $11 million in costs at our synthetic fuel facilities primarilyrelated to production costs at a new facility purchased in the second quarterof 2005; and

•                  Increasedcosts of $5 million associated with the sales of accounts receivable to an unconsolidatedaffiliate, primarily due to increased fees charged by the buyer of thereceivables and an increase in the volume of receivables sold.

 

These increases were partially offset by the following factors:

 

•                  Adecrease of $6 million in power supply expense primarily related to decreasesin brokerage and Midwest Independent System Operator, Inc. (Midwest ISO)administrative fees; and

•                  Costsrelating to an information technology system replacement project that occurredin 2004.

 

60

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

 

The 13 percent increase in *Depreciation*expense was primarily due to the addition of depreciable plant forpollution control equipment which is recovered from ratepayers.

 

##### ***Taxes other than Income Taxes***

 

The 14 percent increase in *Taxes other than incometaxes* was primarily due to an increase in real estate and personalproperty taxes.

 

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

 

The increase in *Miscellaneous Income(Expense) – Net* was primarily due to $15 million in impairment anddisposal charges recognized in the third quarter of 2004 on certain investmentsin the Power Technology and Infrastructure Services Business Unit (PowerTechnology and Infrastructure).

 

#### **Interest Expense**

 

The seven percent increase in *Interest Expense*was primarily due to an increase in amount and in interest rates for ourvariable rate debt.  This expense waspartially offset by interest income received on restricted deposits obtainedthrough these incremental borrowings, which was recorded in *Miscellaneous Income (Expense) – Net* associated with theadditional debt outstanding.

 

61

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**MD&A – 2005 QUARTERLY RESULTSOF OPERATIONS – CG&E**

 

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

 

#### **Summary of Results**

 

Net income for **CG&E**for the quarters ended September 30, 2005, and 2004 was as follows:

 
| ** ** | ** ** | **CG&E**and subsidiaries | ** ** |
|------------|------------|------------------------------|------------|
| ** ** | ** ** | **2005**                     | ** ** | **2004** | ** ** | **Change** | ** ** | **% Change** | ** ** |
| ** ** | ** ** | **(in millions)**            | ** ** |
| * *   | * *   | * *                     | * *   | * * | * * | * * | * * | * * | * * |
| Net income |       | **$**                        | **63**     |   | $ | 64 |   | $ | (1 | ) | (2 | )% |
|            |            |                              |            |  |  |  |  |  |  |  |  |  |

 

Net income for **CG&E** wasrelatively flat for the third quarter of 2005, as compared to 2004.  Theincreased electric gross margins due to warmer weather in the third quarter of2005, as compared to 2004, and rate tariff adjustments resulting from theimplementation of the RSP in January 2005 were offset by decreased non-retailmargins and increased *Operation and maintenance*expenses.

 

#### **Gross Margins**

 

Gross margins for **CG&E** forthe quarters ended September 30, 2005, and 2004 were as follows:

 
| ** **               | ** ** | **CG&E**and subsidiaries | ** ** |
|--------------------------|------------|------------------------------|------------|
| ** **               | ** ** | **2005**                     | ** ** | **2004** | ** ** | **Change** | ** ** | **%****Change** | ** ** |
| ** **               | ** ** | **(in millions)**            | ** ** |
| * *                 | * *   | * *                     | * *   | * * | * * | * * | * * | * * | * * |
| Electric gross margin(1) |       | **$**                        | **336**    |   | $ | 312 |   | $ | 24 |   | 8 | % |
| Gas gross margin(2)      |       | **38**                       |       | 40 |   | (2 | )  | (5 | ) |
|                          |            |                              |            |  |  |  |  |  |  |  |  |  |

 

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

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

 

Cooling degree days and heating degree days in **CG&E’s** service territory for the quartersended September 30, 2005, and 2004 were as follows:

 
| ** **                | ** ** | **CG&E**and  subsidiaries | ** ** |
|---------------------------|------------|-------------------------------|------------|
| ** **                | ** ** | **2005**                      | ** ** | **2004** | ** ** | **Change** | ** ** | **% Change** | ** ** |
|                      |       |                          |       |   |   |   |   |   |   |
| Cooling degree days(1)    |       | **954**                       |       | 552 |   | 402 |   | 73 | % |
| Heating degree days(2)(3) |       | **5**                         |       | 5 |   | — |   | — |   |

 

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

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

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

 

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

 

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

 

•                  Higher retail margins of $36 millionreflecting:

 

•                  A$33 million increase resulting from warmer weather in the third quarter of2005, as compared to 2004; and

•                  A$19 million increase in rate tariff adjustments resulting from implementation ofthe RSP in January 2005.

 

Partially offsettingthese increases was a $23 million increase in fuel, emission allowance, andpurchased power costs attributable to fixed price residential customers.

•                  A$22 million increase in margins from power marketing and trading contracts.

 

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•                  Adecline of $34 million in non-retail margins. We actively manage our non-regulated generation portfolio through a mixof real-time and forward sales of power and the corresponding purchase of fuel(primarily coal) and emission allowances.  When power is soldforward, we typically purchase the fuel and emission allowances required toproduce the power, thereby locking in our eventual margin at the time ofdelivery.  The market values of these commodities change independentlyover time. At times, the value of the fuel and emission allowances becomesgreater than that of the output of electricity.  In these instances, wewill purchase forward power to be used to deliver against forward power sales,and in turn sell the fuel and/or emission allowances.  Margins declineddue to:

 

•                  Duringthe third quarter of 2005, we recognized margins of $69 million less than thecomparable period in 2004 due to timing differences in revenue recognitionbetween certain components of our generation portfolio.  Emission allowances and the majority of fuelcontracts typically follow the accrual method of accounting.  However, GAAP requires that certain forwardpurchases of coal and forward sales of power (those classified as derivatives)use the MTM method of accounting.  This differing accountingtreatment for the various components of the generation portfolio can lead tovolatility in reported results.  Our gross margins reflect $72million of unrealized losses in 2005 and $3 million of unrealized losses in2004 (representing a $69 million change period to period) as a result offorward purchases of coal and forward sales of power and the use of MTMaccounting.  A substantial portion ofthese unrealized losses are expected to reverse in the fourth quarter of 2005and the first quarter of 2006.

•                  Higher fuelcosts during the quarter.

 

Partially offsetting these declines were margins of $37million more than the comparable period in 2004 as a result of selling emissionallowances which were no longer needed to meet our non-retail forward powersales commitments.  This gain reflectssignificant increases in prices of SO2 emission allowancesthroughout much of 2004 and 2005.  Basedon projected generation, we have sufficient fuel and emission allowances tomeet our non-retail forward power sales commitments over the next severalyears, and we will continue to evaluate and optimize our generation resourcesto produce the best economic returns for these assets.

 

#### **Other Operating Revenues and Costs of FuelResold**

 

The 48 percent increase in *Other Operating Revenues*was due to a $20 million increase in revenues from coal origination resultingfrom increases in coal prices and tons of coal sold.

 

*Costs of fuel resold* representsthe costs of coal origination activities. These costs have increased in 2005, which is consistent with theincrease in the associated revenues as previously discussed.

 

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

 

#### **Other Operating Expenses**

 
| ** **                     | ** ** | **CG&E** and subsidiaries | ** ** |
|--------------------------------|------------|-------------------------------|------------|
| ** **                     | ** ** | **2005**                      | ** ** | **2004** | ** ** | **Change** | ** ** | **% Change** | ** ** |
| ** **                     | ** ** | **(in millions)**             | ** ** |
| * *                       | * *   | * *                      | * *   | * * | * * | * * | * * | * * | * * |
| Operation and maintenance      |       | **$**                         | **176**    |   | $ | 153 |   | $ | 23 |   | 15 | % |
| Depreciation                   |       | **46**                        |       | 46 |   | — |   | — |   |
| Taxes other than income  taxes |       | **52**                        |       | 45 |   | 7 |   | 16 |   |
|                                |            |                               |            |  |  |  |  |  |  |  |  |  |

 

63

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

 

The 15 percent increase in *Operation and maintenance*expense was primarily due to the following factors:

 

•                  Increasedregulatory asset amortization of $15 million related to **CG&E’s**RTC.  This increase reflects acceleratedrecovery of the regulatory asset due to both (a) the cessation of deferrals fornon-residential customers due to the end of the market development period forthose customers at the end of 2004 and (b) a reduction in revenues lost fromswitched customers, which is also recovered through the RTC;

•                  Increasedcosts of $4 million primarily associated with the sales of accounts receivableto an unconsolidated affiliate due to increased fees charged by the buyer ofthe receivables and an increase in the volume in receivables sold; and

•                  Anincrease of $4 million of labor expenses primarily resulting from employeeincentives was partially offset by a decrease in severance payments.

 

##### ***Taxes other than Income Taxes***

 

The 16 percent increase in *Taxes other than incometaxes* was primarily due to increases in property taxes and increasesin gross receipts taxes.

 

#### **Income Taxes**

 

The effective income tax rate decreased for the quarter ended September30, 2005, as compared to 2004.  Thedecrease was primarily a result of finalizing the 2004 tax return and otherreconciliation adjustments.****

 

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**MD&A – 2005 QUARTERLY RESULTSOF OPERATIONS – PSI**

 

**2005 QUARTERLY RESULTS OFOPERATIONS - PSI**

** **

#### **Summary of Results**

 

Net income for **PSI** for thequarters ended September 30, 2005, and 2004 was as follows:

 
| ** **  | ** ** | **PSI**           | ** ** |
|-------------|------------|-------------------|------------|
| ** **  | ** ** | **2005**          | ** ** | **2004** | ** ** | **Change** | ** ** | **% Change** | ** ** |
| ** **  | ** ** | **(in millions)** | ** ** |
| * *    | * *   | *** ***      | * *   | * * | * * | * * | * * | * * | * * |
| Net  income |       | **$**             | **66**     |   | $ | 48 |   | $ | 18 |   | 38 | % |
|             |            |                   |            |  |  |  |  |  |  |  |  |  |

 

The increase in net income was primarily due to warmer weather in thethird quarter of 2005, as compared to 2004. This increase was partially offset by an increase in depreciationprimarily due to the addition of pollution control equipment.

 

#### **Electric Gross Margins**

 

Gross margins for **PSI**for the quartersended September 30, 2005, and 2004 were as follows:

 
| ** **                | ** **   | **PSI**           | ** **   |
|---------------------------|--------------|-------------------|--------------|
| ** **                | ** **   | **2005**          | ** **   | **2004** | ** ** | **Change** | ** ** | **%****Change** | ** ** |
| *** ***              | *** *** | **(in millions)** | *** *** |
| * *                  | * *     | *** ***      | * *     | * * | * * | * * | * * | * * | * * |
| Electric  gross margin(1) |         | **$**             | **338**      |   | $ | 296 |   | $ | 42 |   | 14 | % |
|                           |              |                   |              |  |  |  |  |  |  |  |  |  |

 

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

 

Cooling degree days and heating degree days in **PSI’s** service territory for the quartersended September 30, 2005, and 2004 were as follows:

 
| ** **                    | ** ** | **PSI**  | ** ** |
|-------------------------------|------------|----------|------------|
| ** **                    | ** ** | **2005** | ** ** | **2004** | ** ** | **Change** | ** ** | **% Change** | ** ** |
|                          |       |     |       |   |   |   |   |   |   |
| Cooling  degree days(1)  |       | **877**  |       | 536 |   | 341 |   | 64 | % |
| Heating  degree days(2)(3)    |       | **6**    |       | 4 |   | 2 |   | 50 |   |

 

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

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

(3)          Beginning in January 2005, wemodified our heating degree days base temperature from 65 degrees to 59 degreesto more accurately reflect current consumer behavior.  Prior year amounts have been updated toreflect this change.

 

The 14 percent increase in **PSI’s** electricgross margins was primarily due to the following factors:

 

•                  A$24 million increase resulting from warmer weather in the third quarter of2005, as compared to 2004;

•                  A$6 million increase resulting from growth in non-weather related demand; and

•                  A$5 million increase in non-retail margins, primarily attributable to marginsrealized from wholesale sales from generation available after serving regulatedretail customers.

 

65

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The following explanations correspond with the line items on the CondensedConsolidated Statements of Income for **PSI**.  However, only the line items that variedsignificantly from prior periods are discussed.

 

#### **Other Operating Expenses**

 
| ** **                    | ** **   | **PSI**           | ** **   |
|-------------------------------|--------------|-------------------|--------------|
| ** **                    | ** **   | **2005**          | ** **   | **2004** | ** ** | **Change** | ** ** | **% Change** | ** ** |
| *** ***                  | *** *** | **(in millions)** | *** *** |
| * *                      | * *     | * *          | * *     | * * | * * | * * | * * | * * | * * |
| Operation and maintenance     |         | **$**             | **113**      |   | $ | 119 |   | $ | (6 | ) | (5 | )% |
| Depreciation                  |         | **66**            |         | 55 |   | 11 |   | 20 |   |
| Taxes other than income taxes |         | **12**            |         | 10 |   | 2 |   | 20 |   |
|                               |              |                   |              |  |  |  |  |  |  |  |  |  |

 

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

 

The five percent decrease in *Operation and maintenance*expense was primarily due to the following factors:

 

•                  Decreased laborexpenses of $5 million related to decreased severance payments and employeeincentive costs; and

•                  Adecrease of outside services costs of $4 million primarily related to decreasedlitigation and other consulting costs.

 

These decreases are partially offset by increased costs associated withthe sales of accounts receivable to an unconsolidated affiliate primarily relatedto increased fees charged by the buyer of the receivables and an increase inthe volume of receivables sold.

 

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

 

The 20 percent increase in *Depreciation*expense was primarily due to the addition of depreciable plant forpollution control equipment which is recovered from ratepayers.

 

#### **Interest Expense**

 

The 18 percent increase in *Interest Expense*was primarily due to an increase in average long-term debt outstanding and an increasein interest rates for our variable rate debt. This expense was partially offset by interest income received onrestricted deposits obtained through these incremental borrowings, which wasrecorded in *Miscellaneous Income – Net* associatedwith the additional debt outstanding.

 

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**MD&A – 2005 YEAR TO DATERESULTS OF OPERATIONS - CINERGY**

 

### **2005 YEAR TO DATERESULTS OF OPERATIONS – CINERGY**

 

Given the dynamics of our business, which include regulatory revenueswith directly offsetting expenses and commodity trading operations for whichresults are primarily reported on a net basis, we have concluded that adiscussion of our results on a gross margin basis is most appropriate.  Electric gross margins represent electricoperating revenues less the related direct costs of fuel, emission allowances,and purchased power.  Gas gross marginsrepresent gas operating revenues less the related direct cost of gaspurchased.  Within each of these areas,we will discuss the key drivers of our results. Gross margins for **Cinergy**forRegulated and Commercial for the nine months ended September 30, 2005, and 2004were as follows:

 
| ** **               | ** ** | **Cinergy**       | ** ** |
|--------------------------|------------|-------------------|------------|
| ** **               | ** ** | **Regulated**     | ** ** | **Commercial** | ** ** |
| ** **               | ** ** | **2005**          | ** ** | **2004** | ** ** | **Change** | ** ** | **%****Change** | ** ** | **2005** | ** ** | **2004** | ** ** | **Change** | ** ** | **%****Change** | ** ** |
| ** **               | ** ** | **(in millions)** | ** ** |
| * *                 | * *   | * *          | * *   | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * |
| Electric gross margin(1) | ** ** | **$**             | **1,388**  |   | $ | 1,243 |   | $ | 145 |   | 12 | % | **$** | **509** |   | $ | 504 |   | $ | 5 |   | 1 | % |
| Gas gross margin(2)      | ** ** | **179**           |       | 188 |   | (9 | ) | (5 | ) | **3** |   | 45 |   | (42 | ) | (93 | ) |
|                          |            |                   |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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

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

 

Cooling degree days and heating degree days are metrics commonly usedin the utility industry as a measure of the impact weather has on results ofoperations.  Cooling degree days andheating degree days in **Cinergy’s**service territory for the nine months ended September 30, 2005, and 2004 wereas follows:

 
| ** **                | ** ** | **Cinergy** | ** ** |
|---------------------------|------------|-------------|------------|
| ** **                | ** ** | **2005**    | ** ** | **2004** | ** ** | **Change** | ** ** | **% Change** | ** ** |
|                      |       |        |       |   |   |   |   |   |   |
| Cooling degree days(1)    |       | **1,252**   |       | 880 |   | 372 |   | 42 | % |
| Heating degree days(2)(3) |       | **2,325**   |       | 2,450 |   | (125 | ) | (5 | ) |

 

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

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

(3)       Beginning inJanuary 2005, we modified our heating degree days base temperature from 65degrees to 59 degrees to more accurately reflect current consumerbehavior.  Prior year amounts have beenupdated to reflect this change.

 

#### **Regulated**

 

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

 

The 12 percent increase in Regulated’s electric gross margins wasprimarily due to the following factors:

 

•                  A$68 million increase resulting from a higher price received per megawatt hour (MWh)in the first half of 2005 due primarily to **PSI’s**2004 baseretail electric rate increase;

•                  A$42 million increase resulting primarily from warmer weather in the thirdquarter of 2005, as compared to 2004;

•                  A$16 million increase in **PSI’s**non-retail margins, primarily resulting from reduced fuel expense reflectingadjustments to **PSI’s** cost of synthetic fuel; and

•                  A$9 million increase due to growth in non-weather related demand.

 

These increases were partially offset by a decline of $15 millionreflecting rate reductions associated with a property tax adjustment for **PSI**.

 

The five percent decrease in Regulated’s gas gross margins was due, in part,to a decline in non-weather related demand.

 

67

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#### **Commercial**

 

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

 

The one percent increase in Commercial’s electric gross margins wasprimarily due to:

 

•                  A$29 million increase in margins from power marketing and trading contracts.

•                  Higher retail margins of $7 millionreflecting:

 

•                  A$31 million increase resulting from implementation of **CG&E’s**RSP in January 2005; and

•                  A$9 million increase resulting primarily from warmer weather in the thirdquarter of 2005, as compared to 2004.

 

Also contributing toretail margins were increased volumes, due in part to the return of certain **CG&E** retail customers to full electric service.  Partially offsetting these increases was a $40million increase in fuel, emission allowance, and purchased power costsattributable to **CG&E’s**fixed price residentialcustomers.

•                  A$31 million decline in non-retail margins, caused primarily by higher fuelcosts.  We actively manage ournon-regulated generation portfolio through a mix of real-time and forward salesof power and the corresponding purchase of fuel (primarily coal) andemission allowances.  When power is sold forward, we typically purchasethe fuel and emission allowances required to produce the power, thereby lockingin our eventual margin at the time of delivery.  The market values ofthese commodities change independently over time. At times, the value of thefuel and emission allowances becomes greater than that of the output ofelectricity.  In these instances, we will purchase forward power to beused to deliver against forward power sales, and in turn sell the fuel and/oremission allowances.

 

During 2005, we recognized margins of $107 millionless than the comparable period in 2004 due to timing differences in revenuerecognition between certain components of our generation portfolio.  Emission allowances and the majority of fuelcontracts typically follow the accrual method of accounting.  However, GAAP requires that certain forwardpurchases of coal and forward sales of power (those classified as derivatives)use the MTM method of accounting.  This differing accountingtreatment for the various components of the generation portfolio can lead tovolatility in reported results.  Our gross margins reflect $104million of unrealized losses in 2005 and $3 million of unrealized gains in 2004(representing a $107 million change period to period) as a result of forwardpurchases of coal and forward sales of power and the use of MTM accounting.  A substantial portion of these unrealizedlosses are expected to reverse in the fourth quarter of 2005 and the firstquarter of 2006.

 

Largely offsetting these declines were margins of $103million more than the comparable period in 2004 as a result of selling emissionallowances which were no longer needed to meet our non-retail forward powersales commitments.  This gain reflectssignificant increases in prices of SO2 emission allowancesthroughout much of 2004 and 2005.  Basedon projected generation, we have sufficient fuel and emission allowances tomeet our non-retail forward power sales commitments over the next severalyears, and we will continue to evaluate and optimize our generation resourcesto produce the best economic returns for these assets.

 

The 93 percent decrease in Commercial’s gas gross margins was primarilydue to the following factors:

 

•                  A$35 million decrease in financial trading margins primarily from trading resultsin the second quarter of 2005; and

•                  An$11 million decrease due to timing differences in revenue recognition betweenphysical storage activities and the associated derivative contracts that hedgethe physical storage. These agreements with pipelines to store natural gas anddeliver in a future period with higher prices (typically winter) follow theaccrual method of accounting.  However,the derivative contracts hedging the gas are required under GAAP to be accountedfor under the MTM method of accounting. The differing accounting treatments can lead to volatility in reportedresults.  Our year-to-date gross marginsreflect $25 million of unrealized losses in 2005 and $14 million of unrealizedlosses in 2004 (representing an $11 million change period to period) as aresult of derivative contracts and the use of MTM accounting.

 

68

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Partially offsetting these decreases was a $13 million increase inphysical trading margins primarily resulting from favorable price movements inthe third quarter of 2005.

 

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

 

The 40 percent increase in *Other Operating Revenues*was primarily due to the following factors:

 

•                  A$79 million increase in Commercial’s revenues from coal origination resultingfrom increases in coal prices and tons of coal sold; and

•                  A$42 million increase in Commercial’s revenues from the sale of synthetic fuelprimarily reflecting revenues from a new facility purchased in the secondquarter of 2005.

 

Partially offsetting these increases was a $15 million decrease inrevenues from non-regulated energy service subsidiaries.

 

*Costs of fuel resold* includeCommercial’s costs of coal origination activities and the production ofsynthetic fuel.  These costs haveincreased in 2005, which is consistent with the increases in the associatedrevenues as previously discussed.

 

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

 

#### **Other Operating Expenses**

 

| ** **                    | ** **   | **Cinergy**       | ** **   |
|-------------------------------|--------------|-------------------|--------------|
| ** **                    | ** **   | **2005**          | ** **   | **2004** | ** ** | **Change** | ** ** | **%****Change** | ** ** |
| *** ***                  | *** *** | **(in millions)** | *** *** |
| * *                      | * *     | * *          | * *     | * * | * * | * * | * * | * * | * * |
| Operation and maintenance     | ** **   | **$**             | **1,025**    |   | $ | 969 |   | $ | 56 |   | 6 | % |
| Depreciation                  |         | **387**           |         | 334 |   | 53 |   | 16 |   |
| Taxes other than income taxes |         | **209**           |         | 204 |   | 5 |   | 2 |   |
|                               |              |                   |              |  |  |  |  |  |  |  |  |  |

 

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

 

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

 

•                  Increasedregulatory asset amortization of $27 million related to **CG&E’s**RTC.  This increase reflects acceleratedrecovery of the regulatory asset due to both (a) the cessation of deferrals fornon-residential customers due to the end of the market development period forthose customers at the end of 2004 and (b) a reduction in revenues lost fromswitched customers, which is also recovered through the RTC;

•                  Anincrease of $13 million in costs at our synthetic fuel facilities primarilyrelated to production costs at a new facility purchased in the second quarterof 2005;

•                  Expensesof $13 million related to outside services costs for the pending Duke-**Cinergy** merger;

•                  Increasedcosts of $10 million associated with the sales of accounts receivable to an unconsolidatedaffiliate primarily due to increased fees charged by the buyer of thereceivables and an increase in the volume of receivables sold; and

•                  Increasedlabor costs due to severance payments of $9 million.

 

These increases were partially offset by decreased employee incentivecosts of $12 million and a decrease in outside service costs of $10 millionrelated to our continuous improvement initiative in 2004.

 

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

 

The 16 percent increase in *Depreciation*expense was primarily due to (a) higher depreciation rates, as aresult of changes in useful lives of production assets and an increased ratefor cost of removal, (b) recovery of deferred

 

69

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depreciation costs, and (c) the addition of depreciable plant forpollution control equipment, all of which are recovered from ratepayers.

 

#### **Equity in Earnings of UnconsolidatedSubsidiaries**

 

The 39 percent increase in *Equity in Earnings ofUnconsolidated Subsidiaries* is primarily due to $5 million in equityin earnings of a cogeneration project that became fully operational in April of2004.

 

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

 

The increase in *Miscellaneous Income(Expense) – Net* was due to $49 million in impairment and disposalcharges recognized in the first nine months of 2004 on certain investments inPower Technology and Infrastructure.  Theincrease was partially offset by $8 million in gains on the sale of otherinvestments during 2004.

 

#### **Income Taxes**

 

The effective income tax rate decreased for the nine months ended September30, 2005, as compared to 2004.  Thedecrease was primarily a result of an increase in the amount of estimatedannual tax credits associated with the production and sale of syntheticfuel.  **Cinergy’s**2005 effective tax rate is expected to be approximately 22 percent.

 

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**MD&A – 2005 YEAR TO DATERESULTS OF OPERATIONS – CG&E**

 

### **2005 YEAR TO DATERESULTS OF OPERATIONS - CG&E**

 

#### **Summary of Results**

 

Net income for **CG&E**for the nine months ended September 30, 2005, and 2004 was as follows:

 
| ** **  | ** ** | **CG&E**and subsidiaries | ** ** |
|-------------|------------|------------------------------|------------|
| ** **  | ** ** | **2005**                     | ** ** | **2004** | ** ** | **Change** | ** ** | **% Change** | ** ** |
| ** **  | ** ** | **(in millions)**            | ** ** |
| * *    | * *   | * *                     | * *   | * * | * * | * * | * * | * * | * * |
| Net  income |       | **$**                        | **201**    |   | $ | 197 |   | $ | 4 |   | 2 | % |
|             |            |                              |            |  |  |  |  |  |  |  |  |  |

 

Net income for **CG&E** wasrelatively flat for the first nine months of 2005, as compared to 2004.  Net income increased due to increased ratetariff adjustments resulting from implementation of the RSP in January 2005 andincreased margins due to warmer weather in the third quarter of 2005, ascompared to 2004.

 

These increases were partially offset by increased fuel, emissionallowances, and purchased power costs attributable to fixed price residentialcustomers and increased *Operation and maintenance*expense due primarily to increased regulatory asset amortization and increasedexpenses related to the pending Duke-**Cinergy** merger.

 

#### **Gross Margins**

 

Gross margins for **CG&E** forthe nine months ended September 30, 2005, and 2004 were as follows:

 
| ** **                | ** ** | **CG&E**and subsidiaries | ** ** |
|---------------------------|------------|------------------------------|------------|
| ** **                | ** ** | **2005**                     | ** ** | **2004** | ** ** | **Change** | ** ** | **%****Change** | ** ** |
| ** **                | ** ** | **(in millions)**            | ** ** |
| * *                  | * *   | * *                     | * *   | * * | * * | * * | * * | * * | * * |
| Electric  gross margin(1) |       | **$**                        | **960**    |   | $ | 914 |   | $ | 46 |   | 5 | % |
| Gas  gross margin(2)      |       | **181**                      |       | 188 |   | (7 | ) | (4 | ) |
|                           |            |                              |            |  |  |  |  |  |  |  |  |  |

 

----

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

(2)          Gas gross margin is calculatedas *Gas operating revenues* less *Gas purchased* expense from the Condensed ConsolidatedStatements of Income.

 

Cooling degree days and heating degree days in **CG&E’s** service territory for the ninemonths ended September 30, 2005, and 2004 were as follows:

 
| ** **                   | ** ** | **CG&E**and subsidiaries | ** ** |
|------------------------------|------------|------------------------------|------------|
| ** **                   | ** ** | **2005**                     | ** ** | **2004** | ** ** | **Change** | ** ** | **% Change** | ** ** |
|                         |       |                         |       |   |   |   |   |   |   |
| Cooling degree days(1)  |       | **1,294**                    | ** ** | 879 |   | 415 |   | 47 | % |
| Heating degree days(2)(3)    |       | **2,218**                    | ** ** | 2,391 |   | (173 | ) | (7 | ) |

 

----

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

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

(3)          Beginning in January 2005, wemodified our heating degree days base temperature from 65 degrees to 59 degreesto more accurately reflect current consumer behavior.  Prior year amounts have been updated toreflect this change.

 

71

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

 

The five percent increase in **CG&E’s**electric gross margins was primarily due to:

 

•                  Higher retail margins of $48 millionreflecting:

 

•                  A$39 million increase in rate tariff adjustments resulting from implementationof the RSP in January 2005; and

•                  A$30 million increase resulting primarily from warmer weather in the thirdquarter of 2005, as compared to 2004.

 

Also contributing to retail margins were increasedvolumes, due in part to the return of certain retail customers to full electricservice.  Partially offsetting theseincreases was a $40 million increase in fuel, emission allowance, and purchasedpower costs attributable to fixed price residential customers.****

•                  A$29 million increase in margins from power marketing and trading contracts.

•                  A$31 million decline in non-retail margins, caused primarily by higher fuelcosts.  We actively manage ournon-regulated generation portfolio through a mix of real-time and forward salesof power and the corresponding purchase of fuel (primarily coal) andemission allowances.  When power is sold forward, we typically purchasethe fuel and emission allowances required to produce the power, thereby lockingin our eventual margin at the time of delivery.  The market values ofthese commodities change independently over time. At times, the value of thefuel and emission allowances becomes greater than that of the output ofelectricity.  In these instances, we will purchase forward power to beused to deliver against forward power sales, and in turn sell the fuel and/oremission allowances.

 

During 2005, we recognized margins of $107 millionless than the comparable period in 2004 due to timing differences in revenuerecognition between certain components of our generation portfolio.  Emission allowances and the majority of fuelcontracts typically follow the accrual method of accounting.  However, GAAP requires that certain forwardpurchases of coal and forward sales of power (those classified as derivatives)use the MTM method of accounting.  This differing accountingtreatment for the various components of the generation portfolio can lead tovolatility in reported results.  Our gross margins reflect $104million of unrealized losses in 2005 and $3 million of unrealized gains in 2004(representing a $107 million change period to period) as a result of forwardpurchases of coal and forward sales of power and the use of MTM accounting.  A substantial portion of these unrealizedlosses are expected to reverse in the fourth quarter of 2005 and the firstquarter of 2006.

 

Largely offsetting these declines were margins of $103million more than the comparable period in 2004 as a result of selling emissionallowances which were no longer needed to meet our non-retail forward powersales commitments.  This gain reflectssignificant increases in prices of SO2 emission allowancesthroughout much of 2004 and 2005.  Basedon projected generation, we have sufficient fuel and emission allowances tomeet our non-retail forward power sales commitments over the next severalyears, and we will continue to evaluate and optimize our generation resourcesto produce the best economic returns for these assets.

 

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

 

The four percent decrease in **CG&E’s** gasgross margins was due, in part, to a decline in non-weather related demand.

 

#### **Other Operating Revenues and Costs of FuelResold**

 

The increase in *Other Operating Revenues*was due to a $91 million increase in revenues from coal origination resultingfrom increases in coal prices and tons of coal sold.

 

*Costs of fuel resold* representsthe costs of coal origination activities. These costs have increased in 2005, which is consistent with theincrease in the associated revenues as previously discussed.

 

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

 

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#### **Other Operating Expenses**

 

| ** **                    | ** ** | **CG&E**and subsidiaries | ** ** |
|-------------------------------|------------|------------------------------|------------|
| ** **                    | ** ** | **2005**                     | ** ** | **2004** | ** ** | **Change** | ** ** | **% Change** | ** ** |
| ** **                    | ** ** | **(in millions)**            | ** ** |
|                          |       |                         |       |   |   |   |   |   |   |
| Operation and maintenance     |       | **$**                        | **510**    | ** ** | $ | 453 |   | $ | 57 |   | 13 | % |
| Depreciation                  |       | **136**                      | ** ** | 136 |   | — |   | — |   |
| Taxes other than income taxes |       | **163**                      | ** ** | 159 |   | 4 |   | 3 |   |
|                               |            |                              |            |  |  |  |  |  |  |  |  |  |

 

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

 

The 13 percent increase in *Operation and maintenance*expense was primarily due to the following factors:

 

•                  Increasedregulatory asset amortization of $27 million related to **CG&E’s**RTC.  This increase reflects acceleratedrecovery of the regulatory asset due to both (a) the cessation of deferrals fornon-residential customers due to the end of the market development period forthose customers at the end of 2004 and (b) a reduction in revenues lost fromswitched customers, which is also recovered through the RTC;

•                  Expensesof $11 million related to outside service costs for the pending Duke-**Cinergy** merger;

•                  Increasedlabor expenses of $7 million primarily resulting from employee incentive costsand severance payments; and

•                  Increasedcosts of $7 million primarily associated with the sales of accounts receivableto an unconsolidated affiliate primarily related to increased fees charged bythe buyer of the receivables and an increase in the volume of receivables sold.

 

These increases were partially offset by a decrease in outside servicecosts of $5 million related to our continuous improvement initiative in 2004.

 

##### ***Taxes other than Income Taxes***

 

The three percent increase in *Taxes other than incometaxes* was primarily due to increases in gross receipts taxes.

 

#### **Interest Expense**

 

The seven percent increase in *Interest Expense*was primarily due to an increase in average long-term debt outstanding and anincrease in interest rates for our variable rate debt.

 

#### **Income Taxes**

 

The effective income tax rate decreased for the nine months ended September30, 2005, as compared to 2004.  Thedecrease was primarily a result of a change in Ohio law to phase-out the Ohiofranchise tax and finalizing the 2004 tax return.  The phase-out of the Ohio franchise taxresulted in the elimination of state income tax deferrals under GAAP thusreducing the effective income tax rate during the period.  See “Ohio Taxes” in “FutureExpectation/Trends” for additional information.

 

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**MD&A – 2005 YEAR TO DATERESULTS OF OPERATIONS – PSI**

 

### **2005 YEAR TO DATERESULTS OF OPERATIONS - PSI**

 

#### **Summary of Results**

 

Net income for **PSI** for thenine months ended September 30, 2005, and 2004 was as follows:

 
|        |   | **PSI**           |       |
|-------------|--------|-------------------|------------|
|        |   | **2005**          | ** ** | **2004** | ** ** | **Change** | ** ** | **% Change** |   |
|        |   | **(in millions)** |       |
|        |   | ** **        |       |
| Net  income |   | **$**             | **151**    |   | $ | 115 |   | $ | 36 |   | 31 | % |
|             |        |                   |            |  |  |  |  |  |  |  |  |  |

 

The increase in net income was primarily due to the impact of **PSI’s** 2004 base retail electric rate increase and warmerweather in the third quarter of 2005, as compared to 2004.

 

These increases were partially offset by an increase in depreciation dueto increased depreciation rates and the addition of depreciable plant.

 

#### **Electric Gross Margins**

 

Gross margins for **PSI**for the ninemonths ended September 30, 2005, and 2004 were as follows:

 
| ** **                | ** ** | **PSI**           | ** ** |
|---------------------------|------------|-------------------|------------|
| ** **                | ** ** | **2005**          | ** ** | **2004** | ** ** | **Change** | ** ** | **%****Change** | ** ** |
| ** **                | ** ** | **(in millions)** | ** ** |
| * *                  | * *   | * *          | * *   | * * | * * | * * | * * | * * | * * |
| Electric  gross margin(1) |       | **$**             | **926**    |   | $ | 817 |   | $ | 109 |   | 13 | % |
|                           |            |                   |            |  |  |  |  |  |  |  |  |  |

 

----

(1)   Electricgross margin is calculated as *Electric operatingrevenues*less *Fuel, emission allowances,and purchased power* expense from the Condensed ConsolidatedStatements of Income.

 

Cooling degree days and heating degree days in **PSI’s** service territory for the nine monthsended September 30, 2005, and 2004 were as follows:

 
| ** **                    | ** ** | **PSI**   | ** ** |
|-------------------------------|------------|-----------|------------|
| ** **                    | ** ** | **2005**  | ** ** | **2004** | ** ** | **Change** | ** ** | **% Change** | ** ** |
|                          |       |      |       |   |   |   |   |   |   |
| Cooling  degree days(1)  |       | **1,210** |       | 880 |   | 330 |   | 38 | % |
| Heating  degree days(2)(3)    |       | **2,432** |       | 2,509 |   | (77 | ) | (3 | ) |

 

----

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

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

(3)   Beginning in January 2005, wemodified our heating degree days base temperature from 65 degrees to 59 degreesto more accurately reflect current consumer behavior.  Prior year amounts have been updated toreflect this change.

 

 

The 13 percent increase in **PSI’s** electricgross margins was primarily due to the following factors:

 

•                  A$68 million increase resulting from a higher price received per MWh in thefirst half of 2005 due primarily to **PSI’s**2004****base retail electric rate increase;

•                  A$21 million increase resulting primarily from warmer weather in the thirdquarter of 2005, as compared to 2004;

•                  A$16 million increase in non-retail margins, primarily resulting from reducedfuel expense reflecting adjustments to **PSI’s** cost ofsynthetic fuel; and

•                  A$9 million increase due to growth in non-weather related demand.

 

74

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These increases were partially offset by a decline of $15 millionreflecting rate reductions associated with a property tax adjustment.

 

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

 

#### **Other Operating Expenses**

 

| ** **                    | ** **   | **PSI**           | ** **   |
|-------------------------------|--------------|-------------------|--------------|
| ** **                    | ** **   | **2005**          | ** **   | **2004** | ** ** | **Change** | ** ** | **% Change** | ** ** |
| *** ***                  | *** *** | **(in millions)** | *** *** |
| * *                      | * *     | * *          | * *     | * * | * * | * * | * * | * * | * * |
| Operation and maintenance     |         | **$**             | **356**      | ** ** | $ | 350 |   | $ | 6 |   | 2 | % |
| Depreciation                  |         | **199**           | ** **   | 159 |   | 40 |   | 25 |   |
| Taxes other than income taxes |         | **38**            | ** **   | 41 |   | (3 | ) | (7 | ) |
|                               |              |                   |              |  |  |  |  |  |  |  |  |  |

 

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

 

The two percent increase in *Operation and maintenance*expense was primarily due to various increases in operating costs and increaseddistribution system maintenance cost. These increases were partially offset by decreased regulatory commissionexpenses and decreased labor costs primarily related to employee incentives.

 

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

 

The 25 percent increase in *Depreciation*expense was primarily due to (a) higher depreciation rates, as aresult of changes in useful lives of production assets and an increased ratefor cost of removal, (b) recovery of deferred depreciation costs, and (c) theaddition of depreciable plant for pollution control equipment, all of which arerecovered from ratepayers.

 

#### **Miscellaneous Income – Net**

 

The increase in *Miscellaneous Income – Net*was primarily due to an increase in the rate for allowance for funds usedduring construction and interest income on restricted deposits.

 

#### **Interest Expense**

 

The 22 percent increase in *Interest Expense*was primarily due to an increase in average long-term debt outstanding and anincrease in interest rates for our variable rate debt.  This expense was partially offset by interestincome received on restricted deposits obtained through these incrementalborrowings, which was recorded in *Miscellaneous Income – Net*associated with the additional debt outstanding.

 

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**MD&A – 2005 YEAR TO DATERESULTS OF OPERATIONS – ULH&P**

 

### **2005 YEAR TO DATERESULTS OF OPERATIONS - ULH&P**

 

#### **Summary of Results**

 

The Results of Operations discussion for **ULH&P**is presented only for the nine months ended September 30, 2005, in accordance withGeneral Instruction H(2)(a) of Form 10-Q.

 

Electric and gas gross margins and net income for **ULH&P** for the nine months ended September30, 2005, and 2004 were as follows:

 
| ** **                | ** **   | **ULH&P**     | ** **   |
|---------------------------|--------------|-------------------|--------------|
| ** **                | ** **   | **2005**          | ** **   | **2004** | ** ** | **Change** | ** ** | **% Change** | ** ** |
| *** ***              | *** *** | **(in millions)** | *** *** |
| * *                  | * *     | * *          | * *     | * * | * * | * * | * * | * * | * * |
| Electric gross  margin(1) |         | **$**             | **55**       | ** ** | $ | 52 |   | $ | 3 |   | 6 | % |
| Gas gross margin(2)       |         | **32**            | ** **   | 32 |   | — |   | — |   |
| Net income                |         | **9**             | ** **   | 13 |   | (4 | ) | (31 | ) |
|                           |              |                   |              |  |  |  |  |  |  |  |  |  |

 

----

(1)          Electric grossmargin is calculated as *Electric operatingrevenues*less *Electricity purchased fromparent company for resale* expense from the Condensed Statements ofIncome.

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

 

The six percent increase in electric gross margins was primarily due toincreased demand caused by warmer weather in the third quarter of 2005, ascompared to 2004.  Gas gross marginsremained flat as an increase in rate tariff adjustments associated with the gasmain replacement program and the demand-side management program, which encouragesefficient customer gas usage, was partially offset by a decline in non-weatherrelated demand.

 

The 31 percent decrease in net income was partially due to higheroperation and maintenance costs associated with the transmission ofelectricity.  Operation and maintenancecost also increased due to increased expense related to the pending Duke-**Cinergy** merger and increased costs associated with sales ofaccounts receivables to an unconsolidated affiliate.  Also contributing to the decrease in net incomewere increased property taxes.  Therewere also increases in *Interest Expense*related to an increase in average long-term debt outstanding.  These decreases were partially offset by theincrease in electric gross margins as previously discussed.

 

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**MD&A - LIQUIDITY AND CAPITALRESOURCES**

 

### **LIQUIDITY ANDCAPITAL RESOURCES**

 

#### **Capital Requirements**

 

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

 

*Environmental Protection Agency Regulations*

 

In March 2005, the EPA issued the Clean AirInterstate Rule (CAIR) which would require states to revise their StateImplementation Plan (SIP) by September 2006 to address alleged contributions todownwind non-attainment with the revised National Ambient Air Quality Standardsfor ozone and fine particulate matter. The rule established a two-phase, regional cap and trade program for SO2 andNOX, affecting 28states, including Ohio, Indiana, and Kentucky, and requires SO2 andNOX emissions to be cut 70 percent and 65 percent, respectively, by2015.  At the same time, the EPA issuedthe Clean Air Mercury Rule (CAMR) which requires reductions in mercuryemissions from coal-fired power plants beginning in 2010.  The final regulation also adopts a two-phasecap and trade approach that requires mercury emissions to be cut by 70 percentby 2018.  SIPs must comply with theprescribed reduction levels under CAIR and CAMR; however, the states have theability to introduce more stringent requirements if desired.  Under both CAIR and 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 costeffective.  In August 2005, the EPAproposed a Federal Implementation Plan (FIP) to act as a backstop to ensurethat states implement the CAIR in a timely manner.  If a state fails to develop a CAIR SIP, theEPA intends to finalize the FIP in time to implement phase 1 of CAIR for thestate by 2009 and 2010 for NOX and SO2,respectively.  Numerous states,environmental organizations, industry groups, including some of which **Cinergy** is a member, and individual companies havechallenged various portions of both rules. Those challenges are currently pending in the Federal Circuit Court forthe District of Columbia.  On October 21,2005, the EPA agreed to reconsider certain aspects of the CAMR and thedetermination not to regulate mercury under Section 112 of the Clean Air Act (CAA).  At this time we cannot predict the outcome ofthese matters.

 

Over the 2005-2009 time period, we expect tospend approximately $1.8 billion to reduce mercury, SO2, and NOXemissions.  These estimates includeestimated costs to comply at plants that we own but do not operate and couldchange when taking into consideration compliance plans of co-owners oroperators involved.  Moreover, as marketconditions change, additional compliance options may become available and ourplans will be adjusted accordingly. Approximately 60 percent of these estimated environmental costs would beincurred at **PSI’s** coal-firedplants, for which recovery would be pursued in accordance with regulatorystatutes governing environmental cost recovery. See “PSI Environmental Compliance Case” in “Future Expectations/Trends”for more details.  **CG&E**would receive partial recovery of depreciation and financing costs related toenvironmental compliance projects for 2005-2008 through its recently approvedRSP.  See “CG&E Electric Rate Filing”in “Future Expectations/Trends” for more details.

 

The EPA made final state non-attainment areadesignations to implement the revised ozone standard and to implement the newfine particulate standard in June 2004 and 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 withcounties that are designated as being in non-attainment with the new ozoneand/or fine particulate standards are required to develop a plan of complianceby June 2007 and April 2008, respectively. Industrial sources in or near those counties are potentially subject torequirements for installation of additional pollution controls.  In March 2005, various states, localgovernments, environmental groups, and industry groups, including some of which**Cinergy** is a member, filed petitionsfor review in the United States Court of Appeals for the D.C. Circuit tochallenge the EPA’s particulate matter non-attainment designations.  Although the EPA has attempted to structureCAIR to resolve purported utility contributions to ozone and fine particulatenon-attainment, at this time, **Cinergy**cannot predict the effect of current or future non-attainment designations onits financial position or results of operations.

 

In July 2005, the EPA issued its finalregional haze rules and implementing guidelines in response to a 2002 judicialruling overturning key provisions of the original program.  The regional haze program is aimed atreducing certain emissions impacting visibility in national parks andwilderness areas.  The EPA has announcedthat it can foresee no circumstances where the requirements of the regionalhaze rule would require utility controls beyond those required

 

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under CAIR.  The EPA also foundthat states participating in the CAIR cap and trade program need not requireelectric generating units to adhere to best available retrofit technologyrequirements.  The states have untilDecember 2007 to finalize their SIPs addressing compliance with EPAregulations.  The states may choose toimplement more stringent guidelines than promulgated by the EPA, and thereforeit is not possible to predict whether the regional haze rule will have a materialeffect on our financial position or results of operations.

 

*Clear Skies Legislation*

 

President Bush hasproposed environmental legislation that would combine a series of CAArequirements, including the recent mercury, SO2, and NOXreduction regulations for coal-fired power plants with a legislative solutionthat includes trading and specific emissions reductions and timelines to meetthose reductions.  The President’s “ClearSkies Initiative” would seek an overall 70 percent reduction in emissions frompower plants over a phased-in reduction schedule beginning in 2010 andcontinuing through 2018.  When the ClearSkies Initiative was stalled in Congress, the EPA finalized the CAIR and CAMRregulations to accomplish Clear Skies’ goals within the existing framework ofthe CAA.  Clear Skies has been reintroduced in theSenate in 2005, but its prospects for passage are uncertain in the currentsession.  At this time, we cannot predictwhether this or any multi-emissions bill will be passed.

 

*Energy Bill*

 

A comprehensive energy bill (the Energy Policy Act of 2005) passedCongress in July 2005 and was signed by President Bush on August 8, 2005.  The bill, among other things:

 

•                  RepealsPUHCA effective six months after the bill’s enactment (i.e., February 9, 2006);

•                  Amendscertain provisions of the Federal Power Act, including new provisions relatedto consumer protection and enforcement and expands FERC’s authority to imposecivil and criminal penalties for, among other things, reliability infractions andpower trading irregularities;

•                  Revisesthe Public Utility Regulatory Policies Act of 1978, including the removal ofrestrictions on ownership by electric utilities of qualifying facilities andthe removal of the utility’s requirement to purchase power from facilitiesunder certain circumstances;

•                  ProvidesFERC with expanded authority in the electric industry to review mergers,acquisitions and asset dispositions, effective six months after the bill’senactment;

•                  ProvidesFERC with authority to oversee and enforce, through the creation of a newElectric Reliability Organization, reliability standards, and promotes rulesthat provide incentives to enhance transmission facilities;

•                  Includestax incentives for the development of wind and other renewable technologies;

•                  Includestax incentives for integrated coal gasification combined cycle (IGCC)facilities; and

•                  Acceleratesthe tax depreciation rates for pollution control equipment on power plantsbuilt after 1975.

 

Under terms of the bill, **Cinergy’s**pending merger with Duke is grandfathered under existing FERC authority.  In addition, the bill authorizes asignificant number of programs and grants that may be of help in, among otherthings, lowering the cost of adding IGCC facilities and furthering carbonsequestration activities.  However, thoseauthorizations must be appropriated next year by Congress.  It is too early to determine if any of theprograms will be appropriated dollars in order to carry them out, or if **Cinergy** will be a direct beneficiary of those programs.  At this time, it is too early to predict the overallimpact this new legislation will have on our financial position or results ofoperations.

 

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* EnvironmentalLawsuits*

 

We are currently involved in the following lawsuits which are discussedin more detail in Note 9(a) of the “Notes to Condensed Financial Statements” in“Item 1. Financial Statements.”  Anunfavorable outcome of any of these lawsuits could have a material impact onour liquidity and capital resources.

 

•                  CAALawsuit

•                  CO2Lawsuit

•                  SelectiveCatalytic Reduction Units at Gibson Station

•                  ZimmerStation Lawsuit

•                  ManufacturedGas Plant Sites

•                  AsbestosClaims Litigation

 

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

** **

**Cinergy** maintains qualifieddefined benefit pension plans covering substantially all United Statesemployees meeting certain minimum age and service requirements.  Plan assets consist of investments in equityand debt securities.  Funding for thequalified defined benefit pension plans is based on actuarially determinedcontributions, the maximum of which is generally the amount deductible for taxpurposes and the minimum being that required by the Employee Retirement IncomeSecurity Act of 1974, as amended (ERISA). Although mitigated by strong performance in 2003 and 2004, ongoingretiree payments and the decline in market value of the investment portfolio in2002 reduced the assets held in trust to satisfy plan obligations.  Additionally, continuing low long-terminterest rates have increased the liability for funding purposes.  As a result of these events, our near termfunding targets have increased substantially. **Cinergy** has adopted afive-year plan to reduce, or eliminate, the unfunded pension obligationinitially measured as of January 1, 2003. This unfunded obligation will be recalculated as of January 1 of eachyear in the five-year plan.  Because thisunfunded obligation is the difference between the liability determinedactuarially on an ERISA basis and the fair value of plan assets, the liabilitydetermined by this calculation is different than the pension liabilitycalculated for accounting purposes reported on **Cinergy’s** Condensed Consolidated Balance Sheets.

 

**Cinergy’s** minimumrequired contributions in calendar year 2004 totaled $16 million.  Actual contributions in 2004 were $117million, reflecting additional discretionary contributions of $101 millionunder the aforementioned five-year plan. Due to the significant 2004 and previous calendar year contributions, **Cinergy’s** minimum required contributions incalendar year 2005 are zero.  Actualdiscretionary contributions for the nine months ended September 30, 2005 were$102 million, which is an increase from the $72 million disclosed in the 200410-K.  This $30 million increase isprimarily the result of a change in the retirement age assumption whichincreased the near-term funding estimates. **Cinergy** may consider makingdiscretionary contributions in 2006 and future periods; however, at this time,we are unable to determine the amount of those contributions.  Estimated contributions fluctuate based onchanges in market performance of plan assets and actuarial assumptions.  Absent the occurrence of interim events thatcould materially impact these targets, we will update our expected targetcontributions annually as the actuarial funding valuations are completed andmake decisions about future contributions at that time.

 

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

 

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

 

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

 

An EWG is an entity,certified by the FERC, devoted exclusively to owning and/or operating, andselling power from one or more electric generating facilities.  An EWG whose generating facilities arelocated in the United States is limited to making only wholesale sales ofelectricity.  An entity claiming statusas an EWG must provide notification thereof to the SEC under the PUHCA.

 

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

 

InJune 2005, the SEC issued an order under PUHCA authorizing **Cinergy** to invest (including by wayof guarantees) an aggregate amount in EWGs and FUCOs equal to the sum of (1)our average consolidated retained earnings from time to time plus (2) $2 billionthrough the earlier of (a) the closing of the pending Duke-**Cinergy**merger or (b) June 23, 2006.  As of September30, 2005, we had invested or committed to invest $0.7 billion in EWGs andFUCOs, leaving available investment capacity under the order of $2.9 billion.

 

•                  QualifyingFacilities and Energy-Related Non-Utility Entities

 

SEC regulations under thePUHCA permit **Cinergy** and otherregistered holding companies to invest and/or guarantee an amount equal to 15percent of consolidated capitalization (consolidated capitalization is the sumof *Notes payable and other short-termobligations*, *Long-term debt*(including amounts due within one year), Cumulative**Preferred Stock of Subsidiaries,and Total Common Stock Equity)in domestic qualifying cogeneration and small power production plants(qualifying facilities) and certain other domestic energy-related non-utilityentities.  At September 30, 2005, we hadinvested and/or guaranteed $1.3****billionof the $1.5 billion available.  In August2004, **Cinergy** filed an application with theSEC requesting authority under the PUHCA to increase its investment and/orguarantee authority by $2 billion above the current authorized amount.  In light of our existing unused capacity,together with the repeal of PUHCA and the pending merger with Duke, **Cinergy** withdrew this application in the third quarter of2005.

 

•                  Energy-RelatedAssets

 

**Cinergy**has been granted SEC authority under the PUHCA to invest up to $1 billion innon-utility Energy-Related Assets within the United States, Canada, andMexico.  Energy-Related Assets includenatural gas exploration, development, production, gathering, processing,storage and transportation facilities and equipment, liquid oil reserves andstorage facilities, and associated assets, facilities, and equipment, but wouldexclude any assets, facilities, or equipment that would cause the owner oroperator thereof to be deemed a public utility company.  As of September 30, 2005, we did not have anyinvestments in these Energy-Related Assets.

 

•                  InfrastructureServices Companies

 

In July 2005, the SECissued an order under the PUHCA authorizing **Cinergy**to invest up to $100 million (including existing investments and guarantees)through June 30, 2008 in companies that derive or will derive substantially allof their operating revenues from the sale of Infrastructure Services including:

 

•                  Design,construction, retrofit, and maintenance of utility transmission anddistribution systems;

 

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

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

 

At September 30, 2005, wehad invested $30 million in Infrastructure Services companies.

 

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

 

On June 23, 2005, the SEC issued an order under the PUHCA authorizing **Cinergy Corp.** to provide guarantees in an aggregate amountnot to exceed $3.0 billion.  For adiscussion of the PUHCA Repeal, see “Energy Bill” in “Liquidity and CapitalResources.”  As of September 30, 2005, wehad $1.2 billion outstanding under the guarantees issued, of which 81 percentrepresents guarantees of obligations reflected on **Cinergy’s** Condensed Consolidated Balance Sheets.  The amount outstanding represents **Cinergy Corp.’s** guarantees of liabilitiesand commitments of its consolidated subsidiaries, unconsolidated subsidiaries,and joint ventures.

 

See Note 9(c)(*iv*) of the “Notesto Condensed Financial Statements” in “Item 1. Financial Statements” for adiscussion of guarantees in accordance with Financial Accounting StandardsBoard (FASB) Interpretation No. 45, *Guarantor’sAccounting and Disclosure Requirements for Guarantees, Including IndirectGuarantees of Indebtedness of Others* (Interpretation 45).  Interpretation 45 requires disclosure ofmaximum potential liabilities for guarantees issued on behalf of unconsolidatedsubsidiaries and joint ventures and under indemnification clauses in variouscontracts.  The Interpretation 45disclosure differs from the PUHCA restrictions in that it requires acalculation of maximum potential liability, rather than actual amountsoutstanding; it excludes guarantees issued on behalf of consolidatedsubsidiaries and it includes potential liabilities under indemnificationclauses.

 

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

** **

**Cinergy**has certaincontracts in place, primarily with trading counterparties, that require theissuance of collateral in the event our debt ratings are downgraded belowinvestment grade.  Based upon ourSeptember 30, 2005 trading portfolio, if such an event were to occur, **Cinergy** would be required, based oncontractual provisions, to post up to $551 million in additional collateral relatedto its gas and power trading operations, of which $108 million is related to **CG&E**. 

 

As a consequence of rising commodity prices, as of September 30, 2005, **Cinergy** has posted $481 million in total cash collateral, ofwhich $240 million is related to **CG&E**, andreceived total cash collateral of $387 million, of which $260 million isrelated to **CG&E**.  Also, **Cinergy** hasposted non-cash collateral in the form of letters of credit totaling $232million, of which $225 million is related to **CG&E**,and received letters of credit totaling $482 million, of which $136 million isrelated to **CG&E**.

 

#### **Capital Resources**

** **

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

 

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

** **

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

 

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##### ***Notes Payable and Other Short-term Obligations***

 

We are required to secure authority to issue short-term debt from theSEC under the PUHCA and from the PUCO. The SEC under the PUHCA regulates the issuance of short-term debt by **Cinergy Corp.**, **PSI**, and **ULH&P**.  The PUCO has regulatory jurisdiction over theissuance of short-term debt by **CG&E**.For a discussion of the PUHCA Repeal, see “Energy Bill” in “Liquidity andCapital Resources.”

 
| ** **                   | ** ** | **Short-term Regulatory Authority  September 30, 2005** | ** ** |
|------------------------------|------------|---------------------------------------------------------|------------|
| ** **                   | ** ** | **(in millions)**                                       | ** ** |
| ** **                   | ** ** | **Authority**                                           | ** ** | **Outstanding** | ** ** |
| **Cinergy Corp.**            |       | $                                                       | 4,000      | (1) | $ | 874 |   |
| **CG&E**and subsidiaries |       | 665                                                     | (2)        | 205 |   |
| **PSI**                      |       | 600                                                     |       | 373 |   |
| **ULH&P**                |       | 65                                                      | (2)        | 10 |   |
|                              |            |                                                         |            |  |  |  |  |

 

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(1)                    **In June 2005, the SEC issued an order under PUHCA authorizing****Cinergy****to increase its******total capitalization (excluding *retained earnings*and *accumulated other comprehensive income (loss)*),which may be any combination of debt and equity securities, by $4 billion overthe September 30, 2004 levels.  Outsidethis requirement, **CinergyCorp.** is not subject to specific regulatory debtauthorizations.

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

 

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

 

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**Cinergy Corp.’s**short-termborrowings consist primarily of unsecured revolving lines of credit and thesale of commercial paper.  **Cinergy Corp.’s** revolving credit facility andcommercial paper program also support the short-term borrowing needs of **CG&E**, **PSI**,and **ULH&P**.  In addition, **Cinergy Corp.**, **CG&E**,and **PSI** maintain uncommitted linesof credit.  These facilities are not firmsources of capital but rather informal agreements to lend money, subject toavailability, with pricing determined at the time of advance.  The following table summarizes our *Notes payable and other short-term obligations* and *Notes payable to affiliated companies*:

 
| ** **                         | ** **   | **Short-term Borrowings** | ** **   |
|------------------------------------|--------------|---------------------------|--------------|
| ** **                         | ** **   | **September 30, 2005**    | ** **   |
| ** **                         | ** **   | ** **                | ** **   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Available** | ** ** |
| ** **                         | ** **   | ** **                | ** **   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Revolving** | ** ** |
| ** **                         | ** **   | **Established**           | ** **   | ** ** | ** ** | ** ** | ** ** | **Standby** | ** ** | **Lines of** | ** ** |
| ** **                         | ** **   | **Lines**                 | ** **   | **Outstanding** | ** ** | **Unused** | ** ** | **Liquidity(1)** | ** ** | **Credit** | ** ** |
| *** ***                       | *** *** | **(in millions)**         | *** *** |
|                               |         |                      |         |   |   |   |   |   |   |   |   |
| **Cinergy**                        |         |                      |         |   |   | ** ** |   |   |   |   |   |
| **Cinergy  Corp.**                 |         |                      |         |   |   | ** ** |   |   |   |   |   |
| Revolving  line(2)                 |         | $                         | 2,000        |   | $ | — |   | $ | 2,000 |   | $ | 1,102 |   | $ | 898 |   |
| Uncommitted  lines                 |         | 40                        |         | — |   | 40 |   |   |   |   |   |
| Commercial  paper(3)               |         |                      |         | 874 |   |   |   |   |   |   |   |
|                               |         |                      |         |   |   |   |   |   |   |   |   |
| Utility  operating companies       |         |                      |         |   |   |   |   |   |   |   |   |
| Uncommitted  lines                 |         | 75                        |         | — |   | 75 |   |   |   |   |   |
| Pollution  control notes           |         |                      |         | 248 |   |   |   |   |   |   |   |
|                               |         |                      |         |   |   |   |   |   |   |   |   |
| Non-regulated  subsidiaries        |         |                      |         |   |   |   |   |   |   |   |   |
| Revolving  lines(4)                |         | 162                       |         | 45 |   | 117 |   | — |   | 117 |   |
| Short-term debt                    |         |                      |         | 7 |   |   |   |   |   |   |   |
| Pollution  control notes           |         |                      |         | 25 |   |   |   |   |   |   |   |
|                               |         |                      |         |   |   |   |   |   |   |   |   |
| **Cinergy  Total**                 |         |                      |         | $ | 1,199 |   |   |   |   |   | $ | 1,015 |   |
| ** **                         |         |                      |         |   |   |   |   |   |   |   |   |
| **CG&E **and subsidiaries |         |                      |         |   |   | ** ** |   |   |   |   |   |
| Uncommitted  lines                 |         | $                         | 15           |   | $ | — |   | $ | 15 |   |   |   |   |   |
| Pollution  control notes           |         |                      |         | 112 |   |   |   |   |   |   |   |
| Money pool                         |         |                      |         | 205 |   |   |   |   |   |   |   |
|                               |         |                      |         |   |   |   |   |   |   |   |   |
| **CG&E  Total**                |         |                      |         | $ | 317 |   |   |   |   |   |   |   |
| ** **                         |         |                      |         |   |   |   |   |   |   |   |   |
| **PSI**                            |         |                      |         |   |   | ** ** |   |   |   |   |   |
| Uncommitted  lines                 |         | $                         | 60           |   | $ | — |   | $ | 60 |   |   |   |   |   |
| Pollution  control notes           |         |                      |         | 136 |   |   |   |   |   |   |   |
| Money pool                         |         |                      |         | 373 |   |   |   |   |   |   |   |
|                               |         |                      |         |   |   |   |   |   |   |   |   |
| **PSI  Total**                     |         |                      |         | $ | 509 |   |   |   |   |   |   |   |
| ** **                         |         |                      |         | ** ** |   | ** ** |   |   |   |   |   |
| **ULH&P**                      |         |                      |         | ** ** |   | ** ** |   |   |   |   |   |
| Money pool                         |         |                      |         | $ | 10 |   |   |   |   |   |   |   |
| ** **                         |         |                      |         | ** ** |   | ** ** |   |   |   |   |   |
| **ULH&P  Total**               |         |                      |         | $ | 10 |   |   |   |   |   |   |   |
|                                    |              |                           |              |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(1)   Standby liquidity is reservedagainst the revolving line of credit to support the commercial paper programand outstanding letters of credit (currently $874 million and $228 million,respectively).

(2)   Consists of a five-year facilitywhich was entered into in September 2005, matures in September 2010, andcontains $500 million sublimits each for **CG&E**and **PSI,**anda $65 million sublimit for **ULH&P**(which may be increased to $100 million upon the completion of its pendingtransaction with **CG&E** in which **ULH&P** will acquire interests in three of **CG&E’s** electric generating stations.  See “Regulatory Outlook – Kentucky” in“Future Expectations/Trends” for further information regarding thistransaction.).

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

(4)   Of the $162 million, $150million relates to a three-year senior revolving credit facility that CinergyCanada, Inc. entered into in December 2004 and that matures in December 2007.

 

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***Short-term Notes***

 

In September 2005, **Cinergy Corp**., **CG&E**, **PSI,** and **ULH&P** entered into a five-year revolving credit facilitywith a termination date of  September2010 which can be extended twice, each extension for an additional one-yearperiod.  The new credit agreementreplaces two existing credit agreements, one dated April 2004 and one datedDecember 2004.

 

The new credit agreement provides that the pending merger between Dukeand **Cinergy Corp.** will not be considered afundamental change or a “Change of Control” for purposes of the creditagreement.

 

For purposes of making borrowings the new credit agreement does notrequire certain environmental, litigation or material adverse changerepresentations and warranties that were in the credit agreements it replaced.

 

At September 30, 2005, **Cinergy Corp.**had $898 million remaining unused and available capacity relating to its $2billion revolving credit facility.  Therevolving credit 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  |       |           |       |                   |       | $                               | 874        |                      |       |   |
| Letter of credit  support  |       |           |       |                   |       | 228                             |       |                      |       |
| Total(1)                   |       |           |       | $                      | 2,000      |                            | 1,102      |                      | $          | 898 |   |
|                            |            |                |            |                        |            |                                 |            |                           |            |  |  |  |

 

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(1)          In September2005, **Cinergy Corp.** successfully placed a $2billion senior unsecured revolving credit facility which replaced the $1billion five-year facility, set to expire in December 2009, and the $1 billionthree-year facility, set to expire in April 2007. ** CG&E** and **PSI**each have $500 million borrowing sublimits on this facility, and **ULH&P** has a $65 million borrowing sublimit on thisfacility (which may be increased to $100 million upon the completion of itspending transaction with **CG&E** inwhich **ULH&P** will acquire interests inthree of **CG&E’s** electric generatingstations.  See Note 12(a) for furtherinformation regarding this transaction.)

 

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

 

•                  aconsolidated net worth of $2 billion; and

•                  aratio of consolidated indebtedness to consolidated total capitalization not inexcess 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:

 

•                  aconsolidated net worth of $1 billion; and

•                  aratio of consolidated indebtedness to consolidated total capitalization not inexcess of 65 percent.

 

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

 

•                  aconsolidated net worth of $900 million; and

•                  aratio of consolidated indebtedness to consolidated total capitalization not inexcess of 65 percent.

 

As part of **ULH&P’s** $65million sublimit under the $2 billion five-year credit facility, **ULH&P** has covenanted to maintain:

 

•                  aconsolidated net worth of $150 million, provided that in the event that thesublimit has been increased to $100 million the consolidated net worth would be$200 million; and

•                  aratio of consolidated indebtedness to consolidated total capitalization not inexcess 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;

•                  defaultsin the payment 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 September 30, 2005, **Cinergy**, **CG&E**, **PSI,**and**ULH&P** arein compliance with all of their debt covenants.

 

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*Variable Rate Pollution Control Notes*

 

In October 2005, **PSI** borrowedthe proceeds from the Indiana Finance Authority’s issuance of $50 millionprincipal amount of its Environmental Revenue Bonds, Series 2005B, due October 1,2040. Holders of the Series 2005B Bonds are entitled to credit enhancement inthe form of a standby letter of credit, which if drawn upon, provides for thepayment of both interest and principal on the Series 2005B Bonds.  The initial interest rate for the Series2005B Bonds was 2.75% and is reset weekly. Because the holders have the rightto have their Bonds redeemed on a weekly basis, they are classified as *Notes payable and other short-term obligations. ***PSI**is using the proceeds from these borrowings to assist in the acquisition andconstruction of solid waste disposal facilities located at various generatingstations in Indiana.

 

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

 

We are required to secure authority to issue long-term debt from theSEC under the PUHCA and the state utility commissions of Ohio, Kentucky, andIndiana.  For a discussion of the PUHCARepeal, see “Energy Bill” in “Liquidity and Capital Resources.”  The SEC under the PUHCA regulates theissuance of long-term debt by **Cinergy Corp.**  The respective state utility commissionsregulate the issuance of long-term debt by our utility operating companies.

 

A summary of our long-term debt authorizations at September 30, 2005,was as follows:

 
| ** **                                       | ** ** | **Authorized**    | ** ** | **Used** | ** ** | **Available** | ** ** |
|--------------------------------------------------|------------|-------------------|------------|----------|------------|---------------|------------|
| ** **                                       | ** ** | **(in millions)** | ** ** |
| * *                                         | * *   | * *          | * *   | * * | * *   | * *      | * *   |
| **Cinergy Corp.**                                |       |              |       |     |       |          |       |
| PUHCA total  capitalization(1)                   |       | $                 | 4,000      |     | $          | 657           |       | $ | 3,343 |   |
|                                             |       |              |       |     |       |          |       |
| **CG&E**and subsidiaries(2)                  |       |              |       |     |       |          |       |
| State Public  Utility Commissions                |       | $                 | 575        |     | $          | —        |       | $ | 575 |   |
| State Public  Utility Commission - Tax-Exempt    |       | 250               |       | 94       |       | 156           |       |
|                                             |       |              |       |     |       |          |       |
| **PSI**                                          |       |              |       |     |       |          |       |
| State Public  Utility Commission(3)              |       | $                 | 500        |     | $          | —        |       | $ | 500 |   |
| State Public  Utility Commission - Tax-Exempt(4) |       | 250               |       | 50       |       | 200           |       |
|                                             |       |              |       |     |       |          |       |
| **ULH&P**                                    |       |              |       |     |       |          |       |
| State Public  Utility Commission(5)              |       | $                 | 75         |     | $          | —        |       | $ | 75 |   |

 

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(1)                                  In June 2005,the SEC issued an order under PUHCA authorizing **Cinergy**to increase its total capitalization (excluding *retainedearnings* and *accumulated othercomprehensive income (loss)*), which may be any combination of debtand equity securities, by $4 billion over the September 30, 2004 levels.  Outside this requirement, **Cinergy Corp.**is not subject to specific regulatory debt authorizations.

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

(3)                                  In October 2005,**PSI** issued $350 million principalamount of its 6.12% Debentures due October 15, 2035.

(4)                                  In June 2005,the IURC granted **PSI** financing authority to borrowthe proceeds from the issuance and sale of up to $250 million principal amountof tax exempt securities through December 31, 2005.  In October 2005, **PSI**borrowed the proceeds from the Indiana Finance Authority’s issuance of its $100million principal amount of its Environmental Revenue Bonds.

(5)                                  In April 2005,the KPSC granted **ULH&P**financing authority to issue and sell up to $500 million principal amountof secured and unsecured debt; enter into inter-company promissory notesup to an aggregate principal amount of $200 million; and borrow up to a maximumof $200 million aggregate principal amount of tax-exempt debt through December31, 2006.  This authority is contingentupon the completion of its pending transaction with **CG&E**in which **ULH&P** will acquire interests inthree of **CG&E’s** electric generatingstations.  See “Regulatory Outlook –Kentucky” in “Future Expectations/Trends” for further information regardingthis transaction.

 

**Cinergy Corp.** hasan effective shelf registration statement with the SEC relating to the issuanceof up to $750 million in any combination of common stock, preferred stock,stock purchase contracts or unsecured debt securities, of which $323 millionremains available for issuance.  **CG&E** has an effective shelfregistration statement with the SEC relating to the issuance of up to $800million in any combination of unsecured debt securities, first mortgage bonds,or preferred stock, all of which remains available for issuance.  **PSI**has an effective shelf registration statement with the SEC relating to theissuance of up to $800 million in any combination of unsecured debt securities,first mortgage bonds, or preferred stock, all of which remains available forissuance.  **ULH&P**has an

 

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effective shelfregistration statement with the SEC for the issuance of up to $125 million inany combination of unsecured and secured debt securities.

 

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

 

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

 

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

 

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

 

As of September 30,2005, the major credit rating agencies rated our securities as follows:

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

 

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(1)          Fitch Ratings(Fitch)

(2)          Moody’sInvestors Service (Moody’s)

(3)          Standard &Poor’s Ratings Services (S&P)

 

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

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

 

On May 10, 2005,S&P placed its ratings of **Cinergy Corp.**and its subsidiaries on CreditWatch with negative implications.  This action was in response to theannouncement of the pending merger of Duke and **Cinergy**and the uncertainty around the final details of the transaction.  Fitch has affirmed its existing ratings,noting that it anticipates the combined entity to achieve a credit profilesimilar to that of **Cinergy**.  Moody’s has also affirmed its ratings,anticipating that no incremental debt will be issued as a result of themerger.  See “Pending Merger” for afurther discussion of the transaction.

 

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

 

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#### ***Equity***

 

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

 

**Cinergy**issues new **Cinergy Corp.** commonstock shares to satisfy obligations under certain of its employee stock plansand the Cinergy Corp. Direct Stock Purchase and Dividend ReinvestmentPlan.  During the nine months ended September 30,2005, **Cinergy** issued 2.5 millionshares under these plans.

 

In June 2005, **Cinergy Corp.** contributed $200 million in capital to **PSI**.  The capitalcontribution was used to repay short-term indebtedness and is consistent withsupporting **PSI’s** current credit ratings.

 

Cash dividends declaredfor the quarter ended September 30, 2005 include dividends of $0.48 pershare which were declared by the board of directors on July 21 anddividends of $0.48 per share which were declared on September 30.

 

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**MD&A - FUTURE EXPECTATIONS/TRENDS**

 

### **FUTURE EXPECTATIONS/TRENDS**

 

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

 

#### **Electric Industry**

 

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

 

*Ohio*

* *

Transfer of Duke Generating Assets

 

The merger agreementprovides that Duke and **Cinergy** willuse their reasonable best efforts to transfer five generating stations locatedin the Midwest from Duke to **CG&E**.  This transfer will require regulatoryapproval by the FERC and the IURC.  Therecan be no guarantee that such approvals will be obtained or will be obtained onterms or with conditions acceptable to Duke, **Cinergy**,and Duke Energy Holding.  Duke intends toeffectuate the transfer as an equity infusion into **CG&E**at book value.  In conjunction with thetransfer, Duke and **CG&E** intendto enter into a financial arrangement over a multi-year period, to eliminateany potential cash shortfalls that may result from **CG&E**owning and operating the assets.  At thistime, we cannot predict the outcome of this matter.

 

CG&E Electric Rate Filing

 

In response to the PUCO’s request that **CG&E** propose a RSP to mitigate thepotential for significant rate increases when the market development periodcomes to an end, **CG&E** filed a proposed RSPwhich was approved by the PUCO in November 2004.  The major features of the RSP are as follows:

 

•                  **Provider of Last Resort (POLR) Charge:**  **CG&E** begancollecting a POLR charge from non-residential customers effective January 1,2005, and will begin to collect a POLR charge from residential customerseffective January 1, 2006.  The POLRcharge includes several discrete charges, the most significant being anannually adjusted component (AAC) intended to provide cost recovery primarilyfor environmental compliance expenditures; an infrastructure maintenance fundcharge (IMF) intended to provide  compensation to **CG&E**for committing its physical capacity to meet its POLR obligation; and********a system reliability tracker (SRT) intended toprovide cost recovery for capacity purchases, purchased power, reservecapacity, and related market costs for purchases to meet capacity needs.  We anticipate the collection of the AAC andIMF will result in an approximate $36 million increase in revenues in 2005 andan additional $50 million in 2006.  TheSRT will be billed based on dollar-for-dollar costs incurred.  A portion of these charges is avoidable bycertain customers who switch to an alternative generation supplier and providenotice to **CG&E** that they will remain switchedthrough December 31, 2008.  Therefore,these estimates are subject to change, depending on the level of switching thatoccurs in future periods.  **CG&E**has filed an application for approval of its SRT(2005 actual and 2006 estimated) with the PUCO. In October, a settlement agreement unopposed by any party to the casewas filed with the PUCO providing for implementation of the 2006 SRT at a 15percent reserve margin and approval of the 2005 SRT price.  A Commission decision is expected on thismatter in the fourth quarter of 2005.  In2007 and 2008, **CG&E** could seek additionalincreases in the AAC component of the POLR based on **CG&E’s**actual net costs for the specified expenditures.  

•                  **Generation Rates and Fuel Recovery: **A new rate has been established for generation service afterthe market development period ends.  In addition, a fuel cost recoverymechanism that is adjusted quarterly has been established to recover costs forfuel, emission allowances, and certain purchased power costs, that exceed theamount originally included in the rates frozen in the **CG&E** transition plan.  These newrates were applied to non-residential customers beginning January 1, 2005 andwill be applied to residential customers beginning January 1, 2006.  Thefuel clause recovery mechanism was recently audited by the PUCO’sauditor.  The audit recommended alternate methodologies for administrationof the fuel clause recovery mechanism that vary from **CG&E’s** current practice.  A hearing before PUCO hearing examinerswas 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. An order from the PUCO on these matters is expected in the fourthquarter of this year.  While we cannot predict the outcome of theseproceedings, an outcome resulting in administrative methodologies substantiallydifferent from those being employed by **CG&E** couldhave a material impact on **CG&E** and **Cinergy’s** results of operations.

 

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

•                  **Transmission Cost Recovery: **Atransmission cost recovery mechanism was established beginning January 1, 2005for non-residential customers and will be established beginning January 1, 2006for residential customers.  Thetransmission cost recovery mechanism is designed to permit **CG&E**to recover Midwest ISO charges, all FERC approved transmission costs, and allcongestion costs allocable to retail ratepayers that are provided service by **CG&E**.  

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

 

**CG&E** had also filed an electric distribution baserate case for residential and non-residential customers to be effective January1, 2005.  Under the terms of the RSPdescribed previously, **CG&E**withdrew this base rate case and, in February 2005, **CG&E**filed a new distribution base rate case with rates to become effective January1, 2006.  The originally requested amountof the increase was $78 million, which was subsequently updated to $69.5million.  On September 9, 2005, the PUCOissued its Staff Report recommending a revenue increase range betweenapproximately $43 million and $49 million. The hearing for this case is set to begin December 12, 2005.  

 

In March 2005, the Ohio Consumers’ Counselasked the Ohio Supreme Court to overturn the RSP.  We expect the court to decide the case in2006; however, at this time we cannot predict the outcome of this matter.

 

*Kentucky*

* *

TheKPSC and the FERC have approved **ULH&P’s**plannedacquisition of **CG&E’s**approximately 69 percent ownership interest in the East Bend Station, locatedin Boone County, Kentucky, the Woodsdale Station, located in Butler County,Ohio, and one generating unit at the four-unit Miami Fort Station, located inHamilton County, Ohio, and associated transactions.  **ULH&P** iscurrently seeking approval of the transaction in a proceeding before the SEC,wherein the Ohio Consumers’ Counsel has intervened in opposition.  The transfer, which will be at net bookvalue, will not affect current electric rates for **ULH&P’s** customers, as power will be provided under thesame terms as under the current wholesale power contract with **CG&E** through December 31,2006.  Assuming receipt of SEC approval,we would anticipate the transfer to take place in the first quarter of 2006.

 

*Indiana*

* *

Wheatland Generating Facility Acquisition

 

On May 6, 2005, wesigned a definitive agreement with subsidiaries of Allegheny Energy, Inc.whereby, subject to the terms and upon satisfaction of the conditions toclosing provided in the purchase agreement, **PSI**and/or **CG&E** had the right to acquire the512-megawatt Wheatland generating facility for approximately $100 million.  The Wheatland facility, located in KnoxCounty, Indiana, has four natural gas-fired simple cycle combustion turbinesand is directly connected to the **Cinergy**transmission system.  In June and August 2005,respectively, the FERC and IURC approved the acquisition and the Department ofJustice and Federal Trade Commission completed their review of the transactionpursuant to the notification requirements of the Hart-Scott-Rodino AntitrustImprovements Act.  In August 2005, **PSI** acquired 100 percent of the Wheatland facility.  Its output will be used to bolster thereserve margins on the **PSI** system.

 

Integrated Coal Gasification Combined Cycle

 

**Cinergy**is studying the feasibility of constructing a commercial IGCC generatingstation to help meet increased demand over the next decade.  **PSI** would be amajority owner of the facility and operate it. **Cinergy** will partner with BechtelCorporation and General Electric Company to complete this study.  An IGCC plant turns coal to gas, removingmost of the SO2 and other emissions before the gas is used to fuel acombustion turbine generator.  Thetechnology uses less water and has fewer emissions than a conventionalcoal-fired plant with currently required

 

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pollution controlequipment.  Another benefit is thepotential to remove mercury and CO2 upstream of the combustionprocess at a lower cost than conventional plants.  In August 2005, **PSI**and Vectren Energy Delivery of Indiana, Inc. (Vectren) filed a jointpetition at the IURC seeking cost recovery of the feasibility study as well asengineering and preconstruction costs associated with the consideration andexploration of constructing an IGCC plant. If a decision is reached to move forward with constructing such a plant,**PSI**would seek approval from the IURCto begin construction.  If approved, wewould anticipate the IURC’s subsequent approval to include the assets in **PSI’s**rate base.

 

PSI Environmental Compliance Case

 

In November 2004,******PSI**filed a compliance plan case with the IURCseeking approval of**PSI’s** plan forcomplying with SO2, NOX, and mercury emission reductionrequirements discussed previously in “Environmental Protection AgencyRegulations” in “Liquidity and Capital Resources”, including approval of costrecovery and an overall rate of return of eight percent related to certainprojects.  **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 mercury at **PSI’s** coal-burning generating stations.  An evidentiary hearing was held in May 2005and a final IURC Order is expected in the fourth quarter of 2005.

 

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

 

*FERC*

 

The FERC has issuedseveral notices of proposed rulemaking and inquiry on a variety of matters toimplement provisions of the Energy Bill, among other things.  At this time, we cannot predict the outcomeof these proposals.

 

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

 

The Midwest ISO is a regional transmissionorganization established in 1998 as a non-profit organization which maintainsfunctional control over the combined transmission systems of its members,including **Cinergy**.  In March 2004, the Midwest ISO filedwith the FERC proposed changes to its existing transmission tariff to add termsand conditions to implement a centralized economic dispatch platform supportedby a Day-Ahead and Real-Time Energy Market design, including Locational MarginalPricing (LMP) and Financial Transmission Rights (FTRs) (Energy MarketsTariff).  The FERC has issued ordersthat, among other things, conditionally approve the start-up of the EnergyMarkets Tariff which occurred April 1, 2005.  The FERC issued orders in response torequests for rehearing on certain matters in the FERC’s original orders.  **Cinergy**has appealed****the FERC orders to a federal appeals court.

 

Specifically, the EnergyMarkets Tariff manages system reliability through the use of a market-basedcongestion management system and includes a centralized dispatch platform, theintent of which is to dispatch the most economic resources to meet loadrequirements reliably and efficiently in the Midwest ISO region, which covers alarge portion of 15 Midwestern states and one Canadian province.  The Energy Markets Tariff uses LMP (i.e., theenergy price for the next megawatt (MW) may vary throughout the Midwest ISOmarket based on transmission congestion and energy losses), and the allocationor auction of FTRs, which are instruments that hedge against congestion costsoccurring in the Day-Ahead market.  TheEnergy Markets Tariff also includes market monitoring and mitigation measuresas well as a resource adequacy proposal, that proposes both an interim solutionfor participants providing and having access to adequate generation resourcesand a proposal to develop a long-term solution to resource adequacyconcerns.  The Midwest ISO performs aday-ahead unit commitment and dispatch forecast for all resources in its marketand also performs the real-time resource dispatch for resources under itscontrol on a five minute basis.  The **Cinergy** utility operating companies are seekingrecovery of costs that they incur related to the Energy Markets Tariff.  We have been operating under the EnergyMarkets Tariff since****April 2005.  We continue to work with the Midwest ISO tomonitor the implementation of the new market and at this time we do not believeit will have a material impact on our results of operations or financialposition.

 

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

 

Presently, GHG emissions, which principally consist ofCO2, are not regulated, and while several legislative proposals havebeen introduced in Congress to reduce utility GHG emissions, none have beenpassed.  Nevertheless, we anticipate amandatory program to reduce GHG emissions will exist in the future.  We expect that any regulation of GHGs willimpose costs on **Cinergy. **Depending on the details, any GHGregulation could mean:

 

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

•                  Increased operation and maintenanceexpense;

•                  Our older, more expensive to operategenerating stations may operate fewer hours each year because the addition ofCO2 costs could cause their generation to be less economic; and

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

 

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

 

In September 2003, **Cinergy** announced a voluntary GHG management commitment toreduce its GHG emissions during the period from 2010 through 2012 by fivepercent below our 2000 level, maintaining those levels through 2012.  **Cinergy**expects to spend $21 million between 2004 and 2010 on projects to reduce oroffset its GHG emissions.  **Cinergy** is committed to supporting thePresident’s voluntary initiative, addressing shareholder interest in the issue,and building internal expertise in GHG management and GHG markets.  Our voluntary commitment includes thefollowing:

 

•                  Measuring and inventorying company-relatedsources of GHG emissions;

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

•                  Funding research of more efficientand alternative electric generating technologies;

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

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

•                  Participating in discussions to helpshape the policy debate.

 

**Cinergy**is also studying the feasibility of constructing a commercial IGCC generatingstation which would be “carbon capture ready” or have the potential to captureCO2 and then potentially sequester it underground.    See “IntegratedCoal Gasification Combined Cycle” discussed previously for more information.

 

#### **Gas Industry**

 

##### ***SignificantRate Developments***

 

*ULH&P Gas 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 be recovered through a trackingmechanism for an initial three year period expiring on September 30, 2005,with the possibility of renewal up to ten years.  The tracking mechanism allows **ULH&P** to recover depreciation costs andrate of return annually over the life of the deferred assets.  As of September 30, 2005 we havecapitalized $60 million in costs associated with the accelerated gas mainreplacement program through this tracking mechanism of which **ULH&P** has recovered $8.6 million.  The Kentucky Attorney General has appealed tothe Franklin Circuit Court the KPSC’s approval of the tracking mechanism andthe 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 Attorney General.  At the present time, **ULH&P** cannot predict the timing oroutcome of this litigation.

 

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In February 2005, **ULH&P** filed a gas base rate case withthe KPSC requesting approval to continue the tracking mechanism in addition toits request for a $14 million increase in base rates.  The KPSC did not rule on this request byOctober 1, 2005 causing the initial tracking mechanism to expire.  In accordance with Kentucky law, **ULH&P** implemented the full amount of the requested rateincrease on October 1, 2005.  Anyrevenue collected pursuant to the rate increase will be subject to refund ifthe KPSC does not approve the full requested amount.  **ULH&P**expects that the KPSC will issue its decision during the fourth quarter of2005.

 

##### ***Gas Prices andSupply***

 

Naturalgas prices remained in the $8 - $9 per thousand cubic feet (Mcf) rangethrough most of the summer due primarily to the warmer than normal summerand the increased use of gas to fire electric generation peakingunits.  Extensive damage to the natural gas infrastructure along the Gulf Coastcaused by Hurricanes Katrina and Rita pushed the price of natural gas into the$12 - $14 per Mcf range by late September. Winter delivery prices for 2005 and early 2006 assuming normal winterweather, are expected to range from $11 to $13 per Mcf in the Midwest or about50 percent greater than last winter.  Price movement is usually driven bythe effects of weather conditions, availability of supply, and changes indemand and storage inventories. Currently, neither **CG&E’s**nor **ULH&P’s** gas deliveryoperations profit from changes in the cost of natural gas since natural gaspurchase costs are passed directly to the customer dollar-for-dollar under thegas cost recovery mechanism that is mandated under state law.

 

**ULH&P** utilizes a price mitigationprogram designed to mitigate the effects of gas price volatility on customers,which the KPSC has approved through April 2008.  The program allows the pre-arranging ofbetween 20-75 percent of winter heating season base load gas requirements andup to 50 percent of summer season base load gas requirements.  **CG&E**similarly mitigates its gas procurement costs; however, **CG&E’s** gas price mitigation program hasnot been pre-approved by the PUCO but rather it is subject to PUCO review aspart of the normal gas cost recovery process.

 

**CG&E**and **ULH&P**useprimarily long-term fixed price contracts and contracts with a ceiling andfloor on the price.  These contractsemploy the normal purchases and sales scope exception, and do not involve hedgeaccounting under Statement of Financial Accounting Standards No. 133, *Accounting for Derivative Instruments and Hedging Activities*(Statement 133).

 

#### **Other Matters**

 

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

 

**Cinergy**produces from two facilities synthetic fuel that qualifies for tax credits(through 2007) in accordance with Section 29 of the IRC if certainrequirements are satisfied.

 

**Cinergy’s** sale of synthetic fuelhas generated $306 million in tax credits through September 30, 2005 ofwhich $27 million related to the new facility purchased in the second quarterof 2005.  The IRS is currently auditing **Cinergy** for the 2002 and 2003 tax years and has recentlychallenged certain other taxpayers’ Section 29 tax credits.  We expect the IRS will evaluate the variouskey requirements for claiming our Section 29 credits related to syntheticfuel.  If the IRS challenges our Section 29tax credits related to synthetic fuel, and such challenges were successful,this could result in the disallowance of up to all $306 million in previouslyclaimed Section 29 tax credits for synthetic fuel produced by theapplicable **Cinergy** facilities and a loss ofour ability to claim future Section 29 tax credits for synthetic fuelproduced by such facilities.  We believethat we operate in conformity with all the necessary requirements to be allowedsuch tax credits under Section 29. Upon consummation of the pending merger of Duke and **Cinergy**,the synthetic fuel produced by **Cinergy’s** newfacility pursuant to the existing commercial arrangement would cease to qualifyfor the Section 29 credit.  **Cinergy** is evaluating transactions for the disposition of aportion of the affected facility that **Cinergy**believes would enable the fuel produced by the facility to continue to qualifyfor credit under IRC Section 29. In the event a suitable transaction isnot achieved, **Cinergy** anticipates that itsproduction of synthetic fuel at the affected facility would be suspended uponconsummation of the pending merger with Duke.

 

Section 29 alsoprovides for a phase-out of the credit based on the average price of crude oilduring a calendar year.  The phase-out isbased on a prescribed calculation and definition of crude oil prices.  Based on current crude oil

 

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prices and the recentvolatility of such prices, we believe it is possible that for 2006 and 2007,the amount of the tax credits could be reduced.  If oil prices are highenough, we may idle the plants, as the value of the credits would not exceedthe net costs to produce the synthetic fuel.  Net income related to these facilities for thenine months ended ****September 30, 2005 was approximately $30 million.  The net bookvalue of our plants at September 30, 2005 was approximately $50 million.****

 

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

 

The Ohio legislature has approved sweeping changes to Ohio’stax law which will phase out theOhio corporate franchise tax over five years. The franchise tax will be replaced by a “CommercialActivity Tax”, a tax imposed on gross receipts. We do not expect the tax lawchanges to have a material impact on our cash flows.  The phase-out of the Ohio franchise taxresulted in the elimination of state income tax deferrals under GAAP thusreducing the effective income tax rate during the period.  However, we do not expect these changes tohave a material impact on our results of operations or financial position goingforward over the remainder of the phase-out period.

 

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**MD&A - MARKET RISK SENSITIVE INSTRUMENTS**

 

### **MARKET RISK SENSITIVE INSTRUMENTS**

 

#### **Energy Commodities Sensitivity**

 

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

 

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

 

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

 

The changes in fair valueof the energy risk management assets and liabilities for **Cinergy** and **CG&E** for the nine months ended September 30, 2005 and2004 are presented in the table below.

 
| ** **                                                                                | ** ** | **Change in Fair Value**    | ** ** |
|-------------------------------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                                                | ** ** | **September 30, 2005** | ** ** | **September 30, 2004** | ** ** |
| ** **                                                                                | ** ** | **Cinergy(1)**              | ** ** | **CG&E** | ** ** | **Cinergy(1)** | ** ** | **CG&E** | ** ** |
| ** **                                                                                | ** ** | **(in millions)**           | ** ** |
|                                                                                      |       |                        |       |   |   |   |   |   |   |
| Fair value of contracts outstanding at the beginning  of the year                         |       | **$**                       | **82**     | ** ** | **$** | **36** | ** ** | $ | 41 |   | $ | 20 |   |
|                                                                                      |       |                        |       |   |   |   |   |   |   |
| Changes in fair value attributable to changes in  valuation techniques and assumptions(2) |       | **(3**                      | **)**      | **(3** | **)** | — |   | — |   |
|                                                                                      |       | ** **                  | ** ** | ** ** | ** ** |   |   |   |   |
| Other changes in fair value(3)                                                            |       | **(122**                    | **)**      | **(36** | **)** | 129 |   | 60 |   |
|                                                                                      |       | ** **                  | ** ** | ** ** | ** ** |   |   |   |   |
| Option premiums paid/(received)                                                           |       | **15**                      | ** ** | **14** | ** ** | 1 |   | 4 |   |
|                                                                                      |       | ** **                  | ** ** | ** ** | ** ** |   |   |   |   |
| Contracts settled                                                                         |       | **(154**                    | **)**      | **(91** | **)** | (93 | ) | (32 | ) |
|                                                                                      |       | ** **                  | ** ** | ** ** | ** ** |   |   |   |   |
| Fair value of contracts outstanding at end of period                                      |       | **$**                       | **(182**   | **)** | **$** | **(80** | **)** | $ | 78 |   | $ | 52 |   |

 

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

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

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

 

The following are thebalances at September 30, 2005 and 2004 of our energy risk managementassets and liabilities:

 
| ** **                                       | ** ** | **September 30, 2005** | ** ** | **September 30, 2004** | ** ** |
|--------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                                       | ** ** | **Cinergy(1)**              | ** ** | **CG&E**                | ** ** | **Cinergy(1)** | ** ** | **CG&E** | ** ** |
| ** **                                       | ** ** | **(in millions)**           | ** ** |
|                                             |       |                        |       |                        |       |   |   |   |   |
| Energy risk management assets - current          |       | **$**                       | **1,260**  | ** **                  | **$**      | **670** | ** ** | $ | 470 |   | $ | 178 |   |
| Energy risk management assets - non-current      |       | **397**                     | ** ** | **208**                     | ** ** | 137 |   | 48 |   |
|                                             |       | ** **                  | ** ** | ** **                  | ** ** |   |   |   |   |
| Energy risk management liabilities - current     |       | **1,419**                   | ** ** | **741**                     | ** ** | 396 |   | 126 |   |
| Energy risk management liabilities - non-current |       | **420**                     | ** ** | **217**                     | ** ** | 133 |   | 48 |   |
|                                             |       | ** **                  | ** ** | ** **                  | ** ** |   |   |   |   |
| ** **                                       |       | **$**                       | **(182**   | **)**                       | **$**      | **(80** | **)** | $ | 78 |   | $ | 52 |   |

 

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

 

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The following tablepresents the expected maturity of the energy risk management assets andliabilities as of September 30, 2005 for **Cinergy**and **CG&E**:

 
| ** **                                             | ** ** | **Fair Value of Contracts at September 30,  2005** | ** ** |
|--------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                             | ** ** | **Maturing**                                            | ** ** | ** ** | ** ** |
| **Source of Fair Value(1)**                            | ** ** | **Within 12  months**                                   | ** ** | **12-36  months** | ** ** | **36-60  months** | ** ** | **Thereafter** | ** ** | **Total  Fair Value** | ** ** |
| ** **                                             | ** ** | **(in millions)**                                       | ** ** |
| **Cinergy(2)**                                         |       |                                                    |       |   |   |   |   |   |   |   |   |
| Prices actively  quoted                                |       | $                                                       | (190       | ) | $ | (23 | ) | $ | — |   | $ | — |   | $ | (213 | ) |
|                                                   |       |                                                    |       |   |   |   |   |   |   |   |   |
| Prices based on models and other valuation  methods(3) |       | 31                                                      |       | (4 | ) | 7 |   | (3 | ) | 31 |   |
|                                                   |       |                                                    |       |   |   |   |   |   |   |   |   |
| Total                                                  |       | $                                                       | (159       | ) | $ | (27 | ) | $ | 7 |   | $ | (3 | ) | $ | (182 | ) |
|                                                   |       |                                                    |       |   |   |   |   |   |   |   |   |
| **CG&E**                                           |       |                                                    |       |   |   |   |   |   |   |   |   |
| Prices actively quoted                                 |       | $                                                       | (82        | ) | $ | (8 | ) | $ | — |   | $ | — |   | $ | (90 | ) |
|                                                   |       |                                                    |       |   |   |   |   |   |   |   |   |
| Prices based on models and other valuation  methods(3) |       | 11                                                      |       | (2 | ) | 2 |   | (1 | ) | 10 |   |
|                                                   |       |                                                    |       |   |   |   |   |   |   |   |   |
| Total                                                  |       | $                                                       | (71        | ) | $ | (10 | ) | $ | 2 |   | $ | (1 | ) | $ | (80 | ) |

 

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

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

(3)   A substantialportion of these amounts include option values.

 

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

 

**Cinergy**optimizes the value of its non-regulated portfolio.  The portfolio includes generation assets(power and capacity), fuel, and emission allowances and we manage all of thesecomponents as a portfolio.  We use modelsthat forecast future generation output, fuel requirements, and emissionallowance requirements based on forward power, fuel and emission allowancemarkets.  The component pieces of theportfolio are bought and sold based on this model in order to manage theeconomic value of the portfolio.  Withthe issuance of Statement of Financial Accounting Standards No. 149, *Amendment of Statement 133 on Derivative Instruments and HedgingActivities* (Statement 149), most forward power transactions frommanagement of the portfolio are accounted for at fair value. The othercomponent pieces of the portfolio are typically not subject to Statement 149and are accounted for using the accrual method, where changes in fair value arenot recognized.  As a result, we aresubject to earnings volatility via MTM gains or losses from changes in thevalue of the contracts accounted for using fair value.  A hypothetical $1.00 per MWh increase or decreaseconsistently applied to all forward power prices would have resulted in anincrease or decrease in fair value of these contracts of approximately $6.7 millionas of September 30, 2005.  See “2005Quarterly Results of Operations” and “2005 Year to Date Results of Operations”for further discussion of the impact on current quarter and year to dateresults.

 

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

 

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

 

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The following tablesprovide information regarding **Cinergy’s**and **CG&E’s** exposure on energytrading contracts as of September 30, 2005.  The tables include accounts receivable andenergy risk management assets, which are net of accounts payable and energyrisk management liabilities with the same counterparties when we have the rightof offset.  The credit collateral shownin the following tables includes cash and letters of credit.

 

**Cinergy(1)**

 
| **Rating**                            | ** ** | **Total Exposure  Before Credit  Collateral** | ** ** | **Credit  Collateral** | ** ** | **Net Exposure** | ** ** | **Percentage  of  Total  Net Exposure** | ** ** | **Number of  Counterparties  Greater than  10% of  Total Net  Exposure** | ** ** | **Net Exposure of  Counterparties  Greater than  10% of Total Net  Exposure(4)** | ** ** |
|---------------------------------------|------------|-----------------------------------------------|------------|------------------------|------------|------------------|------------|-----------------------------------------|------------|--------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|
| ** **                            | ** ** | **(in millions)**                             | ** ** |
|                                  |       |                                          |       |                   |       |             |       |                                    |       |                                                                     |       |                                                                             |       |
| Investment Grade(2)                   |       | $                                             | 1,360      |                   | $          | 358              |       | $                                       | 1,002      |                                                                     | 81         | %                                                                                | —     |   | $ | — |   |
| Internally Rated-Investment Grade(3)  |       | 326                                           |       | 194                    |       | 132              |       | 11                                      |       | —                                                                   |       | —                                                                           |       |
| Non-Investment Grade                  |       | 134                                           |       | 95                     |       | 39               |       | 3                                       |       | —                                                                   |       | —                                                                           |       |
| Internally Rated-Non-Investment Grade |       | 170                                           |       | 110                    |       | 60               |       | 5                                       |       | —                                                                   |       | —                                                                           |       |
|                                  |       |                                          |       |                   |       |             |       |                                    |       |                                                                     |       |                                                                             |       |
| Total                                 |       | $                                             | 1,990      |                   | $          | 757              |       | $                                       | 1,233      |                                                                     | 100        | %                                                                                | —     |   | $ | — |   |

 

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(1)          Includes amounts related tonon-registrants.

(2)          Includes counterparties ratedInvestment Grade or the counterparties’ obligations are guaranteed or securedby an Investment Grade entity.

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

(4)          Exposures, positive ornegative, with counterparties that are related to one another are notaggregated when no right of offset exists and as a result, credit is extendedand evaluated on a separate basis.

 

**CG&E**

 
| **Rating**                            | ** ** | **Total Exposure  Before Credit  Collateral** | ** ** | **Credit  Collateral** | ** ** | **Net Exposure** | ** ** | **Percentage of  Total  Net Exposure** | ** ** | **Number of  Counterparties  Greater than  10% of  Total Net  Exposure** | ** ** | **Net Exposure of  Counterparties  Greater than  10% of Total Net  Exposure(3)** | ** ** |
|---------------------------------------|------------|-----------------------------------------------|------------|------------------------|------------|------------------|------------|----------------------------------------|------------|--------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|
| ** **                            | ** ** | **(in millions)**                             | ** ** |
|                                  |       |                                          |       |                   |       |             |       |                                   |       |                                                                     |       |                                                                             |       |
| Investment Grade(1)                   |       | $                                             | 384        |                   | $          | 160              |       | $                                      | 224        |                                                                     | 85         | %                                                                                | 1          |   | $ | 54 |   |
| Internally Rated-Investment Grade(2)  |       | 151                                           |       | 138                    |       | 13               |       | 5                                      |       | —                                                                   |       | —                                                                           |       |
| Non-Investment Grade                  |       | 47                                            |       | 37                     |       | 10               |       | 4                                      |       | —                                                                   |       | —                                                                           |       |
| Internally Rated-Non-Investment Grade |       | 30                                            |       | 14                     |       | 16               |       | 6                                      |       | —                                                                   |       | —                                                                           |       |
|                                  |       |                                          |       |                   |       |             |       |                                   |       |                                                                     |       |                                                                             |       |
| Total                                 |       | $                                             | 612        |                   | $          | 349              |       | $                                      | 263        |                                                                     | 100        | %                                                                                | 1          |   | $ | 54 |   |

 

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

(2)   Counterpartiesinclude various cities and municipalities.

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

 

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**MD&A - ACCOUNTING MATTERS**

 

### **ACCOUNTING MATTERS**

 

#### **Critical Accounting Estimates**

 

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

 

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

 

•                  Fair Value Accounting for EnergyMarketing and Trading;

•                  Regulatory Accounting;

•                  Income Taxes;

•                  Contingencies;

•                  Impairment of Long-Lived Assets; and

•                  Impairment of UnconsolidatedInvestments.

 

#### **Accounting Changes**

 

##### ***AssetRetirement Obligations***

 

In March 2005, the FASBissued Interpretation No. 47, *Accountingfor Conditional Asset Retirement Obligations* (Interpretation 47), aninterpretation of Statement of Financial Accounting Standards No. 143, *Accounting for Asset Retirement Obligations*(Statement143).  Statement 143 requires recognitionof legal obligations associated with the retirement or removal of long-livedassets at the time the obligations are incurred.  Interpretation 47 clarifies that aconditional asset retirement obligation (which occurs when the timing and/ormethod of settlement are conditional on a future event that may or may not bewithin the control of the entity) is a legal obligation within the scope ofStatement 143.  As such, the fair valueof a conditional asset retirement obligation must be recognized as a liabilitywhen incurred if the liability’s fair value can be reasonably estimated.  Interpretation 47 also clarifies whensufficient information exists to reasonably estimate the fair value of an assetretirement obligation.

 

**Cinergy**will adopt Interpretation 47 on December 31, 2005.  Upon adoption of Interpretation 47 **Cinergy** will recognize the impact, if any, of additionalliabilities for conditional asset retirement obligations as a cumulative effectof a change in accounting principle.  Wecontinue to evaluate the impact of adopting this new interpretation and arecurrently unable to predict whether the implementation of this accountingstandard will be material to our financial position or results of operations.

 

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

 

In December 2004,the FASB issued a replacement of Statement of Financial Accounting Standards No. 123,*Accounting for Stock-Based Compensation*(Statement 123), *Statement of Financial Accounting Standards No. 123(revised 2004), Share-Based Payment* (Statement 123R).  This standard will require, among otherthings, accounting for all stock-based compensation arrangements under the fairvalue method.

 

In 2003, we prospectivelyadopted accounting for our stock-based compensation plans using the fair valuerecognition provisions of Statement 123, as amended by Statement of FinancialAccounting Standards No. 148, *Accounting for Stock-BasedCompensation-Transition and Disclosure*, for all employee awardsgranted or with terms modified on or after January 1, 2003.  Therefore, the impact of implementation ofStatement 123R on stock options within our stock-based compensation plans isnot expected to be material.  Statement123R contains certain

 

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provisions that willmodify the accounting for various types of stock-based compensation other thanstock options.  We are in the process ofevaluating the impact of this new standard on our plans.  **Cinergy** willadopt Statement 123R on January 1, 2006.

 

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

 

In October 2004, theAmerican Jobs Creation Act (AJCA) was signed into law.  The AJCA includes a one-time deduction of 85percent of certain foreign earnings that are repatriated, as defined in theAJCA.  Based on our analysis, repatriation pursuant to this provision will nothave a material impact on our financial position or results of operations.

 

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**QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUTMARKET RISK**

 

## **ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK**

 

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

 

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**CONTROLS AND PROCEDURES**

 

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

 

#### **Evaluation of Disclosure Controls andProcedures**

 

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 the Securitiesand Exchange Commission’s (SEC) rules and forms.  Disclosure controls and procedures include,without limitation, controls and procedures designed to provide reasonableassurance that information required to be disclosed by us in the reports thatwe file under the Exchange Act is accumulated and communicated to ourmanagement, including our chief executive officer and chief financial officer,as appropriate to allow timely decisions regarding required disclosure.

 

Under the supervision and with the participation ofour management, including our chief executive officer and chief financialofficer, we have evaluated the effectiveness of our disclosure controls andprocedures as of September 30, 2005, and, based upon this evaluation, ourchief executive officer and chief financial officer have concluded that thesecontrols and procedures are effective in providing reasonable assurance thatinformation requiring disclosure is recorded, processed, summarized, andreported within the timeframe specified by the SEC’s rules and forms.

 

Under the supervision andwith the participation of our management, including our chief executive officerand chief financial officer, we have evaluated 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 September 30,2005 and found no change that has materially affected, or is reasonably likelyto materially affect, our internal control over financial reporting.

 

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**PART II. OTHER INFORMATION**

 

## **PART II.  OTHERINFORMATION**

 

## **ITEM 1.  LEGALPROCEEDINGS**

 

### **CLEAN AIR 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 allegesthat we violated the CAA by not obtaining Prevention of SignificantDeterioration (PSD), Non-Attainment New Source Review (NSR), and Ohio andIndiana State Implementation Plan (SIP) permits for various projects at ourowned and co-owned generating stations.  Additionally,the suit claims that we violated an Administrative 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 suit seeks (1) injunctive relief torequire installation of pollution control technology on various generatingunits at **CG&E’s** W.C. Beckjordand Miami Fort Stations, and **PSI’s**Cayuga, Gallagher, Wabash River, and Gibson Stations, and (2) civilpenalties in amounts of up to $27,500 per day for each violation.  In addition, three northeast states and twoenvironmental groups have intervened in the case.  In August 2005, the district courtissued a ruling regarding the emissions test that it will apply to **Cinergy** at the trial 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 courtsubsequently certified the matter for interlocutory appeal to the SeventhCircuit Court of Appeals, which has the discretion to accept the appeal at thistime.  There are a number of other legalissues currently before the district court judge, and the case is currently setfor trial by jury commencing in February 2006.

 

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 injunctive relief 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 District Court for the Southern District of Ohio in that caseruled that the Government and the intervening plaintiff environmental groupscannot seek monetary damages for alleged violations that occurred prior to November 3,1994; however, they are entitled to seek injunctive relief for such allegedviolations.  Neither party appealed thatdecision.  This matter was heard in trialin July 2005.  A decision isexpected by the end of 2005.

 

In addition, **Cinergy**and **CG&E** have been informed byDP&L that in June 2000, the EPA issued a Notice of Violation (NOV) toDP&L for alleged violations of PSD, NSR, and Ohio SIP requirements at astation operated by DP&L and jointly-owned by DP&L, CSP, and **CG&E**. The NOV indicated the EPA may (1) issue an order requiringcompliance with the requirements of the Ohio SIP, or (2) bring a civilaction seeking injunctive relief and civil penalties of up to $27,500 per dayfor each violation.  In September 2004,Marilyn Wall and the Sierra Club brought a lawsuit against **CG&E**,DP&L and CSP for alleged violations of the CAA at this same generatingstation.  This case is currently indiscovery.

 

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

 

### **CARBON DIOXIDE (CO2)LAWSUIT**

 

In July 2004, 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, asimilar lawsuit was filed in the United States District Court for the SouthernDistrict of New York against the same companies by Open Space Institute, Inc.,Open Space Conservancy, Inc., and The Audubon Society of NewHampshire.  These lawsuits allege thatthe defendants’ emissions of CO2 from the combustion of fossil fuelsat

 

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electric generatingfacilities contribute to global warming and amount to a public nuisance.  The complaints also allege that thedefendants could generate the same amount of electricity while emittingsignificantly less CO2.  Theplaintiffs are seeking an injunction requiring each defendant to cap its CO2emissions and then reduce them by a specified percentage each year for atleast a decade.  In September 2005,the district court granted the defendants’ motion to dismiss the lawsuit.  The plaintiffs have appealed this ruling tothe Second Circuit Court of Appeals.  Weare not able to predict whether resolution of these matters would have amaterial effect on our financial position or results of operations.

 

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

 

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

 

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

 

### **ZIMMER GENERATING STATION (ZIMMER STATION) LAWSUIT**

 

InNovember 2004, a citizen of the Village of Moscow, Ohio, the town adjacentto **CG&E****’****s** Zimmer Station, brought a purported classaction in the United States District Court for the Southern District of Ohioseeking monetary damages and injunctive relief against **CG&E**for alleged violations of the CAA, the Ohio SIP, and Ohio laws against nuisanceand common law nuisance.  The plaintiffs have filed a number of additionalnotices of intent to sue and two lawsuits raising claims similar to those inthe original claim.  One lawsuit wasdismissed on procedural grounds and the remaining two have beenconsolidated.  At this time, we cannotpredict whether the outcome of this matter will have a material impact on ourfinancial position or results of operations. We intend to defend this lawsuit vigorously in court.

 

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

 

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

 

In April 1998, **PSI** filed suit in Hendricks County in thestate of Indiana against its general liability insurance carriers.  **PSI**sought a declaratory judgment to obligate its insurance carriers to (1) defendMGP claims against **PSI** andcompensate **PSI** for its costs ofinvestigating, preventing, mitigating, and remediating damage to property andpaying claims related to MGP sites; or (2) pay **PSI’s** cost of defense.  **PSI** settled, in principle, its claims with all but one ofthe insurance carriers in January 2005 prior to commencement of thetrial.  With respect to the loneinsurance

 

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carrier, a jury returneda verdict against **PSI** in February 2005.  **PSI** hasappealed this decision.  At the presenttime, **PSI** cannot predict the outcome of thislitigation, including the outcome of the appeal.

 

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

 

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

 

### **ASBESTOS CLAIMS LITIGATION**

 

**CG&E**and **PSI** have been named asdefendants or co-defendants in lawsuits related to asbestos at their electricgenerating stations.  Currently, thereare approximately 130 pending lawsuits. In these lawsuits, plaintiffs claim to have been exposed toasbestos-containing products in the course of their work at the **CG&E** and **PSI** generating stations. The plaintiffs further claim that as the property owner of thegenerating stations,**CG&E** and **PSI** should be held liable for theirinjuries and illnesses based on an alleged duty to warn and protect them fromany asbestos exposure.  A majority of thelawsuits to date have been brought against **PSI**.  The impact on **CG&E’s** and **PSI’s**financial position or results of operations of these cases to date has not beenmaterial.

 

Of these lawsuits, onecase filed against **PSI** has beentried to verdict.  The jury returned averdict against **PSI** in the amountof approximately $500,000 on a negligence claim and a verdict for **PSI** on punitive damages.  **PSI**appealed this decision up to the Indiana Supreme Court.  In July 2005, the Indiana Supreme Courtupheld the jury’s verdict.  In addition, **PSI** has settled a number of other lawsuitsfor amounts, which neither individually nor in the aggregate, are material to **PSI’s** financial position or results ofoperations.  We are currently evaluatingthe effect of the Indiana Supreme Court’s ruling on our existing docket ofcases.

 

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

 

### **MERGER LAWSUIT**

 

In May, a purportedshareholder class action was filed in the Court of Common Pleas in HamiltonCounty, Ohio against **Cinergy** andeach of the members of the Board of Directors. The lawsuit alleges that thedefendants breached their duties of due care and loyalty to shareholders byagreeing to the merger agreement between Duke and **Cinergy**and is seeking to either enjoin or amend the terms of the merger.  **Cinergy** and theindividual defendants filed a motion to dismiss this lawsuit in July.  We believe this lawsuit is without merit and **Cinergy** intends to defend this lawsuit vigorously incourt.  We are unable to predict theoutcome of this matter, including whether resolution of this matter will impactour pending merger.

 

### **DUNAVAN WASTE SUPERFUND SITE**

 

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

 

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### **OHIO EPA PENALTY ON CINERGY POWERGENERATION SERVICES**

 

In October 2005, theOhio EPA proposed a civil penalty of $102,000 on Cinergy Power GenerationServices to settle multiple, unrelated alleged violations occurring at multiple**CG&E** generating stations over thepast several years.  **CG&E**is currently reviewing the settlement proposal.

 

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

 

The number of shares (orunits) provided in the table below represent shares exchanged in connectionwith employee option exercises and shares purchased by the plan trustee onbehalf of the 401(k) Excess Plan.

 
| **Period**                                | ** ** | **(a) Total Number of   Shares (or Units)   Purchased** | ** ** | **(b) Average Price  Paid per Share (or  Unit)** | ** ** | **(c) Total Number of  Shares (or Units)  Purchased as Part of  Publicly Announced  Plans or Programs** | ** ** | **(d) Maximum Number  (or Approximate  Dollar Value) of  Shares (or Units) that  May Yet Be  Purchased Under the  Plans or Programs** | ** ** |
|-------------------------------------------|------------|--------------------------------------------------------------|------------|-------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------|------------|
|                                      |       |                                                         |       |                                                  |       |                                                                                                              |       |                                                                                                                                            |       |
| July 1 – July 31           |       | 10,997                                                       |       | $                                                     | 45.45      |                                                                                                              | —     |                                                                                                                                            | —     |   |
| August 1 – August 31       |       | 10,692                                                       |       | $                                                     | 43.23      |                                                                                                              | —     |                                                                                                                                            | —     |   |
| September 1 – September 30 |       | 2                                                            |       | $                                                     | 43.19      |                                                                                                              | —     |                                                                                                                                            | —     |   |

 

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## **ITEM 6.  EXHIBITS**

 

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

 
| **Exhibit  Designation** | ** ** | **Registrant**                              | ** ** | **Nature of Exhibit**                                                                                                                                                                                              | ** ** | **Previously Filed  as Exhibit to:**                    |
|--------------------------|------------|---------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------|
|                     |       |                                        |       |                                                                                                                                                                                                               |       |                                                         |
| **Additional  Exhibits** |       |                                        |       |                                                                                                                                                                                                               |       |                                                         |
|                     |       |                                        |       |                                                                                                                                                                                                               |       |                                                         |
| 2-a                      |       | **Cinergy Corp.**                           |       | Amendment No. 2 Agreement and Plan of Merger, dated October 3,  2005, by and among Duke Energy Corporation, **Cinergy  Corp.**, Deer Holding Corp., Deer Acquisition Corp. and Cougar  Acquisition Corp. | ** ** | **Cinergy Corp.**  Form 8-K, filed October 7, 2005 |
|                     |       | ** **                                  |       |                                                                                                                                                                                                               |       |                                                         |
| 10-a                     |       | **Cinergy Corp.**                           |       | Separation Agreement and Waiver and Release Agreement, dated July 8,  2005, between Cinergy Services, Inc. and R. Foster Duncan                                                                          | ** ** | **Cinergy Corp.**  Form 8-K, filed  July 8, 2005   |
|                     |       | ** **                                  |       |                                                                                                                                                                                                               |       |                                                         |
| 10-b                     |       | **Cinergy Corp.**                           |       | Amendment to Employment Agreement, effective May 24, 2005,  between Cinergy Services, Inc. and Michael J. Cyrus                                                                                          | ** ** | **Cinergy Corp.**  Form 8-K, filed  July 8, 2005   |
|                     |       |                                        |       |                                                                                                                                                                                                               |       |                                                         |
| 10-c                     | ** ** | **Cinergy Corp.**                           |       | Form of incentive stock option grant agreement.                                                                                                                                                               |       |                                                         |
|                     |       |                                        |       |                                                                                                                                                                                                               |       |                                                         |
| 10-d                     | ** ** | **Cinergy Corp.**                           |       | Form of non-qualified stock option grant agreement.                                                                                                                                                           |       |                                                         |
|                     |       |                                        |       |                                                                                                                                                                                                               |       |                                                         |
| 10-e                     | ** ** | **Cinergy Corp.**                           |       | Form of restricted stock grant agreement.                                                                                                                                                                     |       |                                                         |
|                     |       |                                        |       |                                                                                                                                                                                                               |       |                                                         |
| 10-f                     | ** ** | **Cinergy Corp.**                           |       | Form of performance share grant agreement.                                                                                                                                                                    |       |                                                         |
|                     |       |                                        |       |                                                                                                                                                                                                               |       |                                                         |
| 10-g                     | ** ** | **Cinergy Corp.**                           |       | Form of phantom stock grant agreement.                                                                                                                                                                        |       |                                                         |
|                     |       |                                        |       |                                                                                                                                                                                                               |       |                                                         |
| **Certificates**         |       |                                        |       |                                                                                                                                                                                                               |       |                                                         |
|                     |       |                                        |       |                                                                                                                                                                                                               |       |                                                         |
| **31-a**                 | ** ** | **Cinergy Corp.  CG&E  PSI  ULH&P** | ** ** | **Certification by James E. Rogers pursuant to Rule 13a-14(a)/15d-14(a) of  the Securities Exchange Act of 1934, as adopted pursuant to Section 302  of the Sarbanes-Oxley Act of 2002.**           | ** ** | ** **                                                   |
| ** **               | ** ** | ** **                                  | ** ** | ** **                                                                                                                                                                                                         | ** ** | ** **                                                   |
| **31-b**                 | ** ** | **Cinergy Corp.  CG&E  PSI  ULH&P** | ** ** | **Certification by Lynn J. Good pursuant to Rule 13a-14(a)/15d-14(a) of  the Securities Exchange Act of 1934, as adopted pursuant to Section 302  of the Sarbanes-Oxley Act of 2002.**              | ** ** | ** **                                                   |
| ** **               | ** ** | ** **                                  | ** ** | ** **                                                                                                                                                                                                         | ** ** | ** **                                                   |
| **32-a**                 | ** ** | **Cinergy Corp.  CG&E  PSI  ULH&P** | ** ** | **Certification by James E. Rogers pursuant to 18 U.S.C. Section 1350,  as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**                                                          | ** ** | ** **                                                   |
| ** **               | ** ** | ** **                                  | ** ** | ** **                                                                                                                                                                                                         | ** ** | ** **                                                   |
| 32-b                     |       | **Cinergy Corp.  CG&E  PSI  ULH&P** |       | Certification by Lynn J. Good pursuant to 18 U.S.C. Section 1350,  as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                 |       |                                                         |

 

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## **SIGNATURES**

 

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

 

CINERGY CORP.

THE CINCINNATI GAS &ELECTRIC COMPANY

PSI ENERGY, INC.

THE UNION LIGHT, HEAT ANDPOWER COMPANY

Registrants

 

 
| Date: November 4,  2005 | /s/    | David L. Wozny                 |   |
|------------------------------|--------|--------------------------------|--------|
|                         |   | David L. Wozny                 |   |
|                         |   | (duly authorized officer       |   |
|                         |   | and                            |   |
|                         |   | principal accounting  officer) |   |
|                              |        |                                |        |  |

 

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