** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

** **

**FORM 10-Q**

(Mark One)

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

For the quarterlyperiod ended **June 30, 2004**

or

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

For the transitionperiod from              to             

 

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

 

----

 

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

Yes ý  No o

 

----

 

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

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

 

----

 

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

 

**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 July 31, 2004,shares of common stock outstanding for each registrant were as listed:

 

| **Registrant**                                 | ** ** | **Description**                                 | ** ** | **Shares**  |
|------------------------------------------------|------------|-------------------------------------------------|------------|-------------|
|                                           |       |                                            |       |        |
| **Cinergy  Corp.**                             |       | Par value $.01 per  share                       |       | 180,577,342 |
| ** **                                     |       |                                            |       |        |
| **The  Cincinnati Gas & Electric Company** |       | Par value $8.50 per  share                      |       | 89,663,086  |
| ** **                                     |       |                                            |       |        |
| **PSI  Energy, Inc.**                          |       | Without par value,  stated value $.01 per share |       | 53,913,701  |
| ** **                                     |       |                                            |       |        |
| **The  Union Light, Heat and Power Company**   |       | Par value $15.00 per  share                     |       | 585,333     |

 

----

 

 

----

 

**TABLE OFCONTENTS**

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

 

2

----

 

**CINERGY CORP.**

**AND SUBSIDIARY COMPANIES**

** **

**3**

----

** **

**CINERGYCORP.**

**CONDENSEDCONSOLIDATED STATEMENTS OF INCOME**

** **
| ** **                                                                                            |   | **Quarter Ended  June 30**                     |       | **Year to Date  June 30** |       |
|-------------------------------------------------------------------------------------------------------|--------|------------------------------------------------|------------|---------------------------|------------|
| ** **                                                                                            |   | **2004**                                       | ** ** | 2003                      | ** ** | **2004** | ** ** | 2003 |   |
| ** **                                                                                            |   | ***(in thousands, except per share amounts)*** |       |
| ** **                                                                                            |   | ***(unaudited)***                              |       |
| **Operating  Revenues**                                                                               |   |                                           |       |                      |       |   |   |   |   |
| Electric                                                                                              |   | **$892,266**                                   |       | $769,258                  |       | **$1,770,394** |   | $1,592,316 |   |
| Gas                                                                                                   |   | **108,082**                                    |       | 114,932                   |       | **458,928** |   | 513,845 |   |
| Other                                                                                                 |   | **53,389**                                     |       | 49,733                    |       | **113,073** |   | 95,719 |   |
| **Total  Operating Revenues**                                                                         |   | **1,053,737**                                  |       | 933,923                   |       | **2,342,395** |   | 2,201,880 |   |
|                                                                                                  |   | ** **                                     |       |                      |       | ** ** |   |   |   |
|                                                                                                  |   | ** **                                     |       |                      |       | ** ** |   |   |   |
| **Operating  Expenses**                                                                               |   | ** **                                     |       |                      |       | ** ** |   |   |   |
| Fuel and  purchased power                                                                             |   | **293,719**                                    |       | 240,470                   |       | **580,633** |   | 510,335 |   |
| Gas purchased                                                                                         |   | **47,420**                                     |       | 53,319                    |       | **270,936** |   | 289,314 |   |
| Operation and  maintenance                                                                            |   | **396,457**                                    |       | 334,073                   |       | **771,731** |   | 662,127 |   |
| Depreciation                                                                                          |   | **114,331**                                    |       | 101,018                   |       | **219,188** |   | 201,623 |   |
| Taxes other than  income taxes                                                                        |   | **65,072**                                     |       | 66,958                    |       | **147,319** |   | 144,707 |   |
| **Total  Operating Expenses**                                                                         |   | **916,999**                                    |       | 795,838                   |       | **1,989,807** |   | 1,808,106 |   |
|                                                                                                  |   | ** **                                     |       |                      |       | ** ** |   |   |   |
|                                                                                                  |   | ** **                                     |       |                      |       | ** ** |   |   |   |
| **Operating  Income**                                                                                 |   | **136,738**                                    |       | 138,085                   |       | **352,588** |   | 393,774 |   |
|                                                                                                  |   | ** **                                     |       |                      |       | ** ** |   |   |   |
|                                                                                                  |   | ** **                                     |       |                      |       | ** ** |   |   |   |
| **Equity  in Earnings of Unconsolidated Subsidiaries**                                                |   | **7,331**                                      |       | 6,104                     |       | **10,079** |   | 6,696 |   |
| **Miscellaneous  Income (Expense) – Net**                                                        |   | **5,033**                                      |       | 7,767                     |       | **(10,475** | ) | 15,382 |   |
| **Interest  Expense**                                                                                 |   | **70,276**                                     |       | 60,537                    |       | **137,671** |   | 119,829 |   |
| **Preferred  Dividend Requirement of Subsidiary Trust**                                               |   | **—**                                     |       | 5,970                     |       | **—** |   | 11,940 |   |
| **Preferred  Dividend Requirements of Subsidiaries**                                                  |   | **858**                                        |       | 858                       |       | **1,716** |   | 1,716 |   |
| ** **                                                                                            |   | ** **                                     |       |                      |       | ** ** |   |   |   |
|                                                                                                  |   | ** **                                     |       |                      |       | ** ** |   |   |   |
| **Income  Before Taxes**                                                                              |   | **77,968**                                     |       | 84,591                    |       | **212,805** |   | 282,367 |   |
|                                                                                                  |   | ** **                                     |       |                      |       | ** ** |   |   |   |
| ** **                                                                                            |   | ** **                                     |       |                      |       | ** ** |   |   |   |
| **Income  Taxes**                                                                                     |   | **19,464**                                     |       | 8,983                     |       | **51,286** |   | 66,966 |   |
|                                                                                                  |   | ** **                                     |       |                      |       | ** ** |   |   |   |
| ** **                                                                                            |   | ** **                                     |       |                      |       | ** ** |   |   |   |
| **Income  Before Discontinued Operations and Cumulative Effect of Changes in Accounting  Principles** |   | **58,504**                                     |       | 75,608                    |       | **161,519** |   | 215,401 |   |
|                                                                                                  |   | ** **                                     |       |                      |       | ** ** |   |   |   |
|                                                                                                  |   | ** **                                     |       |                      |       | ** ** |   |   |   |
| Discontinued  operations, net of tax                                                                  |   | **—**                                     |       | 9,045                     |       | **—** |   | 8,875 |   |
| Cumulative  effect of changes in accounting principles, net of tax (Note 1(c)(*ii*))                  |   | **—**                                     |       | —                    |       | **—** |   | 26,462 |   |
| **Net  Income**                                                                                       |   | **$58,504**                                    |       | $84,653                   |       | **$161,519** |   | $250,738 |   |
|                                                                                                  |   | ** **                                     |       |                      |       | ** ** |   |   |   |
|                                                                                                  |   | ** **                                     |       |                      |       | ** ** |   |   |   |
| **Average  Common Shares Outstanding**                                                                |   | **180,236**                                    |       | 176,645                   |       | **179,749** |   | 175,025 |   |
|                                                                                                  |   | ** **                                     |       |                      |       | ** ** |   |   |   |
|                                                                                                  |   | ** **                                     |       |                      |       | ** ** |   |   |   |
| **Earnings  Per Common Share – Basic** (Note 10)                                                 |   | ** **                                     |       |                      |       | ** ** |   |   |   |
| Income before  discontinued operations and cumulative effect of changes in accounting  principles     |   | **$0.33**                                      |       | $0.42                     |       | **$0.90** |   | $1.23 |   |
| Discontinued  operations, net of tax                                                                  |   | **—**                                     |       | 0.05                      |       | **—** |   | 0.05 |   |
| Cumulative  effect of changes in accounting principles, net of tax                                    |   | **—**                                     |       | —                    |       | **—** |   | 0.15 |   |
| Net income                                                                                            |   | **$0.33**                                      |       | $0.47                     |       | **$0.90** |   | $1.43 |   |
|                                                                                                  |   | ** **                                     |       |                      |       | ** ** |   |   |   |
|                                                                                                  |   | ** **                                     |       |                      |       | ** ** |   |   |   |
| **Earnings  Per Common Share – Assuming Dilution** (Note 10)                                     |   | ** **                                     |       |                      |       | ** ** |   |   |   |
| Income before  discontinued operations and cumulative effect of changes in accounting  principles     |   | **$0.32**                                      |       | $0.42                     |       | **$0.89** |   | $1.22 |   |
| Discontinued  operations, net of tax                                                                  |   | **—**                                     |       | 0.05                      |       | **—** |   | 0.05 |   |
| Cumulative  effect of changes in accounting principles, net of tax                                    |   | **—**                                     |       | —                    |       | **—** |   | 0.15 |   |
| Net income                                                                                            |   | **$0.32**                                      |       | $0.47                     |       | **$0.89** |   | $1.42 |   |
|                                                                                                  |   | ** **                                     |       |                      |       | ** ** |   |   |   |
|                                                                                                  |   | ** **                                     |       |                      |       | ** ** |   |   |   |
| **Dividends  Declared Per Common Share**                                                              |   | **$0.47**                                      |       | $0.46                     |       | **$0.94** |   | $0.92 |   |
|                                                                                                  |   | ** **                                     |       |                      |       | ** ** |   |   |   |

** **

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

** **

4

----

 

**CINERGY CORP.CONDENSED CONSOLIDATED BALANCE SHEETS**

 

**ASSETS**

 
| ** **                                                                                                                         | ** ** | **June 30  2004**            | ** **     | December  31  2003 | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|----------------|--------------------|------------|
| ** **                                                                                                                         | ** ** | ***(dollars in thousands)*** | ** **     |
| ** **                                                                                                                         | ** ** | ***(unaudited)***            | ** **     |
|                                                                                                                               | * *   | * *                     | * *       | * *           | * *   |
| **Current  Assets**                                                                                                                |       | ** **                   |           |               |       |
| Cash and cash  equivalents                                                                                                         |       | **$**                        | **173,818**    |               | $          | 169,120 |   |
| Restricted  deposits                                                                                                               |       | **88,498**                   |           | 92,813             |       |
| Notes  receivable, current                                                                                                         |       | **125,177**                  |           | 189,854            |       |
| Accounts  receivable less accumulated provision for doubtful accounts of $7,506 at June  30, 2004, and $7,884 at December 31, 2003 |       | **719,700**                  |           | 1,074,518          |       |
| Fuel, emission  allowances, and supplies                                                                                           |       | **401,310**                  |           | 357,625            |       |
| Energy risk  management current assets                                                                                             |       | **425,196**                  |           | 305,058            |       |
| Prepayments and  other                                                                                                             |       | **84,578**                   |           | 53,609             |       |
| **Total  Current Assets**                                                                                                          |       | **2,018,277**                |           | 2,242,597          |       |
|                                                                                                                               |       | ** **                   |           |               |       |
|                                                                                                                               |       | ** **                   |           |               |       |
| **Property,  Plant, and Equipment – at Cost**                                                                                 |       | ** **                   |           |               |       |
| Utility plant in  service                                                                                                          |       | **9,986,311**                |           | 9,732,123          |       |
| Construction  work in progress                                                                                                     |       | **244,831**                  |           | 275,459            |       |
| **Total  Utility Plant**                                                                                                           |       | **10,231,142**               |           | 10,007,582         |       |
| Non-regulated  property, plant, and equipment                                                                                      |       | **4,587,951**                |           | 4,527,943          |       |
| Accumulated  depreciation                                                                                                          |       | **5,069,030**                |           | 4,908,019          |       |
| **Net  Property, Plant, and Equipment**                                                                                            |       | **9,750,063**                |           | 9,627,506          |       |
|                                                                                                                               |       | ** **                   |           |               |       |
|                                                                                                                               |       | ** **                   |           |               |       |
| **Other  Assets**                                                                                                                  |       | ** **                   |           |               |       |
| Regulatory  assets                                                                                                                 |       | **1,001,148**                |           | 1,012,151          |       |
| Investments in  unconsolidated subsidiaries                                                                                        |       | **509,453**                  |           | 494,520            |       |
| Energy risk  management non-current assets                                                                                         |       | **137,944**                  |           | 97,334             |       |
| Notes  receivable, non-current                                                                                                     |       | **204,053**                  |           | 213,853            |       |
| Other  investments                                                                                                                 |       | **140,514**                  |           | 184,044            |       |
| Goodwill and  other intangible assets                                                                                              |       | **61,463**                   |           | 45,349             |       |
| Other                                                                                                                              |       | **167,854**                  |           | 197,351            |       |
| **Total  Other Assets**                                                                                                            |       | **2,222,429**                |           | 2,244,602          |       |
|                                                                                                                               |       | ** **                   |           |               |       |
|                                                                                                                               |       | ** **                   |           |               |       |
| **Assets  of Discontinued Operations**                                                                                             |       | **—**                   |           | 4,501              |       |
| ** **                                                                                                                         |       | ** **                   |           |               |       |
| **Total  Assets**                                                                                                                  |       | **$**                        | **13,990,769** |               | $          | 14,119,206 |   |
|                                                                                                                               |       | ** **                   |           |               |       |

 

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

 

5

----

 

**CINERGYCORP.CONDENSED CONSOLIDATED BALANCE SHEETS**

 

**LIABILITIES AND SHAREHOLDERS’ EQUITY**

 
| ** **                                                                                                                                                                                                                                                    | ** ** | **June 30  2004**            | ** **     | December  31  2003 | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|----------------|--------------------|------------|
| ** **                                                                                                                                                                                                                                                    | ** ** | ***(dollars in thousands)*** | ** **     |
| ** **                                                                                                                                                                                                                                                    | ** ** | ***(unaudited)***            | ** **     |
|                                                                                                                                                                                                                                                          | * *   | * *                     | * *       | * *           | * *   |
| **Current  Liabilities**                                                                                                                                                                                                                                      |       |                         | ** **     |               |       |
| Accounts payable                                                                                                                                                                                                                                              |       | **$**                        | **1,026,920**  | ** **         | $          | 1,240,423 |   |
| Accrued taxes                                                                                                                                                                                                                                                 |       | **174,120**                  | ** **     | 217,993            |       |
| Accrued interest                                                                                                                                                                                                                                              |       | **67,892**                   | ** **     | 68,952             |       |
| Notes payable  and other short-term obligations (Note 4)                                                                                                                                                                                                      |       | **496,337**                  | ** **     | 351,412            |       |
| Long-term debt  due within one year                                                                                                                                                                                                                           |       | **670,764**                  | ** **     | 839,103            |       |
| Energy risk  management current liabilities                                                                                                                                                                                                                   |       | **384,024**                  | ** **     | 296,122            |       |
| Other                                                                                                                                                                                                                                                         |       | **110,822**                  | ** **     | 107,438            |       |
| **Total  Current Liabilities**                                                                                                                                                                                                                                |       | **2,930,879**                | ** **     | 3,121,443          |       |
|                                                                                                                                                                                                                                                          |       | ** **                   | ** **     |               |       |
|                                                                                                                                                                                                                                                          |       | ** **                   | ** **     |               |       |
| **Non-Current  Liabilities**                                                                                                                                                                                                                                  |       | ** **                   | ** **     |               |       |
| Long-term debt  (Note 3)                                                                                                                                                                                                                                      |       | **3,986,191**                | ** **     | 4,131,909          |       |
| Deferred income  taxes                                                                                                                                                                                                                                        |       | **1,609,726**                | ** **     | 1,557,981          |       |
| Unamortized  investment tax credits                                                                                                                                                                                                                           |       | **104,357**                  | ** **     | 108,884            |       |
| Accrued pension  and other postretirement benefit costs                                                                                                                                                                                                       |       | **698,260**                  | ** **     | 662,834            |       |
| Accrued cost of  removal                                                                                                                                                                                                                                      |       | **510,555**                  | ** **     | 490,856            |       |
| Energy risk  management non-current liabilities                                                                                                                                                                                                               |       | **114,038**                  | ** **     | 64,861             |       |
| Other                                                                                                                                                                                                                                                         |       | **223,944**                  | ** **     | 205,344            |       |
| **Total  Non-Current Liabilities**                                                                                                                                                                                                                            |       | **7,247,071**                | ** **     | 7,222,669          |       |
|                                                                                                                                                                                                                                                          |       | ** **                   | ** **     |               |       |
|                                                                                                                                                                                                                                                          |       | ** **                   | ** **     |               |       |
| **Liabilities  of Discontinued Operations**                                                                                                                                                                                                                   |       | **—**                   | ** **     | 11,594             |       |
|                                                                                                                                                                                                                                                          |       | ** **                   | ** **     |               |       |
| **Commitments  and Contingencies** (Note 6)                                                                                                                                                                                                                   |       | ** **                   | ** **     |               |       |
|                                                                                                                                                                                                                                                          |       | ** **                   | ** **     |               |       |
| **Total  Liabilities**                                                                                                                                                                                                                                        |       | **10,177,950**               | ** **     | 10,355,706         |       |
|                                                                                                                                                                                                                                                          |       | ** **                   | ** **     |               |       |
|                                                                                                                                                                                                                                                          |       | ** **                   | ** **     |               |       |
| **Cumulative  Preferred Stock of Subsidiaries**                                                                                                                                                                                                               |       | ** **                   | ** **     |               |       |
| Not subject to  mandatory redemption                                                                                                                                                                                                                          |       | **62,818**                   | ** **     | 62,818             |       |
|                                                                                                                                                                                                                                                          |       | ** **                   | ** **     |               |       |
|                                                                                                                                                                                                                                                          |       | ** **                   | ** **     |               |       |
| **Common  Stock Equity** (Note 2)                                                                                                                                                                                                                             |       | ** **                   | ** **     |               |       |
| Common stock -  $.01 par value; authorized shares – 600,000,000; issued shares – 180,446,792  at June 30, 2004, and 178,438,369 at December 31, 2003; outstanding shares –  180,323,246 at June 30, 2004, and 178,336,854 at December 31, 2003 |       | **1,804**                    | ** **     | 1,784              |       |
| Paid-in capital                                                                                                                                                                                                                                               |       | **2,248,084**                | ** **     | 2,195,985          |       |
| Retained  earnings                                                                                                                                                                                                                                            |       | **1,543,883**                | ** **     | 1,551,003          |       |
| Treasury shares  at cost – 123,546 shares at June 30, 2004, and 101,515 shares at December 31,  2003                                                                                                                                                     |       | **(3,966**                   | **)**          | (3,255             | )          |
| Accumulated  other comprehensive loss                                                                                                                                                                                                                         |       | **(39,804**                  | **)**          | (44,835            | )          |
| **Total  Common Stock Equity**                                                                                                                                                                                                                                |       | **3,750,001**                | ** **     | 3,700,682          |       |
|                                                                                                                                                                                                                                                          |       | ** **                   | ** **     |               |       |
|                                                                                                                                                                                                                                                          |       | ** **                   | ** **     |               |       |
| **Total  Liabilities and Shareholders’ Equity**                                                                                                                                                                                                          |       | **$**                        | **13,990,769** | ** **         | $          | 14,119,206 |   |
|                                                                                                                                                                                                                                                          |       | ** **                   | ** **     |               |       |

 

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

 

6

----

 

**CINERGYCORP.CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN COMMONSTOCK EQUITY**

 
| ** **                                                                                            | ** **   | **Common  Stock**            | ** **   | **Paid-in  Capital** | ** **   | **Retained  Earnings** | ** **   | **Treasury  Stock** | ** **    | **Accumulated  Other  Comprehensive  Income (Loss)** | ** **   | **Total  Common  Stock  Equity** | ** **   |
|-------------------------------------------------------------------------------------------------------|--------------|------------------------------|--------------|----------------------|--------------|------------------------|--------------|---------------------|---------------|------------------------------------------------------|--------------|----------------------------------|--------------|
| ** **                                                                                            | ** **   | ***(dollars in thousands)*** | ** **   |
| ** **                                                                                            | ** **   | ***(unaudited)***            | ** **   |
|                                                                                                  | *** *** | *** ***                 | *** *** | *** ***         | *** *** | *** ***           | *** *** | *** ***        | *** ***  | *** ***                                         | *** *** | *** ***                     | *** *** |
| **Quarter  Ended June 30, 2004**                                                                      | ** **   | ** **                   | ** **   | ** **           | ** **   | ** **             | ** **   | ** **          | ** **    | ** **                                           | ** **   | ** **                       | ** **   |
| ** **                                                                                            | ** **   | ** **                   | ** **   | ** **           | ** **   | ** **             | ** **   | ** **          | ** **    | ** **                                           | ** **   | ** **                       | ** **   |
| **Balance  at April 1, 2004 (179,544,917 shares)**                                                    | ** **   | **$**                        | **1,797**    | ** **           | **$**        | **2,220,748**          | ** **   | **$**               | **1,569,995** | ** **                                           | **$**        | **(3,862**                       | **)**        | **$** | **(43,369** | **)** | **$** | **3,745,309** | ** ** |
| **Comprehensive  income:**                                                                            | ** **   | ** **                   | ** **   | ** **           | ** **   | ** **             | ** **   | ** **          | ** **    | ** **                                           | ** **   | ** **                       | ** **   |
| **Net  income**                                                                                       | ** **   | ** **                   | ** **   | ** **           | ** **   | **58,504**             | ** **   | ** **          | ** **    | ** **                                           | ** **   | **58,504**                       | ** **   |
| **Other  comprehensive income (loss), net of tax effect of $(2,176)**                                 | ** **   | ** **                   | ** **   | ** **           | ** **   | ** **             | ** **   | ** **          | ** **    | ** **                                           | ** **   | ** **                       | ** **   |
| **Foreign  currency translation adjustment**                                                          | ** **   | ** **                   | ** **   | ** **           | ** **   | ** **             | ** **   | ** **          | ** **    | **446**                                              | ** **   | **446**                          | ** **   |
| **Unrealized  loss on investment trusts**                                                             | ** **   | ** **                   | ** **   | ** **           | ** **   | ** **             | ** **   | ** **          | ** **    | **(259**                                             | **)**        | **(259**                         | **)**        |
| **Cash  flow hedges**                                                                                 | ** **   | ** **                   | ** **   | ** **           | ** **   | ** **             | ** **   | ** **          | ** **    | **3,378**                                            | ** **   | **3,378**                        | ** **   |
| **Total  comprehensive income**                                                                       | ** **   | ** **                   | ** **   | ** **           | ** **   | ** **             | ** **   | ** **          | ** **    | ** **                                           | ** **   | **62,069**                       | ** **   |
| ** **                                                                                            | ** **   | ** **                   | ** **   | ** **           | ** **   | ** **             | ** **   | ** **          | ** **    | ** **                                           | ** **   | ** **                       | ** **   |
| **Issuance  of common stock – net (781,507 shares)**                                             | ** **   | **7**                        | ** **   | **25,129**           | ** **   | ** **             | ** **   | ** **          | ** **    | ** **                                           | ** **   | **25,136**                       | ** **   |
| **Treasury  shares purchased (3,178 shares)**                                                         | ** **   | ** **                   | ** **   | ** **           | ** **   | ** **             | ** **   | **(104**            | **)**         | ** **                                           | ** **   | **(104**                         | **)**        |
| **Dividends  on common stock ($0.47 per share)**                                                      | ** **   | ** **                   | ** **   | ** **           | ** **   | **(84,558**            | **)**        | ** **          | ** **    | ** **                                           | ** **   | **(84,558**                      | **)**        |
| **Other**                                                                                             | ** **   | ** **                   | ** **   | **2,207**            | ** **   | **(58**                | **)**        | ** **          | ** **    | ** **                                           | ** **   | **2,149**                        | ** **   |
| ** **                                                                                            | ** **   | ** **                   | ** **   | ** **           | ** **   | ** **             | ** **   | ** **          | ** **    | ** **                                           | ** **   | ** **                       | ** **   |
| **Ending  balance at June 30, 2004 (180,323,246 shares)**                                             | ** **   | **$**                        | **1,804**    | ** **           | **$**        | **2,248,084**          | ** **   | **$**               | **1,543,883** | ** **                                           | **$**        | **(3,966**                       | **)**        | **$** | **(39,804** | **)** | **$** | **3,750,001** | ** ** |
|                                                                                                  | ** **   | ** **                   | ** **   | ** **           | ** **   | ** **             | ** **   | ** **          | ** **    | ** **                                           | ** **   | ** **                       | ** **   |
|                                                                                                  | ** **   | ** **                   | ** **   | ** **           | ** **   | ** **             | ** **   | ** **          | ** **    | ** **                                           | ** **   | ** **                       | ** **   |
| Quarter Ended  June 30, 2003                                                                          |         |                         |         |                 |         |                   |         |                |          |                                                 |         |                             |         |
|                                                                                                  |         |                         |         |                 |         |                   |         |                |          |                                                 |         |                             |         |
| Balance at April  1, 2003 (175,876,919 shares)                                                        |         | $                            | 1,759        |                 | $            | 2,116,222              |         | $                   | 1,491,861     |                                                 | $            | —                           |         | $ | (29,013 | ) | $ | 3,580,829 |   |
| Comprehensive  income:                                                                                |         |                         |         |                 |         |                   |         |                |          |                                                 |         |                             |         |
| Net income                                                                                            |         |                         |         |                 |         | 84,653                 |         |                |          |                                                 |         | 84,653                           |         |
| Other  comprehensive income (loss), net of tax effect of $(2,284)                                     |         |                         |         |                 |         |                   |         |                |          |                                                 |         |                             |         |
| Foreign currency  translation adjustment, net of reclassification adjustments of $6,134 (net of  tax) |         |                         |         |                 |         |                   |         |                |          | 3,963                                                |         | 3,963                            |         |
| Unrealized gain  on investment trusts                                                                 |         |                         |         |                 |         |                   |         |                |          | 3,370                                                |         | 3,370                            |         |
| Cash flow hedges                                                                                      |         |                         |         |                 |         |                   |         |                |          | (2,743                                               | )            | (2,743                           | )            |
| Total  comprehensive income                                                                           |         |                         |         |                 |         |                   |         |                |          |                                                 |         | 89,243                           |         |
|                                                                                                  |         |                         |         |                 |         |                   |         |                |          |                                                 |         |                             |         |
| Issuance of  common stock – net (1,070,199 shares)                                               |         | 10                           |         | 25,459               |         |                   |         | —              |          |                                                 |         | 25,469                           |         |
| Dividends on  common stock ($0.46 per share)                                                          |         |                         |         |                 |         | (80,992                | )            |                |          |                                                 |         | (80,992                          | )            |
| Other                                                                                                 |         |                         |         | (5,713               | )            | (20                    | )            |                |          |                                                 |         | (5,733                           | )            |
|                                                                                                  |         |                         |         |                 |         |                   |         |                |          |                                                 |         |                             |         |
| Ending balance  at June 30, 2003 (176,947,118 shares)                                                 |         | $                            | 1,769        |                 | $            | 2,135,968              |         | $                   | 1,495,502     |                                                 | $            | —                           |         | $ | (24,423 | ) | $ | 3,608,816 |   |
|                                                                                                  |         |                         |         |                 |         |                   |         |                |          |                                                 |         |                             |         |

 

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

 

7

----

 

**CINERGYCORP.**

**CONDENSEDCONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCK EQUITY**

**(Continued)**

 
| ** **                                                                                            | ** **   | **Common  Stock**            | ** **   | **Paid-in  Capital** | ** **   | **Retained  Earnings** | ** **   | **Treasury  Stock** | ** **    | **Accumulated  Other  Comprehensive  Income (Loss)** | ** **   | **Total  Common  Stock  Equity** | ** **   |
|-------------------------------------------------------------------------------------------------------|--------------|------------------------------|--------------|----------------------|--------------|------------------------|--------------|---------------------|---------------|------------------------------------------------------|--------------|----------------------------------|--------------|
| ** **                                                                                            | ** **   | ***(dollars in thousands)*** | ** **   |
| ** **                                                                                            | ** **   | ***(unaudited)***            | ** **   |
|                                                                                                  | *** *** | *** ***                 | *** *** | *** ***         | *** *** | *** ***           | *** *** | *** ***        | *** ***  | *** ***                                         | *** *** | *** ***                     | *** *** |
| **Year  to Date June 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**                                                                                       | ** **   | ** **                   | ** **   | ** **           | ** **   | **161,519**            | ** **   | ** **          | ** **    | ** **                                           | ** **   | **161,519**                      | ** **   |
| **Other  comprehensive income, net of tax effect of $(3,090)**                                        | ** **   | ** **                   | ** **   | ** **           | ** **   | ** **             | ** **   | ** **          | ** **    | ** **                                           | ** **   | ** **                       | ** **   |
| **Foreign  currency translation adjustment**                                                          | ** **   | ** **                   | ** **   | ** **           | ** **   | ** **             | ** **   | ** **          | ** **    | **1,432**                                            | ** **   | **1,432**                        | ** **   |
| **Unrealized  gain on investment trusts**                                                             | ** **   | ** **                   | ** **   | ** **           | ** **   | ** **             | ** **   | ** **          | ** **    | **496**                                              | ** **   | **496**                          | ** **   |
| **Cash  flow hedges**                                                                                 | ** **   | ** **                   | ** **   | ** **           | ** **   | ** **             | ** **   | ** **          | ** **    | **3,103**                                            | ** **   | **3,103**                        | ** **   |
| **Total  comprehensive income**                                                                       | ** **   | ** **                   | ** **   | ** **           | ** **   | ** **             | ** **   | ** **          | ** **    | ** **                                           | ** **   | **166,550**                      | ** **   |
| ** **                                                                                            | ** **   | ** **                   | ** **   | ** **           | ** **   | ** **             | ** **   | ** **          | ** **    | ** **                                           | ** **   | ** **                       | ** **   |
| **Issuance  of common stock – net (2,008,423 shares)**                                           | ** **   | **20**                       | ** **   | **46,211**           | ** **   | ** **             | ** **   | ** **          | ** **    | ** **                                           | ** **   | **46,231**                       | ** **   |
| **Treasury  shares purchased (22,031 shares)**                                                        | ** **   | ** **                   | ** **   | ** **           | ** **   | ** **             | ** **   | **(711**            | **)**         | ** **                                           | ** **   | **(711**                         | **)**        |
| **Dividends  on common stock ($0.94 per share)**                                                      | ** **   | ** **                   | ** **   | ** **           | ** **   | **(168,545**           | **)**        | ** **          | ** **    | ** **                                           | ** **   | **(168,545**                     | **)**        |
| **Other**                                                                                             | ** **   | ** **                   | ** **   | **5,888**            | ** **   | **(94**                | **)**        | ** **          | ** **    | ** **                                           | ** **   | **5,794**                        | ** **   |
| ** **                                                                                            | ** **   | ** **                   | ** **   | ** **           | ** **   | ** **             | ** **   | ** **          | ** **    | ** **                                           | ** **   | ** **                       | ** **   |
| **Ending  balance at June 30, 2004 (180,323,246 shares)**                                             | ** **   | **$**                        | **1,804**    | ** **           | **$**        | **2,248,084**          | ** **   | **$**               | **1,543,883** | ** **                                           | **$**        | **(3,966**                       | **)**        | **$** | **(39,804** | **)** | **$** | **3,750,001** | ** ** |
|                                                                                                  |         |                         |         |                 |         |                   |         |                |          |                                                 |         |                             |         |
|                                                                                                  |         |                         |         |                 |         |                   |         |                |          |                                                 |         |                             |         |
| Year to Date June  30, 2003                                                                           |         |                         |         |                 |         |                   |         |                |          |                                                 |         |                             |         |
|                                                                                                  |         |                         |         |                 |         |                   |         |                |          |                                                 |         |                             |         |
| Balance at  January 1, 2003 (168,663,115 shares)                                                      |         | $                            | 1,687        |                 | $            | 1,918,136              |         | $                   | 1,403,453     |                                                 | $            | —                           |         | $ | (29,800 | ) | $ | 3,293,476 |   |
| Comprehensive  income:                                                                                |         |                         |         |                 |         |                   |         |                |          |                                                 |         |                             |         |
| Net income                                                                                            |         |                         |         |                 |         | 250,738                |         |                |          |                                                 |         | 250,738                          |         |
| Other  comprehensive income (loss), net of tax effect of $(2,558)                                     |         |                         |         |                 |         |                   |         |                |          |                                                 |         |                             |         |
| Foreign currency  translation adjustment, net of reclassification adjustments of $6,134 (net of  tax) |         |                         |         |                 |         |                   |         |                |          | 6,054                                                |         | 6,054                            |         |
| Unrealized gain  on investment trusts                                                                 |         |                         |         |                 |         |                   |         |                |          | 2,518                                                |         | 2,518                            |         |
| Cash flow hedges                                                                                      |         |                         |         |                 |         |                   |         |                |          | (3,195                                               | )            | (3,195                           | )            |
| Total  comprehensive income                                                                           |         |                         |         |                 |         |                   |         |                |          |                                                 |         | 256,115                          |         |
|                                                                                                  |         |                         |         |                 |         |                   |         |                |          |                                                 |         |                             |         |
| Issuance of  common stock – net (8,284,003 shares)                                               |         | 82                           |         | 219,355              |         |                   |         | —              |          |                                                 |         | 219,437                          |         |
| Dividends on  common stock ($0.92 per share)                                                          |         |                         |         |                 |         | (158,677               | )            |                |          |                                                 |         | (158,677                         | )            |
| Other                                                                                                 |         |                         |         | (1,523               | )            | (12                    | )            |                |          |                                                 |         | (1,535                           | )            |
|                                                                                                  |         |                         |         |                 |         |                   |         |                |          |                                                 |         |                             |         |
| Ending balance  at June 30, 2003 (176,947,118 shares)                                                 |         | $                            | 1,769        |                 | $            | 2,135,968              |         | $                   | 1,495,502     |                                                 | $            | —                           |         | $ | (24,423 | ) | $ | 3,608,816 |   |
|                                                                                                  |         |                         |         |                 |         |                   |         |                |          |                                                 |         |                             |         |

 

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

 

8

----

 

**CINERGYCORP.**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

** **
| ** **                                                                            | ** ** | **Year to Date June 30**     | ** **   |
|---------------------------------------------------------------------------------------|------------|------------------------------|--------------|
| ** **                                                                            | ** ** | **2004**                     | ** **   | 2003 | ** ** |
| ** **                                                                            | ** ** | ***(dollars in thousands)*** | ** **   |
| ** **                                                                            | ** ** | ***(unaudited)***            | *** *** |
| **Cash  Flows from Continuing Operations**                                            |       |                         |         |   |   |
| **Operating  Activities**                                                             |       |                         | ** **   |   |   |
| Net income                                                                            |       | **$**                        | **161,519**  | ** ** | $ | 250,738 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities:    |       | ** **                   | ** **   |   |   |
| Depreciation                                                                          |       | **219,188**                  | ** **   | 201,623 |   |
| Income of  discontinued operations, net of tax                                        |       | **—**                   | ** **   | (8,875 | ) |
| Loss on  impairment or disposal of investments                                        |       | **29,362**                   | ** **   | — |   |
| Cumulative  effect of changes in accounting principles, net of tax                    |       | **—**                   | ** **   | (26,462 | ) |
| Change in net  position of energy risk management activities                          |       | **(23,669**                  | **)**        | 12,421 |   |
| Deferred income  taxes and investment tax credits - net                               |       | **41,938**                   | ** **   | 24,315 |   |
| Equity in  earnings of unconsolidated subsidiaries                                    |       | **(10,079**                  | **)**        | (6,696 | ) |
| Allowance for  equity funds used during construction                                  |       | **(976**                     | **)**        | (6,191 | ) |
| Regulatory  assets deferrals                                                          |       | **(36,205**                  | **)**        | (32,571 | ) |
| Regulatory  assets amortization                                                       |       | **48,302**                   | ** **   | 52,000 |   |
| Accrued pension  and other postretirement benefit costs                               |       | **35,426**                   | ** **   | 34,755 |   |
| Deferred costs  under gas cost recovery mechanism                                     |       | **21,311**                   | ** **   | (36,422 | ) |
| Cost of removal                                                                       |       | **(9,118**                   | **)**        | (7,098 | ) |
| Changes in  current assets and current liabilities:                                   |       | ** **                   | ** **   |   |   |
| Restricted  deposits                                                                  |       | **(5,918**                   | **)**        | (517 | ) |
| Accounts and  notes receivable                                                        |       | **420,693**                  | ** **   | 169,107 |   |
| Fuel, emission  allowances, and supplies                                              |       | **(44,545**                  | **)**        | (4,414 | ) |
| Prepayments                                                                           |       | **(31,762**                  | **)**        | (17,642 | ) |
| Accounts payable                                                                      |       | **(213,787**                 | **)**        | (209,005 | ) |
| Accrued taxes  and interest                                                           |       | **(44,933**                  | **)**        | (59,226 | ) |
| Other assets                                                                          |       | **10,828**                   | ** **   | (4,735 | ) |
| Other  liabilities                                                                    |       | **28,788**                   | ** **   | 57,715 |   |
| **Net  cash provided by operating activities**                                        |       | **596,363**                  | ** **   | 382,820 |   |
|                                                                                  |       | ** **                   | ** **   |   |   |
| **Financing  Activities**                                                             |       | ** **                   | ** **   |   |   |
| Change in  short-term debt                                                            |       | **137,832**                  | ** **   | (258,714 | ) |
| Issuance of  long-term debt                                                           |       | **—**                   | ** **   | 291,198 |   |
| Redemption of  long-term debt                                                         |       | **(319,511**                 | **)**        | (127,896 | ) |
| Issuance of  common stock                                                             |       | **46,231**                   | ** **   | 219,437 |   |
| Dividends on  common stock                                                            |       | **(168,545**                 | **)**        | (158,677 | ) |
| **Net  cash used in financing activities**                                            |       | **(303,993**                 | **)**        | (34,652 | ) |
|                                                                                  |       | ** **                   | ** **   |   |   |
| **Investing  Activities**                                                             |       | ** **                   | ** **   |   |   |
| Construction  expenditures (less allowance for equity funds used during construction) |       | **(309,699**                 | **)**        | (327,424 | ) |
| Proceeds from  notes receivable                                                       |       | **8,559**                    | ** **   | — |   |
| Acquisitions and  other investments                                                   |       | **(11,350**                  | **)**        | (23,092 | ) |
| Proceeds from  disposition of subsidiaries and investments                            |       | **14,405**                   | ** **   | 51,252 |   |
| Withdrawal of  restricted cash held on deposit                                        |       | **10,413**                   | ** **   | — |   |
| **Net  cash used in investing activities**                                            |       | **(287,672**                 | **)**        | (299,264 | ) |
|                                                                                  |       | ** **                   | ** **   |   |   |
| **Net  increase in cash and cash equivalents from continuing operations**             |       | **4,698**                    | ** **   | 48,904 |   |
| **Cash  and cash equivalents from continuing operations at beginning of period**      |       | **169,120**                  | ** **   | 200,112 |   |
| **Cash  and cash equivalents from continuing operations at end of period**            |       | **$**                        | **173,818**  | ** ** | $ | 249,016 |   |
| ** **                                                                            |       | ** **                   | ** **   |   |   |
| **Cash  Flows from Discontinued Operations**                                          |       | ** **                   | ** **   |   |   |
| Operating  activities                                                                 |       | **$**                        | **(7,093**   | **)** | $ | (7,108 | ) |
| Financing  activities                                                                 |       | **7,093**                    | ** **   | (13,863 | ) |
| Investing  activities                                                                 |       | **—**                   | ** **   | — |   |
| **Net  decrease in cash and cash equivalents from discontinued operations**           |       | **—**                   | ** **   | (20,971 | ) |
| **Cash  and cash equivalents from discontinued operations at beginning of period**    |       | **—**                   | ** **   | 20,971 |   |
| **Cash  and cash equivalents from discontinued operations at end of period**          |       | **$**                        | **—**   | ** ** | — |   |
| ** **                                                                            |       | ** **                   | ** **   |   |   |
| **Supplemental  Disclosure of Cash Flow Information**                                 |       | ** **                   | ** **   |   |   |
| Cash paid during  the period for:                                                     |       | ** **                   | ** **   |   |   |
| Interest (net of  amount capitalized)                                                 |       | **$**                        | **139,868**  | ** ** | $ | 117,496 |   |
| Income taxes                                                                          |       | **$**                        | **32,123**   | ** ** | $ | 96,696 |   |

 

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

 

9

----

 

**THE CINCINNATI GAS & ELECTRIC COMPANY**

**AND SUBSIDIARY COMPANIES**

** **

**10**

----

** **

**THECINCINNATI GAS & ELECTRIC COMPANY**

**CONDENSED** CONSOLIDATEDSTATEMENTS OF INCOME AND COMPREHENSIVE INCOME

 
| ** **                                                                           | ** ** | **Quarter Ended  June 30**   | ** **  | **Year to Date  June 30** | ** ** |
|--------------------------------------------------------------------------------------|------------|------------------------------|-------------|---------------------------|------------|
| ** **                                                                           | ** ** | **2004**                     | ** **  | 2003                      | ** ** | **2004** | ** ** | 2003 | ** ** |
| ** **                                                                           | ** ** | ***(dollars in thousands)*** | ** **  |
| ** **                                                                           | ** ** | ***(unaudited)***            | ** **  |
|                                                                                 | * *   | * *                     | * *    | * *                  | * *   | * * | * * | * * | * * |
| **Operating  Revenues**                                                              |       | ** **                   | ** **  |                      |       | ** ** | ** ** |   |   |
| Electric                                                                             |       | **$**                        | **455,276** | ** **                | $          | 397,455 |   | **$** | **892,883** | ** ** | $ | 826,019 |   |
| Gas                                                                                  |       | **90,651**                   | ** **  | 85,311                    |       | **418,303** | ** ** | 360,587 |   |
| **Total  Operating Revenues**                                                        |       | **545,927**                  | ** **  | 482,766                   |       | **1,311,186** | ** ** | 1,186,606 |   |
|                                                                                 |       | ** **                   | ** **  |                      |       | ** ** | ** ** |   |   |
|                                                                                 |       | ** **                   | ** **  |                      |       | ** ** | ** ** |   |   |
| **Operating  Expenses**                                                              |       | ** **                   | ** **  |                      |       | ** ** | ** ** |   |   |
| Fuel and purchased  power                                                            |       | **137,999**                  | ** **  | 106,267                   |       | **270,791** | ** ** | 236,821 |   |
| Gas purchased                                                                        |       | **47,418**                   | ** **  | 48,086                    |       | **270,935** | ** ** | 219,851 |   |
| Operation and  maintenance                                                           |       | **159,284**                  | ** **  | 125,932                   |       | **315,659** | ** ** | 260,690 |   |
| Depreciation                                                                         |       | **45,477**                   | ** **  | 50,313                    |       | **89,863** | ** ** | 99,577 |   |
| Taxes other than  income taxes                                                       |       | **49,305**                   | ** **  | 49,739                    |       | **113,500** | ** ** | 110,257 |   |
| **Total  Operating Expenses**                                                        |       | **439,483**                  | ** **  | 380,337                   |       | **1,060,748** | ** ** | 927,196 |   |
|                                                                                 |       | ** **                   | ** **  |                      |       | ** ** | ** ** |   |   |
|                                                                                 |       | ** **                   | ** **  |                      |       | ** ** | ** ** |   |   |
| **Operating  Income**                                                                |       | **106,444**                  | ** **  | 102,429                   |       | **250,438** | ** ** | 259,410 |   |
|                                                                                 |       | ** **                   | ** **  |                      |       | ** ** | ** ** |   |   |
|                                                                                 |       | ** **                   | ** **  |                      |       | ** ** | ** ** |   |   |
| **Miscellaneous  Income – Net**                                                 |       | **3,189**                    | ** **  | 6,899                     |       | **6,043** | ** ** | 13,483 |   |
| **Interest  Expense**                                                                |       | **22,415**                   | ** **  | 29,424                    |       | **44,851** | ** ** | 55,267 |   |
|                                                                                 |       | ** **                   | ** **  |                      |       | ** ** | ** ** |   |   |
|                                                                                 |       | ** **                   | ** **  |                      |       | ** ** | ** ** |   |   |
| **Income  Before Taxes**                                                             |       | **87,218**                   | ** **  | 79,904                    |       | **211,630** | ** ** | 217,626 |   |
|                                                                                 |       | ** **                   | ** **  |                      |       | ** ** | ** ** |   |   |
|                                                                                 |       | ** **                   | ** **  |                      |       | ** ** | ** ** |   |   |
| **Income  Taxes**                                                                    |       | **31,909**                   | ** **  | 28,985                    |       | **78,866** | ** ** | 80,409 |   |
|                                                                                 |       | ** **                   | ** **  |                      |       | ** ** | ** ** |   |   |
|                                                                                 |       | ** **                   | ** **  |                      |       | ** ** | ** ** |   |   |
| **Income  Before Cumulative Effect of Changes in Accounting Principles**             |       | **55,309**                   | ** **  | 50,919                    |       | **132,764** | ** ** | 137,217 |   |
|                                                                                 |       | ** **                   | ** **  |                      |       | ** ** | ** ** |   |   |
|                                                                                 |       | ** **                   | ** **  |                      |       | ** ** | ** ** |   |   |
| Cumulative  effect of changes in accounting principles, net of tax (Note 1(c)(*ii*)) |       | **—**                   | ** **  | —                    |       | **—** | ** ** | 30,938 |   |
|                                                                                 |       | ** **                   | ** **  |                      |       | ** ** | ** ** |   |   |
| **Net  Income**                                                                      |       | **$**                        | **55,309**  | ** **                | $          | 50,919 |   | **$** | **132,764** | ** ** | $ | 168,155 |   |
|                                                                                 |       | ** **                   | ** **  |                      |       | ** ** | ** ** |   |   |
| **Preferred  Dividend Requirement**                                                  |       | **212**                      | ** **  | 212                       |       | **423** | ** ** | 423 |   |
|                                                                                 |       | ** **                   | ** **  |                      |       | ** ** | ** ** |   |   |
| **Net  Income Applicable to Common Stock**                                           |       | **$**                        | **55,097**  | ** **                | $          | 50,707 |   | **$** | **132,341** | ** ** | $ | 167,732 |   |
|                                                                                 |       | ** **                   | ** **  |                      |       | ** ** | ** ** |   |   |
|                                                                                 |       | ** **                   | ** **  |                      |       | ** ** | ** ** |   |   |
| **Net  Income**                                                                      |       | **$**                        | **55,309**  | ** **                | $          | 50,919 |   | **$** | **132,764** | ** ** | $ | 168,155 |   |
|                                                                                 |       | ** **                   | ** **  |                      |       | ** ** | ** ** |   |   |
| **Other  Comprehensive Income (Loss), Net of Tax**                                   |       | **3,207**                    | ** **  | (2,721                    | )          | **2,883** | ** ** | (3,027 | ) |
|                                                                                 |       | ** **                   | ** **  |                      |       | ** ** | ** ** |   |   |
| **Comprehensive  Income**                                                            |       | **$**                        | **58,516**  | ** **                | $          | 48,198 |   | **$** | **135,647** | ** ** | $ | 165,128 |   |
|                                                                                 |       | ** **                   | ** **  |                      |       | ** ** | ** ** |   |   |

 

**The accompanying notes as they relateto The Cincinnati Gas & Electric Company are an integral part of thesecondensed consolidated financial statements.**

 

11

----

 

**THE CINCINNATI GAS &ELECTRIC COMPANY**

**CONDENSE**D CONSOLIDATED BALANCE SHEETS

 

**ASSETS**

 
| ** **                                                                                                                         | ** ** | **June 30  2004**            | ** **    | December  31  2003 | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|---------------|--------------------|------------|
| ** **                                                                                                                         | ** ** | ***(dollars in thousands)*** | ** **    |
| ** **                                                                                                                         | ** ** | ***(unaudited)***            | ** **    |
|                                                                                                                               | * *   | * *                     | * *      | * *           | * *   |
| **Current  Assets**                                                                                                                |       | ** **                   | ** **    |               |       |
| Cash and cash  equivalents                                                                                                         |       | **$**                        | **8,850**     | ** **         | $          | 15,842 |   |
| Restricted  deposits                                                                                                               |       | **137**                      | ** **    | 137                |       |
| Notes receivable  from affiliated companies                                                                                        |       | **55,464**                   | ** **    | 110,149            |       |
| Accounts  receivable less accumulated provision for doubtful accounts of $1,273 at June  30, 2004, and $1,602 at December 31, 2003 |       | **99,558**                   | ** **    | 107,733            |       |
| Accounts  receivable from affiliated companies                                                                                     |       | **29,789**                   | ** **    | 58,406             |       |
| Fuel, emission  allowances, and supplies                                                                                           |       | **166,053**                  | ** **    | 135,948            |       |
| Energy risk  management current assets                                                                                             |       | **155,876**                  | ** **    | 72,830             |       |
| Prepayments and  other                                                                                                             |       | **22,490**                   | ** **    | 15,049             |       |
| **Total  Current Assets**                                                                                                          |       | **538,217**                  | ** **    | 516,094            |       |
|                                                                                                                               |       | ** **                   | ** **    |               |       |
|                                                                                                                               |       | ** **                   | ** **    |               |       |
| **Property,  Plant, and Equipment – at Cost**                                                                                 |       | ** **                   | ** **    |               |       |
| Utility plant in  service                                                                                                          |       | ** **                   | ** **    |               |       |
| Electric                                                                                                                           |       | **2,215,001**                | ** **    | 2,155,457          |       |
| Gas                                                                                                                                |       | **1,146,542**                | ** **    | 1,104,797          |       |
| Common                                                                                                                             |       | **290,750**                  | ** **    | 288,394            |       |
| **Total  Utility Plant In Service**                                                                                                |       | **3,652,293**                | ** **    | 3,548,648          |       |
| Construction  work in progress                                                                                                     |       | **61,522**                   | ** **    | 71,947             |       |
| **Total  Utility Plant**                                                                                                           |       | **3,713,815**                | ** **    | 3,620,595          |       |
| Non-regulated  property, plant, and equipment                                                                                      |       | **3,613,834**                | ** **    | 3,576,187          |       |
| Accumulated  depreciation                                                                                                          |       | **2,688,118**                | ** **    | 2,625,568          |       |
| **Net  Property, Plant, and Equipment**                                                                                            |       | **4,639,531**                | ** **    | 4,571,214          |       |
|                                                                                                                               |       | ** **                   | ** **    |               |       |
|                                                                                                                               |       | ** **                   | ** **    |               |       |
| **Other  Assets**                                                                                                                  |       | ** **                   | ** **    |               |       |
| Regulatory  assets                                                                                                                 |       | **579,652**                  | ** **    | 594,764            |       |
| Energy risk  management non-current assets                                                                                         |       | **58,338**                   | ** **    | 36,583             |       |
| Other                                                                                                                              |       | **75,168**                   | ** **    | 90,824             |       |
| **Total  Other Assets**                                                                                                            |       | **713,158**                  | ** **    | 722,171            |       |
|                                                                                                                               |       | ** **                   | ** **    |               |       |
|                                                                                                                               |       | ** **                   | ** **    |               |       |
| **Total  Assets**                                                                                                                  |       | **$**                        | **5,890,906** | ** **         | $          | 5,809,479 |   |
|                                                                                                                               |       | ** **                   | ** **    |               |       |

 

**The accompanying notes as they relateto The Cincinnati Gas & Electric Company are an integral part of thesecondensed consolidated financial statements.**

 

12

----

 

**THECINCINNATI GAS & ELECTRIC COMPANY**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

 

**LIABILITIES AND SHAREHOLDERS’ EQUITY**

 
| ** **                                                                                                                                               | ** ** | **June 30  2004**            | ** **    | December  31  2003 | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|---------------|--------------------|------------|
| ** **                                                                                                                                               | ** ** | ***(dollars in thousands)*** | ** **    |
| ** **                                                                                                                                               | ** ** | ***(unaudited)***            | ** **    |
|                                                                                                                                                     | * *   | * *                     | * *      | * *           | * *   |
| **Current  Liabilities**                                                                                                                                 |       |                         |          |               |       |
| Accounts payable                                                                                                                                         |       | **$**                        | **252,591**   | ** **         | $          | 217,652 |   |
| Accounts payable  to affiliated companies                                                                                                                |       | **46,355**                   | ** **    | 136,470            |       |
| Accrued taxes                                                                                                                                            |       | **171,743**                  | ** **    | 146,216            |       |
| Accrued interest                                                                                                                                         |       | **19,039**                   | ** **    | 21,572             |       |
| Notes payable  and other short-term obligations (Note 4)                                                                                                 |       | **112,100**                  | ** **    | 112,100            |       |
| Notes payable to  affiliated companies (Note 4)                                                                                                          |       | **126,768**                  | ** **    | 49,126             |       |
| Long-term debt  due within one year                                                                                                                      |       | **150,000**                  | ** **    | 110,000            |       |
| Energy risk  management current liabilities                                                                                                              |       | **133,900**                  | ** **    | 77,791             |       |
| Other                                                                                                                                                    |       | **35,568**                   | ** **    | 32,319             |       |
| **Total  Current Liabilities**                                                                                                                           |       | **1,048,064**                | ** **    | 903,246            |       |
|                                                                                                                                                     |       | ** **                   | ** **    |               |       |
|                                                                                                                                                     |       | ** **                   | ** **    |               |       |
| **Non-Current  Liabilities**                                                                                                                             |       | ** **                   | ** **    |               |       |
| Long-term debt  (Note 3)                                                                                                                                 |       | **1,309,432**                | ** **    | 1,458,807          |       |
| Deferred income  taxes                                                                                                                                   |       | **1,007,697**                | ** **    | 985,481            |       |
| Unamortized  investment tax credits                                                                                                                      |       | **76,216**                   | ** **    | 79,186             |       |
| Accrued pension  and other postretirement benefit costs                                                                                                  |       | **226,031**                  | ** **    | 219,393            |       |
| Accrued cost of  removal                                                                                                                                 |       | **160,654**                  | ** **    | 155,336            |       |
| Energy risk  management non-current liabilities                                                                                                          |       | **37,077**                   | ** **    | 11,665             |       |
| Other                                                                                                                                                    |       | **74,371**                   | ** **    | 69,687             |       |
| **Total  Non-Current Liabilities**                                                                                                                       |       | **2,891,478**                | ** **    | 2,979,555          |       |
|                                                                                                                                                     |       | ** **                   | ** **    |               |       |
|                                                                                                                                                     |       | ** **                   | ** **    |               |       |
| **Commitments  and Contingencies** (Note 6)                                                                                                              |       | ** **                   | ** **    |               |       |
|                                                                                                                                                     |       | ** **                   | ** **    |               |       |
| **Total  Liabilities**                                                                                                                                   |       | **3,939,542**                | ** **    | 3,882,801          |       |
|                                                                                                                                                     |       | ** **                   | ** **    |               |       |
|                                                                                                                                                     |       | ** **                   | ** **    |               |       |
| **Cumulative  Preferred Stock**                                                                                                                          |       | ** **                   | ** **    |               |       |
| Not subject to  mandatory redemption                                                                                                                     |       | **20,485**                   | ** **    | 20,485             |       |
|                                                                                                                                                     |       | ** **                   | ** **    |               |       |
|                                                                                                                                                     |       | ** **                   | ** **    |               |       |
| **Common  Stock Equity**                                                                                                                                 |       | ** **                   | ** **    |               |       |
| Common stock –  $8.50 par value; authorized shares – 120,000,000; outstanding shares –  89,663,086 at June 30, 2004 and December 31, 2003 |       | **762,136**                  | ** **    | 762,136            |       |
| Paid-in capital                                                                                                                                          |       | **586,528**                  | ** **    | 586,528            |       |
| Retained  earnings                                                                                                                                       |       | **611,796**                  | ** **    | 589,993            |       |
| Accumulated  other comprehensive loss                                                                                                                    |       | **(29,581**                  | **)**         | (32,464            | )          |
| **Total  Common Stock Equity**                                                                                                                           |       | **1,930,879**                | ** **    | 1,906,193          |       |
|                                                                                                                                                     |       | ** **                   | ** **    |               |       |
|                                                                                                                                                     |       | ** **                   | ** **    |               |       |
| **Total  Liabilities and Shareholders’ Equity**                                                                                                     |       | **$**                        | **5,890,906** | ** **         | $          | 5,809,479 |   |
|                                                                                                                                                     |       | ** **                   | ** **    |               |       |

 

**The accompanying notes as they relateto The Cincinnati Gas & Electric Company are an integral part of thesecondensed consolidated financial statements.**

 

13

----

 

**THECINCINNATI GAS & ELECTRIC COMPANY**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

 
| ** **                                                                            | ** ** | **Year to Date  June 30**    | ** **  |
|---------------------------------------------------------------------------------------|------------|------------------------------|-------------|
| ** **                                                                            | ** ** | **2004**                     | ** **  | 2003 | ** ** |
| ** **                                                                            | ** ** | ***(dollars in thousands)*** | ** **  |
| ** **                                                                            | ** ** | ***(unaudited)***            | ** **  |
|                                                                                  | * *   | * *                     | * *    | * * | * * |
| **Operating  Activities**                                                             |       |                         |        |   |   |
| Net income                                                                            |       | **$**                        | **132,764** | ** ** | $ | 168,155 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities:    |       | ** **                   | ** **  |   |   |
| Depreciation                                                                          |       | **89,863**                   | ** **  | 99,577 |   |
| Deferred income  taxes and investment tax credits – net                          |       | **16,294**                   | ** **  | 12,144 |   |
| Cumulative  effect of changes in accounting principles, net of tax                    |       | **—**                   | ** **  | (30,938 | ) |
| Change in net  position of energy risk management activities                          |       | **(23,280**                  | **)**       | 1,161 |   |
| Allowance for  equity funds used during construction                                  |       | **(719**                     | **)**       | (1,841 | ) |
| Regulatory  assets deferrals                                                          |       | **(13,753**                  | **)**       | (12,725 | ) |
| Regulatory  assets amortization                                                       |       | **27,022**                   | ** **  | 19,654 |   |
| Accrued pension  and other postretirement benefit costs                               |       | **6,638**                    | ** **  | 6,876 |   |
| Deferred costs  under gas cost recovery mechanism                                     |       | **21,311**                   | ** **  | (36,422 | ) |
| Cost of removal                                                                       |       | **(3,774**                   | **)**       | — |   |
| Changes in  current assets and current liabilities:                                   |       | ** **                   | ** **  |   |   |
| Restricted  deposits                                                                  |       | **—**                   | ** **  | 34 |   |
| Accounts and  notes receivable                                                        |       | **88,007**                   | ** **  | 131,511 |   |
| Fuel, emission  allowances, and supplies                                              |       | **(30,965**                  | **)**       | (7,714 | ) |
| Prepayments                                                                           |       | **(7,544**                   | **)**       | (7,962 | ) |
| Accounts payable                                                                      |       | **(55,176**                  | **)**       | (138,911 | ) |
| Accrued taxes  and interest                                                           |       | **22,994**                   | ** **  | 9,926 |   |
| Other assets                                                                          |       | **1,858**                    | ** **  | 6,930 |   |
| Other  liabilities                                                                    |       | **10,081**                   | ** **  | (5,635 | ) |
|                                                                                  |       | ** **                   | ** **  |   |   |
| **Net  cash provided by operating activities**                                        |       | **281,621**                  | ** **  | 213,820 |   |
|                                                                                  |       | ** **                   | ** **  |   |   |
| **Financing  Activities**                                                             |       | ** **                   | ** **  |   |   |
| Change in  short-term debt, including net affiliate notes                             |       | **81,112**                   | ** **  | (90,887 | ) |
| Issuance of  long-term debt                                                           |       | **—**                   | ** **  | 256,198 |   |
| Redemption of  long-term debt                                                         |       | **(110,000**                 | **)**       | (100,000 | ) |
| Dividends on  preferred stock                                                         |       | **(423**                     | **)**       | (423 | ) |
| Dividends on  common stock                                                            |       | **(110,538**                 | **)**       | (110,182 | ) |
|                                                                                  |       | ** **                   | ** **  |   |   |
| **Net  cash used in financing activities**                                            |       | **(139,849**                 | **)**       | (45,294 | ) |
|                                                                                  |       | ** **                   | ** **  |   |   |
| **Investing  Activities**                                                             |       | ** **                   | ** **  |   |   |
| Construction  expenditures (less allowance for equity funds used during construction) |       | **(148,762**                 | **)**       | (150,672 | ) |
| Other  investments                                                                    |       | **(2**                       | **)**       | 2 |   |
|                                                                                  |       | ** **                   | ** **  |   |   |
| **Net  cash used in investing activities**                                            |       | **(148,764**                 | **)**       | (150,670 | ) |
|                                                                                  |       | ** **                   | ** **  |   |   |
| **Net  increase (decrease) in cash and cash equivalents**                             |       | **(6,992**                   | **)**       | 17,856 |   |
| ** **                                                                            |       | ** **                   | ** **  |   |   |
| **Cash  and cash equivalents at beginning of period**                                 |       | **15,842**                   | ** **  | 45,336 |   |
| ** **                                                                            |       | ** **                   | ** **  |   |   |
| **Cash  and cash equivalents at end of period**                                       |       | **$**                        | **8,850**   | ** ** | $ | 63,192 |   |
|                                                                                  |       | ** **                   | ** **  |   |   |
|                                                                                  |       | ** **                   | ** **  |   |   |
| **Supplemental  Disclosure of Cash Flow Information**                                 |       | ** **                   | ** **  |   |   |
| Cash paid during  the period for:                                                     |       | ** **                   | ** **  |   |   |
| Interest (net of  amount capitalized)                                                 |       | **$**                        | **45,345**  | ** ** | $ | 30,010 |   |
| Income taxes                                                                          |       | **$**                        | **11,264**  | ** ** | $ | 37,155 |   |
|                                                                                  |       | ** **                   | ** **  |   |   |

 

**The accompanying notes as they relateto The Cincinnati Gas & Electric Company are an integral part of thesecondensed consolidated financial statements.**

 

14

----

 

**PSI**ENERGY, INC.

**AND SUBSIDIARY COMPANY**

 

15

----

 

**PSIENERGY, INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVEINCOME**

 
| ** **                                                                           | ** **   | **Quarter Ended  June 30**   | ** **   | **Year to Date  June 30** | ** ** |
|--------------------------------------------------------------------------------------|--------------|------------------------------|--------------|---------------------------|------------|
| ** **                                                                           | ** **   | **2004**                     | ** **   | 2003                      | ** ** | **2004** | ** ** | 2003 | ** ** |
| *** ***                                                                         | *** *** | ***(dollars in thousands)*** | *** *** |
| *** ***                                                                         | *** *** | ***(unaudited)***            | *** *** |
| * *                                                                             | * *     | * *                     | * *     | * *                  | * *   | * * | * * | * * | * * |
| **Operating Revenues**                                                               |         |                         |         |                      |       |   |   |   |   |
| Electric                                                                             |         | **$**                        | **414,444**  | ** **                | $          | 361,385 |   | **$** | **830,723** | ** ** | $ | 773,073 |   |
|                                                                                 |         | ** **                   | ** **   |                      |       | ** ** | ** ** |   |   |
|                                                                                 |         | ** **                   | ** **   |                      |       | ** ** | ** ** |   |   |
| **Operating Expenses**                                                               |         | ** **                   | ** **   |                      |       | ** ** | ** ** |   |   |
| Fuel and purchased power                                                             |         | **139,600**                  | ** **   | 121,998                   |       | **276,396** | ** ** | 288,870 |   |
| Operation and maintenance                                                            |         | **138,291**                  | ** **   | 127,020                   |       | **265,202** | ** ** | 242,298 |   |
| Depreciation                                                                         |         | **55,059**                   | ** **   | 40,735                    |       | **103,890** | ** ** | 80,416 |   |
| Taxes other than income taxes                                                        |         | **14,121**                   | ** **   | 16,150                    |       | **30,533** | ** ** | 32,032 |   |
| **Total Operating Expenses**                                                         |         | **347,071**                  | ** **   | 305,903                   |       | **676,021** | ** ** | 643,616 |   |
|                                                                                 |         | ** **                   | ** **   |                      |       | ** ** | ** ** |   |   |
|                                                                                 |         | ** **                   | ** **   |                      |       | ** ** | ** ** |   |   |
| **Operating Income**                                                                 |         | **67,373**                   | ** **   | 55,482                    |       | **154,702** | ** ** | 129,457 |   |
| ** **                                                                           |         | ** **                   | ** **   |                      |       | ** ** | ** ** |   |   |
| ** **                                                                           |         | ** **                   | ** **   |                      |       | ** ** | ** ** |   |   |
| **Miscellaneous Income – Net**                                                  |         | **3,017**                    | ** **   | 5,411                     |       | **3,564** | ** ** | 7,569 |   |
| **Interest Expense**                                                                 |         | **21,701**                   | ** **   | 22,174                    |       | **41,625** | ** ** | 42,427 |   |
| ** **                                                                           |         | ** **                   | ** **   |                      |       | ** ** | ** ** |   |   |
|                                                                                 |         | ** **                   | ** **   |                      |       | ** ** | ** ** |   |   |
| **Income Before Taxes**                                                              |         | **48,689**                   | ** **   | 38,719                    |       | **116,641** | ** ** | 94,599 |   |
| ** **                                                                           |         | ** **                   | ** **   |                      |       | ** ** | ** ** |   |   |
| ** **                                                                           |         | ** **                   | ** **   |                      |       | ** ** | ** ** |   |   |
| **Income Taxes**                                                                     |         | **23,243**                   | ** **   | 15,640                    |       | **50,389** | ** ** | 37,299 |   |
| ** **                                                                           |         | ** **                   | ** **   |                      |       | ** ** | ** ** |   |   |
| ** **                                                                           |         | ** **                   | ** **   |                      |       | ** ** | ** ** |   |   |
| **Income Before Cumulative Effect of  a Change in Accounting Principle**             |         | **25,446**                   | ** **   | 23,079                    |       | **66,252** | ** ** | 57,300 |   |
| ** **                                                                           |         | ** **                   | ** **   |                      |       | ** ** | ** ** |   |   |
|                                                                                 |         | ** **                   | ** **   |                      |       | ** ** | ** ** |   |   |
| Cumulative effect of a change in accounting  principle, net of tax (Note 1(c)(*ii*)) |         | **—**                   | ** **   | —                    |       | **—** | ** ** | (494 | ) |
|                                                                                 |         | ** **                   | ** **   |                      |       | ** ** | ** ** |   |   |
| **Net Income**                                                                       |         | **$**                        | **25,446**   | ** **                | $          | 23,079 |   | **$** | **66,252** | ** ** | $ | 56,806 |   |
| ** **                                                                           |         | ** **                   | ** **   |                      |       | ** ** | ** ** |   |   |
| **Preferred Dividend Requirement**                                                   |         | **646**                      | ** **   | 646                       |       | **1,293** | ** ** | 1,293 |   |
| ** **                                                                           |         | ** **                   | ** **   |                      |       | ** ** | ** ** |   |   |
| **Net Income Applicable to Common  Stock**                                           |         | **$**                        | **24,800**   | ** **                | $          | 22,433 |   | **$** | **64,959** | ** ** | $ | 55,513 |   |
| ** **                                                                           |         | ** **                   | ** **   |                      |       | ** ** | ** ** |   |   |
| ** **                                                                           |         | ** **                   | ** **   |                      |       | ** ** | ** ** |   |   |
| **Net Income**                                                                       |         | **$**                        | **25,446**   | ** **                | $          | 23,079 |   | **$** | **66,252** | ** ** | $ | 56,806 |   |
| ** **                                                                           |         | ** **                   | ** **   |                      |       | ** ** | ** ** |   |   |
| **Other Comprehensive Income (Loss),  Net of Tax**                                   |         | **(118**                     | **)**        | 2,954                     |       | **366** | ** ** | 2,324 |   |
| ** **                                                                           |         | ** **                   | ** **   |                      |       | ** ** | ** ** |   |   |
| **Comprehensive Income**                                                             |         | **$**                        | **25,328**   | ** **                | $          | 26,033 |   | **$** | **66,618** | ** ** | $ | 59,130 |   |
|                                                                                 | ** **   | ** **                   | ** **   | ** **                | ** ** | ** ** | ** ** | ** ** | ** ** |

 

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

 

16

----

 

**PSIENERGY, INC.**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

 

**ASSETS**

 
| ** **                                                                                                                      | ** **   | **June  30  2004**           | ** **    | December  31  2003 | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------|--------------|------------------------------|---------------|--------------------|------------|
| *** ***                                                                                                                    | *** *** | ***(dollars in thousands)*** | *** ***  |
| *** ***                                                                                                                    | *** *** | ***(unaudited)***            | *** ***  |
| * *                                                                                                                        | * *     | * *                     | * *      | * *           | * *   |
| **Current Assets**                                                                                                              |         |                         |          |               |       |
| Cash and cash equivalents                                                                                                       |         | **$**                        | **24,695**    | ** **         | $          | 6,565 |   |
| Restricted deposits                                                                                                             |         | **88,180**                   | ** **    | 92,675             |       |
| Notes receivable from affiliated companies                                                                                      |         | **51,011**                   | ** **    | 65,715             |       |
| Accounts receivable less accumulated provision for  doubtful accounts of $408 at June 30, 2004, and $1,110 at December 31, 2003 |         | **37,966**                   | ** **    | 37,194             |       |
| Accounts receivable from affiliated companies                                                                                   |         | **7,273**                    | ** **    | 459                |       |
| Fuel, emission allowances, and supplies                                                                                         |         | **145,529**                  | ** **    | 149,392            |       |
| Energy risk management current assets                                                                                           |         | **6,714**                    | ** **    | 7,959              |       |
| Prepayments and other                                                                                                           |         | **4,642**                    | ** **    | 5,303              |       |
| **Total Current Assets**                                                                                                        |         | **366,010**                  | ** **    | 365,262            |       |
| ** **                                                                                                                      |         | ** **                   | ** **    |               |       |
|                                                                                                                            |         | ** **                   | ** **    |               |       |
| **Property, Plant, and Equipment – at  Cost**                                                                              |         | ** **                   | ** **    |               |       |
| Utility plant in service                                                                                                        |         | **6,334,018**                | ** **    | 6,183,475          |       |
| Construction work in progress                                                                                                   |         | **183,309**                  | ** **    | 203,512            |       |
| **Total Utility Plant**                                                                                                         |         | **6,517,327**                | ** **    | 6,386,987          |       |
| Accumulated depreciation                                                                                                        |         | **2,211,926**                | ** **    | 2,133,235          |       |
| **Net Property, Plant, and Equipment**                                                                                          |         | **4,305,401**                | ** **    | 4,253,752          |       |
| ** **                                                                                                                      |         | ** **                   | ** **    |               |       |
|                                                                                                                            |         | ** **                   | ** **    |               |       |
| **Other Assets**                                                                                                                |         | ** **                   | ** **    |               |       |
| Regulatory assets                                                                                                               |         | **421,496**                  | ** **    | 417,387            |       |
| Energy risk management non-current assets                                                                                       |         | **3,348**                    | ** **    | 7,061              |       |
| Other investments                                                                                                               |         | **68,763**                   | ** **    | 66,803             |       |
| Other                                                                                                                           |         | **31,552**                   | ** **    | 29,372             |       |
| **Total Other Assets**                                                                                                          |         | **525,159**                  | ** **    | 520,623            |       |
| ** **                                                                                                                      |         | ** **                   | ** **    |               |       |
|                                                                                                                            |         | ** **                   | ** **    |               |       |
| **Total Assets**                                                                                                                |         | **$**                        | **5,196,570** | ** **         | $          | 5,139,637 |   |
|                                                                                                                            | ** **   | ** **                   | ** **    | ** **         | ** ** |

 

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

 

17

----

 

**PSIENERGY, INC.**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

 

**LIABILITIES AND SHAREHOLDERS’ EQUITY**

 
| ** **                                                                                                                                                                    | ** **   | **June  30  2004**           | ** **    | December  31  2003 | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------|------------------------------|---------------|--------------------|------------|
| *** ***                                                                                                                                                                  | *** *** | ***(dollars in thousands)*** | *** ***  |
| *** ***                                                                                                                                                                  | *** *** | ***(unaudited)***            | *** ***  |
| * *                                                                                                                                                                      | * *     | * *                     | * *      | * *           | * *   |
| **Current Liabilities**                                                                                                                                                       |         |                         |          |               |       |
| Accounts payable                                                                                                                                                              |         | **$**                        | **54,354**    | ** **         | $          | 58,286 |   |
| Accounts payable to affiliated companies                                                                                                                                      |         | **32,170**                   | ** **    | 69,746             |       |
| Accrued taxes                                                                                                                                                                 |         | **63,760**                   | ** **    | 69,419             |       |
| Accrued interest                                                                                                                                                              |         | **29,595**                   | ** **    | 26,615             |       |
| Notes payable and other short-term obligations (Note  4)                                                                                                                      |         | **80,500**                   | ** **    | 80,500             |       |
| Notes payable to affiliated companies (Note 4)                                                                                                                                |         | **218,783**                  | ** **    | 188,446            |       |
| Long-term debt due within one year                                                                                                                                            |         | **1,100**                    | ** **    | —             |       |
| Energy risk management current liabilities                                                                                                                                    |         | **15,631**                   | ** **    | 14,744             |       |
| Other                                                                                                                                                                         |         | **24,642**                   | ** **    | 25,636             |       |
| **Total Current Liabilities**                                                                                                                                                 |         | **520,535**                  | ** **    | 533,392            |       |
|                                                                                                                                                                          |         | ** **                   | ** **    |               |       |
|                                                                                                                                                                          |         | ** **                   | ** **    |               |       |
| **Non-Current Liabilities**                                                                                                                                                   |         | ** **                   | ** **    |               |       |
| Long-term debt                                                                                                                                                                |         | **1,719,673**                | ** **    | 1,720,476          |       |
| Deferred income taxes                                                                                                                                                         |         | **610,801**                  | ** **    | 573,946            |       |
| Unamortized investment tax credits                                                                                                                                            |         | **28,141**                   | ** **    | 29,698             |       |
| Accrued pension and other postretirement benefit  costs                                                                                                                       |         | **203,596**                  | ** **    | 193,336            |       |
| Accrued cost of removal                                                                                                                                                       |         | **349,901**                  | ** **    | 335,520            |       |
| Energy risk management non-current liabilities                                                                                                                                |         | **1,664**                    | ** **    | 2,796              |       |
| Other                                                                                                                                                                         |         | **79,289**                   | ** **    | 74,958             |       |
| **Total Non-Current Liabilities**                                                                                                                                             |         | **2,993,065**                | ** **    | 2,930,730          |       |
|                                                                                                                                                                          |         | ** **                   | ** **    |               |       |
|                                                                                                                                                                          |         | ** **                   | ** **    |               |       |
| **Commitments and Contingencies** (Note 6)                                                                                                                                    |         | ** **                   | ** **    |               |       |
|                                                                                                                                                                          |         | ** **                   | ** **    |               |       |
| **Total Liabilities**                                                                                                                                                         |         | **3,513,600**                | ** **    | 3,464,122          |       |
|                                                                                                                                                                          |         | ** **                   | ** **    |               |       |
|                                                                                                                                                                          |         | ** **                   | ** **    |               |       |
| **Cumulative Preferred Stock**                                                                                                                                                |         | ** **                   | ** **    |               |       |
| Not subject to mandatory redemption                                                                                                                                           |         | **42,333**                   | ** **    | 42,333             |       |
|                                                                                                                                                                          |         | ** **                   | ** **    |               |       |
|                                                                                                                                                                          |         | ** **                   | ** **    |               |       |
| **Common Stock Equity**                                                                                                                                                       |         | ** **                   | ** **    |               |       |
| Common stock – without par value; $.01 stated value;  authorized shares – 60,000,000; outstanding shares – 53,913,701 at June 30,  2004, and December 31, 2003 |         | **539**                      | ** **    | 539                |       |
| Paid-in capital                                                                                                                                                               |         | **627,274**                  | ** **    | 627,274            |       |
| Retained earnings                                                                                                                                                             |         | **1,025,879**                | ** **    | 1,018,790          |       |
| Accumulated other comprehensive loss                                                                                                                                          |         | **(13,055**                  | **)**         | (13,421            | )          |
| **Total Common Stock Equity**                                                                                                                                                 |         | **1,640,637**                | ** **    | 1,633,182          |       |
|                                                                                                                                                                          |         | ** **                   | ** **    |               |       |
|                                                                                                                                                                          |         | ** **                   | ** **    |               |       |
| **Total Liabilities and Shareholders’  Equity**                                                                                                                          |         | **$**                        | **5,196,570** | ** **         | $          | 5,139,637 |   |
|                                                                                                                                                                          | ** **   | ** **                   | ** **    | ** **         | ** ** |

 

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

 

18

----

 

**PSIENERGY, INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

 
| ** **                                                                            | ** **   | **Year to Date  June 30**    | ** **   |
|---------------------------------------------------------------------------------------|--------------|------------------------------|--------------|
| ** **                                                                            | ** **   | **2004**                     | ** **   | 2003 | ** ** |
| *** ***                                                                          | *** *** | ***(dollars in thousands)*** | *** *** |
| *** ***                                                                          | *** *** | ***(unaudited)***            | *** *** |
| * *                                                                              | * *     | * *                     | * *     | * * | * * |
| **Operating Activities**                                                              |         |                         |         |   |   |
| Net income                                                                            |         | **$**                        | **66,252**   | ** ** | $ | 56,806 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities:    |         | ** **                   | ** **   |   |   |
| Depreciation                                                                          |         | **103,890**                  | ** **   | 80,416 |   |
| Cumulative effect of a change in accounting  principle, net of tax                    |         | **—**                   | ** **   | 494 |   |
| Deferred income taxes and investment tax credits –  net                          |         | **35,052**                   | ** **   | (937 | ) |
| Change in net position of energy risk management  activities                          |         | **4,713**                    | ** **   | 635 |   |
| Allowance for equity funds used during construction                                   |         | **(257**                     | **)**        | (4,350 | ) |
| Regulatory assets deferrals                                                           |         | **(22,452**                  | **)**        | (19,846 | ) |
| Regulatory assets amortization                                                        |         | **21,280**                   | ** **   | 32,346 |   |
| Accrued pension and other postretirement benefit  costs                               |         | **10,260**                   | ** **   | 7,480 |   |
| Cost of removal                                                                       |         | **(5,344**                   | **)**        | (7,098 | ) |
| Changes in current assets and current liabilities:                                    |         | ** **                   | ** **   |   |   |
| Restricted deposits                                                                   |         | **(5,918**                   | **)**        | (551 | ) |
| Accounts and notes receivable                                                         |         | **7,118**                    | ** **   | 28,201 |   |
| Fuel, emission allowances, and supplies                                               |         | **3,863**                    | ** **   | 2,702 |   |
| Prepayments                                                                           |         | **(32**                      | **)**        | (406 | ) |
| Accounts payable                                                                      |         | **(41,508**                  | **)**        | (136,320 | ) |
| Accrued taxes and interest                                                            |         | **(2,679**                   | **)**        | 491 |   |
| Other assets                                                                          |         | **177**                      | ** **   | (2,353 | ) |
| Other liabilities                                                                     |         | **4,080**                    | ** **   | (1,755 | ) |
|                                                                                  |         | ** **                   | ** **   |   |   |
| **Net cash provided by operating  activities**                                        |         | **178,495**                  | ** **   | 35,955 |   |
|                                                                                  |         | ** **                   | ** **   |   |   |
| **Financing Activities**                                                              |         | ** **                   | ** **   |   |   |
| Change in short-term debt, including net affiliate  notes                             |         | **30,337**                   | ** **   | 63,523 |   |
| Issuance of long-term debt                                                            |         | **—**                   | ** **   | 35,000 |   |
| Redemption of long-term debt                                                          |         | **—**                   | ** **   | (27,896 | ) |
| Contribution from parent                                                              |         | **—**                   | ** **   | 100,000 |   |
| Dividends on preferred stock                                                          |         | **(1,293**                   | **)**        | (1,293 | ) |
| Dividends on common stock                                                             |         | **(57,870**                  | **)**        | (48,340 | ) |
|                                                                                  |         | ** **                   | ** **   |   |   |
| **Net cash provided by (used in)  financing activities**                              |         | **(28,826**                  | **)**        | 120,994 |   |
|                                                                                  |         | ** **                   | ** **   |   |   |
| **Investing Activities**                                                              |         | ** **                   | ** **   |   |   |
| Construction expenditures (less allowance for equity  funds used during construction) |         | **(140,606**                 | **)**        | (156,984 | ) |
| Withdrawal of restricted cash held on deposit                                         |         | **10,413**                   | ** **   | — |   |
| Other investments                                                                     |         | **(1,346**                   | **)**        | (1,066 | ) |
|                                                                                  |         | ** **                   | ** **   |   |   |
| **Net cash used in investing  activities**                                            |         | **(131,539**                 | **)**        | (158,050 | ) |
|                                                                                  |         | ** **                   | ** **   |   |   |
| **Net increase (decrease) in cash and  cash equivalents**                             |         | **18,130**                   | ** **   | (1,101 | ) |
| ** **                                                                            |         | ** **                   | ** **   |   |   |
| **Cash and cash equivalents at  beginning of period**                                 |         | **6,565**                    | ** **   | 2,007 |   |
| ** **                                                                            |         | ** **                   | ** **   |   |   |
| **Cash and cash equivalents at end of  period**                                       |         | **$**                        | **24,695**   | ** ** | $ | 906 |   |
| ** **                                                                            |         | ** **                   | ** **   |   |   |
|                                                                                  |         | ** **                   | ** **   |   |   |
| **Supplemental Disclosure of Cash  Flow Information**                                 |         | ** **                   | ** **   |   |   |
| Cash paid during the period for:                                                      |         | ** **                   | ** **   |   |   |
| Interest (net of amount capitalized)                                                  |         | **$**                        | **43,894**   | ** ** | $ | 20,465 |   |
| Income taxes                                                                          |         | **$**                        | **19,502**   | ** ** | $ | 55,919 |   |
|                                                                                  |         | ** **                   | ** **   |   |   |
| Non-cash financing and investing activities:                                          |         | ** **                   | ** **   |   |   |
| Issuance of promissory notes to affiliated company  for acquisition of assets         |         | **$**                        | **—**   | ** ** | $ | 375,969 |   |
|                                                                                  |         | ** **                   | ** **   |   |   |

 

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

 

19

----

 

**THE UNION LIGHT, HEAT**

**AND POWER COMPANY**

 

20

----

 

**THEUNION LIGHT, HEAT AND POWER COMPANY**

**CONDENSEDSTATEMENTS OF INCOME**

 
| ** **                                           | ** **   | **Quarter Ended  June 30**   | ** **   | **Year to Date  June 30** | ** ** |
|------------------------------------------------------|--------------|------------------------------|--------------|---------------------------|------------|
| ** **                                           | ** **   | **2004**                     | ** **   | 2003                      | ** ** | **2004** | ** ** | 2003 | ** ** |
| *** ***                                         | *** *** | ***(dollars in thousands)*** | *** *** |
| *** ***                                         | *** *** | ***(unaudited)***            | *** *** |
| * *                                             | * *     | * *                     | * *     | * *                  | * *   | * * | * * | * * | * * |
| **Operating Revenues**                               |         | ** **                   | ** **   |                      |       | ** ** | ** ** |   |   |
| Electric                                             |         | **$**                        | **56,732**   | ** **                | $          | 51,096 |   | **$** | **112,947** | ** ** | $ | 106,025 |   |
| Gas                                                  |         | **15,985**                   | ** **   | 14,383                    |       | **74,124** | ** ** | 63,767 |   |
| **Total Operating Revenues**                         |         | **72,717**                   | ** **   | 65,479                    |       | **187,071** | ** ** | 169,792 |   |
|                                                 |         | ** **                   | ** **   |                      |       | ** ** | ** ** |   |   |
|                                                 |         | ** **                   | ** **   |                      |       | ** ** | ** ** |   |   |
| **Operating Expenses**                               |         | ** **                   | ** **   |                      |       | ** ** | ** ** |   |   |
| Electricity purchased from parent company for resale |         | **39,854**                   | ** **   | 37,136                    |       | **79,307** | ** ** | 76,259 |   |
| Gas purchased                                        |         | **7,481**                    | ** **   | 9,450                     |       | **48,314** | ** ** | 40,950 |   |
| Operation and maintenance                            |         | **13,795**                   | ** **   | 13,794                    |       | **27,555** | ** ** | 26,379 |   |
| Depreciation                                         |         | **5,027**                    | ** **   | 4,583                     |       | **9,952** | ** ** | 9,028 |   |
| Taxes other than income taxes                        |         | **1,239**                    | ** **   | 1,121                     |       | **2,677** | ** ** | 2,282 |   |
| **Total Operating Expenses**                         |         | **67,396**                   | ** **   | 66,084                    |       | **167,805** | ** ** | 154,898 |   |
|                                                 |         | ** **                   | ** **   |                      |       | ** ** | ** ** |   |   |
|                                                 |         | ** **                   | ** **   |                      |       | ** ** | ** ** |   |   |
| **Operating Income (Loss)**                          |         | **5,321**                    | ** **   | (605                      | )          | **19,266** | ** ** | 14,894 |   |
| ** **                                           |         | ** **                   | ** **   |                      |       | ** ** | ** ** |   |   |
| ** **                                           |         | ** **                   | ** **   |                      |       | ** ** | ** ** |   |   |
| **Miscellaneous Income – Net**                  |         | **242**                      | ** **   | 901                       |       | **741** | ** ** | 2,380 |   |
| **Interest Expense**                                 |         | **1,270**                    | ** **   | 1,470                     |       | **2,497** | ** ** | 2,972 |   |
| ** **                                           |         | ** **                   | ** **   |                      |       | ** ** | ** ** |   |   |
| ** **                                           |         | ** **                   | ** **   |                      |       | ** ** | ** ** |   |   |
| **Income (Loss) Before Taxes**                       |         | **4,293**                    | ** **   | (1,174                    | )          | **17,510** | ** ** | 14,302 |   |
| ** **                                           |         | ** **                   | ** **   |                      |       | ** ** | ** ** |   |   |
| ** **                                           |         | ** **                   | ** **   |                      |       | ** ** | ** ** |   |   |
| **Income Taxes**                                     |         | **1,202**                    | ** **   | (679                      | )          | **6,531** | ** ** | 5,391 |   |
| ** **                                           |         | ** **                   | ** **   |                      |       | ** ** | ** ** |   |   |
| **Net Income (Loss)**                                |         | **$**                        | **3,091**    | ** **                | $          | (495 | ) | **$** | **10,979** | ** ** | $ | 8,911 |   |
|                                                 | ** **   | ** **                   | ** **   | ** **                | ** ** | ** ** | ** ** | ** ** | ** ** |

 

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

 

21

----

 

**THEUNION LIGHT, HEAT AND POWER COMPANY**

**CONDENSEDBALANCE SHEETS**

 

**ASSETS**

 
| ** **                                                                                                                    | ** **   | **June  30  2004**           | ** **   | December  31  2003 | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------|--------------|------------------------------|--------------|--------------------|------------|
| *** ***                                                                                                                  | *** *** | ***(dollars in thousands)*** | *** *** |
| *** ***                                                                                                                  | *** *** | ***(unaudited)***            | *** *** |
| * *                                                                                                                      | * *     | * *                     | * *     | * *           | * *   |
| **Current Assets**                                                                                                            |         |                         |         |               |       |
| Cash and cash equivalents                                                                                                     |         | **$**                        | **6,994**    | ** **         | $          | 1,899 |   |
| Notes receivable from affiliated companies                                                                                    |         | **9,141**                    | ** **   | 17,906             |       |
| Accounts receivable less accumulated provision for  doubtful accounts of $286 at June 30, 2004, and $192 at December 31, 2003 |         | **1,329**                    | ** **   | 2,458              |       |
| Accounts receivable from affiliated companies                                                                                 |         | **167**                      | ** **   | 4,407              |       |
| Fuel and supplies                                                                                                             |         | **7,794**                    | ** **   | 7,936              |       |
| Prepayments and other                                                                                                         |         | **—**                   | ** **   | 279                |       |
| **Total Current Assets**                                                                                                      |         | **25,425**                   | ** **   | 34,885             |       |
|                                                                                                                          |         | ** **                   | ** **   |               |       |
|                                                                                                                          |         | ** **                   | ** **   |               |       |
| **Property, Plant, and Equipment – at  Cost**                                                                            |         | ** **                   | ** **   |               |       |
| Utility plant in service                                                                                                      |         | ** **                   | ** **   |               |       |
| Electric                                                                                                                      |         | **281,475**                  | ** **   | 273,895            |       |
| Gas                                                                                                                           |         | **245,423**                  | ** **   | 239,670            |       |
| Common                                                                                                                        |         | **53,552**                   | ** **   | 53,297             |       |
| **Total Utility Plant In Service**                                                                                            |         | **580,450**                  | ** **   | 566,862            |       |
| Construction work in progress                                                                                                 |         | **7,583**                    | ** **   | 6,165              |       |
| **Total Utility Plant**                                                                                                       |         | **588,033**                  | ** **   | 573,027            |       |
| Accumulated depreciation                                                                                                      |         | **183,275**                  | ** **   | 176,368            |       |
| **Net Property, Plant, and Equipment**                                                                                        |         | **404,758**                  | ** **   | 396,659            |       |
|                                                                                                                          |         | ** **                   | ** **   |               |       |
|                                                                                                                          |         | ** **                   | ** **   |               |       |
| **Other Assets**                                                                                                              |         | ** **                   | ** **   |               |       |
| Regulatory assets                                                                                                             |         | **13,072**                   | ** **   | 13,224             |       |
| Other                                                                                                                         |         | **776**                      | ** **   | 3,903              |       |
| **Total Other Assets**                                                                                                        |         | **13,848**                   | ** **   | 17,127             |       |
| ** **                                                                                                                    |         | ** **                   | ** **   |               |       |
| ** **                                                                                                                    |         | ** **                   | ** **   |               |       |
| **Total Assets**                                                                                                              |         | **$**                        | **444,031**  | ** **         | $          | 448,671 |   |
|                                                                                                                          |         | ** **                   | ** **   |               |       |

 

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

 

22

----

 

**THEUNION LIGHT, HEAT AND POWER COMPANY**

**CONDENSEDBALANCE SHEETS**

 

**LIABILITIES AND SHAREHOLDER’S EQUITY**

 
| ** **                                                                                                                                            | ** **   | **June  30  2004**           | ** **   | December  31  2003 | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------|--------------|------------------------------|--------------|--------------------|------------|
| *** ***                                                                                                                                          | *** *** | ***(dollars in thousands)*** | *** *** |
| *** ***                                                                                                                                          | *** *** | ***(unaudited)***            | *** *** |
| * *                                                                                                                                              | * *     | * *                     | * *     | * *           | * *   |
| **Current Liabilities**                                                                                                                               |         |                         |         |               |       |
| Accounts payable                                                                                                                                      |         | **$**                        | **4,441**    | ** **         | $          | 13,431 |   |
| Accounts payable to affiliated companies                                                                                                              |         | **20,914**                   | ** **   | 21,131             |       |
| Accrued taxes                                                                                                                                         |         | **8,487**                    | ** **   | 298                |       |
| Accrued interest                                                                                                                                      |         | **1,314**                    | ** **   | 1,230              |       |
| Notes payable to affiliated companies (Note 4)                                                                                                        |         | **29,098**                   | ** **   | 45,233             |       |
| Other                                                                                                                                                 |         | **6,623**                    | ** **   | 6,815              |       |
| **Total Current Liabilities**                                                                                                                         |         | **70,877**                   | ** **   | 88,138             |       |
|                                                                                                                                                  |         | ** **                   | ** **   |               |       |
|                                                                                                                                                  |         | ** **                   | ** **   |               |       |
| **Non-Current Liabilities**                                                                                                                           |         | ** **                   | ** **   |               |       |
| Long-term debt                                                                                                                                        |         | **54,701**                   | ** **   | 54,685             |       |
| Deferred income taxes                                                                                                                                 |         | **56,009**                   | ** **   | 55,488             |       |
| Unamortized investment tax credits                                                                                                                    |         | **2,751**                    | ** **   | 2,879              |       |
| Accrued pension and other postretirement benefit  costs                                                                                               |         | **17,709**                   | ** **   | 16,953             |       |
| Accrued cost of removal                                                                                                                               |         | **28,500**                   | ** **   | 27,443             |       |
| Other                                                                                                                                                 |         | **13,149**                   | ** **   | 13,729             |       |
| **Total Non-Current Liabilities**                                                                                                                     |         | **172,819**                  | ** **   | 171,177            |       |
|                                                                                                                                                  |         | ** **                   | ** **   |               |       |
|                                                                                                                                                  |         | ** **                   | ** **   |               |       |
| **Commitments and Contingencies** (Note 6)                                                                                                            |         | ** **                   | ** **   |               |       |
|                                                                                                                                                  |         | ** **                   | ** **   |               |       |
| **Total Liabilities**                                                                                                                                 |         | **243,696**                  | ** **   | 259,315            |       |
| ** **                                                                                                                                            |         | ** **                   | ** **   |               |       |
| ** **                                                                                                                                            |         | ** **                   | ** **   |               |       |
| **Common Stock Equity**                                                                                                                               |         | ** **                   | ** **   |               |       |
| Common stock – $15.00 par value; authorized shares –  1,000,000; outstanding shares – 585,333 at June 30, 2004, and December 31,  2003 |         | **8,780**                    | ** **   | 8,780              |       |
| Paid-in capital                                                                                                                                       |         | **23,541**                   | ** **   | 23,541             |       |
| Retained earnings                                                                                                                                     |         | **168,503**                  | ** **   | 157,524            |       |
| Accumulated other comprehensive income (loss)                                                                                                         |         | **(489**                     | **)**        | (489               | )          |
| **Total Common Stock Equity**                                                                                                                         |         | **200,335**                  | ** **   | 189,356            |       |
| ** **                                                                                                                                            |         | ** **                   | ** **   |               |       |
| ** **                                                                                                                                            |         | ** **                   | ** **   |               |       |
| **Total Liabilities and Shareholder’s  Equity**                                                                                                  |         | **$**                        | **444,031**  | ** **         | $          | 448,671 |   |
|                                                                                                                                                  |         | ** **                   | ** **   |               |       |

 

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

 

23

----

 

**THEUNION LIGHT, HEAT AND POWER COMPANY**

**CONDENSED STATEMENTS OF CASH FLOWS**

 
| ** **                                                                            | ** **   | **Year to Date  June 30**    | ** **   |
|---------------------------------------------------------------------------------------|--------------|------------------------------|--------------|
| ** **                                                                            | ** **   | **2004**                     | ** **   | 2003 | ** ** |
| *** ***                                                                          | *** *** | ***(dollars in thousands)*** | *** *** |
| *** ***                                                                          | *** *** | ***(unaudited)***            | *** *** |
| * *                                                                              | * *     | * *                     | * *     | * * | * * |
| **Operating Activities**                                                              |         |                         |         |   |   |
| Net income                                                                            |         | **$**                        | **10,979**   | ** ** | $ | 8,911 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities:    |         | ** **                   | ** **   |   |   |
| Depreciation                                                                          |         | **9,952**                    | ** **   | 9,028 |   |
| Deferred income taxes and investment tax credits –  net                          |         | **393**                      | ** **   | 4,737 |   |
| Allowance for equity funds used during construction                                   |         | **9**                        | ** **   | (287 | ) |
| Regulatory assets deferrals                                                           |         | **(555**                     | **)**        | (197 | ) |
| Regulatory assets amortization                                                        |         | **617**                      | ** **   | 209 |   |
| Accrued pension and other postretirement benefit  costs                               |         | **756**                      | ** **   | 593 |   |
| Deferred costs under gas cost recovery mechanism                                      |         | **2,925**                    | ** **   | (8,375 | ) |
| Cost of removal                                                                       |         | **(852**                     | **)**        | — |   |
| Changes in current assets and current liabilities:                                    |         | ** **                   | ** **   |   |   |
| Accounts and notes receivable                                                         |         | **14,134**                   | ** **   | 8,374 |   |
| Fuel and supplies                                                                     |         | **142**                      | ** **   | 1,549 |   |
| Prepayments                                                                           |         | **279**                      | ** **   | (242 | ) |
| Accounts payable                                                                      |         | **(9,207**                   | **)**        | (7,645 | ) |
| Accrued taxes and interest                                                            |         | **8,273**                    | ** **   | (598 | ) |
| Other assets                                                                          |         | **301**                      | ** **   | 598 |   |
| Other liabilities                                                                     |         | **(769**                     | **)**        | (630 | ) |
|                                                                                  |         | ** **                   | ** **   |   |   |
| **Net cash provided by operating  activities**                                        |         | **37,377**                   | ** **   | 16,025 |   |
|                                                                                  |         | ** **                   | ** **   |   |   |
| **Financing Activities**                                                              |         | ** **                   | ** **   |   |   |
| Change in short-term debt, including net affiliate  notes                             |         | **(16,135**                  | **)**        | 6,876 |   |
| Dividends on common stock                                                             |         | **—**                   | ** **   | (6,305 | ) |
|                                                                                  |         | ** **                   | ** **   |   |   |
| **Net cash provided by (used in)  financing activities**                              |         | **(16,135**                  | **)**        | 571 |   |
|                                                                                  |         | ** **                   | ** **   |   |   |
| **Investing Activities**                                                              |         | ** **                   | ** **   |   |   |
| Construction expenditures (less allowance for equity  funds used during construction) |         | **(16,147**                  | **)**        | (16,587 | ) |
|                                                                                  |         | ** **                   | ** **   |   |   |
| **Net cash used in investing  activities**                                            |         | **(16,147**                  | **)**        | (16,587 | ) |
|                                                                                  |         | ** **                   | ** **   |   |   |
| **Net increase in cash and cash  equivalents**                                        |         | **5,095**                    | ** **   | 9 |   |
| ** **                                                                            |         | ** **                   | ** **   |   |   |
| **Cash and cash equivalents at  beginning of period**                                 |         | **1,899**                    | ** **   | 3,926 |   |
| ** **                                                                            |         | ** **                   | ** **   |   |   |
| **Cash and cash equivalents at end of  period**                                       |         | **$**                        | **6,994**    | ** ** | $ | 3,935 |   |
| ** **                                                                            |         | ** **                   | ** **   |   |   |
|                                                                                  |         | ** **                   | ** **   |   |   |
| **Supplemental Disclosure of Cash  Flow Information**                                 |         | ** **                   | ** **   |   |   |
| Cash paid during the period for:                                                      |         | ** **                   | ** **   |   |   |
| Interest (net of amount capitalized)                                                  |         | **$**                        | **2,295**    | ** ** | $ | 1,437 |   |
| Income taxes                                                                          |         | **$**                        | **4**        | ** ** | $ | 3,001 |   |
|                                                                                  | ** **   | ** **                   | ** **   | ** ** | ** ** |

 

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

** **

**24**

----

** **

**NOTES****TO CONDENSED FINANCIAL STATEMENTS**

 

### **NOTES TO CONDENSED FINANCIALSTATEMENTS**

 

In this report **Cinergy** (which includes **Cinergy Corp.** and all of our regulated andnon-regulated subsidiaries) is, at times, referred to in the first person as“we”, “our”, or “us”.  In addition, whendiscussing **Cinergy’s** financialinformation, it necessarily includes the results of The Cincinnati Gas &Electric Company (**CG&E**), PSIEnergy, Inc. (**PSI**), The UnionLight, Heat and Power Company (**ULH&P**)and all of **Cinergy’s** otherconsolidated subsidiaries.  Whendiscussing **CG&E’s** financialinformation, it necessarily includes the results of **ULH&P** and all of **CG&E’s**other consolidated subsidiaries.

 

**1.     Summary of Significant Accounting Policies**

** **

***(a)***                                  Presentation

 

Our Condensed FinancialStatements reflect all adjustments (which include normal, recurringadjustments) necessary in the opinion of the registrants for a fairpresentation of the interim results. These results are not necessarily indicative of results for a fullyear.  These statements should be read inconjunction with the Financial Statements and the notes thereto included in theregistrants’ combined Form 10-K for the year ended December 31, 2003 (200310-K).  Certain amounts in the 2003Condensed Financial Statements have been reclassified to conform to the 2004presentation.

 

Management makesestimates and assumptions when preparing financial statements under generallyaccepted accounting principles.  Actualresults could differ, as these estimates and assumptions involve judgment.

 

***(b)***                                  RevenueRecognition

 

*(i)           UtilityRevenues*

 

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

 

25

----

 

**NOTESTO CONDENSED FINANCIAL STATEMENTS**

 

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

 

| * *                           | * *     | * *            | * *     | * *   | * *   |
|------------------------------------|--------------|---------------------|--------------|------------|------------|
| ** **                         | ** **   | ** **          | ** **   | ** ** | ** ** |
| ** **                         | ** **   | **2004**            | ** **   | 2003       | ** ** |
| *** ***                       | *** *** | ***(in millions)*** | *** *** |
| * *                           | * *     | * *            | * *     | * *   | * *   |
| **Cinergy**                        |         | **$**               | **135**      |       | $          | 123 |   |
| **CG&E** and subsidiaries |         | **70**              |         | 64         |       |
| **PSI**                            |         | **65**              |         | 59         |       |
| **ULH&P**                      |         | **12**              |         | 10         |       |
|                               |         |                |         |       |       |
|                                    |              |                     |              |            |            |  |  |

 

*(ii)          Energy Marketing and Trading Revenues*

 

We market and tradeelectricity, natural gas, and other energy-related products.  Many of the contracts associated with theseproducts qualify as derivatives in accordance with Statement of FinancialAccounting Standards No. 133, *Accounting forDerivative Instruments and Hedging Activities*.  We designate derivative transactions aseither trading or non-trading at the time they are originated in accordancewith Emerging Issues Task Force (EITF) Issue 02-3, *Issues Involved in Accounting for Derivative Contracts Held for TradingPurposes and Contracts Involved in Energy Trading and Risk ManagementActivities*.  Generally,trading contracts are reported on a net basis and non-trading contracts arereported on a gross basis.  Net reportingrequires presentation of realized and unrealized gains and losses on tradingderivatives on a net basis in *OperatingRevenues*.  Gross reportingrequires presentation of sales contracts in *OperatingRevenues* and purchase contracts in *Fueland purchased power* expense or *Gaspurchased* expense.

 

***(c)***                                  AccountingChanges

* *

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

 

In January 2003, theFinancial Accounting Standards Board (FASB) issued Interpretation No. 46, *Consolidation of Variable Interest Entities*(Interpretation 46), which significantly changes the consolidation requirementsfor traditional special purpose entities (SPE) and certain other entitiessubject to its scope.  Thisinterpretation defines a VIE as (a) an entity that does not have sufficientequity to support its activities without additional financial support or (b)any entity that has equity investors that do not have voting rights, do notabsorb first dollar losses, or receive returns. These entities must be consolidated when certain criteria are met.  The interpretation was originally to be effectiveas of July 1, 2003, for **Cinergy**;however, the FASB subsequently permitted deferral of the effective date toDecember 31, 2003, for traditional SPEs and to March 31, 2004, for all otherentities subject to the scope of Interpretation 46.  We elected to implement Interpretation 46 fortraditional SPEs in accordance with the original implementation date of July 1,2003, and for all other entities, including certain operating joint ventures,as of March 31, 2004.  The consolidationof certain operating joint ventures as of March 31, 2004, did not have amaterial impact on our financial position or results of operations.

 

**Cinergy**also holds interests in several joint ventures that are considered VIEs whichdo not require consolidation.  If allthese entities were consolidated, their total assets and liabilities would beimmaterial to our Condensed Consolidated Balance Sheets.

 

26

----

 

**NOTESTO CONDENSED FINANCIAL STATEMENTS**

 

*(ii)          Cumulative Effect of Changes inAccounting Principles*

 

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

 

**2.     **Common Stock**

 

As discussed in the 200310-K, **Cinergy** issues new **Cinergy Corp.** common stock shares tosatisfy obligations under certain of its employee stock plans and the CinergyCorp. Direct Stock Purchase and Dividend Reinvestment Plan.  During the six months ended June 30, 2004, **Cinergy** issued approximately 2.0 millionshares under these plans.

 

**3.     Long-term Debt**

 

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

 

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

 

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

 

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

 

At June 30, 2004, **Cinergy Corp.** had approximately $1.2 billion remainingunused and available capacity relating to its $1.5 billion revolving creditfacilities.  These revolving creditfacilities include the following:

 
| ** **                   | ** **   | ** **     | ** **   | ** **             | ** **   | ** **                      | ** **   | ** **                | ** **   |
|------------------------------|--------------|----------------|--------------|------------------------|--------------|---------------------------------|--------------|---------------------------|--------------|
| **Credit  Facility**         | ** **   | **Expiration** | ** **   | **Established  Lines** | ** **   | **Outstanding  and  Committed** | ** **   | **Unused and  Available** | ** **   |
| *** ***                 | *** *** | *** ***   | *** *** | *** ***           | *** *** | ***(in millions)***             | *** *** | *** ***              | *** *** |
| * *                     | * *     | * *       | * *     | * *               | * *     | * *                        | * *     | * *                  | * *     |
| 364-day senior revolving     |         | April 2005     |         |                   |         |                            |         |                      |         |
| Direct borrowing             |         |           |         | $                      |         |                            | $            | —                    |         | $ |   |   |
| Commercial paper support     |         |           |         |                   |         | 267                             |         |                      |         |
|                         |         |           |         |                   |         |                            |         |                      |         |
| Total 364-day facility       |         |           |         | 500                    |         | 267                             |         | 233                       |         |
|                         |         |           |         |                   |         |                            |         |                      |         |
| Three-year senior  revolving |         | April 2007     |         |                   |         |                            |         |                      |         |
| Direct borrowing             |         |           |         |                   |         | —                          |         |                      |         |
| Commercial paper support     |         |           |         |                   |         | —                          |         |                      |         |
| Letter of credit support     |         |           |         |                   |         | 4                               |         |                      |         |
|                         |         |           |         |                   |         |                            |         |                      |         |
| Total three-year facility    |         |           |         | 1,000                  |         | 4                               |         | 996                       |         |
|                         |         |           |         |                   |         |                            |         |                      |         |
| Total Credit Facilities      |         |           |         | $                      | 1,500        |                            | $            | 271                       |         | $ | 1,229 |   |
|                         |         |           |         |                   |         |                            |         |                      |         |

 

27

----

 

**NOTESTO CONDENSED FINANCIAL STATEMENTS**

 

The following tablesummarizes our *Notes payable and othershort-term obligations* and *Notespayable to affiliated companies*.

 
| ** **                    | ** **   | ** **            | ** **   | ** **        | ** ** | ** **        | ** ** | ** **  | ** ** |
|-------------------------------|--------------|-----------------------|--------------|-------------------|------------|-------------------|------------|-------------|------------|
| ** **                    | ** **   | **June 30, 2004**     | ** **   | December 31, 2003 | ** ** |
| ** **                    | ** **   | **Established Lines** | ** **   | **Outstanding**   | ** ** | Established Lines |       | Outstanding | ** ** |
| *** ***                  | *** *** | ***(in millions)***   | *** *** |
| **Cinergy**                   |         |                  |         |              |       |              |       |        |       |
| **Cinergy Corp.**             |         |                  |         |              |       |              |       |        |       |
| Revolving lines               |         | **$**                 | **1,500**    | ** **        | **$**      | **—**        | ** ** | $           | 1,000      |   | $ | — |   |
| Uncommitted lines(1)          |         | **40**                | ** **   | **—**        | ** ** | 40                |       | —      |       |
| Commercial paper(2)           |         | ** **            | ** **   | **267**           | ** ** |              |       | 146         |       |
|                          |         | ** **            | ** **   | ** **        | ** ** |              |       |        |       |
| Utility operating companies   |         | ** **            | ** **   | ** **        | ** ** |              |       |        |       |
| Uncommitted lines(1)          |         | **75**                | ** **   | **—**        | ** ** | 75                |       | —      |       |
| Pollution control notes       |         | ** **            | ** **   | **193**           | ** ** |              |       | 193         |       |
|                          |         | ** **            | ** **   | ** **        | ** ** |              |       |        |       |
| Non-regulated subsidiaries    |         | ** **            | ** **   | ** **        | ** ** |              |       |        |       |
| Revolving lines               |         | **18**                | ** **   | **9**             | ** ** | 19                |       | 10          |       |
| Short-term debt               |         | ** **            | ** **   | **2**             | ** ** |              |       | 2           |       |
| Pollution control notes(3)    |         | ** **            | ** **   | **25**            | ** ** |              |       | —      |       |
|                          |         | ** **            | ** **   | ** **        | ** ** |              |       |        |       |
| **Cinergy Total**             |         | ** **            | ** **   | **$**             | **496**    | ** **        |       |        | $          | 351 |   |
|                          |         | ** **            | ** **   | ** **        | ** ** |              |       |        |       |
| **CG&E** and subsidiaries |         | ** **            | ** **   | ** **        | ** ** |              |       |        |       |
| Uncommitted lines(1)          |         | **$**                 | **15**       | ** **        | **$**      | **—**        | ** ** | $           | 15         |   | $ | — |   |
| Pollution control notes       |         | ** **            | ** **   | **112**           | ** ** |              |       | 112         |       |
| Money pool                    |         | ** **            | ** **   | **127**           | ** ** |              |       | 49          |       |
|                          |         | ** **            | ** **   | ** **        | ** ** |              |       |        |       |
| **CG&E Total**            |         | ** **            | ** **   | **$**             | **239**    | ** **        |       |        | $          | 161 |   |
|                          |         | ** **            | ** **   | ** **        | ** ** |              |       |        |       |
| **PSI**                       |         | ** **            | ** **   | ** **        | ** ** |              |       |        |       |
| Uncommitted lines(1)          |         | **$**                 | **60**       | ** **        | **$**      | **—**        | ** ** | $           | 60         |   | $ | — |   |
| Pollution control notes       |         | ** **            | ** **   | **81**            | ** ** |              |       | 81          |       |
| Money pool                    |         | ** **            | ** **   | **219**           | ** ** |              |       | 188         |       |
|                          |         | ** **            | ** **   | ** **        | ** ** |              |       |        |       |
| **PSI Total**                 |         | ** **            | ** **   | **$**             | **300**    | ** **        |       |        | $          | 269 |   |
| ** **                    |         | ** **            | ** **   | ** **        | ** ** |              |       |        |       |
| **ULH&P**                 |         | ** **            | ** **   | ** **        | ** ** |              |       |        |       |
| Money pool                    |         | ** **            | ** **   | **$**             | **29**     | ** **        |       |        | $          | 45 |   |
|                          |         | ** **            | ** **   | ** **        | ** ** |              |       |        |       |
| **ULH&P Total**           |         | ** **            | ** **   | **$**             | **29**     | ** **        |       |        | $          | 45 |   |

 

 
| (1)    | These facilities are  not guaranteed sources of capital and represent an informal agreement to lend  money, subject to availability, with pricing to be determined at the time of  advance.                                                                                                                                                                                                                                                                                                                                               |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| (2)    | The commercial paper  program is limited to $800 million and is supported by **Cinergy Corp.’s** revolving lines of  credit.                                                                                                                                                                                                                                                                                                                                                                                                         |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| (3)    | In May 2004, **Cinergy**, through a subsidiary, borrowed  the proceeds from the issuance by the Gulf Coast Industrial Development  Authority of $25 million principal amount of its Gulf Coast Industrial  Development Exempt Facilities Industrial Revenue Bonds Series 2004, due April  1, 2039. These bonds bear interest in a weekly interest rate mode. Because  the holders of these notes have the right to have their notes redeemed on a  weekly basis, they are reflected in *Notes  payable and other short-term obligations*. |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |

 

28

----

 

**NOTESTO CONDENSED FINANCIAL STATEMENTS**

 

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

 

•                  a consolidated net worth of $2billion; and

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

 

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

 

•                  bankruptcy;

•                  defaults in the payment of otherindebtedness; and

•                  judgments against the company thatare not paid or insured.

 

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

 

**5.     Energy Trading Credit Risk**

 

**Cinergy’s**extension of credit for energy marketing and trading is governed by a CorporateCredit Policy.  Written guidelinesapproved by **Cinergy’s** Risk PolicyCommittee document the management approval levels for credit limits, evaluationof creditworthiness, and credit risk mitigation procedures.  Exposures to credit risks are monitored dailyby the Corporate Credit Risk function, which is independent of all tradingoperations.  As of June 30, 2004,approximately 92 percent of the credit exposure, net of credit collateral,related to energy trading and marketing activity was with counterparties ratedinvestment grade or the counterparties’ obligations were guaranteed or securedby an investment grade entity.  Themajority of these investment grade counterparties are externally rated.  If a counterparty has an external rating, thelower of Standard & Poor’s or Moody’s Investors Service is used; otherwise,**Cinergy’s** internal rating of thecounterparty is used.  The remainingeight percent represents $53 million with counterparties rated non-investmentgrade.

 

As of June 30, 2004, **CG&E** had a concentration of tradingcredit exposure of approximately $13 million with one counterparty accountingfor greater than 10 percent of **CG&E’s**total trading credit exposure.  Thiscounterparty is rated investment grade.

 

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

 

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

 

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**NOTES TOCONDENSED FINANCIAL STATEMENTS**

 

**6.**              Commitmentsand Contingencies

 

***(a)***                                  Environmental

 

*(i)*                                  Ozone TransportRulemakings

 

In October 1998, theUnited States Environmental Protection Agency (EPA) finalized its ozonetransport rule, also known as the Nitrogen Oxide (NOX) StateImplementation Plan (SIP) Call, which addresses wind-blown ozone and ozoneprecursors 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 proposedwithdrawal of the Section 126 rule in states with approved rules under thefinal NOX SIP Call, which includes Indiana, Kentucky, and Ohio.  All three states have adopted a cap and tradeprogram as the mechanism to achieve the required reductions.  In September 2000, **Cinergy** announced a plan for itssubsidiaries, **CG&E** and **PSI**, to invest in pollution control andother equipment to reduce NOX emissions.  We have installed selective catalyticreduction units and other pollution controls and implemented certain combustionimprovements at various generating stations to meet the May 2004 compliancedeadline under the NOX SIP Call. **Cinergy** will also utilizethe NOX emission allowance market to buy or sell NOXemission allowances as appropriate.  Wecurrently estimate that we will incur costs of approximately $60 million inaddition to $735 million already incurred to comply with this program.

 

*(ii)*                              Section 126Petitions

 

In March 2004, thestate of North Carolina filed a petition under Section 126 of the CAA inwhich it alleges that sources in 13 upwind states including Ohio, Indiana, andKentucky, significantly contribute to North Carolina’s non-attainment withcertain ambient air quality standards. Depending on the EPA’s final disposition of the pending petition, **Cinergy’s** generating stations could becomesubject to requirements for additional sulfur dioxide and NOXemissions reductions.  It is unclear atthis time whether any additional reductions would be necessary beyond thoserequired under the CAA.

 

*(iii)*                          Clean Air Act Lawsuit

 

In November 1999, and through subsequent amendments,the United States brought a lawsuit in the United States Federal District Courtfor the Southern District of Indiana (District Court) against **Cinergy**, **CG&E**,and **PSI** alleging variousviolations of the CAA.  Specifically, thelawsuit alleges that we violated the CAA by not obtaining Prevention ofSignificant Deterioration (PSD), Non-Attainment New Source Review (NSR), andOhio and Indiana SIP permits for various projects at our owned and co-ownedgenerating stations.  Additionally, thesuit claims that we violated an Administrative Consent Order entered into in1998 between the EPA and **Cinergy**relating to alleged

 

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**NOTES TOCONDENSED FINANCIAL STATEMENTS**

 

violations of Ohio’s SIP provisions governing particulatematter at Unit 1 at **CG&E’s**W.C. Beckjord Generating Station (Beckjord Station).  The suit seeks (1) injunctive relief torequire installation of pollution control technology on various generatingunits at **CG&E’s** BeckjordStation and Miami Fort Generating Station, and **PSI’s** Cayuga Generating Station, Gallagher Generating Station(Gallagher Station), Wabash River Generating Station, and Gibson GeneratingStation, and (2) civil penalties in amounts of up to $27,500 per day for eachviolation.  In addition, three northeaststates and two environmental groups have intervened in the case.  In May 2004, the City of Louisville, Kentuckyfiled a motion to intervene in the case with respect to all claims made by theUnited States against **PSI** and **Cinergy** regarding the GallagherStation.  The court denied Louisville’smotion in June 2004.  The case iscurrently in discovery, and the District Court has set the case for trial byjury commencing in August 2005.

 

In March 2000, the United States also filed in theDistrict Court an amended complaint in a separate lawsuit alleging violationsof the CAA 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 being defended by CSP.  In April 2001, the District Court inthat case ruled that the Government and the intervening plaintiff environmentalgroups cannot seek monetary damages for alleged violations that occurred priorto November 3, 1994; however, they are entitled to seek injunctive relieffor such alleged violations.  Neither partyappealed that decision.

 

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

 

It is not possible to predict whether resolution of thesematters would have a material effect on our financial position or results ofoperations.  We intend to defendagainst the allegations, discussed above, vigorously in court.

 

*(iv)*                            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** and American Electric PowerCompany, Inc., American Electric Power Service Corporation, The SouthernCompany, Tennessee Valley Authority, and Xcel Energy Inc.  That same day, a similar lawsuit was filedagainst the same companies by Open Space Institute, Inc., Open SpaceConservancy, Inc., and The Audubon Society of New Hampshire.  These lawsuits allege that the defendants’emissions of CO2 from the combustion of fossil fuels at electricgenerating facilities contribute to global warming and amount to a publicnuisance.  The complaints also allegethat the defendants could generate the same amount of electricity while emittingsignificantly less CO2. Plaintiffs are seeking an injunction requiring each defendant to cap itsCO2 emissions and then reduce them by a specified percentage eachyear for at

 

31

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**NOTES TOCONDENSED FINANCIAL STATEMENTS**

 

least a decade.  **Cinergy**intends to defend this lawsuit vigorously in court; however, we are not able topredict whether resolution of these matters would have a material effect on ourfinancial position or results of operations.

 

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

 

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

 

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

 

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

 

In April 1998, **PSI** filed suit in Hendricks County in thestate of Indiana against its general liability insurance carriers.  **PSI**sought a declaratory judgment to obligate its insurance carriers to (1) defendMGP claims against **PSI** andcompensate **PSI** for its costs ofinvestigating, preventing, mitigating, and remediating damage to property andpaying claims related to MGP sites; or (2) pay **PSI’s** cost of defense. The trial court issued a variety of rulings with respect to the claimsand defenses in the litigation.  **PSI**appealed certain adverse rulings to theIndiana Court of Appeals and the appellate court has remanded the case to thetrial court.  The court has set the casefor trial commencing in January 2005. At the present time, **PSI**cannot predict the outcome of this litigation, including the outcome of theappeals.

 

**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.

 

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**NOTES TOCONDENSED FINANCIAL STATEMENTS**

 

*(vi)*                            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 85 pending lawsuits.  Inthese lawsuits, plaintiffs claim to have been exposed to asbestos-containingproducts in the course of their work at the **CG&E**and **PSI** generating stations.  The plaintiffs further claim that as theproperty owner of the generating stations,**CG&E** and **PSI** shouldbe held liable for their injuries and illnesses based on an alleged duty towarn and protect them from any asbestos exposure.  A majority of the lawsuits to date have beenbrought against **PSI**.  The impact on **CG&E’s** and **PSI’s**financial position or results of operations of these cases to date has not beenmaterial.

 

Of these lawsuits, onecase filed against **PSI** has beentried to verdict.  The jury returned averdict against **PSI** in the amountof approximately $500,000 on a negligence claim and a verdict for **PSI** on punitive damages.  **PSI**received an adverse ruling in an initial appeal of that verdict, but theIndiana Supreme Court accepted the transfer of the case, and heard oralargument in June 2004.  In addition,**PSI** has settled a number of otherlawsuits for amounts, which neither individually nor in the aggregate, arematerial to **PSI’s** financialposition or results of operations.

 

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

 

***(b)***                                  Regulatory

 

*(i)*                                  PSI Retail ElectricRate Case

 

In December 2002, **PSI** filed a petition with the IndianaUtility Regulatory Commission (IURC) seeking approval of an increase in baseretail electric rates and approval of certain rate recovery mechanisms.  In May 2004, the IURC issued an order in thiscase.  When combined with revenueincreases attributable to **PSI’s**environmental construction-work-in-progress tracking mechanism, the orderresults in an approximate $140 million increase in annual revenues.  **PSI’s**original request for an approximate $180 million annual revenue increase wasreduced by approximately $20 million for a lower return on equity,approximately $15 million related to profits from off-system sales (subject tofuture adjustment through a tracking mechanism and a 50/50 sharing agreement),and approximately $5 million of additional items.  The order authorizes full recovery of allrequested regulatory assets and an overall 7.3 percent return, including a 10.5percent return on equity.  In addition,the IURC’s order provides **PSI** thecontinuation of a purchased power tracker and the establishment of new trackersfor future NOX emission allowance costs and certain costs related tothe Midwest Independent System Operator, Inc.

 

*(ii)*                              CG&E Rate Filings

 

As discussed in moredetail in the 2003 10-K, **CG&E**made multiple rate filings in 2003 with the Public Utilities Commission of Ohio(PUCO) seeking to establish market-based rates for generation service at theend of the market development period and to recover investments made in thetransmission and distribution system.  InDecember 2003, these filings, and **CG&E’s**proposal for establishing its post-market development period market pricingmethodology, were consolidated for hearing before the PUCO.  In addition, the PUCO requested that **CG&E** propose a rate stabilization

 

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**NOTES TOCONDENSED FINANCIAL STATEMENTS**

 

plan in these sameproceedings.  In January 2004, **CG&E** filed its proposed ratestabilization plan.  In May 2004, **CG&E**enteredinto a settlement agreement with most of the parties to these proceedingsrequesting that the PUCO approve a modified version of the rate stabilizationplan.

 

Themajor features of the modified plan are as follows (some of these featuresrevise provisions of the **CG&E** transition plan discussed more fully in the2003 10-K):

 

•                  **CG&E**would begin to collect a Provider of Last Resort (POLR) charge fromnon-residential customers effective January 1, 2005, and from residentialcustomers effective January 1, 2006. The POLR charge, which consists of a fixed and variable component, isintended to provide cost recovery primarily for increased capacity reserves,environmental compliance and emission allowance expenditures.  The fixed component, which is 15 percent ofcurrent generation rates, is not charged to the first 25 percent of customersin each customer class who switch to an alternative supplier.  The variable component, which is charged toall customers, could be increased by up to eight percent of **CG&E’s** generation rate each year from2005 through 2008.  If the settlement isapproved, revenues are expected to increase approximately $40 million in 2005and $98 million in 2006 for the POLR charge;

•                  Customers receiving generation from **CG&E** would be charged **CG&E’s** existing generation rates, lessthe 15 percent recovered through the POLR charge discussed above.  A fuel cost recovery mechanism would beestablished to recover costs for fuel that exceed the amount originally includedin the rates frozen in the **CG&E**transition plan.  These new rates wouldapply to non-residential customers beginning January 1, 2005 and toresidential customers beginning January 1, 2006;

•                  The five percent generation ratereduction for residential customers currently in effect through 2005 would beextended to 2008;

•                  The recovery of the residentialregulatory transition charge currently in effect through 2008 would be extendedto 2010;

•                  Transmission cost recovery mechanismswould be established beginning January 1, 2005 for non-residentialcustomers and January 1, 2006 for residential customers;

•                  **CG&E**would have the ability to defer certain capital-related distribution costs fromJuly 1, 2004 through December 31, 2005 (we currently estimate thatapproximately $70 million would be deferred during this period) with recoveryto be provided through riders beginning January 1, 2006 throughDecember 31, 2010.

 

Evidentiary hearingsaddressing the issues described above took place during May andJune 2004.  We cannot predict theoutcome of these proceedings.

 

**CG&E**has also filed an application for an annual increase of approximately $78million in electric distribution base rates, to be effective in the firstquarter of 2005 for non-residential customers and January 1, 2006 for residentialcustomers.  The rate stabilization plansettlement agreement described above provides for **CG&E** to withdraw this base rate case upon approval of therate stabilization plan.  **CG&E** can then file a new distributionbase rate case, with rates to become effective January 1, 2006.

 

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**NOTES TOCONDENSED FINANCIAL STATEMENTS**

 

*(iii)*                          ULH&P Gas Rate Case

 

Inthe second quarter of 2001, **ULH&P** filed a retail gas rate case with theKentucky Public Service Commission (KPSC) requesting, among other things,deferral of costs associated with an accelerated gas main replacement programof up to $112 million over ten years. The costs would be recovered through a tracking mechanism for an initialthree year period, with the possibility of renewal up to ten years.  The tracking mechanism allows **ULH&P** to recoverdepreciation costs and rate of return annually over the life of the deferredassets.  Through June 30,2004, **ULH&P** has recovered approximately $3.2 million underthis tracking mechanism.  The KentuckyAttorney General has appealed to the Franklin Circuit Court the KPSC’s approvalof the tracking mechanism and the new tracking mechanism rates.  At the present time, **ULH&P** cannotpredict the timing or outcome of this litigation.

 

*(iv)*                            Gas Distribution Plant

 

In June 2003, thePUCO approved an amended settlement agreement between **CG&E** and the PUCO Staff in a gasdistribution safety case arising out of a gas leak at a service head-adapter(SHA) style riser on **CG&E’s** distributionsystem.  The amended settlement agreementrequired **CG&E** to expend aminimum of $700,000 to replace SHA risers by December 31, 2003, and tofile a comprehensive plan addressing all SHA risers on its distributionsystem.  **Cinergy**has an estimated 190,000 SHA risers on itsdistribution system, of which 155,000 are in **CG&E’s**service area and 31,000 are in **ULH&P’s**service area.  Further investigation todetermine whether any additional SHA risers will need maintenance orreplacement is ongoing.  If **CG&E** and**ULH&P** determine that replacement of all SHA risers isappropriate, we currently estimate that the replacement cost could beapproximately $70 million for **CG&E**,which includes approximately $10 million for **ULH&P**.  **CG&E**and**ULH&P** would pursue recoveryof this cost through rates.  At thistime, **Cinergy**, **CG&E**, and**ULH&P** cannot predict the outcome of this matter.

 

***(c)***                                  Other

 

*(i)*                                  Gas Customer Choice

 

InJanuary 2000, Cinergy Investments, Inc. (Investments) sold CinergyResources, Inc. (Resources), a former subsidiary, to Licking RuralElectrification, Inc., doing business as The Energy Cooperative.  In February 2001, **Cinergy**, **CG&E**, andResources were named as defendants in three class action lawsuits brought bycustomers relating to The Energy Cooperative’s removal from the Ohio GasCustomer Choice program and the failure to deliver gas to customers.  Subsequently, these class action suits wereamended and consolidated into one suit (Class-action).  In October 2001, **Cinergy**, **CG&E**,and Investments initiated litigation against The Energy Cooperative requestingindemnification by The Energy Cooperative for the claims asserted by formercustomers in the Class-action litigation (Cinergy lawsuit).

 

InMarch 2001, **Cinergy**, **CG&E**, and Investments were named as defendants ina lawsuit filed by Energy Cooperative and Resources (Energy Cooperativelawsuit).  This lawsuit concerned anyobligations or liabilities Investments may have had to The Energy Cooperativefollowing its sale of Resources.  Allthree matters were settled in the second quarter of 2004.  In the Energy Cooperative

 

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**NOTES TOCONDENSED FINANCIAL STATEMENTS**

 

lawsuit,The Energy Cooperative agreed to indemnify **Cinergy,CG&E**and Investmentsfor the claims asserted by the former residential customers in the Class-actionlitigation.  In exchange, **Cinergy**has agreed to settle claimsthat it brought in the Cinergy****lawsuit.  The settlement is pending final courtapproval.  None of these settlements arematerial to **Cinergy’s**financialposition or results of operations.

 

*(ii)*                              Energy MarketInvestigations

 

In July 2003, **Cinergy** received a subpoena from theCommodity Futures Trading Commission (CFTC). As has been previously reported by the press, the CFTC has served subpoenason numerous other energy companies.  TheCFTC request sought certain information regarding our trading activities,including price reporting to energy industry publications for the period May2000 through January 2001.  Based onan initial review of these matters, we placed one employee on administrativeleave and have subsequently terminated his employment.  **Cinergy**is continuing an investigation of these matters, including whether pricereporting inconsistencies occurred in our operations.  We have been cooperating fully with the CFTC,and hope to resolve the investigation in the near future.

 

In August 2003, **Cinergy**, along with 38 other companies, wasnamed as a defendant in civil litigation filed as a purported class action onbehalf of all persons who purchased and/or sold New York Mercantile Exchangenatural gas futures and options contracts between January 1, 2000, andDecember 31, 2002.  The complaintalleges that improper price reporting caused damages to the class.  Two similar lawsuits have subsequently beenfiled, and these three lawsuits have been consolidated for pretrialpurposes.  Plaintiffs filed aconsolidated class action complaint in January 2004.  We believe this action is without merit andintend to defend this lawsuit vigorously; however, we cannot predict theoutcome of this matter at this time.

 

In the second quarter of2003, **Cinergy** received initial andfollow-up third-party subpoenas from the Securities and Exchange Commission(SEC) requesting information related to particular trading activity with one ofits counterparties who was the target of an investigation by the SEC.  **Cinergy**has fully cooperated with the SEC in connection with this matter.  In early 2004, **Cinergy** received two grand jury subpoenas from the AssistantUnited States Attorney in the Southern District of Texas for informationrelating to the same trading activities being investigated by the SEC.  Specifically, the Assistant United StatesAttorney has requested information relating to communications between somecurrent and former employees and another energy company.  We understand that we are neither a targetnor are we under investigation by the Department of Justice in relation tothese communications.

 

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

 

*(iii)*                          Patents

 

Ronald A. Katz TechnologyLicensing, L.P. (RAKTL) has offered us a license to a portfolio of patentsclaiming that the patents may be infringed by certain products and servicesutilized by us.  The patents purportedlyrelate to various aspects of telephone call processing in **Cinergy**call centers.  As of this date, no legal proceedings havebeen instituted against us, but if the RAKTL patents are valid, enforceable,and apply to our business, we could be required to seek a license from RAKTL or

 

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**NOTES TOCONDENSED FINANCIAL STATEMENTS**

 

to discontinue certainactivities.  Based on the information wehave at this time, we do not believe resolution of this matter will have amaterial impact on our financial position or results of operations.

 

*(iv)*                            Guarantees

 

In the ordinary course ofbusiness, **Cinergy**enters intovarious agreements providing financial or performance assurances to thirdparties on behalf of certain unconsolidated subsidiaries and jointventures.  These agreements are enteredinto primarily to support or enhance the creditworthiness otherwise attributedto these entities****on a stand-alonebasis, thereby facilitating the extension of sufficient credit to accomplishtheir intended commercial purposes.  Theguarantees have various termination dates, from short-term (less than one year)to open-ended.

 

In many cases, the maximumpotential amount of an outstanding guarantee is an express term, set forth inthe guarantee agreement, representing the maximum potential obligation of **Cinergy**under that guarantee (excluding, attimes, certain legal fees to which a guaranty beneficiary may beentitled).  In those cases where there isno maximum potential amount expressly set forth in the guarantee agreement, wecalculate the maximum potential amount by considering the terms of theguaranteed transactions, to the extent such amount is estimable.

 

**Cinergy**has guaranteed the payment of $22 million as of June 30,2004, for borrowings by individuals under the Director, Officer, and KeyEmployee Stock Purchase Program.  **Cinergy**may be obligated to pay the debt’sprincipal and any related interest in the event of an unexcused breach of aguaranteed payment obligation by certain directors, officers, and keyemployees.  The guarantees do not have aset termination date; however, the borrowings associated with the majority ofthe guarantees are due in the first quarter of 2005.

 

**CinergyCorp.** has also provided performance guarantees on behalf ofcertain unconsolidated subsidiaries and joint ventures.  These guarantees support performance undervarious agreements and instruments (such as construction contracts, operationsand maintenance agreements, and energy service agreements).  **CinergyCorp.**may be liable in the event of an unexcused breach of aguaranteed performance obligation by an unconsolidated subsidiary.  **CinergyCorp.** has estimated its maximum potential liability to be $76million under these guarantees as of June 30, 2004.  **CinergyCorp.** may also have recourse to third parties for claims required tobe paid under certain of these guarantees. The majority of these guarantees expire at the completion of theunderlying performance agreement, the majority of which expire from 2016 to2019.

 

**Cinergy**has entered into contracts that include indemnificationprovisions as a routine part of its business activities.  Examples of these****contracts include purchase and sale agreements and operatingagreements.  In general, these provisionsindemnify the counterparty for matters such as breaches of representations andwarranties and covenants contained in the contract.  In some cases, particularly with respect topurchase and sale agreements, the potential liability for certainindemnification obligations is capped, in whole or in part (generally at anaggregate amount not exceeding the sale price), and subject to a deductibleamount before****any payments wouldbecome due.** **In other cases (such as indemnifications for willfulmisconduct of employees in a joint venture), the maximum potential liability isnot estimable given that the magnitude of any claims under thoseindemnifications would be a function of the extent of damages actuallyincurred.  **Cinergy** has estimated the maximum potential liability, whereestimable, to be $115 million under these

 

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**NOTES TOCONDENSED FINANCIAL STATEMENTS**

 

indemnificationprovisions.  The termination period forthe majority of matters provided by indemnification provisions in purchase andsale agreements generally ranges from 2004 to 2009.

 

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

 

**7.**              Pension andOther Postretirement Benefits

 

As discussed in the 200310-K, **Cinergy Corp.** sponsors bothpension and other postretirement benefits plans.  Our qualified defined benefit pension planscover substantially all United States employees meeting certain minimum age andservice requirements.  Funding for thequalified defined benefit pension plans is based on actuarially determinedcontributions, the maximum of which is generally the amount deductible forincome tax purposes and the minimum being that required by the EmployeeRetirement Income Security Act of 1974, as amended.  The pension plans’ assets consist ofinvestments in equity and debt securities. In addition, we sponsor non-qualified pension plans (plans that do notmeet the criteria for tax benefits) that cover officers, certain other keyemployees, and non-employee directors. We provide certain health care and life insurance benefits to retiredUnited States employees and their eligible dependents.  These benefits are subject to minimum age andservice requirements.  The health carebenefits include medical coverage, dental coverage, and prescription drugs andare subject to certain limitations, such as deductibles and co-payments.

 

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**NOTES TOCONDENSED FINANCIAL STATEMENTS**

 

Our benefit plans’ costsfor the quarter and year to date ended June 30, 2004 and 2003, includedthe following components:

 

| ** **                                         | ** ** | ** **                      | ** **   | ** **                          | ** ** | ** **                          | ** ** | ** ** | ** ** | ** **   | ** ** | ** ** | ** ** |
|----------------------------------------------------|------------|---------------------------------|--------------|-------------------------------------|------------|-------------------------------------|------------|------------|------------|--------------|------------|------------|------------|
| ** **                                         | ** ** | **Qualified  Pension Benefits** | ** **   | **Non-Qualified  Pension Benefits** | ** ** | **Other  Postretirement  Benefits** | ** ** |
| ** **                                         | ** ** | ** **                      | ** **   | ** **                          | ** ** | ** **                          | ** ** | ** ** | ** ** | ** **   | ** ** | ** ** | ** ** |
| **Quarter Ended June 30**                     | ** ** | **2004**                        | ** **   | 2003                                | ** ** | **2004**                            | ** ** | 2003       | ** ** | **2004**     | ** ** | 2003       | ** ** |
| ** **                                         | ** ** | ***(in millions)***             | ** **   |
| * *                                           | * *   | * *                        | * *     | * *                            | * *   | * *                            | * *   | * *   | * *   | * *     | * *   | * *   | * *   |
| Service cost                                       |       | **$**                           | **8.8**      | ** **                          | $          | 7.8                                 |       | **$**      | **1.2**    |         | $          | 0.8        |       | **$** | **1.2** |   | $ | 1.0 |   |
| Interest cost                                      |       | **22.1**                        | ** **   | 21.5                                |       | **1.7**                             |       | 1.6        |       | **5.4**      |       | 5.6        |       |
| Expected return on plans’ assets              |       | **(20.1**                       | **)**        | (20.2                               | )          | **—**                          |       | —     |       | **—**   |       | —     |       |
| Amortization of transition (asset) obligation      |       | **(0.1**                        | **)**        | (0.2                                | )          | **—**                          |       | —     |       | **0.1**      |       | 0.9        |       |
| Amortization of prior service cost                 |       | **1.1**                         | ** **   | 1.2                                 |       | **0.5**                             |       | 0.3        |       | **—**   |       | —     |       |
| Recognized actuarial (gain) loss                   |       | **0.5**                         | ** **   | —                              |       | **0.7**                             |       | 0.5        |       | **1.9**      |       | 1.3        |       |
| Voluntary early retirement costs (Statement 88)(1) |       | **—**                      | ** **   | 2.1                                 |       | **—**                          |       | —     |       | **—**   |       | —     |       |
| Net periodic benefit cost                          |       | **$**                           | **12.3**     | ** **                          | $          | 12.2                                |       | **$**      | **4.1**    |         | $          | 3.2        |       | **$** | **8.6** |   | $ | 8.8 |   |
|                                               |       | ** **                      | ** **   |                                |       | ** **                          |       |       |       | ** **   |       |       |       |
| * *                                           | * *   | *** ***                    | *** *** | * *                            | * *   | *** ***                        | * *   | * *   | * *   | *** *** | * *   | * *   | * *   |
| **Year to Date June 30**                      |       | ** **                      | ** **   |                                |       | ** **                          |       |       |       | ** **   |       |       |       |
| * *                                           | * *   | *** ***                    | *** *** | * *                            | * *   | *** ***                        | * *   | * *   | * *   | *** *** | * *   | * *   | * *   |
| Service cost                                       |       | **$**                           | **17.6**     | ** **                          | $          | 15.6                                |       | **$**      | **2.4**    |         | $          | 1.6        |       | **$** | **2.6** |   | $ | 2.0 |   |
| Interest cost                                      |       | **44.2**                        | ** **   | 43.0                                |       | **3.4**                             |       | 3.2        |       | **11.4**     |       | 11.2       |       |
| Expected return on plans’ assets              |       | **(40.2**                       | **)**        | (40.4                               | )          | **—**                          |       | —     |       | **—**   |       | —     |       |
| Amortization of transition (asset) obligation      |       | **(0.2**                        | **)**        | (0.4                                | )          | **—**                          |       | —     |       | **0.9**      |       | 1.7        |       |
| Amortization of prior service cost                 |       | **2.2**                         | ** **   | 2.4                                 |       | **1.0**                             |       | 0.6        |       | **—**   |       | —     |       |
| Recognized actuarial (gain) loss                   |       | **1.0**                         | ** **   | —                              |       | **1.4**                             |       | 1.0        |       | **4.0**      |       | 2.6        |       |
| Voluntary early retirement costs (Statement 88)(1) |       | **—**                      | ** **   | 4.2                                 |       | **—**                          |       | —     |       | **—**   |       | —     |       |
| Net periodic benefit cost                          |       | **$**                           | **24.6**     | ** **                          | $          | 24.4                                |       | **$**      | **8.2**    |         | $          | 6.4        |       | **$** | **18.9** |   | $ | 17.5 |   |

 

 

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

 

The net periodic benefitcost by registrant for the quarter and year to date ended June 30, 2004and 2003, was as follows:

 

| ** **                         | ** ** | ** **                      | ** ** | ** **                          | ** ** | ** **                          | ** ** |
|------------------------------------|------------|---------------------------------|------------|-------------------------------------|------------|-------------------------------------|------------|
| ** **                         | ** ** | **Qualified  Pension Benefits** | ** ** | **Non-Qualified  Pension Benefits** | ** ** | **Other  Postretirement  Benefits** | ** ** |
| ** **                         | ** ** | ** **                      | ** ** | ** **                          | ** ** | ** **                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Quarter Ended June 30**     | ** ** | **2004**                        | ** ** | 2003                                | ** ** | **2004**                            | ** ** | 2003 | ** ** | **2004** | ** ** | 2003 | ** ** |
| ** **                         | ** ** | ***(in millions)***             | ** ** |
|                               | * *   | * *                        | * *   | * *                            | * *   | * *                            | * *   | * * | * * | * * | * * | * * | * * |
| **Cinergy**(1)                     |       | **$**                           | **12.3**   |                                | $          | 12.2                                |       | **$** | **4.1** |   | $ | 3.2 |   | **$** | **8.6** |   | $ | 8.8 |   |
| **CG&E**and subsidiaries       |       | **3.7**                         |       | 2.4                                 |       | **0.2**                             |       | 0.2 |   | **2.0** |   | 2.3 |   |
| **PSI**                            |       | **3.2**                         |       | 2.9                                 |       | **0.2**                             |       | 0.2 |   | **4.7** |   | 4.4 |   |
| **ULH&P**                      |       | **0.4**                         |       | 0.3                                 |       | **—**                          |       | — |   | **0.2** |   | 0.2 |   |
| ** **                         |       | ** **                      |       |                                |       | ** **                          |       |   |   | ** ** |   |   |   |
|                               | * *   | *** ***                    | * *   | * *                            | * *   | *** ***                        | * *   | * * | * * | *** *** | * * | * * | * * |
| **Year to Date June 30**      |       | ** **                      |       |                                |       | ** **                          |       |   |   | ** ** |   |   |   |
|                               | * *   | *** ***                    | * *   | * *                            | * *   | *** ***                        | * *   | * * | * * | *** *** | * * | * * | * * |
| **Cinergy**(1)                     |       | **$**                           | **24.6**   |                                | $          | 24.4                                |       | **$** | **8.2** |   | $ | 6.4 |   | **$** | **18.9** |   | $ | 17.5 |   |
| **CG&E** and subsidiaries |       | **7.4**                         |       | 4.8                                 |       | **0.4**                             |       | 0.4 |   | **4.6** |   | 4.6 |   |
| **PSI**                            |       | **6.4**                         |       | 5.8                                 |       | **0.4**                             |       | 0.4 |   | **10.0** |   | 8.8 |   |
| **ULH&P**                      |       | **0.8**                         |       | 0.6                                 |       | **—**                          |       | — |   | **0.4** |   | 0.4 |   |

 

 

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

 

39

----

 

**NOTES TOCONDENSED FINANCIAL STATEMENTS**

 

On December 8, 2003,President Bush signed into law the Medicare Prescription Drug, Improvement andModernization Act of 2003 (the Act).  TheAct introduced a prescription drug benefit to retirees as well as a federalsubsidy to sponsors of retiree health care benefit plans that provide aprescription drug benefit that is actuarially equivalent to the benefit providedby Medicare.  We believe that ourcoverage for prescription drugs is at least actuarially equivalent to thebenefits provided by Medicare for most current retirees because our benefitsfor that group substantially exceed the benefits provided by Medicare, therebyallowing us to qualify for the subsidy. We have accounted for the subsidy as a reduction of our accumulatedpostretirement benefit obligation (APBO). The APBO was reduced by approximately $17 million and will be amortizedas an actuarial gain over future periods, thus reducing future benefitcosts.  The impact on 2004 net periodicbenefit cost is not material.  Ouraccounting treatment for the subsidy is consistent with FASB Staff Position No.106-2, *Accounting and DisclosureRequirements Related to the Medicare Prescription Drug, Improvement andModernization Act of 2003*.

 

**8.**              InvestmentActivity

 

***(a)***                                  InvestmentImpairment

 

**Cinergy**holds a portfolio of direct and indirect investments in energy technologycompanies in the Power Technology and Infrastructure Services (Power Technologyand Infrastructure) Business Unit (discussed in Note 9).  During 2004, **Cinergy** recognized approximately $34 million in impairmentcharges associated with this portfolio. The majority of these charges relate to a company in which **Cinergy** holds a non-controlling interest,that agreed to sell its major assets. This company is involved in the development and sale of outagemanagement software.  Based on the terms ofthe transaction, **Cinergy** concludedthat this cost method investment was other-than-temporarily impaired.  These impairment charges are included in *Miscellaneous Income (Expense) — Net* in **Cinergy’s**Condensed Consolidated Statementsof Income.

 

***(b)***                                  SubsequentEvent

 

Power Technology andInfrastructure holds an investment in a company that develops, owns andoperates wireless communication towers. In July 2004, this company agreed to sell the majority of itsassets.  We anticipate recording earningsof approximately $20 million relating to this sale in the fourth quarter of2004.  These earnings will be reflectedin *Equity in Earnings of UnconsolidatedSubsidiaries* in **Cinergy’s**CondensedConsolidated Statements of Income.

 

**9.**              FinancialInformation by Business Segment

 

As discussed in the 200310-K, we conduct operations through our subsidiaries, and manage through thefollowing three reportable segments:

 

•                  Commercial Business Unit(Commercial);

•                  Regulated Businesses Business Unit(Regulated Businesses); and

•                  Power Technology and InfrastructureServices Business Unit (Power Technology and Infrastructure).

 

The followingsection describes the activities of our business units as of June 30,2004.

 

40

----

 

**NOTES TOCONDENSED FINANCIAL STATEMENTS**

 

Commercial manageswholesale generation and energy marketing and trading of energycommodities.  Additionally, Commercialoperates and maintains our electric generating plants including some of ourjointly-owned plants.  Commercial is alsoresponsible for all of our international operations, performs energy riskmanagement activities, and provides customized energy solutions.

 

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

 

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

 

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

 

41

----

 

**NOTES TOCONDENSED FINANCIAL STATEMENTS**

 

Financial results bybusiness unit for the quarters ended June 30, 2004, and June 30,2003, are as indicated below.

 
| ** **                            | ** **                                                                                                                                                             | ** **                 | ** **  | ** **                | ** ** | ** **                               | ** ** | ** **  | ** ** | ** **                        | ** ** | ** **       | ** ** |
|---------------------------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------------------------|-------------|---------------------------|------------|------------------------------------------|------------|-------------|------------|-----------------------------------|------------|------------------|------------|
| **Business Units**                    | ** **                                                                                                                                                             | ** **                 | ** **  | ** **                | ** ** | ** **                               | ** ** | ** **  | ** ** | ** **                        | ** ** | ** **       | ** ** |
| ** **                            | ** **                                                                                                                                                             | **Cinergy Business Units** | ** **  | ** **                | ** ** | ** **                               | ** ** |
| ** **                            | ** **                                                                                                                                                             | **Commercial**             | ** **  | **Regulated  Businesses** | ** ** | **Power Technology  and Infrastructure** | ** ** | **Total**   | ** ** | **Reconciling  Eliminations (1)** | ** ** | **Consolidated** | ** ** |
| ** **                            | ** **                                                                                                                                                             | ***(in thousands)***       | ** **  |
|                                  | * *                                                                                                                                                               | * *                   | * *    | * *                  | * *   | * *                                 | * *   | * *    | * *   | * *                          | * *   | * *         | * *   |
| **Quarter  ended June 30, 2004** |                                                                                                                                                                   |                       |        |                      |       |                                     |       |        |       |                              |       |             |       |
|                                  |                                                                                                                                                                   |                       |        |                      |       |                                     |       |        |       |                              |       |             |       |
| **Operating  revenues -**             | ** **                                                                                                                                                             | ** **                 | ** **  | ** **                | ** ** | ** **                               | ** ** | ** **  | ** ** | ** **                        | ** ** | ** **       | ** ** |
| **External  customers**               |                                                                                                                                                                   | **$**                      | **390,396** |                      | **$**      | **663,339**                              |       | **$**       | **2**      | ** **                        | **$**      | **1,053,737**    |       | **$** | **—** | ** ** | **$** | **1,053,737** | ** ** |
| **Intersegment  revenues**            |                                                                                                                                                                   | **39,854**                 |        | **—**                |       | **—**                               | ** ** | **39,854**  |       | **(39,854**                       | **)**      | **—**       | ** ** |
|                                  |                                                                                                                                                                   | ** **                 |        | ** **                |       | ** **                               | ** ** | ** **  |       | ** **                        | ** ** | ** **       | ** ** |
| **Gross  margins -**                  |                                                                                                                                                                   | ** **                 |        | ** **                |       | ** **                               | ** ** | ** **  |       | ** **                        | ** ** | ** **       |       |
| **Electric**                          |                                                                                                                                                                   | **187,366**                |        | **411,181**               |       | **—**                               | ** ** | **598,547** |       | **—**                        | ** ** | **598,547**      | (3)        |
| **Gas**                               |                                                                                                                                                                   | **16,558**                 |        | **44,104**                |       | **—**                               | ** ** | **60,662**  |       | **—**                        | ** ** | **60,662**       | (4)        |
|                                  |                                                                                                                                                                   | ** **                 |        | ** **                |       | ** **                               | ** ** | ** **  |       | ** **                        | ** ** | ** **       | ** ** |
| **Segment  profit (loss)**(2)         |                                                                                                                                                                   | **29,380**                 |        | **35,788**                |       | **(6,664**                               | **)**      | **58,504**  |       | **—**                        | ** ** | **58,504**       | ** ** |
|                                  |                                                                                                                                                                   |                       |        |                      |       |                                     |       |        |       |                              |       |             |       |
|                                  |                                                                                                                                                                   |                       |        |                      |       |                                     |       |        |       |                              |       |             |       |
| Quarter ended June 30,  2003     |                                                                                                                                                                   |                       |        |                      |       |                                     |       |        |       |                              |       |             |       |
|                                  | ** **                                                                                                                                                             | ** **                 | ** **  | ** **                | ** ** | ** **                               | ** ** | ** **  | ** ** | ** **                        | ** ** | ** **       | ** ** |
| Operating revenues -                  |                                                                                                                                                                   |                       |        |                      |       |                                     |       |        |       |                              |       |             |       |
| External customers                    |                                                                                                                                                                   | $                          | 350,198     |                      | $          | 583,723                                  |       | $           | 2          |                              | $          | 933,923          |       | $ | — |   | $ | 933,923 |   |
| Intersegment revenues                 |                                                                                                                                                                   | 37,156                     |        | —                    |       | —                                   |       | 37,156      |       | (37,156                           | )          | —           |       |
|                                  |                                                                                                                                                                   |                       |        |                      |       |                                     |       |        |       |                              |       |             |       |
| Gross margins -                       |                                                                                                                                                                   |                       |        |                      |       |                                     |       |        |       |                              |       |             |       |
| Electric                              |                                                                                                                                                                   | 175,473                    |        | 353,315                   |       | —                                   |       | 528,788     |       | —                            |       | 528,788          | (3)        |
| Gas                                   |                                                                                                                                                                   | 24,889                     |        | 36,724                    |       | —                                   |       | 61,613      |       | —                            |       | 61,613           | (4)        |
|                                  |                                                                                                                                                                   |                       |        |                      |       |                                     |       |        |       |                              |       |             |       |
| Discontinued operations,  net of tax  |                                                                                                                                                                   | 9,045                      |        | —                    |       | —                                   |       | 9,045       |       | —                            |       | 9,045            |       |
|                                  |                                                                                                                                                                   |                       |        |                      |       |                                     |       |        |       |                              |       |             |       |
| Segment profit (loss)(2)              |                                                                                                                                                                   | 64,332                     |        | 26,105                    |       | (5,784                                   | )          | 84,653      |       | —                            |       | 84,653           |       |
|                                  |                                                                                                                                                                   |                       |        |                      |       |                                     |       |        |       |                              |       |             |       |
|                                  |                                                                                                                                                                   |                       |        |                      |       |                                     |       |        |       |                              |       |             |       |
|                                  |                                                                                                                                                                   |                       |        |                      |       |                                     |       |        |       |                              |       |             |       |
| (1)                                   | The Reconciling  Eliminations category eliminates the intersegment revenues of Commercial.                                                                             |
| (2)                                   | Management  utilizes segment profit (loss), after taxes, to evaluate segment performance.                                                                              |
| (3)                                   | Electric gross margin  is calculated as *Electric operating  revenues* less *Fuel and  purchased power* expense from the Condensed Consolidated Statements  of Income. |
| (4)                                   | Gas gross margin  is calculated as *Gas operating revenues*  less *Gas purchased* expense from  the Condensed Consolidated Statements of Income.                       |
|                                  |                                                                                                                                                                   |
|                                       |                                                                                                                                                                        |                            |             |                           |            |                                          |            |             |            |                                   |            |                  |            |  |  |  |  |  |  |  |

 

42

----

 

**NOTES TOCONDENSED FINANCIAL STATEMENTS**

 

Financial results bybusiness unit for year to date June 30, 2004 and June 30, 2003, areas indicated below.

 
| ** **                                                        | ** ** | ** **                 | ** **  | ** **                | ** ** | ** **                               | ** ** | ** **    | ** ** | ** **                       | ** ** | ** **       | ** ** |
|-------------------------------------------------------------------|------------|----------------------------|-------------|---------------------------|------------|------------------------------------------|------------|---------------|------------|----------------------------------|------------|------------------|------------|
| **Business Units**                                                | ** ** | ** **                 | ** **  | ** **                | ** ** | ** **                               | ** ** | ** **    | ** ** | ** **                       | ** ** | ** **       | ** ** |
| ** **                                                        | ** ** | **Cinergy Business Units** | ** **  | ** **                | ** ** | ** **                               | ** ** |
| ** **                                                        | ** ** | **Commercial**             | ** **  | **Regulated  Businesses** | ** ** | **Power Technology  and Infrastructure** | ** ** | **Total**     | ** ** | **Reconciling  Eliminations(1)** | ** ** | **Consolidated** | ** ** |
| ** **                                                        | ** ** | ***(in thousands)***       | ** **  |
|                                                              | * *   | * *                   | * *    | * *                  | * *   | * *                                 | * *   | * *      | * *   | * *                         | * *   | * *         | * *   |
| **Year to  Date June 30, 2004**                              |       |                       |        |                      |       |                                     |       |          |       |                             |       |             |       |
|                                                              |       |                       |        |                      |       |                                     |       |          |       |                             |       |             |       |
| **Operating  revenues -**                                         | ** ** | ** **                 | ** **  | ** **                | ** ** | ** **                               | ** ** | ** **    | ** ** | ** **                       | ** ** | ** **       | ** ** |
| **External  customers**                                           |       | **$**                      | **796,103** |                      | **$**      | **1,546,288**                            |       | **$**         | **4**      | ** **                       | **$**      | **2,342,395**    | ** ** | **$** | **—** | ** ** | **$** | **2,342,395** | ** ** |
| **Intersegment  revenues**                                        |       | **79,307**                 |        | **—**                |       | **—**                               | ** ** | **79,307**    | ** ** | **(79,307**                      | **)**      | **—**       | ** ** |
|                                                              |       | ** **                 |        | ** **                |       | ** **                               | ** ** | ** **    | ** ** | ** **                       | ** ** | ** **       | ** ** |
| **Gross margins  -**                                              |       | ** **                 |        | ** **                |       | ** **                               | ** ** | ** **    | ** ** | ** **                       | ** ** | ** **       | ** ** |
| **Electric**                                                      |       | **368,746**                |        | **821,015**               |       | **—**                               | ** ** | **1,189,761** | ** ** | **—**                       | ** ** | **1,189,761**    | (3)        |
| **Gas**                                                           |       | **39,692**                 |        | **148,300**               |       | **—**                               | ** ** | **187,992**   | ** ** | **—**                       | ** ** | **187,992**      | (4)        |
|                                                              |       | ** **                 |        | ** **                |       | ** **                               | ** ** | ** **    | ** ** | ** **                       | ** ** | ** **       | ** ** |
| **Segment  profit (loss)**(2)                                     |       | **75,472**                 |        | **115,293**               |       | **(29,246**                              | **)**      | **161,519**   | ** ** | **—**                       | ** ** | **161,519**      | ** ** |
| ** **                                                        |       | ** **                 |        | ** **                |       | ** **                               | ** ** | ** **    | ** ** | ** **                       | ** ** | ** **       | ** ** |
|                                                              |       |                       |        |                      |       |                                     |       |          |       |                             |       |             |       |
| Year to Date June 30,  2003                                  |       |                       |        |                      |       |                                     |       |          |       |                             |       |             |       |
|                                                              | ** ** | ** **                 | ** **  | ** **                | ** ** | ** **                               | ** ** | ** **    | ** ** | ** **                       | ** ** | ** **       | ** ** |
| Operating revenues -                                              |       |                       |        |                      |       |                                     |       |          |       |                             |       |             |       |
| External customers                                                |       | $                          | 783,839     |                      | $          | 1,418,038                                |       | $             | 3          |                             | $          | 2,201,880        |       | $ | — |   | $ | 2,201,880 |   |
| Intersegment revenues                                             |       | 76,279                     |        | —                    |       | —                                   |       | 76,279        |       | (76,279                          | )          | —           |       |
|                                                              |       |                       |        |                      |       |                                     |       |          |       |                             |       |             |       |
| Gross margins -                                                   |       |                       |        |                      |       |                                     |       |          |       |                             |       |             |       |
| Electric                                                          |       | 349,680                    |        | 732,301                   |       | —                                   |       | 1,081,981     |       | —                           |       | 1,081,981        | (3)        |
| Gas                                                               |       | 84,917                     |        | 139,614                   |       | —                                   |       | 224,531       |       | —                           |       | 224,531          | (4)        |
|                                                              |       |                       |        |                      |       |                                     |       |          |       |                             |       |             |       |
| Discontinued operations, net  of tax                              |       | 8,875                      |        | —                    |       | —                                   |       | 8,875         |       | —                           |       | 8,875            |       |
| Cumulative effect of  changes in accounting principle, net of tax |       | 26,462                     |        | —                    |       | —                                   |       | 26,462        |       | —                           |       | 26,462           |       |
|                                                              |       |                       |        |                      |       |                                     |       |          |       |                             |       |             |       |
| Segment profit (loss)(2)                                          |       | 161,437                    |        | 100,174                   |       | (10,873                                  | )          | 250,738       |       | —                           |       | 250,738          |       |
|                                                              |       |                       |        |                      |       |                                     |       |          |       |                             |       |             |       |

 

----

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

 

43

----

 

**NOTES TOCONDENSED FINANCIAL STATEMENTS**

 

Total segment assets atJune 30, 2004, and December 31, 2003, were as follows:

 
| ** **                                       | ** **   | ** **                 | ** **    | ** **                | ** **   | ** **                               | ** **   | ** **   | ** **   | ** **         | ** **   | ** **       | ** **   |
|--------------------------------------------------|--------------|----------------------------|---------------|---------------------------|--------------|------------------------------------------|--------------|--------------|--------------|--------------------|--------------|------------------|--------------|
| **Business Units**                               | ** **   | ** **                 | ** **    | ** **                | ** **   | ** **                               | ** **   | ** **   | ** **   | ** **         | ** **   | ** **       | ** **   |
| ** **                                       | ** **   | **Cinergy Business Units** | ** **    | ** **                | ** **   | ** **                               | ** **   |
| ** **                                       | ** **   | **Commercial**             | ** **    | **Regulated  Businesses** | ** **   | **Power Technology  and Infrastructure** | ** **   | **Total**    | ** **   | **All  Other (1)** | ** **   | **Consolidated** | ** **   |
| ** **                                       | ** **   | ***(in thousands)***       | ** **    |
|                                             | *** *** | *** ***               | *** ***  | *** ***              | *** *** | *** ***                             | *** *** | *** *** | *** *** | *** ***       | *** *** | *** ***     | *** *** |
| **Segment  assets from continuing operations**   |         | **$**                      | **5,262,749** | ** **                | **$**        | **8,529,017**                            | ** **   | **$**        | **145,418**  | ** **         | **$**        | **13,937,184**   | ** **   | **$** | **53,585** | ** ** | **$** | **13,990,769** | ** ** |
| **Segment  assets from discontinued operations** |         | **—**                 | ** **    | **—**                | ** **   | **—**                               | ** **   | **—**   | ** **   | **—**         | ** **   | **—**       | ** **   |
| **Total  segment assets at June 30, 2004**  |         | **$**                      | **5,262,749** | ** **                | **$**        | **8,529,017**                            | ** **   | **$**        | **145,418**  | ** **         | **$**        | **13,937,184**   | ** **   | **$** | **53,585** | ** ** | **$** | **13,990,769** | ** ** |
|                                             | ** **   | ** **                 | ** **    | ** **                | ** **   | ** **                               | ** **   | ** **   | ** **   | ** **         | ** **   | ** **       | ** **   |
| Segment assets from continuing  operations       |         | $                          | 5,360,886     |                      | $            | 8,515,478                                |         | $            | 175,619      |               | $            | 14,051,983       |         | $ | 62,722 |   | $ | 14,114,705 |   |
| Segment assets from  discontinued operations     |         | 4,501                      |          | —                    |         | —                                   |         | 4,501        |         | —             |         | 4,501            |         |
| Total segment assets at  December 31, 2003  |         | $                          | 5,365,387     |                      | $            | 8,515,478                                |         | $            | 175,619      |               | $            | 14,056,484       |         | $ | 62,722 |   | $ | 14,119,206 |   |

 

----

| (1)    | The All Other  category represents miscellaneous corporate items which are not allocated to  business units for purposes of segment performance measurement. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                         |

 

44

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**NOTES TOCONDENSED FINANCIAL STATEMENTS**

 

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

** **

A reconciliation of EPS –basic to EPS – assuming dilution is presented below for the quarters endedJune 30, 2004 and 2003:

 

| ** **                                                                                       | ** ** | ** **                                      | ** ** | ** ** | ** **  | ** ** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|------------|-------------|------------|------------|
| ** **                                                                                       | ** ** | **Income**                                      | ** ** | **Shares** | ** **  | **EPS**    | ** ** |
| ** **                                                                                       | ** ** | ***(in thousands, except  per share amounts)*** | ** ** |
| **Quarter Ended June 30, 2004**                                                             |       |                                            |       |       |        |       |       |
| **EPS – basic:**                                                                            | ** ** | ** **                                      | ** ** | ** ** | ** **  | ** ** | ** ** |
| **Net Income**                                                                                   |       | **$**                                           | **58,504** | ** ** | **180,236** | ** ** | **$**      | **0.33** | ** ** |
|                                                                                             |       | ** **                                      | ** ** | ** ** | ** **  | ** ** | ** ** |
| **Effect of dilutive securities:**                                                               |       | ** **                                      | ** ** | ** ** | ** **  | ** ** | ** ** |
| **Common stock options**                                                                         |       | ** **                                      | ** ** | **574**    | ** **  | ** ** | ** ** |
| **Directors’ compensation plans**                                                           |       | ** **                                      | ** ** | **155**    | ** **  | ** ** | ** ** |
| **Contingently issuable common stock**                                                           |       | ** **                                      | ** ** | **471**    | ** **  | ** ** | ** ** |
| **Stock purchase contracts**                                                                     |       | ** **                                      | ** ** | **841**    | ** **  | ** ** | ** ** |
|                                                                                             |       | ** **                                      | ** ** | ** ** | ** **  | ** ** | ** ** |
| **EPS - assuming dilution:**                                                                     |       | ** **                                      | ** ** | ** ** | ** **  | ** ** | ** ** |
| **Net income plus assumed conversions**                                                          |       | **$**                                           | **58,504** | ** ** | **182,277** | ** ** | **$**      | **0.32** | ** ** |
|                                                                                             | ** ** | ** **                                      | ** ** | ** ** | ** **  | ** ** | ** ** |
|                                                                                             | ** ** | ** **                                      | ** ** | ** ** | ** **  | ** ** | ** ** |
| Quarter Ended June 30, 2003                                                                 |       |                                            |       |       |        |       |       |
| EPS – basic:                                                                                |       |                                            |       |       |        |       |       |
| Income before discontinued operations and cumulative  effect of changes in accounting principles |       | $                                               | 75,608     |       |        |       | $          | 0.42 |   |
| Discontinued operations, net of tax                                                              |       | 9,045                                           |       |       |        | 0.05       |       |
| Net Income                                                                                       |       | $                                               | 84,653     |       | 176,645     |       | $          | 0.47 |   |
|                                                                                             |       |                                            |       |       |        |       |       |
| Effect of dilutive securities:                                                                   |       |                                            |       |       |        |       |       |
| Common stock options                                                                             |       |                                            |       | 866        |        |       |       |
| Employee stock purchase and savings plan                                                         |       |                                            |       | 18         |        |       |       |
| Directors’ compensation plans                                                               |       |                                            |       | 145        |        |       |       |
| Contingently issuable common stock                                                               |       |                                            |       | 824        |        |       |       |
| Stock purchase contracts                                                                         |       |                                            |       | 415        |        |       |       |
|                                                                                             |       |                                            |       |       |        |       |       |
| EPS - assuming dilution:                                                                         |       |                                            |       |       |        |       |       |
| Net income plus assumed conversions                                                              |       | $                                               | 84,653     |       | 178,913     |       | $          | 0.47 |   |
|                                                                                             |       |                                            |       |       |        |       |       |

 

Options to purchaseshares of common stock are excluded from the calculation of EPS - assumingdilution when the exercise price of these options plus unrecognizedcompensation expense is greater than the average market price of a common shareduring the period multiplied by the number of options outstanding at the end ofthe period because they are anti-dilutive. Approximately 1.2 million and 1.5 million shares were excluded from theEPS - assuming dilution calculation for the quarters ended June 30, 2004and 2003, respectively.

 

Also excluded from theEPS - assuming dilution calculation for the quarters ended June 30, 2004and 2003, are up to 10.0 million and 10.4 million shares, respectively,issuable pursuant to the stock purchase contracts issued by **Cinergy Corp.** in December 2001associated with the preferred trust securities transaction.  The number of shares issuable pursuant to thestock purchase contracts is contingent upon the market price of **Cinergy Corp.** stock in February 2005and could range between 9.2 and 10.8 million shares.

 

45

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**NOTES TOCONDENSED FINANCIAL STATEMENTS**

 

A reconciliation of EPS –basic to EPS – assuming dilution is presented below for the year to dateJune 30, 2004 and 2003:

 

| ** **                                                                                       | ** ** | ** **                                      | ** **   | ** ** | ** **  | ** ** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|-------------------------------------------------|--------------|------------|-------------|------------|------------|
| ** **                                                                                       | ** ** | **Income**                                      | ** **   | **Shares** | ** **  | **EPS**    | ** ** |
| ** **                                                                                       | ** ** | ***(in thousands, except  per share amounts)*** | *** *** |
| **Year to Date June 30, 2004**                                                              |       |                                            |         |       |        |       |       |
| **EPS – basic:**                                                                            | ** ** | ** **                                      | ** **   | ** ** | ** **  | ** ** | ** ** |
| **Net Income**                                                                                   |       | **$**                                           | **161,519**  | ** ** | **179,749** | ** ** | **$**      | **0.90** | ** ** |
|                                                                                             |       | ** **                                      | ** **   | ** ** | ** **  | ** ** | ** ** |
| **Effect of dilutive securities:**                                                               |       | ** **                                      | ** **   | ** ** | ** **  | ** ** | ** ** |
| **Common stock options**                                                                         |       | ** **                                      | ** **   | **702**    | ** **  | ** ** | ** ** |
| **Directors’ compensation plans**                                                           |       | ** **                                      | ** **   | **155**    | ** **  | ** ** | ** ** |
| **Contingently issuable common stock**                                                           |       | ** **                                      | ** **   | **523**    | ** **  | ** ** | ** ** |
| **Stock purchase contracts**                                                                     |       | ** **                                      | ** **   | **977**    | ** **  | ** ** | ** ** |
|                                                                                             |       | ** **                                      | ** **   | ** ** | ** **  | ** ** | ** ** |
| **EPS - assuming dilution:**                                                                     |       | ** **                                      | ** **   | ** ** | ** **  | ** ** | ** ** |
| **Net income plus assumed conversions**                                                          |       | **$**                                           | **161,519**  | ** ** | **182,106** | ** ** | **$**      | **0.89** | ** ** |
| ** **                                                                                       |       | ** **                                      | ** **   | ** ** | ** **  | ** ** | ** ** |
|                                                                                             | ** ** | ** **                                      | ** **   | ** ** | ** **  | ** ** | ** ** |
| Year to Date June 30, 2003                                                                  |       |                                            |         |       |        |       |       |
| EPS – basic:                                                                                |       |                                            |         |       |        |       |       |
| Income before discontinued operations and cumulative  effect of changes in accounting principles |       | $                                               | 215,401      |       |        |       | $          | 1.23 |   |
| Discontinued operations, net of tax                                                              |       | 8,875                                           |         |       |        | 0.05       |       |
| Cumulative effect of changes in accounting  principles, net of tax                               |       | 26,462                                          |         |       |        | 0.15       |       |
| Net Income                                                                                       |       | $                                               | 250,738      |       | 175,025     |       | $          | 1.43 |   |
|                                                                                             |       |                                            |         |       |        |       |       |
| Effect of dilutive securities:                                                                   |       |                                            |         |       |        |       |       |
| Common stock options                                                                             |       |                                            |         | 791        |        |       |       |
| Employee stock purchase and savings plan                                                         |       |                                            |         | 9          |        |       |       |
| Directors’ compensation plans                                                               |       |                                            |         | 145        |        |       |       |
| Contingently issuable common stock                                                               |       |                                            |         | 770        |        |       |       |
|                                                                                             |       |                                            |         |       |        |       |       |
| EPS - assuming dilution:                                                                         |       |                                            |         |       |        |       |       |
| Net income plus assumed conversions                                                              |       | $                                               | 250,738      |       | 176,740     |       | $          | 1.42 |   |
|                                                                                             |       |                                            |         |       |        |       |       |

 

Options to purchaseshares of common stock are excluded from the calculation of EPS - assuming dilutionwhen the exercise price of these options plus unrecognized compensation expenseis greater than the average market price of a common share during the periodmultiplied by the number of options outstanding at the end of the periodbecause they are anti-dilutive. Approximately 1.2 million and 2.1 million shares were excluded from theEPS - assuming dilution calculation for the year to date June 30, 2004 and2003, respectively.

 

Also excluded from theEPS - assuming dilution calculation for the year to date June 30, 2004 and2003, are up to 9.9 million and 10.8 million shares, respectively, issuablepursuant to the stock purchase contracts issued by **Cinergy Corp.** in December 2001 associated with thepreferred trust securities transaction. The number of shares issuable pursuant to the stock purchase contractsis contingent upon the market price of **CinergyCorp.** stock in February 2005 and could range between 9.2 and10.8 million shares.

 

**11.**       Transfer ofGenerating Assets

 

In December 2002,the IURC approved a settlement agreement among **PSI**, the Indiana Office of the Utility Consumer Counselor, andthe IURC Staff authorizing **PSI’s**purchases of the Henry County, Indiana and Butler County, Ohio, gas-firedpeaking plants from two non-regulated affiliates.  In

 

46

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**NOTES TOCONDENSED FINANCIAL STATEMENTS**

 

February 2003, theFederal Energy Regulatory Commission (FERC) issued an order underSection 203 of the Federal Power Act authorizing **PSI’s** acquisitions of the plants, whichoccurred on February 5, 2003. Subsequently, in April 2003, the FERC issued a tolling orderallowing additional time to consider a request for rehearing filed in responseto the February 2003 FERC order.  InJune 2004, the FERC conducted a technical conference concerning, amongother things, **PSI’s**purchase ofthe Henry and Butler County plants.  Atthis time, the rehearing request is still pending before the FERC, and **PSI** cannot predict the outcome of thismatter.

 

47

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**CAUTIONARYSTATEMENTS**

 

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

 

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

 

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

 

•                  Factors affecting operations, suchas:

 

(1)               unanticipatedweather conditions;

(2)               unscheduledgeneration outages;

(3)               unusualmaintenance or repairs;

(4)               unanticipatedchanges in costs;

(5)               environmentalincidents; and

(6)               electrictransmission or gas pipeline system constraints.

 

•                  Legislative and regulatoryinitiatives.

 

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

 

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

 

•                  Political, legal, and economicconditions and developments in the countries in which we have a presence.

 

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

 

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

 

•                  Availability of, or cost of, capital.

 

•                  Employee workforce factors.

 

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

 

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

 

We undertake noobligation to update the information contained herein.

 

48

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

 

## **ITEM2.** MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

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

 

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

 

### **INTRODUCTION**

 

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

 

•                  factors affecting current and futureoperations;

•                  potential sources of cash for futurecapital expenditures;

•                  why revenues and expenses changedfrom period to period; and

•                  how the above items affect ouroverall financial condition.

 

### **ORGANIZATION**

 

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

 

**CG&E**,an Ohio corporation organized in 1837, is a combination electric and gas publicutility company that provides service primarily in the southwestern portion ofOhio and, through **ULH&P**, innearby areas of Kentucky.  **CG&E** is responsible for the majority ofour power marketing and trading activity. **CG&E’s** principalsubsidiary, **ULH&P**, is aKentucky corporation organized in 1901, that provides electric and gas servicein northern Kentucky.  **CG&E’s** other subsidiaries areinsignificant to its results of operations.

 

**PSI**,an Indiana corporation organized in 1942, is a vertically integrated andregulated electric utility that provides service in north central, central, andsouthern Indiana.

 

49

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

 

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

 

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

 

### **LIQUIDITYAND CAPITAL RESOURCES**

 

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

 

InDecember 2003, the United States Environmental Protection Agency (EPA)proposed the Clean Air Interstate Rule (CAIR), formerly the Interstate AirQuality Rule, that would require states to revise their State ImplementationPlans to address alleged contributions to downwind non-attainment with therevised National Ambient Air Quality Standards for ozone and fine particulatematter.  The proposed rule wouldestablish a two-phase, regional cap and trade program for sulfur dioxide(SO2) and nitrogenoxide (NOX), affectingapproximately 30 states, including Ohio, Indiana, and Kentucky, and wouldrequire SO2 and NOX emissions to be cut approximately 70percent and 65 percent, respectively, by 2015. The EPA is expected to issue final rules by December 2004.

 

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

 

Overthe 2004-2008 time period, estimated capital costs associated with reducingmercury, SO2, and NOX in compliance with the currentlyproposed CAIR and mercury rule are not expected to exceed approximately $1.65billion if the EPA approves the mercury cap and trade approach andapproximately $2.15 billion if the EPA approves the source specific reduction approachwithout a cap and trade.  Approximately55 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.  Recovery of depreciationand financing costs for **CG&E’s**generating units from 2005-2008 is being pursued through the settlementagreement of the **CG&E** ratestabilization plan.  The settlementagreement allows **CG&E** tocollect a Provider of Last Resort (POLR) charge from customers to cover increased environmental costs, capacityreserves, and emission allowance expenditures. Further details about the settlement agreement are discussed in Note6(b)(*ii*)of the “Notes to Condensed Financial Statements” in “Item 1. FinancialStatements”.

 

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

 

50

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

 

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

 

InMay 2004, the EPA issued proposed revisions to its regional haze rules andimplementing guidelines in response to a 2002 judicial ruling overturning keyprovisions of the original program.  Theregional haze program is aimed at reducing certain emissions impactingvisibility in national parks and wilderness areas.  The EPA is currently considering whether SO2and NOX reductions under the CAIR regulation will also satisfy thereduction requirements under the regional haze rule.  However, the regional haze rule, whenfinalized, could potentially require significant additional SO2 andNOX reductions necessitating the installation of pollution controlsfor certain generating units at **Cinergy’s**power plants.  It is not possible topredict whether the regional haze rule will have a material effect on ourfinancial position or results of operations in light of the EPA’s ongoingrulemaking efforts and the fact that the states have yet to announce how theywill implement the rule, when finalized.

 

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

 

*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** and American Electric PowerCompany, Inc., American Electric Power Service Corporation, The SouthernCompany, Tennessee Valley Authority, and Xcel Energy Inc.  That same day, a similar lawsuit was filedagainst the same companies by Open Space Institute, Inc., Open SpaceConservancy, Inc., and The Audubon Society of New Hampshire.  These lawsuits allege that the defendants’emissions of CO2 from the combustion of fossil fuels at electricgenerating facilities contribute to global warming and amount to a publicnuisance.  The complaints also allegethat the defendants could generate the same amount of electricity whileemitting significantly less CO2. Plaintiffs are seeking an injunction requiring each defendant to cap itsCO2 emissions and then reduce them by a specified percentage eachyear for at least a decade.  **Cinergy** intends to defend this lawsuitvigorously in court; however, we are not able to predict whether resolution ofthese matters would have a material effect on our financial position or resultsof operations.

 

51

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

 

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

 

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

 

*Selective CatalyticReduction Units (SCR) at Gibson Generating Station (Gibson Station)*

 

In May 2004, SCRs andother pollution control equipment became operational at Units 4 and 5 of **PSI’s** Gibson Station in accordance withcompliance deadlines under the NOX SIP Call.  In June and July 2004, GibsonStation temporarily shut down the equipment on these units due to a concernover an acid aerosol mist haze sometimes occurring in areas near theplant.  Portions of the plume from thoseunits’ stacks sometimes appeared to break apart and descend to groundlevel.  As a result, we are developing aprotocol working with the City of Mt. Carmel, Illinois; Illinois EPA; IndianaDepartment of Environmental Management; United States EPA; and the State ofIllinois; regarding the use of the SCRs while we explore alternatives toaddress this issue.  We would seekrecovery of any related capital as well as increased emission allowanceexpenditures through the regulatory process.  Given existing recoverymechanisms, we do not believe costs related to resolving this matter will havea material impact on our financial position or results of operations.

 

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

 

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

 

•                  Exempt Wholesale Generators (EWG) andForeign Utility Companies (FUCO)

 

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

 

A FUCO is acompany all of whose utility assets and operations are located outside theUnited States and which are used for the generation, transmission, ordistribution of electric energy for sale at retail or wholesale, or thedistribution of gas at retail.  A FUCOmay not derive any income, directly or indirectly, from the generation,transmission, or distribution of electric energy for sale or the distributionof gas at retail within the United

 

52

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

 

States.  An entity claiming status as a FUCO mustprovide notification thereof to the SEC under PUHCA.

 

**Cinergy**has been granted SEC authority under PUHCA to invest (including by way ofguarantees) an aggregate amount in EWGs and FUCOs equal to the sum of (1) ouraverage consolidated retained earnings from time to time plus (2) $2billion.  As of June 30, 2004, wehad invested or committed to invest approximately $0.8 billion in EWGs andFUCOs, leaving available investment capacity under the order of approximately$2.7 billion.

 

•                  Qualifying Facilities andEnergy-Related Non-utility Entities

 

SEC regulations under the PUHCA permit **Cinergy**and other registered holding companies to invest and/or guarantee an amountequal to 15 percent of consolidated capitalization (consolidated capitalizationis the sum of Notes payable and other short-term obligations, Long-term debt(including amounts due within one year), Cumulative Preferred Stock ofSubsidiaries, and total Common Stock Equity) in domestic qualifyingcogeneration and small power production plants (qualifying facilities) andcertain other domestic energy-related non-utility entities.  At June 30, 2004, we had invested and/orguaranteed approximately $1.0 billion of the $1.3 billion available.

 

•                  Energy-Related Assets

 

**Cinergy**has been granted SEC authority under 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 June 30, 2004, we did not have anyinvestments in these Energy-Related Assets.

 

•                  Infrastructure Services Companies

 

**Cinergy**has been granted SEC authority under PUHCA to invest up to $500 million incompanies that derive or will derive substantially all of their operatingrevenues from the sale of Infrastructure Services including:

 

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

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

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

 

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

 

At June 30,2004, we had invested approximately $29 million in Infrastructure Servicescompanies.

 

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

 

We are subject to an SECorder under the PUHCA, which limits the amounts **Cinergy Corp.** can have outstanding under guarantees at any onetime to $2 billion.  As of June 30,2004, we had $852 million outstanding under the guarantees issued, of whichapproximately 93 percent represents guarantees of obligations reflected on **Cinergy’s** Condensed Balance Sheets.  The amount outstanding represents **Cinergy Corp.’s** guarantees of liabilitiesand commitments of its consolidated subsidiaries, unconsolidated subsidiaries,and joint ventures.  See Note 6(c)(*iv*) of the “Notes to Condensed Financial Statements” in “Item 1. FinancialStatements” for a discussion of guarantees in accordance with FinancialAccounting Standards Board (FASB) Interpretation No. 45, *Guarantor’s Accounting and Disclosure Requirementsfor Guarantees, Including Indirect Guarantees of Indebtedness of Others*(Interpretation 45).  Interpretation 45requires disclosure of maximum potential liabilities for guarantees issued onbehalf of unconsolidated subsidiaries and joint ventures and underindemnification clauses in various contracts. The Interpretation 45 disclosure differs from the PUHCA restrictions inthat it requires a calculation of maximum potential liability, rather thanactual amounts outstanding; it excludes guarantees issued on behalf ofconsolidated subsidiaries; and it includes potential liabilities underindemnification clauses.

 

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

 

**Cinergy**has certain contracts in place, primarily with tradingcounterparties, that require the issuance of collateral in the event our debtratings are downgraded below investment grade. Based upon our June 30, 2004 trading portfolio, if such an eventwere to occur, **Cinergy** would berequired to issue up to approximately $116 million in collateral related to itsgas and power trading operations, of which $65 million is related to **CG&E**.

 

#### **Capital Resources**

 

**Cinergy**,**CG&E**, **PSI**, and **ULH&P**meet current and future capital requirement needs through a combination ofinternally and externally generated funds, including the issuance of debtand/or equity securities.  **Cinergy**, **CG&E**,**PSI**, and **ULH&P** believe that they have adequatefinancial resources to meet their future needs.

 

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

 

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

 

54

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

 

| ** **                    | ** ** | ** **                                              | ** **   | ** **      | ** ** |
|-------------------------------|------------|---------------------------------------------------------|--------------|-----------------|------------|
| ** **                    | ** ** | **Short-term Regulatory Authority  June 30, 2004** | *** *** |
| ** **                    | ** ** | ***(in millions)***                                     | ** **   |
|                          | * *   | * *                                                | * *     | * *        | * *   |
| ** **                    | ** ** | **Authority**                                           | ** **   | **Outstanding** | ** ** |
|                          |       |                                                    |         |            |       |
| **Cinergy Corp.**             |       | $                                                       | 5,000        | (1)             | $          | 267 |   |
| **CG&E**and  subsidiaries |       | 671                                                     |         | 127             |       |
| **PSI**                       |       | 600                                                     |         | 219             |       |
| **ULH&P**                 |       | 65                                                      |         | 29              |       |
|                               |            |                                                         |              |                 |            |  |  |

 

 

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

 

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

 

**CinergyCorp.’s**short-term borrowings consists primarily of unsecuredrevolving lines of credit and the sale of commercial paper.  **CinergyCorp.’s** $1.5 billion revolving credit facilities and $800 millioncommercial 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.

 

55

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

 

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

 
| ** **                     | ** ** | ** **                                    | ** ** | ** **      | ** ** | ** ** | ** ** | ** **                | ** ** | ** **                                 | ** ** |
|--------------------------------|------------|-----------------------------------------------|------------|-----------------|------------|------------|------------|---------------------------|------------|--------------------------------------------|------------|
| ** **                     | ** ** | ** **                                    | ** ** | ** **      | ** ** | ** ** | ** ** | ** **                | ** ** | ** **                                 | ** ** |
| ** **                     | ** ** | **Short-term Borrowings  June 30, 2004** | ** ** |
| ** **                     | ** ** | ** **                                    | ** ** | ** **      | ** ** | ** ** | ** ** | ** **                | ** ** | ** **                                 | ** ** |
| ** **                     | ** ** | **Established  Lines**                        | ** ** | **Outstanding** | ** ** | **Unused** | ** ** | **Standby  Liquidity(3)** | ** ** | **Available  Revolving  Lines of  Credit** | ** ** |
| ** **                     | ** ** | ***(in millions)***                           | ** ** |
|                           | * *   | * *                                      | * *   | * *        | * *   | * *   | * *   | * *                  | * *   | * *                                   | * *   |
| **Cinergy**                    |       |                                          |       |            |       |       |       |                      |       |                                       |       |
| **Cinergy Corp.**              |       |                                          |       |            |       |       |       |                      |       |                                       |       |
| Revolving lines                |       | $                                             | 1,500      |            | $          | —     |       | $                         | 1,500      |                                       | $          | 271 |   | $ | 1,229 |   |
| Uncommitted lines(1)           |       | 40                                            |       | —          |       | 40         |       |                      |       |                                       |       |
| Commercial paper(2)            |       |                                          |       | 267             |       | 533        |       |                      |       |                                       |       |
|                           |       |                                          |       |            |       |       |       |                      |       |                                       |       |
| Utility operating companies    |       |                                          |       |            |       |       |       |                      |       |                                       |       |
| Uncommitted lines(1)           |       | 75                                            |       | —          |       | 75         |       |                      |       |                                       |       |
| Pollution control notes        |       |                                          |       | 193             |       |       |       |                      |       |                                       |       |
|                           |       |                                          |       |            |       |       |       |                      |       |                                       |       |
| Non-regulated subsidiaries     |       |                                          |       |            |       |       |       |                      |       |                                       |       |
| Revolving lines                |       | 18                                            |       | 9               |       | 9          |       |                      |       | 9                                          |       |
| Short-term debt                |       |                                          |       | 2               |       |       |       |                      |       |                                       |       |
| Pollution control notes(4)     |       |                                          |       | 25              |       |       |       |                      |       |                                       |       |
|                           |       |                                          |       |            |       |       |       |                      |       |                                       |       |
| **Cinergy Total**              |       |                                          |       | $               | 496        |       |       |                      |       |                                       | $          | 1,238 |   |
|                           |       |                                          |       |            |       |       |       |                      |       |                                       |       |
| **CG&E** and  subsidiaries |       |                                          |       |            |       |       |       |                      |       |                                       |       |
| Uncommitted lines(1)           |       | $                                             | 15         |            | $          | —     |       | $                         | 15         |                                       |       |   |   |   |
| Pollution control notes        |       |                                          |       | 112             |       |       |       |                      |       |                                       |       |
| Money pool                     |       |                                          |       | 127             |       |       |       |                      |       |                                       |       |
|                           |       |                                          |       |            |       |       |       |                      |       |                                       |       |
| **CG&E Total**             |       |                                          |       | $               | 239        |       |       |                      |       |                                       |       |   |
|                           |       |                                          |       |            |       |       |       |                      |       |                                       |       |
| **PSI**                        |       |                                          |       |            |       |       |       |                      |       |                                       |       |
| Uncommitted lines(1)           |       | $                                             | 60         |            | $          | —     |       | $                         | 60         |                                       |       |   |   |   |
| Pollution control notes        |       |                                          |       | 81              |       |       |       |                      |       |                                       |       |
| Money pool                     |       |                                          |       | 219             |       |       |       |                      |       |                                       |       |
|                           |       |                                          |       |            |       |       |       |                      |       |                                       |       |
| **PSI Total**                  |       |                                          |       | $               | 300        |       |       |                      |       |                                       |       |   |
|                           |       |                                          |       |            |       |       |       |                      |       |                                       |       |
| **ULH&P**                  |       |                                          |       |            |       |       |       |                      |       |                                       |       |
| Money pool                     |       |                                          |       | $               | 29         |       |       |                      |       |                                       |       |   |
|                           |       |                                          |       |            |       |       |       |                      |       |                                       |       |
| **ULH&P Total**            |       |                                          |       | $               | 29         |       |       |                      |       |                                       |       |   |
|                                |            |                                               |            |                 |            |            |            |                           |            |                                            |            |  |  |  |  |  |

 

----

| (1)    | These facilities  are not guaranteed sources of capital and represent an informal agreement to  lend money, subject to availability, with pricing to be determined at the  time of advance.                                                                                                                                                                                                                                                                                                                                                                |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2)    | The commercial  paper program is limited to $800 million and is supported by **Cinergy Corp.’s** revolving lines of  credit.                                                                                                                                                                                                                                                                                                                                                                                                                          |
| (3)    | Standby  liquidity is reserved against the revolving lines to support the commercial  paper program and outstanding letters of credit (currently $267 million and  $4 million, respectively).                                                                                                                                                                                                                                                                                                                                                              |
| (4)    | In May 2004, **Cinergy**, through a subsidiary, borrowed  the proceeds from the issuance by the Gulf Coast Industrial Development  Authority of $25 million principal amount of its Gulf Coast Industrial  Development Exempt Facilities Industrial Revenue Bonds Series 2004, due  April 1, 2039.  These bonds bear  interest in a weekly interest rate mode.   Because the holders of these notes have the right to have their notes  redeemed on a weekly basis, they are reflected in *Notes payable and other short-term obligations*. |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |

 

56

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

 

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

 

At June 30, 2004, **Cinergy Corp.** had approximately $1.2billion remaining unused and available capacity relating to its $1.5 billionrevolving credit facilities.  Theserevolving credit facilities include the following:

 

| ** **                  | ** ** | ** **      | ** ** | ** **             | ** ** | ** **                      | ** ** | ** **                | ** ** |
|-----------------------------|------------|-----------------|------------|------------------------|------------|---------------------------------|------------|---------------------------|------------|
| **Credit Facility**         | ** ** | **Expiration**  | ** ** | **Established  Lines** | ** ** | **Outstanding  and  Committed** | ** ** | **Unused and  Available** | ** ** |
|                        |       |            |       | ***(in millions)***    |       |
|                        | * *   | * *        | * *   | * *               | * *   | * *                        | * *   | * *                  | * *   |
| 364-day senior revolving    |       | April 2005 |       |                   |       |                            |       |                      |       |
| Direct borrowing            |       |            |       | $                      |       |                            | $          | —                    |       | $ |   |   |
| Commercial paper support    |       |            |       |                   |       | 267                             |       |                      |       |
|                        |       |            |       |                   |       |                            |       |                      |       |
| Total 364-day facility      |       |            |       | 500                    |       | 267                             |       | 233                       |       |
|                        |       |            |       |                   |       |                            |       |                      |       |
| Three-year senior revolving |       | April 2007 |       |                   |       |                            |       |                      |       |
| Direct borrowing            |       |            |       |                   |       | —                          |       |                      |       |
| Commercial paper support    |       |            |       |                   |       | —                          |       |                      |       |
| Letter of credit support    |       |            |       |                   |       | 4                               |       |                      |       |
|                        |       |            |       |                   |       |                            |       |                      |       |
| Total three-year facility   |       |            |       | 1,000                  |       | 4                               |       | 996                       |       |
|                        |       |            |       |                   |       |                            |       |                      |       |
| Total Credit Facilities     |       |            |       | $                      | 1,500      |                            | $          | 271                       |       | $ | 1,229 |   |
|                        |       |            |       |                   |       |                            |       |                      |       |

 

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

 

•                  a consolidated net worth of $2billion; and

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

 

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

 

•                  bankruptcy;

•                  defaults in the payment of otherindebtedness; and

•                  judgments against the company thatare not paid or insured.

 

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

 

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

 

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

 

57

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

 

A current summary of our long-term debt authorizations at June 30,2004, was as follows:

 

| ** **                                   | ** ** | ** **          | ** ** | ** ** | ** ** | ** **    | ** ** |
|----------------------------------------------|------------|---------------------|------------|------------|------------|---------------|------------|
| ** **                                   | ** ** | **Authorized**      | ** ** | **Used**   | ** ** | **Available** | ** ** |
| ** **                                   | ** ** | ***(in millions)*** | ** ** |
|                                         | * *   | * *            | * *   | * *   | * *   | * *      | * *   |
| **Cinergy Corp.**                            |       |                |       |       |       |          |       |
| PUHCA total capitalization(1)                |       | $                   | 5,000      |       | $          | 1,535         |       | $ | 3,465 |   |
|                                         |       |                |       |       |       |          |       |
| **CG&E** and subsidiaries(2)             |       |                |       |       |       |          |       |
| State Public Utility Commissions             |       | $                   | 575        |       | $          | —        |       | $ | 575 |   |
|                                         |       |                |       |       |       |          |       |
| **PSI**                                      |       |                |       |       |       |          |       |
| State Public Utility Commission              |       | $                   | 500        |       | $          | —        |       | $ | 500 |   |
| State Public Utility Commission - Tax-Exempt |       | 250                 |       | —     |       | 250           |       |
|                                         |       |                |       |       |       |          |       |
| **ULH&P**                                |       |                |       |       |       |          |       |
| State Public Utility Commission              |       | $                   | 75         |       | $          | —        |       | $ | 75 |   |

 

 

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

 

**CinergyCorp.** has an effective shelf registration statement with theSEC relating to the issuance of up to $750 million in any combination of commonstock, preferred stock, stock purchase contracts or unsecured debt securities,of which approximately $574 million remains available for issuance.  **CG&E**has an effective shelf registration statement with the SEC relating to theissuance of up to $800 million in any combination of unsecured debt securities,first mortgage bonds, or preferred stock, all of which remains available forissuance.  **PSI** has an effective shelf registration statement with the SECrelating to the issuance of up to $800 million in any combination of unsecureddebt securities, first mortgage bonds, or preferred stock, all of which remainsavailable for issuance.  **ULH&P** has effective shelf registrationstatements with the SEC relating to the issuance of up to $50 million inunsecured debt securities and up to $40 million in first mortgage bonds, ofwhich $30 million in unsecured debt securities and $20 million in firstmortgage bonds remain available for issuance.

 

##### ***Off-Balance Sheet Arrangements***

 

As discussed in the 200310-K, **Cinergy** uses off-balancesheet arrangements from time to time to facilitate financing of variousprojects.  **Cinergy’s** primary off-balance sheet arrangements involve (a)the sale of accounts receivable to a qualifying special purpose entity, and (b)a forward stock contract that will result in the issuances of between 9.2 and10.8 million **Cinergy** common sharesin February 2005.

 

58

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

 

***Securities Ratings***

 

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

 

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

 

 

| (1)                                                                                                       | Fitch Ratings  (Fitch)                         |
|-----------------------------------------------------------------------------------------------------------|------------------------------------------------|
| (2)                                                                                                       | Moody’s Investors  Service (Moody’s) |
| (3)                                                                                                       | Standard &  Poor’s (S&P)          |
|                                                                                                      |                                           |
| The highest  investment grade credit rating for Fitch is AAA, Moody’s is Aaal, and S&P  is AAA.  |
| The lowest  investment grade credit rating for Fitch is BBB-, Moody’s is Baa3, and  S&P is BBB-. |
|                                                                                                      |                                           |

 

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

 

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

 

As discussed in the 200310-K, **Cinergy**issues new **Cinergy Corp.** common stock shares tosatisfy obligations under certain of its employee stock plans and the CinergyCorp. Direct Stock Purchase and Dividend Reinvestment Plan.  During the six months ended June 30,2004, **Cinergy** issued approximately2.0 million shares under these plans.

 

59

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

 

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

 

### **2004 QUARTERLY RESULTS OFOPERATIONS - HISTORICAL**

####  

#### **Summary of Results**

 

Electric and gas grossmargins and net income for **Cinergy**,**CG&E**, and **PSI** for the quarters ended June 30,2004 and 2003 were as follows:

 
| ** **               |
|--------------------------|
| ** **               | ** ** | **Cinergy(1)** | ** ** | **CG&E and subsidiaries** | ** ** | **PSI** | ** ** |
| ** **               | ** ** | **2004** | ** ** | 2003 |   | Change |   | %  Change | ** ** | **2004** | ** ** | 2003 |   | Change |   | %  Change | ** ** | **2004** | ** ** | 2003 |   | Change |   | %  Change | ** ** |
| ** **               | ** ** | ***(in thousands)*** | ** ** |
|                     | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * |
| Net income               |   | **$** | **58,504** |   | $ | 84,653 |   | $ | (26,149 | ) | (31 | ) | **$** | **55,309** |   | $ | 50,919 |   | $ | 4,390 |   | 9 |   | **$** | **25,446** |   | $ | 23,079 |   | $ | 2,367 |   | 10 |   |
|                     |   | ** ** |   |   |   |   |   |   |   | ** ** |   |   |   |   |   |   |   | ** ** |   |   |   |   |   |   |   |
| Electric gross margin(2) |   | **598,547** |   | 528,788 |   | 69,759 |   | 13 |   | **317,277** |   | 291,188 |   | 26,089 |   | 9 |   | **274,844** |   | 239,387 |   | 35,457 |   | 15 |   |
| Gas gross margin(3)      |   | **60,662** |   | 61,613 |   | (951 | ) | (2 | ) | **43,233** |   | 37,225 |   | 6,008 |   | 16 |   | **—** |   | — |   | — |   | — |   |
|                          |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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

 

**Cinergy’s**net income decreased while **CG&E’s**and **PSI’s** increased for thequarter ended June 30, 2004, as compared to the same period last year as aresult of a number of factors.  **Cinergy’s**,**CG&E’s**, and**PSI’s**variances were affected by higher electric gross margins discussed below.  **CG&E’s**variance also includes an increase in gas gross margins discussed below.  **Cinergy’s**increase in electric gross margins was offset, and **CG&E’s** and **PSI’s**were partially offset, by increases in a variety of expenses.  Higher *Operationand maintenance*expense for all three companies was primarily due toincreases in emission allowances expenses and consulting fees for a continuousimprovement initiative.  **Cinergy’s** and **PSI’s** variances were also impacted by increases in *Depreciation* expense and effective incometax rates.  **Cinergy’s** decrease also reflects gains realized in the secondquarter of 2003 from the disposal of discontinued operations.

 

#### **Electric Margins**

 

**Cinergy’s**,**CG&E’s**, and **PSI’s** electric gross margins increased forthe quarter ended June 30, 2004 as compared to the same period lastyear.  These variances primarily reflectadditional MWh sales due to warmer weather in the current period and additionalMWhs delivered as a result of an increase in non-weather related demand.  **Cinergy’s**and**CG&E’s** variances also reflect, inpart, an increase in net revenues on power marketing, trading, and originationcontracts.  **Cinergy’s**and **PSI’s**variancesincluded a higher price received per MWh primarily due to **PSI’s** base retail electric rate case andcertain rate tariff adjustments.  **Cinergy’s**and**CG&E’s** increases were partially offset by an increase inthe average price of fuel for the period.

 

60

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

 

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

 
| ** ** | ** ** | ** **          | ** ** | ** **                    | ** ** | ** ** | ** ** |
|------------|------------|---------------------|------------|-------------------------------|------------|------------|------------|
| ** ** | ** ** | **Cinergy(1)**      | ** ** | **CG&E and subsidiaries** | ** ** | **PSI**    | ** ** |
| ** ** | ** ** | **2004**            | ** ** | 2003                          |       | Change     |       | %  Change | ** ** | **2004** | ** ** | 2003 |   | Change |   | %  Change | ** ** | **2004** | ** ** | 2003 |   | Change |   | %  Change | ** ** |
| ** ** | ** ** | ***(in millions)*** | ** ** |
|       | * *   | * *            | * *   | * *                      | * *   | * *   | * *   | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * |
| Retail     |       | **$**               | **695**    |                          | $          | 636        |       | $ | 59 |   | 9 |   | **$** | **340** |   | $ | 319 |   | $ | 21 |   | 7 |   | **$** | **355** |   | $ | 316 |   | $ | 39 |   | 12 |   |
| Wholesale  |       | **151**             |       | 111                           |       | 40         |       | 36 |   | **74** |   | 59 |   | 15 |   | 25 |   | **50** |   | 39 |   | 11 |   | 28 |   |
| Other      |       | **46**              |       | 22                            |       | 24         |       | N/M |   | **41** |   | 19 |   | 22 |   | N/M |   | **9** |   | 6 |   | 3 |   | 50 |   |
| Total      |       | **$**               | **892**    |                          | $          | 769        |       | $ | 123 |   | 16 |   | **$** | **455** |   | $ | 397 |   | $ | 58 |   | 15 |   | **$** | **414** |   | $ | 361 |   | $ | 53 |   | 15 |   |

 

 
| (1)              The results of **Cinergy** also include amounts related to  non-registrants. |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------|
| N/M Not  meaningful to an understanding of the change.                                                                                                         |
|                                                                                                                                                           |

 

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

 

| ** **             | ** ** | ** **                    | ** ** | ** ** | ** ** |
|------------------------|------------|-------------------------------|------------|------------|------------|
| ** **             | ** ** | **CG&E and subsidiaries** | ** ** | **PSI**    | ** ** |
| ** **             | ** ** | **2004**                      | ** ** | 2003       |       | Change |   | %  Change | ** ** | **2004** | ** ** | 2003 |   | Change |   | %  Change | ** ** |
|                   |       |                          |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Heating degree-days(1) |       | **414**                       |       | 444        |       | (30 | ) | (7 | ) | **404** |   | 519 |   | (115 | ) | (22 | ) |
| Cooling degree-days(2) |       | **327**                       |       | 166        |       | 161 |   | 97 |   | **342** |   | 199 |   | 143 |   | 72 |   |

 

 

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

 

Retail electric operatingrevenues increased for **Cinergy**, **CG&E**, and **PSI** mainly due to eight percent, sevenpercent, and nine percent higher amounts of MWhs delivered, respectively, inthe quarter ended June 30, 2004, as compared to 2003.  These increases in MWhs delivered resulted inapproximately $51 million, $23 million, and $28 million higher retail revenuesfor **Cinergy**,**CG&E**, and **PSI**, respectively.  Thegreater amount of MWhs delivered is primarily due to warmer weather in thesecond quarter of 2004, as compared to 2003, as reflected in the variance inthe number of cooling degree-days, and an increase in non-weather relateddemand.

 

Also contributing to **Cinergy’s** and **PSI’s** higher retail electric operating revenues were one andthree percent increases, respectively, in the average retail price perMWh.  These average increases resulted inadditional retail electric operating revenues of approximately $8 million and$10 million for **Cinergy** and **PSI**,****respectively.  The higher retail prices per MWh primarilyreflect the Indiana Utility Regulatory Commission’s (IURC) approval of a baseretail electric rate average increase of eight percent for **PSI** in May 2004, discussed further in Note6(b)(*i*) of the “Notes toCondensed Financial Statements” in “Item 1. Financial Statements”, and otherrate adjustments related to emission allowances and clean coal technology trackingmechanisms.  These increases more thanoffset a decline in the retail price per MWh due to decreases in rate tariffadjustments associated with **PSI’s**

 

61

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

 

fuel cost recoverymechanism.  The cost of fuel for **PSI’s** retail customers is passed ondollar-for-dollar under the state mandated fuel cost recovery mechanism.

 

Electric wholesalerevenues increased for **Cinergy**,**CG&E**, and **PSI** for the quarter ended June 30, 2004, as compared to2003.  **Cinergy’s**increase includes a number of factors.  Net revenues on power marketing, trading, and origination contractsincreased approximately $8 million over the second quarter of 2003.  The increase in power trading results isattributable to higher earnings on physical and financial trading primarilywithin the Midwest and the PJM Interconnection (PJM) markets.  Also, approximately $14 million of **Cinergy’s** variance includes increases inwholesale revenues from non-regulated energy service subsidiaries that startedoperations, or became fully consolidated, after the second quarter of2003.  The majority of the remainingincrease was attributable to increases in wholesale sales from generationavailable after serving regulated retail customers.

 

The variance in **CG&E’s** wholesale revenues reflects anincrease in net revenues on power marketing, trading, and originationcontracts.  The increase in power tradingresults was attributable to higher earnings on physical and financial tradingprimarily within the Midwest and the PJM markets.  The majority of **PSI’s** increase was attributable to increases in wholesalesales from generation available after serving regulated retail customers.

 

Other Electric operatingrevenues increased for **Cinergy**, **CG&E**, and **PSI** for the quarter ended June 30, 2004, as compared to2003.  **Cinergy’s**and **CG&E’s** higher otherElectric operating revenues reflect increases in coal origination ofapproximately $11 million and increases in the sales of emission allowances ofapproximately $5 million.  **Cinergy’s**,**CG&E’s**, and **PSI’s**increases reflect higher transmission revenues primarily resulting from MidwestIndependent System Operator, Inc. (Midwest ISO) operations of approximately $5million, $2 million, and $3 million, respectively.

 

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

 
| ** **      | ** ** | ** **          | ** ** | ** **                    | ** ** | ** ** | ** ** |
|-----------------|------------|---------------------|------------|-------------------------------|------------|------------|------------|
| ** **      | ** ** | **Cinergy****(1)**  | ** ** | **CG&E and subsidiaries** | ** ** | **PSI**    | ** ** |
| ** **      | ** ** | **2004**            | ** ** | 2003                          |       | Change     |       | %  Change | ** ** | **2004** | ** ** | 2003 |   | Change |   | %  Change | ** ** | **2004** | ** ** | 2003 |   | Change |   | %  Change | ** ** |
| ** **      | ** ** | ***(in millions)*** | ** ** |
|            | * *   | * *            | * *   | * *                      | * *   | * *   | * *   | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * |
| Fuel            |       | **$**               | **250**    |                          | $          | 219        |       | $ | 31 |   | 14 |   | **$** | **115** |   | $ | 88 |   | $ | 27 |   | 31 |   | **$** | **116** |   | $ | 116 |   | $ | — |   | — |   |
| Purchased power |       | **44**              |       | 21                            |       | 23         |       | N/M |   | **23** |   | 18 |   | 5 |   | 28 |   | **24** |   | 6 |   | 18 |   | N/M |   |
|                 |            |                     |            |                               |            |            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| Total |   | **$** | **294** |   | $ | 240 |   | $ | 54 |   | 23 |   | **$** | **138** |   | $ | 106 |   | $ | 32 |   | 30 |   | **$** | **140** |   | $ | 122 |   | $ | 18 |   | 15 |   |
|-------|--------|-------|---------|--------|---|-----|--------|---|----|--------|----|--------|-------|---------|--------|---|-----|--------|---|----|--------|----|--------|-------|---------|--------|---|-----|--------|---|----|--------|----|--------|

 

 
| (1)              The results of **Cinergy** also include amounts related to  non-registrants. |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------|
| N/M Not  meaningful to an understanding of the change.                                                                                                         |
|                                                                                                                                                           |

 

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

 

*Fuel*

 

*Fuel*primarily represents the cost of coal, natural gas, and oil that is used togenerate electricity.  The followingtable details the changes to fuel expense from the quarter ended June 30,2003, to the quarter ended June 30, 2004:

 

| ** **                                 | ** ** | ** **          | ** ** | ** **   | ** ** | ** ** | ** ** |
|--------------------------------------------|------------|---------------------|------------|--------------|------------|------------|------------|
| ** **                                 | ** ** | **Cinergy****(1)**  | ** ** | **CG&E** | ** ** | **PSI**    | ** ** |
| ** **                                 | ** ** | ***(in millions)*** | ** ** |
|                                       |       |                |       |         |       |       |       |
| Fuel Expense – June 30, 2003     |       | $                   | 219        |         | $          | 88         |       | $ | 116 |   |
|                                       |       |                |       |         |       |       |       |
| *Increase (Decrease) due to changes  in:*  |       |                |       |         |       |       |       |
| Price of fuel                              |       | **15**              | ** ** | **12**       | ** ** | **3**      | ** ** |
| Deferred fuel cost                         |       | **(13**             | **)**      | **—**   | ** ** | **(13**    | **)**      |
| Fuel consumption                           |       | **15**              | ** ** | **5**        | ** ** | **10**     | ** ** |
| Other(2)                                   |       | **14**              | ** ** | **10**       | ** ** | **—** | ** ** |
|                                       |       | ** **          | ** ** | ** **   | ** ** | ** ** | ** ** |
| **Fuel Expense – June 30, 2004** | ** ** | **$**               | **250**    | ** **   | **$**      | **115**    | ** ** | **$** | **116** | ** ** |

 

 

| (1)              The results of **Cinergy** also include amounts related to  non-registrants.                                                                                              |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2)              Includes costs of coal  origination and non-regulated energy service subsidiaries that started  operations, or became fully consolidated, during the second half of 2003. |
| ** **                                                                                                                                                                                                                                                  |

 

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

 

*Purchased Power*

 

*Purchasedpower* expense increased for **Cinergy**and **PSI** for the quarter endedJune 30, 2004, as compared to 2003. These increases in *Purchased power*expense primarily reflect a greater volume of MWhs purchased to serve wholesalefull requirements customers and a higher price paid per MWh for thesepurchases.

 

#### **Gas Margins**

 

**CG&E’s**gas gross margins increased and **Cinergy’s**remained relatively flat for the quarter ended June 30, 2004, as comparedto the same period last year.  **CG&E’s** gas margins increased by $6million primarily due to rate tariff adjustments associated with the gas mainreplacement program, a low-income subsidy program, and Ohio excise taxes.

 

**Cinergy’s**gas margins remained relatively flat as **CG&E’s** increase was offset, in part, bylower margins from our gas marketing and trading business.  Our North American gas marketing and tradingbusiness experienced a decline in physical and financial trading marginsresulting from fewer trading opportunities caused by lower volatility in 2004.

 

63

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

 

#### **Other Revenues**

 

*Otherrevenues* for **Cinergy**increasedfor the quarter ended June 30, 2004, as compared to 2003, primarily due tonon-regulated energy service subsidiaries that started operations, or becamefully consolidated, after June 30, 2003.

 

#### **Operating Expenses**

#####  

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

 

*Operationand maintenance* expense increased for **Cinergy**, **CG&E**,and **PSI** for the quarter endedJune 30, 2004, as compared to 2003. **Cinergy’s**, **CG&E’s**, and **PSI’s** increases include approximately $22 million, $11million, and $11 million, respectively, of higher expenses related to emissionsallowances.  These increases primarilyreflect higher expenses due to an increase in the cost of SO2emission allowances as market prices have increased, timing differences in therecovery of SO2 emission allowances costs under **PSI’s** emission allowances trackingmechanism authorized by the IURC, and the introduction of the NOXcompliance program in the second quarter of 2004.  See Note 6(a)(*i*) of the “Notes to Condensed Financial Statements” in “Item1. Financial Statements” for further information regarding NOXcompliance.

 

The higher *Operation and maintenance* expense alsoreflects consulting fees related to a continuous improvement initiative of approximately $12 million, $5million, and $5 million for **Cinergy**,**CG&E**, and **PSI**, respectively, in the currentperiod.  Maintenance expenses, primarilyproduction-related, were higher by approximately $8 million and $7 million for **Cinergy** and **CG&E**, respectively. Employee benefit expenses increased approximately $7 million and $2million for **Cinergy** and **CG&E**, respectively.  Approximately $6 million of **Cinergy’s** increase relates to non-regulatedenergy service subsidiaries that started operations, or became fullyconsolidated, after the second quarter of 2003. **Cinergy’s** increases werepartially offset by costs associated with employee retirement and severanceprograms recorded in the second quarter of 2003.

 

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

 

*Depreciation*expense increased for **Cinergy** and **PSI** and decreased for **CG&E** for the quarter endedJune 30, 2004, as compared to 2003. ** **Approximately $9 million of **Cinergy’s** and **PSI’s** increase was due to the addition of depreciable plantprimarily for pollution control equipment. Partially offsetting **Cinergy’s**increase and contributing to **CG&E’s**decrease was an approximate $7.5 million reduction due to longer estimateduseful lives of **CG&E’s**generation assets resulting from a depreciation study completed during thethird quarter of 2003.  Approximately $2million of **Cinergy’s** increase andpartially offsetting **CG&E’s**decrease was the addition of depreciable plant primarily for pollution controlequipment and additions related to the accelerated gas main replacementprogram.

 

#### **Interest Expense**

 

*Interest**Expense* increased for **Cinergy** and decreased for **CG&E** for the quarter endedJune 30, 2004, as compared to 2003. Approximately $6 million of **Cinergy’s**increase reflects the recognition of a note payable to a trust.  Also reflected in **Cinergy’s** increase is approximately $4 million related toadditional debt recorded in accordance with the consolidation of two newentities.  The note

 

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

 

payable and additionaldebt were both recorded in the third quarter of 2003 resulting from theadoption of FASB Interpretation No. 46, *Consolidationof Variable Interest Entities* (Interpretation 46), as discussed inthe 2003 10-K.**  CG&E’s**decrease was primarilydue to a decrease in average long-term debt and a decrease in the effectiveinterest rate on long-term debt for the quarter ended June 30, 2004, ascompared to 2003.** **Partially offsetting**Cinergy’s** increases and contributing to **CG&E’s** decrease were charges recordedduring 2003 associated with the re-financing of certain debt.

 

#### **Preferred Dividend Requirement of SubsidiaryTrust**

 

*PreferredDividend Requirement of Subsidiary Trust* decreased for **Cinergy** for the quarter ended June 30,2004, as compared to 2003, as a result of the implementation of Interpretation46.  Effective July 1, 2003, thepreferred trust securities and the related dividends are no longer reported in **Cinergy’s** financial statements.  However, interest expense is still beingincurred on a note payable to this trust as discussed above.

 

#### **Income Taxes**

 

The effective income taxrate increased for **Cinergy**and **PSI** and remained flat for **CG&E** for the quarter endedJune 30, 2004, as compared to 2003. **Cinergy’s** increase reflectsa second quarter 2003 adjustment related to the estimated annual effective taxrate that includes a change in the amount of estimated annual tax creditsassociated with the production and sale of synthetic fuel.  **PSI’s**increase was primarily a result of an increase in Indiana state incometaxes.  **Cinergy’s**2004 effective tax rate is expected to be approximately 24 percent.

 

In July 2002, CinergyCapital & Trading, Inc. (Capital & Trading) acquired a coal-basedsynthetic fuel production facility.  Thesynthetic fuel produced at this facility qualifies for tax credits inaccordance with Section 29 of the Internal Revenue Code.  Eligibility for these credits expires after2007.  **Cinergy**received a private letter ruling from the Internal Revenue Service inconnection with the acquisition of the facility.  To date, **Cinergy**has recorded approximately $158 million in tax credits.

 

#### **Discontinued Operations**

 

### During the second quarter of 2003, **Cinergy** completed the disposal of its gas distributionoperation in South Africa, sold its remaining wind assets in the United States,and substantially sold or liquidated the assets of its energy trading operationin the Czech Republic.  Pursuant toStatement of Financial Accounting Standards No. 144, *Accounting for the Impairment of Long-lived Assets*(Statement 144), these investments have been classified as discontinuedoperations in our financial statements.

 

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

 

### **2004 YEAR TO DATE RESULTS OFOPERATIONS - HISTORICAL**

####  

#### **Summary of Results**

 

Electric and gas grossmargins and net income for **Cinergy**,**CG&E**, and **PSI** for the six months ended June 30,2004 and 2003, were as follows:

 
| ** **               |
|--------------------------|
| ** **               | ** ** | **Cinergy****(1)** | ** ** | **CG&E and subsidiaries** | ** ** | **PSI** | ** ** |
| ** **               | ** ** | **2004** | ** ** | 2003 |   | Change |   | %  Change | ** ** | **2004** | ** ** | 2003 |   | Change |   | %  Change | ** ** | **2004** | ** ** | 2003 |   | Change |   | %  Change | *** *** |
| ** **               | ** ** | ***(in thousands)*** | ** ** |
|                     | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * |
| Net income               |   | **$** | **161,519** |   | $ | 250,738 |   | $ | (89,219 | ) | (36 | ) | **$** | **132,764** |   | $ | 168,155 |   | $ | (35,391 | ) | (21 | ) | **$** | **66,252** |   | $ | 56,806 |   | $ | 9,446 |   | 17 |   |
|                     |   | ** ** |   |   |   |   |   |   |   | ** ** |   |   |   |   |   |   |   | ** ** |   |   |   |   |   |   |   |
| Electric gross margin(2) |   | **1,189,761** |   | 1,081,981 |   | 107,780 |   | 10 |   | **622,092** |   | 589,198 |   | 32,894 |   | 6 |   | **554,327** |   | 484,203 |   | 70,124 |   | 14 |   |
| Gas gross margin(3)      |   | **187,992** |   | 224,531 |   | (36,539 | ) | (16 | ) | **147,368** |   | 140,736 |   | 6,632 |   | 5 |   | **—** |   | — |   | — |   | — |   |
|                          |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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

 

**Cinergy’s**and **CG&E’s** net incomedecreased and **PSI’s** increased forthe six months ended June 30, 2004, as compared to the same period lastyear as a result of a number of factors. **Cinergy’s,****CG&E’s**, and **PSI’s**variances include higher electric gross marginsdiscussed below.  **CG&E’s** variance also includes anincrease in gas gross margins discussed below. Offsetting **Cinergy’s** and **CG&E’s** increases in electric grossmargins was higher *Operation and maintenance*expense primarily due to****greateremission allowances expenses, consulting fees for a continuous improvementinitiative and higher employee benefit expenses.  **Cinergy’s**increase in electric gross margins was also offset by lower margins from ourgas marketing and trading business, impairment charges on non-controllinginterests in investments, higher *Depreciation*expense, and gains realized in the second quarter of 2003 from the disposal ofdiscontinued operations.  **Cinergy’s**and **CG&E’s**increase was also offset by net gains recognized inthe first quarter of 2003 resulting from the implementation of certainaccounting changes that have been reflected as cumulative effects of changes inaccounting principles.

 

Partially offsetting**PSI’s** increase in electric gross marginswas higher *Operation and maintenance*expense primarily due to****greateremission allowances expenses, consulting fees for a continuous improvementinitiative, and higher employee benefit expenses.  Higher *Depreciation*expense and a greater effective income tax rate also partially offset **PSI’s** increase.

 

#### **Electric Margins**

 

**Cinergy’s**,**CG&E’s**, and **PSI’s** electric gross margins increased forthe six months ended June 30, 2004 as compared to the same period lastyear.  These variances primarily reflectadditional MWhs delivered due to an increase in non-weather related demand andwarmer weather in the current period.  **Cinergy’s**and**CG&E’s** variances also reflect in part, an increase in netrevenues on power marketing, trading, and origination contracts.  **Cinergy’s**and**PSI’s**increases included a higherprice received per MWh primarily due to certain rate tariff adjustments and **PSI’s** base retail electric rate

 

66

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

 

case.  **Cinergy’s**and**CG&E’s** increases were partially offsetby an increase in the average price of fuel for the period.

 

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

 
| ** ** | ** ** | ** **         | ** ** | ** **                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** **          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|------------|------------|--------------------|------------|-------------------------------|------------|------------|------------|------------|------------|---------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
| ** ** | ** ** | **Cinergy****(1)** | ** ** | **CG&E and subsidiaries** | ** ** | **PSI**    | ** ** |
| ** ** | ** ** | **2004**           | ** ** | 2003                          |       | Change     |       | %  Change  | ** ** | **2004**            | ** ** | 2003       |       | Change     |       | %  Change  | ** ** | **2004**   | ** ** | 2003       |       | Change     |       | %  Change  | ** ** |
| ** ** | ** ** | ** **         | ** ** | ** **                    | ** ** | ** ** | ** ** | ** ** | ** ** | ***(in millions)*** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| * *   | * *   | * *           | * *   | * *                      | * *   | * *   | * *   | * *   | * *   | * *            | * *   | * *   | * *   | * *   | * *   | * *   | * *   | * *   | * *   | * *   | * *   | * *   | * *   | * *   | * *   |
| Retail     |       | **$**              | **1,366**  |                          | $          | 1,319      |       | $          | 47         |                | 4          |       | **$**      | **674**    |       | $          | 653        |       | $          | 21         |       | 3          |       | **$**      | **691**    |   | $ | 666 |   | $ | 25 |   | 4 |   |
| Wholesale  |       | **320**            |       | 223                           |       | 97         |       | 43         |       | **145**             |       | 129        |       | 16         |       | 12         |       | **121**    |       | 95         |       | 26         |       | 27         |       |
| Other      |       | **84**             |       | 50                            |       | 34         |       | 68         |       | **74**              |       | 44         |       | 30         |       | 68         |       | **19**     |       | 12         |       | 7          |       | 58         |       |
| Total      |       | **$**              | **1,770**  |                          | $          | 1,592      |       | $          | 178        |                | 11         |       | **$**      | **893**    |       | $          | 826        |       | $          | 67         |       | 8          |       | **$**      | **831**    |   | $ | 773 |   | $ | 58 |   | 8 |   |

 

 

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

 

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

 

|                   |       |                          |       |    |       |   |   |      |       |      |       |   |   |   |   |      |       |
|------------------------|------------|-------------------------------|------------|---------|------------|--------|--------|-----------|------------|-----------|------------|--------|--------|--------|--------|-----------|------------|
| ** **             | ** ** | **CG&E and subsidiaries** | ** ** | **PSI** | ** ** |
| ** **             | ** ** | **2004**                      | ** ** | 2003    |       | Change |   | %  Change | ** ** | **2004**  | ** ** | 2003   |   | Change |   | %  Change | ** ** |
|                   |       |                          |       |    |       |   |   |      |       |      |       |   |   |   |   |      |       |
| Heating degree-days(1) |       | **3,085**                     |       | 3,315   |       | (230   | )      | (7        | )          | **3,214** |       | 3,606  |   | (392   | )      | (11       | )          |
| Cooling degree-days(2) |       | **327**                       |       | 166     |       | 161    |   | 97        |       | **344**   |       | 199    |   | 145    |   | 73        |       |

 

 

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

 

Retail electric operatingrevenues increased for **Cinergy**,**CG&E**,and **PSI** mainly due tofive percent, four percent, and five percent higher amounts of MWhs delivered,respectively, for the six months ended June 30, 2004, as compared to2003.  These increases in MWhs deliveredresulted in approximately $60 million, $26 million, and $34 million higherretail revenues for **Cinergy**,**CG&E**, and **PSI**, respectively.  Thegreater number of MWhs delivered reflects an increase in non-weather relateddemand and warmer weather in the second quarter of 2004, as compared to 2003,as reflected in the greater number of cooling degree-days.

 

**Cinergy’s**and **PSI’s**increases in retail electric operating revenues were partially offset by onepercent decreases in the average retail price per MWh for the first six monthsof 2004, as compared to 2003.  Theseaverage decreases resulted in approximately $15 million and $9 million lowerretail electric operating revenues for **Cinergy**and **PSI**, respectively.  These declines in the retail price per MWhwere mainly due to decreases in rate tariff adjustments associated with **PSI’s** fuel cost recovery mechanism.  The cost of fuel for **PSI’s** retail customers is passed ondollar-for-dollar under the state mandated fuel cost recovery mechanism.  This was partially offset by the IURC’s approvalof **PSI’s** base retail electric rateincrease in May 2004, discussed in Note 6(b)(*i*)of the “Notes to Condensed

 

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Financial Statements” in“Item 1. Financial Statements”, and approximately $15 million in increases inother rate tariff adjustments related to emission allowances, construction workin progress, and clean coal technologies tracking mechanisms.

 

**CG&E’s**increase in retail electric operating revenues was partially offset by a $5million decline due to a reduction in the average retail price per MWh for thesix months ended June 30, 2004, as compared to 2003.  This decrease primarily reflects customersswitching from full service to transportation only service as a result ofderegulation in the state of Ohio.  Thisswitching also contributed to **Cinergy’s**decrease in the average retail price per MWh.

 

Electric wholesalerevenues increased for **Cinergy**,**CG&E**, and **PSI** for the six months ended June 30, 2004, as comparedto 2003.  **Cinergy’s** increase includes a number of factors.  Net revenues on power marketing, trading, andorigination contracts increased approximately $27 million over the first halfof 2003.** **The increase in power trading results is attributable tohigher earnings on physical and financial trading primarily within the Midwestand the PJM markets.  Also, approximately$26 million of **Cinergy’s** varianceincludes increases in wholesale revenues from non-regulated energy service subsidiariesthat started operations, or became fully consolidated, after the second quarterof 2003.  The majority of the remainingincrease was attributable to increases in wholesale sales from generationavailable after serving regulated retail customers.

 

**CG&E’s**net revenues on power marketing, trading, and origination contracts increasedby approximately $30 million over the first six months of 2003.  The increase in power trading results wasattributable to higher earnings on physical and financial trading primarilywithin the Midwest and the PJM markets. This increase was partially offset by a decrease in MWhs available forwholesale activity due in part to a decrease in generation available for thesetransactions.

 

The majority of **PSI’s** increase was attributable to agreater amount of wholesale sales from generation available after servingregulated retail customers.  Thisincrease was partially offset by an approximate $4 million decrease in netrevenues on power marketing, trading, and origination contracts, due to **PSI’s** discontinuation of entering into anynew transactions beginning in 2002. Revenues continue to be affected by changes in the fair value ofexisting contracts over the remaining duration of the contracts.

 

Other Electric operatingrevenues increased for **Cinergy**, **CG&E**, and **PSI** for the six months ended June 30, 2004, as comparedto 2003.  **Cinergy’s** and **CG&E’s**higher Other Electric operating revenues reflect increases in coal originationof approximately $15 million and increases in the sales of emission allowancesof approximately $4 million.  **Cinergy’s**,**CG&E’s**, and **PSI’s**increases reflect higher transmission revenues primarily resulting from MidwestISO operations of approximately $11 million, $5 million, and $6 million,respectively.

 

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

 

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

 
| ** **      | ** ** | ** **         | ** ** | ** **                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** **          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **   | ** ** | ** ** | ** ** | ** ** | ** ** | ** **   |
|-----------------|------------|--------------------|------------|-------------------------------|------------|------------|------------|------------|------------|---------------------|------------|------------|------------|------------|------------|------------|------------|------------|--------------|------------|------------|------------|------------|------------|--------------|
| ** **      | ** ** | **Cinergy****(1)** | ** ** | **CG&E and subsidiaries** | ** ** | **PSI**    | ** ** |
| ** **      | ** ** | **2004**           | ** ** | 2003                          |       | Change     |       | %  Change  | ** ** | **2004**            | ** ** | 2003       |       | Change     |       | %  Change  | ** ** | **2004**   | *** *** | 2003       | * *   | Change     | * *   | %  Change  | *** *** |
| ** **      | ** ** | ** **         | ** ** | ** **                    | ** ** | ** ** | ** ** | ** ** | ** ** | ***(in millions)*** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **   |
|            | * *   | * *           | * *   | * *                      | * *   | * *   | * *   | * *   | * *   | * *            | * *   | * *   | * *   | * *   | * *   | * *   | * *   | * *   | * *     | * *   | * *   | * *   | * *   | * *   | * *     |
| Fuel            |       | $                  | **499**    |                          | $          | 459        |       | $          | 40         |                | 9          |       | **$**      | **230**    |       | $          | 193        |       | $            | 37         |       | 19         |       | **$**      | **231**      |   | $ | 251 |   | $ | (20 | ) | (8 | ) |
| Purchased power |       | **82**             |       | 51                            |       | 31         |       | 61         |       | **41**              |       | 44         |       | (3         | )          | (7         | )          | **45**     |         | 38         |       | 7          |       | 18         |         |
| Total           |       | $                  | **581**    |                          | $          | 510        |       | $          | 71         |                | 14         |       | **$**      | **271**    |       | $          | 237        |       | $            | 34         |       | 14         |       | **$**      | **276**      |   | $ | 289 |   | $ | (13 | ) | (4 | ) |
|                 |            |                    |            |                               |            |            |            |            |            |                     |            |            |            |            |            |            |            |            |              |            |            |            |            |            |              |  |  |  |  |  |  |  |  |  |  |  |  |

 

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

 

*Fuel*

 

*Fuel*primarily represents the cost of coal, natural gas, and oil that is used togenerate electricity.  The followingtable details the changes to fuel expense from the six months endedJune 30, 2003, to the six months ended June 30, 2004:

 

| ** **                                | ** ** | ** **        | ** ** | ** **   | ** ** | ** ** | ** ** |
|-------------------------------------------|------------|-------------------|------------|--------------|------------|------------|------------|
| ** **                                | ** ** | **Cinergy(1)**    | ** ** | **CG&E** | ** ** | **PSI**    | ** ** |
| ** **                                | ** ** | **(in millions)** | ** ** |
|                                      | * *   | * *          | * *   | * *     | * *   | * *   | * *   |
| Fuel expense - June 30, 2003         |       | $                 | 459        |         | $          | 193        |       | $ | 251 |   |
|                                      |       |              |       |         |       |       |       |
| *Increase (decrease) due to changes  in:* |       |              |       |         |       |       |       |
| Price of fuel                             |       | 28                |       | 23           |       | 5          |       |
| Deferred fuel cost                        |       | (49               | )          | —       |       | (49        | )          |
| Fuel consumption                          |       | 22                |       | (2           | )          | 24         |       |
| Other(2)                                  |       | 39                |       | 16           |       | —     |       |
|                                      |       |              |       |         |       |       |       |
| **Fuel expense - June 30, 2004**     |       | **$**             | **499**    | ** **   | **$**      | **230**    | ** ** | **$** | **231** |   |

 

 

| (1)              The results  of **Cinergy** also include amounts  related to non-registrants.                                                                                              |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2)              Includes  costs of coal origination and non-regulated energy service subsidiaries that  started operations, or became fully consolidated, during the second half of  2003. |
|                                                                                                                                                                                                                                                         |

 

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

 

*Purchased Power*

 

*Purchasedpower* expense increased for **Cinergy**and **PSI** and decreased for **CG&E** for the six months endedJune 30, 2004, as compared to 2003. **Cinergy’s** increase wasprimarily due to a significantly greater number of third party purchases by itssubsidiaries in 2004.  In 2003, **Cinergy’s** subsidiaries’ *purchased power* expense included certainintercompany purchases that were eliminated in consolidation.

 

Also contributing to **Cinergy’s** increase and primarily causing **PSI’s**increase were additional purchasesmade for **PSI’s** wholesale fullrequirement customers resulting from both an increase in the

 

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

 

amount of MWhs purchasedfor these customers and the price paid per MWh.   Partially offsetting **Cinergy’s**increase and primarily causing**CG&E’s** decrease was a reduction in theamount of MWhs purchased to serve **CG&E’s**wholesale full requirements customers, partially offset by an increase in theprice paid per MWh for these purchases.

 

#### **Gas Margins**

 

**CG&E’s**gas gross margins increased and **Cinergy’s**decreased for the six months ended June 30, 2004, as compared to the sameperiod last year.  **CG&E’s** gas margins increased by $7million primarily due to rate tariff adjustments associated with the gas mainreplacement program, a low-income subsidy program, and Ohio excise taxes.

 

**Cinergy’s**gas margins fell approximately $43 million due to lower margins from our gasmarketing and trading business.  OurNorth American gas marketing and trading business experienced a $37 milliondecline in physical and financial trading margins in 2004 primarily resultingfrom fewer trading opportunities causedby lower volatility, lower price levels, and milder weather in the firstquarter of 2004.  Natural gas prices were extremelyvolatile in the first quarter of 2003.  The remaining decline was due to a drop inour storage and transportation margins. Our volume sold from storage experienced a 33 percent decline in the first six months of 2004, as compared to2003, primarily as a result of a reduction in available gas in storage, milderweather, and lower volatility of gas prices in the first quarter of 2004, ascompared to the first quarter of 2003.

 

#### **Other Revenues**

 

*Otherrevenues* for **Cinergy**increasedfor the six months ended June 30, 2004, as compared to 2003, primarily dueto non-regulated energy service subsidiaries that started operations, or becamefully consolidated, after June 30, 2003.

 

#### **Operating Expenses**

 

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

 

*Operationand maintenance* expense increased for **Cinergy**, **CG&E**,and **PSI** for the six months endedJune 30, 2004, as compared to 2003. **Cinergy’s**, **CG&E’s**, and **PSI’s** increases include approximately $43 million, $18million, and $25 million, respectively, of higher expenses related to emissionsallowances.  These increases primarilyreflect higher expenses due to an increase in the cost of SO2emission allowances as market prices have increased, timing differences in therecovery of SO2 emission allowances costs under **PSI’s** emission allowances trackingmechanism authorized by the IURC, the introduction of the NOXcompliance program in the second quarter of 2004 (see Note 6(a)(*i*) of the “Notes to Condensed FinancialStatements” in “Item 1. Financial Statements” for further information regardingNOX compliance), and an increase in the number of SO2 emissionallowances used during the period.

 

The higher *Operation and maintenance* expense alsoreflects consulting fees related to a continuous improvement initiative of approximately $12 million, $5million, and $5 million for **Cinergy**,**CG&E**, and **PSI**, respectively, in the currentperiod.  Employee benefit expensesincreased approximately $11 million and $4 million for **Cinergy**and **CG&E**, respectively. Approximately $12

 

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

 

million of **Cinergy’s** increase is due to non-regulatedenergy service subsidiaries that started operations, or became fullyconsolidated, after the second quarter of 2003. In addition, higher costs of approximately $9 million, $7 million, and$2 million for **Cinergy**, **CG&E**, and **PSI**, respectively, were due to changes in transmission costslargely resulting from changes in the Midwest ISO operations in 2003.  Maintenance expenses, primarilyproduction-related, were higher by approximately $12 million and $11 millionfor **Cinergy** and **CG&E**, respectively.

 

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

 

*Depreciation*expense increased for **Cinergy** and **PSI**, and decreased for **CG&E** for the six months endedJune 30, 2004, as compared to 2003. ** **Approximately $19 million of **Cinergy’s** and **PSI’s** increase was due to the addition of depreciable plantprimarily for pollution control equipment. Partially offsetting **Cinergy’s**increase and contributing to **CG&E’s**decrease was an approximate $15 million reduction due to longer estimateduseful lives of **CG&E’s**generation assets resulting from a depreciation study completed during thethird quarter of 2003.  Approximately $4million of **Cinergy’s** increase andpartially offsetting **CG&E’s**decrease was the addition of depreciable plant primarily for pollution controlequipment and additions related to the accelerated gas main replacementprogram.

 

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

 

*MiscellaneousIncome (Expense)*– *Net*decreased for **Cinergy** for the sixmonths ended June 30, 2004, as compared to 2003, which reflectsapproximately $34 million in impairment charges on non-controlling interests ininvestments.  The majority of thesecharges relate to a company, in which **Cinergy**holds a non-controlling interest, that agreed to sell its major assets.  This company is involved in the developmentand sale of outage management software. This decrease was partially offset by interest income of approximately$10 million on the notes receivable of two subsidiaries consolidated in thethird quarter of 2003, as discussed in the 2003 10-K.

 

#### **Interest Expense**

 

*Interest**Expense* increased for **Cinergy** and decreased for **CG&E** for the six months endedJune 30, 2004, as compared to 2003. Approximately $12 million of **Cinergy’s**increase reflects the recognition of a note payable to a trust.  Also reflected in **Cinergy’s** increase is approximately $9 million related toadditional debt recorded in accordance with the consolidation of two newentities.  The note payable andadditional debt were both recorded in the third quarter of 2003 resulting fromthe adoption of Interpretation 46, as discussed in the 2003 10-K.  **CG&E’s**decreasewas primarily due to a decrease in average long-term debt and a decrease in theeffective interest rate on long-term debt for the six months endedJune 30, 2004, as compared to 2003.** **Partially offsetting**Cinergy’s** increases and contributing to **CG&E’s** decrease were charges recordedduring 2003 associated with the re-financing of certain debt.

 

#### **Preferred Dividend Requirement of SubsidiaryTrust**

 

*PreferredDividend Requirement of Subsidiary Trust* decreased for **Cinergy** for the six months endedJune 30, 2004, as compared to 2003, as a result of the implementation ofInterpretation 46.  EffectiveJuly 1, 2003, the preferred trust securities and the related dividends areno longer reported in

 

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

 

**Cinergy’s**financial statements.  However, interestexpense is still being incurred on a note payable to this trust as discussedabove.

 

#### **Income Taxes**

 

The effective income taxrate for **Cinergy** and**CG&E**remained flat for the six-monthsended June 30, 2004, as compared to 2003. ** PSI’s**effective incometax rate increased for the comparative period, primarily a result of anincrease in Indiana state income taxes.  **Cinergy’s** 2004 effective tax rate isexpected to be approximately 24 percent.

 

In July 2002,Capital & Trading acquired a coal-based synthetic fuel productionfacility.  The synthetic fuel produced atthis facility qualifies for tax credits in accordance with Section 29 ofthe Internal Revenue Code.  Eligibilityfor these credits expires after 2007.  **Cinergy** received a private letter rulingfrom the Internal Revenue Service in connection with the acquisition of thefacility.  To date, **Cinergy** has recorded approximately $158million in tax credits.

 

#### **Discontinued Operations**

 

During the second quarterof 2003, **Cinergy** completed thedisposal of its gas distribution operation in South Africa, sold its remainingwind assets in the United States, and substantially sold or liquidated theassets of its energy trading operation in the Czech Republic.  Pursuant to Statement 144, these investmentshave been classified as discontinued operations in our financial statements.

 

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

 

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

 

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

 

**ULH&P**

 

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

 

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

 

| ** **               | ** ** | ** **           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **   |
|--------------------------|------------|----------------------|------------|------------|------------|------------|------------|------------|--------------|
| ** **               | ** ** | **ULH&P**        | ** ** |
| ** **               | ** ** | **2004**             | ** ** | 2003       |       | Change     | * *   | %  Change  | *** *** |
| ** **               | ** ** | ***(in thousands)*** | ** ** |
|                     | * *   | * *             | * *   | * *   | * *   | * *   | * *   | * *   | * *     |
| Electric gross margin(1) |       | **$**                | **33,640** |       | $          | 29,766     |       | $          | 3,874        |   | 13 |   |
| Gas gross margin(2)      |       | **25,810**           |       | 22,817     |       | 2,993      |       | 13         |         |
|                     |       | ** **           |       |       |       |       |       |       |         |
| Net income               |       | **10,979**           |       | 8,911      |       | 2,068      |       | 23         |         |
|                          |            |                      |            |            |            |            |            |            |              |  |  |  |

 

 

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

 

#### **Summary of Results**

 

Electric and gas grossmargins increased for **ULH&P** forthe six months ended June 30, 2004, as compared to 2003.  The increase in electric gross marginsreflects a greater amount of MWhs delivered due to increases in non-weatherrelated demand and warmer weather in the current period.  The increase in gas gross margins was due, inpart, to rate tariff adjustments associated with the gas main replacementprogram.

 

The increase in netincome for the year was primarily due to the increased electric and gas grossmargins discussed above.  These increaseswere partially offset by higher *Depreciation*expense primarily related to non-utility property****and higher *Operation andmaintenance* expense associated with demand side management programs,maintenance, and employee benefits.

 

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

 

### **FUTURE EXPECTATIONS/TRENDS**

 

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

 

### **ELECTRIC INDUSTRY**

 

***Ohio***

 

As discussed in moredetail in the 2003 10-K, **CG&E**made multiple rate filings in 2003 with the PUCO seeking to establishmarket-based rates for generation service at the end of the market developmentperiod and to recover investments made in the transmission and distributionsystem.  In December 2003, thesefilings, and **CG&E’s** proposalfor establishing its post-market development period market pricing methodology,were consolidated for hearing before the PUCO. In addition, the PUCO requested that **CG&E**propose a rate stabilization plan in these same proceedings.  In January 2004, **CG&E** filed its proposed ratestabilization plan.  In May 2004, **CG&E**enteredinto a settlement agreement with most of the parties to these proceedingsrequesting that the PUCO approve a modified version of the rate stabilizationplan.

 

Themajor features of the modified plan are as follows (some of these featuresrevise provisions of the **CG&E** transition plan discussed more fully in the2003 10-K):

 

•                  **CG&E**would begin to collect a POLR charge from non-residential customers effectiveJanuary 1, 2005, and from residential customers effective January 1,2006.  The POLR charge, which consists ofa fixed and variable component, is intended to provide cost recovery primarilyfor increased capacity reserves, environmental compliance and emissionallowance expenditures.  The fixedcomponent, which is 15 percent of current generation rates, is not charged tothe first 25 percent of customers in each customer class who switch to analternative supplier.  The variablecomponent, which is charged to all customers, could be increased by up to eightpercent of **CG&E’s** generationrate each year from 2005 through 2008. If the settlement is approved, revenues are expected to increaseapproximately $40 million in 2005 and $98 million in 2006 for the POLR charge;

•                  Customers receiving generation from **CG&E** would be charged **CG&E’s** existing generation rates, lessthe 15 percent recovered through the POLR charge discussed above.  A fuel cost recovery mechanism would beestablished to recover costs for fuel that exceed the amount originally includedin the rates frozen in the **CG&E**transition plan.  These new rates wouldapply to non-residential customers beginning January 1, 2005 and toresidential customers beginning January 1, 2006;

•                  The five percent generation ratereduction for residential customers currently in effect through 2005 would beextended to 2008;

•                  The recovery of the residentialregulatory transition charge currently in effect through 2008 would be extendedto 2010;

•                  Transmission cost recovery mechanismswould be established beginning January 1, 2005 for non-residentialcustomers and January 1, 2006 for residential customers;

 

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

 

•                  **CG&E**would have the ability to defer certain capital-related distribution costs fromJuly 1, 2004 through December 31, 2005 (we currently estimate thatapproximately $70 million would be deferred during this period) with recoveryto be provided through riders beginning January 1, 2006 throughDecember 31, 2010.

 

Evidentiary hearingsaddressing the issues described above took place during May andJune 2004.  We cannot predict theoutcome of these proceedings.

 

**CG&E**has also filed an application for an annual increase of approximately $78million in electric distribution base rates, to be effective in the firstquarter of 2005 for non-residential customers and January 1, 2006 forresidential customers.  The ratestabilization plan settlement agreement described above provides for **CG&E** to withdraw this base rate caseupon approval of the rate stabilization plan. **CG&E** can then file anew distribution base rate case, with rates to become effective January 1,2006.

 

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

 

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

 

In response to prior FERCorders, in March 2004, the Midwest ISO filed with the FERC proposedchanges to its existing transmission tariff to add terms and conditions toimplement a centralized security-constrained economic dispatch platformsupported by a Day-Ahead and Real-Time Energy Market design, including LocationalMarginal Pricing and Financial Transmission Rights (Energy MarketsTariff).  In May 2004, the FERC releasedan order scheduling the start-up of the Energy Markets Tariff for no earlierthan March 1, 2005, and establishing various procedures for resolvingoutstanding issues, but has not ruled on the filing itself.  At this time, **Cinergy** cannot predict the effect the Midwest ISO’s EnergyMarkets Tariff filing will have on our financial position or results ofoperations.

 

***Blackout Report***

 

In April 2004, theUnited States-Canada Power System Outage Task Force issued its Final Report onthe August 14, 2003 Blackout in the United States and Canada.  The report reviewed the causes of theBlackout and made 46 recommendations intended to minimize the likelihood andscope of similar events in the future. One of the recommendations is to make reliability standards mandatoryand enforceable with penalties for noncompliance.  In the past, compliance with North ElectricReliability Council’s reliability standards and guidelines has largely beenvoluntary.  At this time, we do notbelieve the Final Report will have a material impact on our financial positionor results of operations.

 

***FERC’s Market Screen Orders***

 

In April 2004, FERCissued an order establishing a new, interim set of market power screens for usein evaluating sales of wholesale power at market-based rates.  In July 2004, the FERC issued an ordergenerally affirming that order.  InApril 2004, the FERC also commenced a rulemaking to evaluate whether itsoverall test for market-based rates should be continued, and to determine apermanent market power test to replace the interim test.  That rulemaking process remains pending.  At this

 

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

 

time, we cannot predictthe effect the April and July orders and the April rulemakingwill have on our financial position or results of operations.

 

### **MARKET RISK SENSITIVEINSTRUMENTS AND POSITIONS**

 

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

 

As discussed in the 200310-K, **CG&E** and **PSI** executed a new joint operatingagreement in April 2002 whereby we choose to originate all new powermarketing and trading contracts since April 2002 on behalf of **CG&E** only.  Historically, such contracts were executed onbehalf of **PSI** and **CG&E** jointly.  **PSI’s**remaining contracts, entered into prior to the new joint operating agreement,are not material.  Additionally, weexpect that **PSI** will not enterinto new power marketing and trading contracts in the future.  Therefore, we have not presented **PSI** separately in the fair value and creditrisk tables below.

 

*Value at Risk*(VaR)

 

Commercial measures themarket risk inherent in the trading portfolio employing VaR analysis and othermethodologies, which utilize forward price curves in electric power and naturalgas markets to quantify estimates of the magnitude and probability of futurevalue changes related to open contract positions.  VaR is a statistical measure used to quantifythe potential change in fair value of the trading portfolio over a particularperiod of time, with a specified likelihood of occurrence, due to marketmovement.  Commercial, through some ofour non-regulated subsidiaries, markets physical natural gas and electricityand trades derivative commodity instruments which are usually settled in cashincluding: forwards, futures, swaps, and options.

 

Any proprietary tradingtransaction, whether settled physically or financially, is included in the VaRcalculation.

 

Our VaR is reported basedon a 95 percent confidence interval, utilizing a one-day holding period.  This means that on a given day (one-dayholding period) there is a 95 percent chance (confidence level) that our tradingportfolio will not lose more than the stated amount.  Prior to March 31, 2004, our VaR modelused the Parametric variance-covariance statistical modeling technique andhistorical volatilities and correlations over the past 21-trading dayperiod.  Beginning with April 1,2004, we calculate VaR using a Monte Carlo simulation methodology using impliedforward-looking volatilities and historical correlations.  Comparisons indicated that the differences inVaR between the Monte Carlo and Parametric calculations were not material andwere within expectations.   The primaryreason for changing to a Monte Carlo approach is that it offers a more scalablemethod for handling more complex derivative positions and provides a consistentplatform for quantifying both market and credit risk.

 

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

 

*Changes in Fair Value*

 

The changes in fair valueof the energy risk management assets and liabilities, for the periods endedJune 30, 2004 and 2003, are presented in the table below:

 

| ** **                                                                                 | ** ** | ** **                             | ** ** | ** **    | ** ** | ** **     | ** ** | ** **   | ** ** |
|--------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|---------------|------------|----------------|------------|--------------|------------|
| ** **                                                                                 | ** ** | **Change in Fair Value  Year to Date** | ** ** |
| ** **                                                                                 | ** ** | **June 30, 2004**                 | ** ** | June 30, 2003 | ** ** |
| ** **                                                                                 | ** ** | **Cinergy(1)**                         | ** ** | **CG&E**  | ** ** | **Cinergy(1)** | ** ** | **CG&E** | ** ** |
| ** **                                                                                 | ** ** | ***(in millions)***                    | ** ** |
|                                                                                       | * *   | * *                               | * *   | * *      | * *   | * *       | * *   | * *     | * *   |
| Fair value of contracts outstanding at beginning of  year                                  |       | **$**                                  | **41**     | ** **    | **$**      | **20**         | ** ** | $            | 75         |   | $ | 42 |   |
|                                                                                       |       | ** **                             | ** ** | ** **    | ** ** |           |       |         |       |
| Changes in fair value attributable to changes in  valuation techniques and assumptions (2) |       | **—**                             | ** ** | **—**    | ** ** | 1              |       | 1            |       |
|                                                                                       |       | ** **                             | ** ** | ** **    | ** ** |           |       |         |       |
| Other changes in fair value (3)                                                            |       | **103**                                | ** ** | **49**        | ** ** | 82             |       | 19           |       |
|                                                                                       |       | ** **                             | ** ** | ** **    | ** ** |           |       |         |       |
| Option premiums paid/(received)                                                            |       | **(3**                                 | **)**      | **2**         | ** ** | (11            | )          | (2           | )          |
|                                                                                       |       | ** **                             | ** ** | ** **    | ** ** |           |       |         |       |
| Cumulative effect of changes in accounting principle                                       |       | **—**                             | ** ** | **—**    | ** ** | (20            | )          | (13          | )          |
|                                                                                       |       | ** **                             | ** ** | ** **    | ** ** |           |       |         |       |
| Contracts settled                                                                          |       | **(76**                                | **)**      | **(28**       | **)**      | (117           | )          | (49          | )          |
|                                                                                       |       | ** **                             | ** ** | ** **    | ** ** |           |       |         |       |
| Fair value of contracts outstanding at end of period                                       |       | **$**                                  | **65**     | ** **    | **$**      | **43**         | ** ** | $            | 10         |   | $ | (2 | ) |

 

 

| (1)              The results  of **Cinergy** also include amounts  related to non-registrants.                                                                                                                          |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2)              Represents  changes in fair value recognized in income, caused by changes in assumptions  used in calculating fair value or changes in modeling techniques.                                            |
| (3)              Represents  changes in fair value, recognized in income, primarily attributable to  fluctuations in price.  This amount  includes both realized and unrealized gains on energy trading contracts. |
| ** **                                                                                                                                                                                                                                                                               |

 

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

 

| ** **                                            | ** ** | ** **             | ** ** | ** **         | ** ** | ** **     | ** ** | ** **   | ** ** |
|-------------------------------------------------------|------------|------------------------|------------|--------------------|------------|----------------|------------|--------------|------------|
| ** **                                            | ** ** | **June 30, 2004** | ** ** | June 30, 2003 | ** ** |
| ** **                                            | ** ** | **Cinergy(1)**         | ** ** | **CG&E**       | ** ** | **Cinergy(1)** | ** ** | **CG&E** | ** ** |
| ** **                                            | ** ** | ***(in millions)***    | ** ** |
|                                                  | * *   | * *               | * *   | * *           | * *   | * *       | * *   | * *     | * *   |
| Energy risk management assets – current          |       | **$**                  | **425**    | ** **         | **$**      | **156**        | ** ** | $            | 401        |   | $ | 68 |   |
| Energy risk management assets – non-current      |       | **138**                | ** ** | **58**             | ** ** | 151            |       | 63           |       |
|                                                  |       | ** **             | ** ** | ** **         | ** ** |           |       |         |       |
| Energy risk management liabilities – current     |       | **384**                | ** ** | **134**            | ** ** | 385            |       | 79           |       |
| Energy risk management liabilities – non-current |       | **114**                | ** ** | **37**             | ** ** | 157            |       | 54           |       |
|                                                  |       | ** **             | ** ** | ** **         | ** ** |           |       |         |       |
| ** **                                            |       | **$**                  | **65**     | ** **         | **$**      | **43**         | ** ** | $            | 10         |   | $ | (2 | ) |

 

 

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

 

77

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

 

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

 

| ** **                                            | ** ** | ** **                                            | ** **   | ** **        | ** ** | ** **        | ** ** | ** **     | ** ** | ** **            | ** ** |
|-------------------------------------------------------|------------|-------------------------------------------------------|--------------|-------------------|------------|-------------------|------------|----------------|------------|-----------------------|------------|
| ** **                                            | ** ** | **Fair Value of Contracts as of  June 30, 2004** | ** **   |
| ** **                                            | ** ** | ** **                                            | ** **   |
| ** **                                            | ** ** | **Maturing**                                          | ** **   | ** **        | ** ** |
| **Source of Fair Value(1)**                           | ** ** | **Within  12 months**                                 | ** **   | **12-36  months** | ** ** | **36-60  months** | ** ** | **Thereafter** | ** ** | **Total  Fair Value** | ** ** |
| ** **                                            | ** ** | ***(in millions)***                                   | *** *** |
|                                                  | * *   | * *                                              | * *     | * *          | * *   | * *          | * *   | * *       | * *   | * *              | * *   |
| **Cinergy(2)**                                        |       |                                                  |         |              |       |              |       |           |       |                  |       |
| Prices actively quoted                                |       | $                                                     | 38           |              | $          | 18                |       | $              | —     |                  | $          | — |   | $ | 56 |   |
|                                                  |       |                                                  |         |              |       |              |       |           |       |                  |       |
| Prices based on models and other valuation methods(3) |       | 3                                                     |         | 11                |       | (1                | )          | (4             | )          | 9                     |       |
|                                                  |       |                                                  |         |              |       |              |       |           |       |                  |       |
| Total                                                 |       | $                                                     | 41           |              | $          | 29                |       | $              | (1         | )                     | $          | (4 | ) | $ | 65 |   |
|                                                  |       |                                                  |         |              |       |              |       |           |       |                  |       |
| **CG&E**                                          |       |                                                  |         |              |       |              |       |           |       |                  |       |
| Prices actively quoted                                |       | $                                                     | 15           |              | $          | 15                |       | $              | —     |                  | $          | — |   | $ | 30 |   |
|                                                  |       |                                                  |         |              |       |              |       |           |       |                  |       |
| Prices based on models and other valuation methods(3) |       | 7                                                     |         | 9                 |       | (3                | )          | —         |       | 13                    |       |
|                                                  |       |                                                  |         |              |       |              |       |           |       |                  |       |
| Total                                                 |       | $                                                     | 22           |              | $          | 24                |       | $              | (3         | )                     | $          | — |   | $ | 43 |   |

 

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

 

*Energy Trading Credit Risk*

 

**Cinergy’s**extension of credit for energy marketing and trading is governed by a CorporateCredit Policy.  Written guidelinesapproved by **Cinergy’s** Risk PolicyCommittee document the management approval levels for credit limits, evaluationof creditworthiness, and credit risk mitigation procedures.  **Cinergy**analyzes net credit exposure and establishes credit reserves based on thecounterparties’ credit rating, payment history, and tenor of the outstandingobligation.  Exposures to credit risksare monitored daily by the Corporate Credit Risk function, which is independentof all trading operations.  Energy commodityprices can be extremely volatile and the market can, at times, lack liquidity.  Because of these issues, credit risk forenergy commodities is generally greater than with other commodity trading.

 

78

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

 

The following tablesprovide information regarding **Cinergy’s**and **CG&E’s** exposure on energytrading contracts as well as the expected maturities of those exposures as ofJune 30, 2004.  The tables includeaccounts receivable and energy risk management assets, which are net of accountspayable and energy risk management liabilities with the same counterpartieswhen we have the right of offset.  Thecredit collateral shown in the following tables includes cash and letters ofcredit.

 
| ** **                            | ** ** | ** **                                     | ** ** | ** **             | ** ** | ** **        | ** ** | ** **                             | ** ** | ** **                                                             | ** ** | ** **                                                                      | ** ** |
|---------------------------------------|------------|------------------------------------------------|------------|------------------------|------------|-------------------|------------|----------------------------------------|------------|------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------|------------|
| **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 thousands)***                           |       |
|                                  |       |                                           |       |                   |       |              |       |                                   |       |                                                                   |       |                                                                            |       |
| Investment Grade(2)                   |       | $                                              | 519,187    |                   | $          | 48,587            |       | $                                      | 470,600    |                                                                   | 74         | %                                                                               | —     |   | $ | — |   |
| Internally Rated-Investment Grade(3)  |       | 119,891                                        |       | 6,262                  |       | 113,629           |       | 18                                     |       | —                                                                 |       | —                                                                          |       |
| Non-Investment Grade                  |       | 94,932                                         |       | 61,622                 |       | 33,310            |       | 5                                      |       | —                                                                 |       | —                                                                          |       |
| Internally Rated-Non-Investment Grade |       | 45,349                                         |       | 25,873                 |       | 19,476            |       | 3                                      |       | —                                                                 |       | —                                                                          |       |
|                                  |       |                                           |       |                   |       |              |       |                                   |       |                                                                   |       |                                                                            |       |
| Total                                 |       | $                                              | 779,359    |                   | $          | 142,344           |       | $                                      | 637,015    |                                                                   | 100        | %                                                                               | —     |   | $ | — |   |

 
| ** **                            | ** ** | **Maturity of Credit Risk  Exposure** | ** ** |
|---------------------------------------|------------|---------------------------------------|------------|
| ** **                            | ** ** | ** **                            | ** ** |
| **Rating**                            | ** ** | **Less than  2 Years**                | ** ** | **2-5 Years** | ** ** | **Exposure  Greater than  5 Years** | ** ** | **Total Exposure  Before Credit  Collateral** | ** ** |
| ** **                            | ** ** | ***(in thousands)***                  | ** ** |
|                                  | * *   | * *                              | * *   | * * | * * | * * | * * | * * | * * |
| Investment Grade(2)                   |       | $                                     | 454,917    |   | $ | 47,541 |   | $ | 16,729 |   | $ | 519,187 |   |
| Internally Rated-Investment Grade(3)  |       | 117,326                               |       | 2,280 |   | 285 |   | 119,891 |   |
| Non-Investment Grade                  |       | 94,493                                |       | 439 |   | — |   | 94,932 |   |
| Internally Rated-Non-Investment Grade |       | 45,064                                |       | 285 |   | — |   | 45,349 |   |
|                                  |       |                                  |       |   |   |   |   |   |   |
| Total                                 |       | $                                     | 711,800    |   | $ | 50,545 |   | $ | 17,014 |   | $ | 779,359 |   |

 

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

 

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

 
| ** **                            | ** ** | ** **                                     | ** ** | ** **             | ** ** | ** **        | ** ** | ** **                             | ** ** | ** **                                                             | ** ** | ** **                                                                          | ** ** |
|---------------------------------------|------------|------------------------------------------------|------------|------------------------|------------|-------------------|------------|----------------------------------------|------------|------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------|------------|
| **CG&E**                          | ** ** | ** **                                     | ** ** | ** **             | ** ** | ** **        | ** ** | ** **                             | ** ** | ** **                                                             | ** ** | ** **                                                                          | ** ** |
| ** **                            | ** ** | ** **                                     | ** ** | ** **             | ** ** | ** **        | ** ** | ** **                             | ** ** | ** **                                                             | ** ** | ** **                                                                          | ** ** |
| **Rating**                            | ** ** | **Total  Exposure  Before Credit  Collateral** | ** ** | **Credit  Collateral** | ** ** | **Net  Exposure** | ** ** | **Percentage of  Total  Net Exposure** | ** ** | **Number of  Counterparties  Greater than 10%  of Total Net Exposure** | ** ** | **Net Exposure of  Counterparties  Greater than 10% of  Total Net Exposure****(3)** | ** ** |
|                                  | * *   | ***(in thousands)***                           |
| Investment Grade(1)                   |       | $                                              | 131,405    |                   | $          | 37,928            |       | $                                      | 93,477     |                                                                   | 83         | %                                                                                   | 1          |   | $ | 12,733 |   |
| Internally Rated-Investment Grade(2)  |       | 14,160                                         |       | —                 |       | 14,160            |       | 13                                     |       | —                                                                 |       | —                                                                              |       |
| Non-Investment Grade                  |       | 16,206                                         |       | 14,059                 |       | 2,147             |       | 1                                      |       | —                                                                 |       | —                                                                              |       |
| Internally Rated-Non-Investment Grade |       | 4,423                                          |       | 1,493                  |       | 2,930             |       | 3                                      |       | —                                                                 |       | —                                                                              |       |
|                                  |       |                                           |       |                   |       |              |       |                                   |       |                                                                   |       |                                                                                |       |
| Total                                 |       | $                                              | 166,194    |                   | $          | 53,480            |       | $                                      | 112,714    |                                                                   | 100        | %                                                                                   | 1          |   | $ | 12,733 |   |

 
| ** **                            | ** ** | **Maturity of Credit Risk  Exposure** | ** ** |
|---------------------------------------|------------|---------------------------------------|------------|
| ** **                            | ** ** | ** **                            | ** ** |
| **Rating**                            | ** ** | **Less than  2 Years**                | ** ** | **2-5 Years** | ** ** | **Exposure  Greater than  5 Years** | ** ** | **Total Exposure  Before Credit  Collateral** | ** ** |
| ** **                            | ** ** | ***(in thousands)***                  | ** ** |
|                                  | * *   | * *                              | * *   | * * | * * | * * | * * | * * | * * |
| Investment Grade(1)                   |       | $                                     | 117,004    |   | $ | 14,401 |   | $ | — |   | $ | 131,405 |   |
| Internally Rated-Investment Grade(2)  |       | 14,160                                |       | — |   | — |   | 14,160 |   |
| Non-Investment Grade                  |       | 15,786                                |       | 420 |   | — |   | 16,206 |   |
| Internally Rated-Non-Investment Grade |       | 4,423                                 |       | — |   | — |   | 4,423 |   |
|                                  |       |                                  |       |   |   |   |   |   |   |
| Total                                 |       | $                                     | 151,373    |   | $ | 14,821 |   | $ | — |   | $ | 166,194 |   |

 

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

 

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

 

### **ACCOUNTING MATTERS**

 

#### **Critical Accounting Policies**

 

Preparation of financialstatements and related disclosures in compliance with generally acceptedaccounting principles (GAAP) requires the use of assumptions andestimates.  In certain instances, theapplication of GAAP requires judgments regarding future events, including thelikelihood of success of particular initiatives, legal and regulatorychallenges, and anticipated recovery of costs. Therefore, the possibility exists for materially different reportedamounts under different conditions or assumptions.

 

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

 

•                  Fair Value Accounting for EnergyMarketing and Trading;

•                  Retail Customer Revenue Recognition;

•                  Regulatory Accounting;

•                  Pension and Other PostretirementBenefits;

•                  Income Taxes;

•                  Legal and EnvironmentalContingencies; and

•                  Impairment of Long-lived Assets.

 

#### **Accounting Changes**

 

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

 

In January 2003, theFASB issued Interpretation 46, which significantly changes the consolidationrequirements for traditional special purpose entities (SPE) and certain otherentities subject to its scope.  Thisinterpretation defines a VIE as (a) an entity that does not have sufficientequity to support its activities without additional financial support or (b)any entity that has equity investors that do not have voting rights, do notabsorb first dollar losses, or receive returns. These entities must be consolidated when certain criteria are met.  The interpretation was originally to beeffective as of July 1, 2003, for **Cinergy**;however, the FASB subsequently permitted deferral of the effective date toDecember 31, 2003, for traditional SPEs and to March 31, 2004, forall other entities subject to the scope of Interpretation 46.  We elected to implement Interpretation 46 fortraditional SPEs in accordance with the original implementation date ofJuly 1, 2003, and for all other entities, including certain operatingjoint ventures, as of March 31, 2004. The consolidation of certain operating joint ventures as of March 31,2004, did not have a material impact on our financial position or results ofoperations.

 

**Cinergy**also holds interests in several joint ventures that are considered VIEs whichdo not require consolidation.  If allthese entities were consolidated, their total assets and liabilities would beimmaterial to our Condensed Consolidated Balance Sheets.

 

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

 

### **SUBSEQUENT EVENT**

 

**Cinergy’s**Power Technology and Infrastructure Services Business Unit holds an investmentin a company that develops, owns and operates wireless communicationtowers.  In July 2004, this companyagreed to sell the majority of its assets. We anticipate recording earnings of approximately $20 million relatingto this sale in the fourth quarter of 2004. These earnings will be reflected in *Equityin Earnings of Unconsolidated Subsidiaries* in **Cinergy’s**CondensedConsolidated Statements of Income.

 

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**QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

## **ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUTMARKET RISK**

 

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

 

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**CONTROLSAND PROCEDURES**

 

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

 

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

 

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

 

Under the supervision andwith the participation of our management, including our chief executive officerand chief financial officer, we have evaluated any change in our internalcontrol over financial reporting (as such term is defined in Rules 13a-15(f)and 15d-15(f) under the Exchange Act) during the fiscal quarter endedJune 30, 2004 and found no change that has materially affected, or is reasonablylikely to materially affect, our internal control over financial reporting.

 

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**PART II.- OTHER INFORMATION**

 

## **PART II.  OTHER INFORMATION**

 

## **ITEM 1.  LEGAL PROCEEDINGS**

 

### **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 (District Court) against **Cinergy**, The Cincinnati Gas & ElectricCompany (**CG&E**), and PSIEnergy, Inc. (**PSI**) allegingvarious violations of the CAA. Specifically, the lawsuit alleges that we violated the CAA by notobtaining Prevention of Significant Deterioration (PSD), Non-Attainment NewSource Review (NSR), and Ohio and Indiana State Implementation Plan (SIP)permits for various projects at our owned and co-owned generatingstations.  Additionally, the suit claimsthat we violated an Administrative Consent Order entered into in 1998 betweenthe United States 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 Generating Station(Beckjord Station).  The suit seeks (1)injunctive relief to require installation of pollution control technology onvarious generating units at **CG&E’s**Beckjord Station and Miami Fort Generating Station, and **PSI’s** Cayuga Generating Station, GallagherGenerating Station (Gallagher Station), Wabash River Generating Station, andGibson Generating Station, and (2) civil penalties in amounts of up to $27,500per day for each violation.  In addition,three northeast states and two environmental groups have intervened in thecase.  In May 2004, the City ofLouisville, Kentucky filed a motion to intervene in the case with respect toall claims made by the United States against **PSI**and **Cinergy** regarding theGallagher Station.  The court deniedLouisville’s motion in June 2004. The case is currently in discovery, and the District Court has set thecase for trial by jury commencing in August 2005.

 

In March 2000, the United States also filed in theDistrict Court an amended complaint in a separate lawsuit alleging violationsof the CAA 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 being defended by CSP.  In April 2001, the District Court inthat case ruled that the Government and the intervening plaintiff environmentalgroups cannot seek monetary damages for alleged violations that occurred priorto November 3, 1994; however, they are entitled to seek injunctive relieffor such alleged violations.  Neitherparty appealed that decision.

 

In addition, **Cinergy**and **CG&E** have been informed byDP&L that in June 2000, the EPA issued a Notice of Violation (NOV) to DP&Lfor alleged violations of PSD, NSR, and Ohio SIP requirements at a generatingstation operated by DP&L and jointly-owned by **CG&E**.  The NOVindicated the EPA may (1) issue an order requiring compliance with therequirements of the Ohio SIP, or (2) bring a civil action seeking injunctiverelief and civil penalties of up to $27,500 per day for each violation.  In July 2004, the Sierra Club sent **Cinergy** a notice of intent to sue foralleged violations of the CAA at this same generating station.

 

In December 2000, **Cinergy**, **CG&E**,and **PSI** reached an agreement inprinciple with the plaintiffs regarding the above matters.  The complete resolution of these issues wascontingent upon

 

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**Controlsand Procedures**

 

establishing a finalagreement with the EPA and other parties, but the plaintiffs insisted oncommitments which went beyond those contained in the agreement inprinciple.  At this time we believe it isunlikely that a final settlement agreement will be reached on these terms.  It is not possible to predict whether resolution of thesematters would have a material effect on our financial position or results ofoperations.  We intend to defendagainst the allegations, discussed above, vigorously in court.

 

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

 

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

 

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

 

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

 

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

 

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

 

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,

 

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**PART II.- OTHER INFORMATION**

 

and remediating damage toproperty and paying claims related to MGP sites; or (2) pay **PSI’s** cost of defense.  The trial court issued a variety of rulingswith respect to the claims and defenses in the litigation.  **PSI**appealedcertain adverse rulings to the Indiana Court of Appeals and the appellate courthas remanded the case to the trial court. The court has set the case for trial commencing inJanuary 2005.  At the present time, **PSI** cannot predict the outcome of thislitigation, including the outcome of the appeals.

 

**PSI**has accrued costs related to investigation, remediation, and groundwatermonitoring for those sites where such costs are probable and can be reasonablyestimated.  We will continue toinvestigate and remediate the sites as outlined in the voluntary remediationplan.  As additional facts become knownand investigation is completed, we will assess 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 CLAIM LITIGATION**

 

**CG&E**and **PSI** have been named asdefendants or co-defendants in lawsuits related to asbestos at their electricgenerating stations.  Currently, thereare approximately 85 pending lawsuits.  Inthese lawsuits, plaintiffs claim to have been exposed to asbestos-containingproducts in the course of their work at the **CG&E**and **PSI** generating stations.  The plaintiffs further claim that as theproperty owner of the generating stations,**CG&E** and **PSI** shouldbe held liable for their injuries and illnesses based on an alleged duty towarn and protect them from any asbestos exposure.  A majority of the lawsuits to date have beenbrought against **PSI**.  The impact on **CG&E’s** and **PSI’s**financial position or results of operations of these cases to date has not beenmaterial.

 

Of these lawsuits, onecase filed against **PSI** has beentried to verdict.  The jury returned averdict against **PSI** in the amountof approximately $500,000 on a negligence claim and a verdict for **PSI** on punitive damages.  **PSI**received an adverse ruling in an initial appeal of that verdict, but theIndiana Supreme Court accepted the transfer of the case, and heard oralargument in June 2004.  In addition,**PSI** has settled a number of otherlawsuits for amounts, which neither individually nor in the aggregate, arematerial to **PSI’s** financialposition or results of operations.

 

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

 

We currently, and fromtime to time, are involved in lawsuits, claims, and complaints incidental tothe conduct of our business.  In theopinion of management, no such proceeding is likely to have a material adverseeffect on us.

 

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**PART II.- OTHER INFORMATION**

 

### **ITEM 2.  CHANGES****INSECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES**

 

The number of sharesprovided in the table below represent shares exchanged in connection withemployee option exercises and shares purchased by the plan trustee on behalf ofthe 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** | ** ** |
|                              |       |                                                  |       |                                             |       |                                                                                                    |       |                                                                                                                                   |       |
| April 1 – April 30 |       | 7,089                                                 |       | $                                                | 40.34      |                                                                                                    | N/A        |                                                                                                                                   | N/A        |   |
| May 1 – May 31               |       | 47,141                                                |       | $                                                | 37.03      |                                                                                                    | N/A        |                                                                                                                                   | N/A        |   |
| June 1 – June 30   |       | —                                                |       | $                                                | —     |                                                                                                    | N/A        |                                                                                                                                   | N/A        |   |
|                              |       |                                                  |       |                                             |       |                                                                                                    |       |                                                                                                                                   |       |

 

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**PART II.- OTHER INFORMATION**

 

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

 

(a)               Thedocuments listed below are being furnished or filed on behalf of **Cinergy Corp.**, The Cincinnati Gas &Electric Company (**CG&E**), PSIEnergy, Inc. (**PSI**), and The UnionLight, Heat and Power Company (**ULH&P**).  Exhibits not identified as previously furnishedor filed are furnished or filed herewith:

 

| **Exhibit  Designation** | ** ** | **Registrant**                              | ** ** | **Nature of Exhibit**                                                                                                                                                                           | ** ** | **Previously Filed  as Exhibit to:** |
|--------------------------|------------|---------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|
|                     |       |                                        |       |                                                                                                                                                                                            |       |                                 |
| **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 R. Foster Duncan 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 R. Foster Duncan pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                         |       |                                 |
|                     |       |                                        |       |                                                                                                                                                                                            |       |                                 |

 

(b)                       Thefollowing reports on Form 8-K were furnished or filed during the quarter endedJune 30, 2004.

 

| **Date of Report**  | ** ** | **Registrant**     | ** ** | **Item  Furnished or Filed**                            |
|---------------------|------------|--------------------|------------|---------------------------------------------------------|
|                |       |               |       |                                                    |
| April 27, 2004 |       | **Cinergy  Corp.** |       | Item 12. Results of  Operations and Financial Condition |
|                |       | ** **         |       |                                                    |
| May 6, 2004         |       | **Cinergy  Corp.** |       | Item 12. Results of  Operations and Financial Condition |
|                |       |               |       |                                                    |

 

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## **SIGNATURES**

 

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

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

 

 
|       Date:  August 4, 2004 |     /s/                                  | Lynn J. Good |   |
|---------------------------------------------------------------------|--------------------------------------------------------------|--------------|--------|
|                                                                |                                                         | Lynn J. Good |   |
|                                                                | (duly authorized officer  and  principal accounting officer) |         |
|                                                                     |                                                              |              |        |  |

 

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