UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                           Washington, D.C.  20549

                                  FORM 10-K
(Mark One)
(x)  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
      ACT OF 1934
For the fiscal year ended December 31, 1997

                                      OR
( )  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________

 Commission        Registrant, State of Incorporation,       I.R.S. Employer
File Number           Address, and Telephone Number        Identification No.

  1-11377                     CINERGY CORP.                    31-1385023
                         (A Delaware Corporation)
                         139 East Fourth Street
                         Cincinnati, Ohio  45202
                             (513) 381-2000

  1-1232          THE CINCINNATI GAS & ELECTRIC COMPANY        31-0240030
                         (An Ohio Corporation)
                         139 East Fourth Street
                         Cincinnati, Ohio  45202
                             (513) 381-2000

  1-3543                     PSI ENERGY, INC.                  35-0594457
                         (An Indiana Corporation)
                          1000 East Main Street
                        Plainfield, Indiana  46168
                              (317) 839-9611

  2-7793        THE UNION LIGHT,  HEAT AND POWER COMPANY       31-0473080
                        (A Kentucky Corporation)
                         139 East Fourth Street
                         Cincinnati, Ohio  45202
                             (513) 381-2000

Securities registered pursuant to Section 12(b) of the Act:
                                                       Name of each exchange
     Registrant            Title of each class          on which registered
Cinergy Corp.           Common Stock                   New York Stock Exchange

The Cincinnati Gas      Cumulative Preferred Stock
  & Electric Company      4%                           New York Stock Exchange
                        Junior Subordinated
                          Debentures 8.28%             New York Stock Exchange

PSI Energy, Inc.        Cumulative Preferred Stock
                          4.32%, 4.16%, 6 7/8%         New York Stock Exchange
                        First Mortgage Bonds
                          Series S and Y               New York Stock Exchange

The Union Light,        None
  Heat and Power
  Company
<PAGE>

Securities registered pursuant to Section 12(g) of the Act for Cinergy Corp.,
The Cincinnati Gas & Electric Company, PSI Energy, Inc., and The Union Light,
Heat and Power Company:  None

Indicate  by check  mark  whether  each  registrant  (1) has filed  all  reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during the  preceding  12 months  (or for such  shorter  period  that such
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days. Yes X No __

Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation  S-K is not contained  herein,  and will not be contained,  to the
best of registrants'  knowledge,  in definitive proxy or information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ( )

Requirements  pursuant to Item 405 of Regulation  S-K are not applicable for The
Union Light, Heat and Power Company.

The Union  Light,  Heat and Power  Company  meets  the  conditions  set forth in
General  Instruction  I(1)(a) and (b) of Form 10-K and is therefore  filing this
Form 10-K with the reduced  disclosure  format specified in General  Instruction
I(2) of Form 10-K.

As of February 28, 1998, the aggregate  market value of the voting and nonvoting
common equity of Cinergy Corp. held by nonaffiliates was $5.4 billion.

Cinergy Corp. is the sole owner of the Common Stock of each of PSI Energy, Inc.
and The Cincinnati Gas & Electric Company.  The Union Light, Heat and Power
Company's Common Stock is wholly-owned by The Cincinnati Gas & Electric
Company.

As of February 28, 1998,  shares of Common Stock outstanding for each registrant
were as listed:

Company Shares Cinergy Corp., par value $.01 per share               157,764,020
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

                       DOCUMENTS INCORPORATED BY REFERENCE

The Proxy  Statement of Cinergy Corp.  dated March 16, 1998, and the Information
Statement  of PSI  Energy,  Inc.  dated  March 23,  1998,  are  incorporated  by
reference into Part III of this report.

This combined Form 10-K is separately filed by Cinergy Corp., The Cincinnati Gas
& Electric  Company,  PSI  Energy,  Inc.,  and The Union  Light,  Heat and Power
Company.  Information  contained herein relating to any individual registrant is
filed  by  such  registrant  on  its  own  behalf.   Each  registrant  makes  no
representation as to information relating to the other registrants.
<PAGE>
                                TABLE OF CONTENTS
 Item                                                                   Page
Number                                                                 Number

                                      PART I

  1      Business
           Organization . . . . . . . . . . . . . . . . . . . . . .
           CG&E . . . . . . . . . . . . . . . . . . . . . . . . . .
           ULH&P. . . . . . . . . . . . . . . . . . . . . . . . . .
           PSI. . . . . . . . . . . . . . . . . . . . . . . . . . .
           Investments. . . . . . . . . . . . . . . . . . . . . . .
           Services . . . . . . . . . . . . . . . . . . . . . . . .
           Customer, Sales, and Revenue Data. . . . . . . . . . . .
           Financial Information by Business Segment. . . . . . . .
           Regulation . . . . . . . . . . . . . . . . . . . . . . .
           Regulatory Matters . . . . . . . . . . . . . . . . . . .
           Power Supply . . . . . . . . . . . . . . . . . . . . . .
           Fuel Supply. . . . . . . . . . . . . . . . . . . . . . .
           Gas Supply . . . . . . . . . . . . . . . . . . . . . . .
           Competition. . . . . . . . . . . . . . . . . . . . . . .
           Capital Requirements . . . . . . . . . . . . . . . . . .
           Environmental Matters. . . . . . . . . . . . . . . . . .
           Employees. . . . . . . . . . . . . . . . . . . . . . . .
  2      Properties . . . . . . . . . . . . . . . . . . . . . . . .
           CG&E . . . . . . . . . . . . . . . . . . . . . . . . . .
           PSI. . . . . . . . . . . . . . . . . . . . . . . . . . .
           ULH&P. . . . . . . . . . . . . . . . . . . . . . . . . .
           Other Utility Subsidiaries . . . . . . . . . . . . . . .
  3      Legal Proceedings
           WVPA Settlement Agreement. . . . . . . . . . . . . . . .
           Manufactured Gas Plant Claims. . . . . . . . . . . . . .
           Skinner Landfill Remediation . . . . . . . . . . . . . .
           United Scrap Lead Site . . . . . . . . . . . . . . . . .
           Enertech Litigation. . . . . . . . . . . . . . . . . . .
  4      Submission of Matters to a Vote of Security Holders. . . .
         Executive Officers of the Registrant . . . . . . . . . . .

                                     PART II

  5      Market for Registrant's Common Equity
           and Related Stockholder Matters. . . . . . . . . . . . .
  6      Selected Financial Data. . . . . . . . . . . . . . . . . .
  7      Management's Discussion and Analysis of Financial
           Condition and Results of Operations. . . . . . . . . . .
         Index to Financial Statements and Financial Statement
           Schedules. . . . . . . . . . . . . . . . . . . . . . . .
  7A     Quantitative and Qualitative Disclosures About
           Market Risk. . . . . . . . . . . . . . . . . . . . . . .
  8      Financial Statements and Supplementary Data. . . . . . . .
  9      Changes in and Disagreements with Accountants on
           Accounting and Financial Disclosure. . . . . . . . . . .

                                       PART III

 10      Directors and Executive Officers of the Registrant . . . .
 11      Executive Compensation . . . . . . . . . . . . . . . . . .
 12      Security Ownership of Certain Beneficial Owners
           and Management . . . . . . . . . . . . . . . . . . . . .
 13      Certain Relationships and Related Transactions . . . . . .

                                      PART IV

 14      Exhibits, Financial Statement Schedules, and
           Reports on Form 8-K
             Financial Statements and Schedules . . . . . . . . . .
             Reports on Form 8-K. . . . . . . . . . . . . . . . . .
             Exhibits . . . . . . . . . . . . . . . . . . . . . . .
         Signatures . . . . . . . . . . . . . . . . . . . . . . . .
<PAGE>

                                    PART I

                               ITEM 1.  BUSINESS

Cinergy, CG&E, PSI, and ULH&P

Organization

Cinergy  Corp.,  a Delaware  corporation  (Cinergy or Company),  is a registered
holding  company under the Public Utility  Holding  Company Act of 1935 (PUHCA).
Cinergy  was  created  in  the  October  1994  merger  of  PSI  Resources,  Inc.
(Resources)  and The Cincinnati  Gas & Electric  Company  (CG&E).  Following the
merger,  Cinergy became the parent holding  company of PSI Energy,  Inc.  (PSI),
previously Resources' utility subsidiary, CG&E, Cinergy Investments, Inc.
(Investments), and Cinergy Services, Inc. (Services).

Cinergy's two utility  subsidiaries,  CG&E and PSI,  account for the majority of
Cinergy's revenues and total assets.

Cinergy, CG&E, and ULH&P

CG&E

CG&E,  an Ohio  corporation,  is a combination  electric and gas public  utility
company with five wholly-owned utility  subsidiaries,  The Union Light, Heat and
Power Company (ULH&P), Miami Power Corporation,  an Indiana corporation (Miami),
The  West  Harrison  Gas  and  Electric  Company  (West  Harrison),  an  Indiana
corporation,  KO Transmission  Company (KO  Transmission),  and Lawrenceburg Gas
Company  (Lawrenceburg),  an  Indiana  corporation.  In  addition,  CG&E has one
wholly-owned non-utility subsidiary, Tri-State Improvement Company (Tri-State).


CG&E and its utility  subsidiaries are engaged in the production,  transmission,
distribution,  and sale of electric energy and/or the sale and transportation of
natural gas in the  southwestern  portion of Ohio and adjacent areas in Kentucky
and Indiana. The area served with electricity, gas, or both covers approximately
3,000 square  miles,  has an estimated  population  of two million  people,  and
includes the cities of Cincinnati and Middletown in Ohio,  Covington and Newport
in Kentucky, and Lawrenceburg in Indiana.

KO Transmission,  a Kentucky corporation,  acquired an interest in an interstate
natural gas  pipeline in June 1996,  to which CG&E was entitled as a result of a
settlement with the Columbia Gas  Transmission  Corp. KO Transmission is engaged
in the transportation of natural gas in interstate commerce between Kentucky and
Ohio.

Tri-State, an Ohio corporation,  is devoted to acquiring and holding property in
Ohio,  Kentucky,  and Indiana for  substations,  electric and gas rights of way,
office space, and other uses in CG&E's and its subsidiaries' operations.

ULH&P

ULH&P, a Kentucky corporation, is engaged in the transmission, distribution, and
sale of  electric  energy  and the sale and  transportation  of  natural  gas in
northern  Kentucky.  The area  served  with  electricity,  gas,  or both  covers
approximately  500 square  miles,  has an estimated  population  of 319 thousand
people, and includes the cities of Covington and Newport in Kentucky.

Cinergy and PSI

PSI

PSI,  an  Indiana  corporation,  is  engaged  in the  production,  transmission,
distribution,  and sale of  electric  energy  in  north  central,  central,  and
southern  Indiana.  It serves an  estimated  population  of 2.1  million  people
located in 69 of the state's 92 counties  including  the cities of  Bloomington,
Columbus, Kokomo, Lafayette, New Albany, and Terre Haute.

PSI Energy Argentina,  Inc. (PSI Energy Argentina), a wholly-owned subsidiary of
PSI and an  Indiana  corporation,  was  formed  to  invest  in  foreign  utility
companies.  PSI Energy Argentina is a member of a multinational consortium which
has   controlling   ownership   of   Edesur   S.A.   (Edesur).   Edesur   is  an
electricity-distribution  network  serving the  southern  half of Buenos  Aires,
Argentina.  Edesur provides distribution services to 2.1 million customers.  PSI
Energy  Argentina  owns a small  equity  interest in this  project and  provides
operating and consulting services.

South Construction Company, Inc. (South Construction), a wholly-owned subsidiary
of PSI and an Indiana  corporation,  has been used solely to hold legal title to
real estate and interests in real estate which are either not used and useful in
the conduct of PSI's business (such as undeveloped real estate of PSI abutting a
PSI office building) or which have some defect in title which is unacceptable to
PSI. Most of the real estate to which South Construction  acquires title relates
to PSI's utility business.

Cinergy

Investments

Investments, a Delaware corporation, is a non-utility subholding company that
was formed to operate Cinergy's domestic non-utility and international
businesses and interests.  Investments holds the following non-utility
subsidiaries and interests, which are more fully described below:  Cinergy-
Cadence, Inc.; Cinergy Capital & Trading, Inc. (Capital & Trading); Cinergy
Communications, Inc. (Communications); Cinergy Engineering, Inc. (Engineering);
Cinergy Global Power, Inc. (Cinergy Global); Cinergy Resources, Inc. (CRI);
Cinergy Supply Network, Inc. (Supply); Cinergy Solutions, Inc. (Solutions);
Cinergy Technology, Inc. (Technology); Cinergy UK, Inc. (Cinergy UK); and
Enertech Associates, Inc. (Enertech).

Cinergy-Cadence,  Inc., an Indiana  corporation,  is dedicated solely to holding
Investment's  one-third  ownership  interest in Cadence  Network LLC  (Cadence).
Cadence  was  formed in the third  quarter of 1997 as a joint  venture  with New
Century  Energies,  Inc. and Florida  Progress  Corporation  to provide a single
source for both energy management services and products designed to lower energy
costs for  national  customers  that  operate in multiple  locations  across the
country.  These services include consolidated billing, bill auditing,  and usage
analysis. Cadence commenced operations in the third quarter of 1997.

Capital & Trading, an Indiana corporation,  was formed to engage in the business
of marketing power, electricity futures, and trading related energy products and
services  and to provide  consulting  services  in the  wholesale  power-related
markets.  In June 1997,  Capital & Trading  acquired the assets and personnel of
Greenwich  Energy  Partners,   which  specialized  in  energy  risk  management,
marketing, and proprietary arbitrage trading.

Communications,  a Delaware corporation, is an exempt telecommunications company
engaged or planning to be engaged in a variety of telecommunications  activities
including,  but not limited to: right-of-way  leasing,  fiber installation,  and
radio tower construction and leasing.

Engineering,  an Ohio corporation,  provides engineering designs and engineering
technical  support  in  connection  with  various  energy-related  projects  and
proposals.

Cinergy Global, a Delaware corporation, holds substantially all of the equity of
MPII (Zambia)  B.V., a Netherlands  company,  which in turn,  holds a 39% equity
interest in Copperbelt  Energy  Corporation  PLC (CEC), a corporation  organized
under the laws of the Republic of Zambia. CEC holds certain electric generation,
transmission,  and  distribution  assets formerly held by the Republic of Zambia
through the Power Division of Zambia Consolidated Copper Mines Limited.

Cinergy  Global also owns all of the equity of MPI  International  Limited  (MPI
International), a United Kingdom (UK) company. During the third quarter of 1997,
MPI  International  assumed  ownership of all of the projects in development and
all future  projects of Midlands Power  International,  a subsidiary of Midlands
Electricity plc (Midlands) which is discussed below. Cinergy Global, through MPI
International, will acquire and/or develop energy projects throughout the world.

CRI, a Delaware  corporation,  was formed to hold CG&E's interest in U.S. Energy
Partners, a gas marketing  partnership that was dissolved effective September 1,
1995.  Upon  dissolution,  CRI took its  portion  of the  partnership  assets to
continue in the gas marketing business. CRI competes with traditional, regulated
local distribution  companies by offering  "merchant  service" (i.e.,  acquiring
natural gas for resale to end-use  customers)  and brokers gas to industrial and
large commercial customers.

Recently,  CRI expanded its business to include retail marketing of electricity.
CRI is  participating  in a pilot program in  Pennsylvania  under which electric
customers  throughout the state will have the right to choose their  electricity
supplier. CRI began delivering power to Pennsylvania customers in December 1997.

Solutions,   a  Delaware   corporation,   was  formed  to  market  an  array  of
energy-related  products and services  and  develop,  acquire,  own, and operate
certain   energy-related   projects.   Solutions   holds  a  50%   interest   in
Trigen-Cinergy   Solutions   LLC,   a   Delaware   limited   liability   company
(Trigen-Cinergy).  Trigen-  Cinergy  was  formed  to  build,  own,  and  operate
cogeneration  and  trigeneration   facilities  for  industrial  plants,   office
buildings,  shopping centers,  hospitals,  universities,  and other major energy
users  that can  benefit  from  combined  heat and power  production  economies.
Trigen-Cinergy will also provide energy and asset management services, including
fuel procurement, ancillary to its activities.

Solutions  also holds a 51% interest in  Trigen-Cinergy  Solutions of Cincinnati
LLC, an Ohio limited liability company  (Trigen-Cinergy  Cincinnati),  which was
formed in the third  quarter of 1997.  Effective  August 1997,  Cinergy  Cooling
Corp. was merged with and into  Trigen-Cinergy  Cincinnati,  with Trigen-Cinergy
Cincinnati  being the surviving  company  jointly  owned by Solutions  (51%) and
Trigen  Solutions,  Inc.  (49%).  Trigen-Cinergy  Cincinnati  has  an  exclusive
franchise from the City of Cincinnati which permits it to maintain and operate a
chilled water system in the downtown business district of Cincinnati, Ohio.

Supply,  a  Delaware   corporation,   was  formed  in  January  1998  to  broker
transmission and distribution  materials and services and to provide underground
utility facilities location services.

Technology,  an Indiana  corporation,  was  created to manage  certain  existing
technology-related  investments  of  Cinergy,  assess the market  potential  for
technology-related product and service development  opportunities,  and form key
alliances for technology-related product development.

Cinergy UK, a Delaware corporation, was formed to hold Cinergy's 50% interest in
Avon Energy Partners Holdings,  a UK unlimited liability company, and its wholly
owned  subsidiary,  Avon Energy  Partners  PLC, a UK limited  liability  company
(collectively,  Avon  Energy).  During  1996,  Avon Energy  acquired  all of the
outstanding common stock of Midlands,  a UK regional electric company.  Midlands
primarily  distributes and supplies  electricity to over 2.2 million industrial,
commercial, and residential customers. In addition,  Midlands, together with its
subsidiaries,  generates power,  supplies natural gas to retail  customers,  and
performs  electrical  contracting  services.  (See  Note  1(e) of the  "Notes to
Financial Statements" in "Item 8. Financial Statements and Supplementary Data.")

Enertech was incorporated in Ohio in 1992 as a vehicle for CG&E to offer utility
management  consulting  services  and  to  pursue  investment  opportunities  in
energy-related   areas,   including   demand-side   management  (DSM)  services,
consulting, energy and fuel brokering, engineering services, construction and/or
operation of generation, cogeneration,  independent power production facilities,
and   project   development.   In  July  1994,   Enertech   acquired   Beheer-En
Belegginsmaatschappij  Bruwabel B.V.  (Bruwabel)  and its  subsidiaries  for the
purpose of pursuing design,  engineering,  and development work involving energy
privatization  projects,   primarily  in  the  Czech  Republic.  In  June  1996,
Investments   sold  what  remained  of  its   investment  in  Bruwabel  and  its
subsidiaries  and their  assets,  including the Vytopna  Kromeriz  Heating Plant
which was acquired by Power  Development  s.r.o. in 1995. (See Note 12(d) of the
"Notes  to  Financial   Statements"  in  "Item  8.   Financial   Statements  and
Supplementary Data.")

PSI Recycling,  Inc. (Recycling) was an Indiana corporation which recycled metal
from CG&E and paper,  metal,  and other  materials  from PSI, its largest single
supplier, and other sources.  Investments sold the assets of Recycling in August
1996. Recycling was dissolved effective December 31, 1997.

Power Equipment Supply Co. (PESCO) was incorporated in Indiana to sell equipment
and parts from a PSI  generating  plant  which was  canceled,  the  Marble  Hill
Nuclear Project. PESCO also purchased equipment for resale,  brokered equipment,
and sold equipment on consignment for others.  PESCO discontinued  operations in
early 1996 and was dissolved effective December 31, 1997.

CGE ECK,  Inc.,  a Delaware  corporation  (CGE ECK),  was created to hold CG&E's
one-third  interest in a Czech electric  utility company,  ECK s.r.o.  After the
Cinergy  merger,  CGE ECK reduced its ownership  interest in ECK s.r.o.  In mid-
1997, CGE ECK sold what remained of its interest in ECK s.r.o. and was dissolved
effective December 31, 1997.

Cinergy, CG&E, PSI, and ULH&P

Services

Services, a Delaware corporation, is the service company for the Cinergy system,
providing member  companies with a variety of  administrative,  management,  and
support services.

Cinergy, CG&E, PSI, and ULH&P

Customer, Sales, and Revenue Data

The number of customers served at year-end and the percent of operating revenues
derived from the sale of electricity and the sale and  transportation of natural
gas for each registrant for 1997 are as follows:

                                                    Operating
                                Customers           Revenues
Registrant                   Electric    Gas     Electric   Gas

Cinergy and subsidiaries    1 412 552  456 651      88%     11%
CG&E and subsidiaries         737 502  456 651      79%     20%
PSI                           675 052      N/A      98%     N/A
ULH&P                         117 835   77 944      70%     29%

Cinergy's  utilities' service territory spans 86 counties in Ohio, Indiana,  and
Kentucky  and  includes   approximately   840  cities,   towns,   unincorporated
communities,  and adjacent rural areas,  including municipal utilities and rural
electric cooperatives.

The service territory of CG&E and its utility subsidiaries,  including ULH&P, is
heavily populated and characterized by a stable residential  customer base and a
diverse  mix of  industrial  customers.  CG&E's  and its  utility  subsidiaries'
service  territory  spans 19 counties in Ohio,  Indiana,  and Kentucky (of which
ULH&P serves six counties in Kentucky)  and includes  approximately  130 (44 for
ULH&P)  cities,  towns,  unincorporated  communities,  and adjacent rural areas,
including municipal utilities and rural electric  cooperatives.  The area served
by  PSI  is a  residential,  agricultural,  and  widely  diversified  industrial
territory.  PSI's service territory  includes  approximately 710 cities,  towns,
unincorporated  communities,  and  adjacent  rural  areas,  including  municipal
utilities and rural  electric  cooperatives.  No one customer  accounts for more
than 6% of operating  revenues for PSI, 5% of electric or gas operating revenues
for CG&E and its  utility  subsidiaries,  or 10% of  electric  or gas  operating
revenues for ULH&P.  Sales of electricity and gas sales and  transportation  are
affected by seasonal weather patterns,  and,  therefore,  operating revenues and
associated operating expenses are not distributed evenly during the year.

Cinergy, CG&E, and ULH&P

Financial Information by Business Segment

For financial information by business segment, see Note 15 of the "Notes to
Financial Statements" in "Item 8.  Financial Statements and Supplementary
Data."  For a discussion of the potential divestiture of CG&E's, including
ULH&P's, gas operations, see Note 12(f) of the "Notes to Financial Statements"
in "Item 8.  Financial Statements and Supplementary Data."

Regulation

Cinergy, CG&E, PSI, and ULH&P

Cinergy, its utility subsidiaries,  and certain of its non-utility  subsidiaries
are subject to regulation by the Securities and Exchange  Commission (SEC) under
the  PUHCA  with  respect  to,  among  other  things,  issuances  and  sales  of
securities,  acquisitions and sales of certain utility properties,  acquisitions
and  retentions of interests in  non-utility  businesses,  intrasystem  sales of
certain goods and services,  the method of keeping accounts, and access to books
and  records.  In  addition,  the  PUHCA  generally  limits  registered  holding
companies  to a  single  "integrated"  public  utility  system,  which  the  SEC
traditionally  has interpreted to prohibit a registered  holding  company,  with
limited exceptions, from owning both gas and electric properties.  (Refer to the
information   appearing  under  the  captions  "Repeal  of  the  PUHCA"  in  the
"Competitive Pressures" section and "Potential Divestiture of Gas Operations" in
the  "Regulatory  Matters"  section  in "Item  7.  Management's  Discussion  and
Analysis of Financial  Condition and Results of Operations"  and to Note 1(f) of
the  "Notes  to  Financial  Statements"  in "Item 8.  Financial  Statements  and
Supplementary Data.")

CG&E, ULH&P, Miami, and PSI are each subject to regulation by the Federal Energy
Regulatory  Commission  (FERC)  under the Federal  Power Act with respect to the
classification   of  accounts,   rates  for  wholesale   sales  of  electricity,
interconnection  agreements,  and  acquisitions  and  sales of  certain  utility
properties. In addition,  services by KO Transmission are rendered in accordance
with terms and conditions and at rates  contained in a gas tariff filed with the
FERC. Transportation of gas between CG&E and ULH&P by KO Transmission is subject
to regulation by the FERC under the Natural Gas Act.

Cinergy, CG&E, and ULH&P

CG&E, as a public  utility under the laws of Ohio, is also subject to regulation
by the Public Utilities  Commission of Ohio (PUCO) as to retail electric and gas
rates, services, accounts,  depreciation,  issuance of securities,  acquisitions
and sales of certain  utility  properties,  and in other respects as provided by
Ohio law. Rates within municipalities in Ohio are subject to original regulation
by the municipalities. The Ohio Power Siting Board has jurisdiction in Ohio over
the location,  construction,  and initial  operation of new electric  generating
facilities and certain  electric and gas  transmission  lines  presently used by
CG&E. As to retail rates and other  matters,  ULH&P is regulated by the Kentucky
Public Service  Commission,  and West Harrison and Lawrenceburg are regulated by
the Indiana Utility Regulatory Commission (IURC).

Cinergy and PSI

PSI, as a public  utility  under the laws of Indiana,  is also  regulated by the
IURC as to its retail  rates,  services,  accounts,  depreciation,  issuance  of
securities,  acquisitions and sales of certain utility properties,  and in other
respects as provided by Indiana law.  Prior to the  construction,  purchase,  or
lease of a facility used for the generation of electricity,  a public utility in
Indiana  must  obtain  from the IURC a  certificate  of public  convenience  and
necessity.

Cinergy, CG&E, PSI, and ULH&P

Regulatory Matters

Refer to the  information  appearing under the caption  "Regulatory  Matters" in
"Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations."

Power Supply

Cinergy, CG&E, PSI, and ULH&P

Cinergy and other utilities in an eight-state  region are  participating  in the
East  Central  Area  Reliability  Coordination  Agreement  for  the  purpose  of
coordinating   the  planning  and  operation  of  generating  and   transmission
facilities  to provide for maximum  reliability  of regional  bulk power supply.
(Refer to the  information  appearing  under the  caption  "Midwest  ISO" in the
"Competitive Pressures" section of "Item 7. Management's Discussion and Analysis
of Financial  Condition and Results of Operations" for a discussion of Cinergy's
involvement in a coalition for operation of a regional transmission system.)

In addition to an  intercompany  tie between CG&E's and PSI's electric  systems,
Cinergy's electric system, which is operated by Services, is interconnected with
the electric systems of Indiana Michigan Power Company,  Columbus Southern Power
Company,  Ohio Power  Company  (all doing  business as American  Electric  Power
Company,  Inc. (AEP)),  Central  Illinois Public Service Company,  East Kentucky
Power Cooperative, Hoosier Energy Rural Electric Cooperative, Inc., Indianapolis
Power and Light Company,  Kentucky Utilities Company,  Louisville Gas & Electric
Company (LG&E),  Northern Indiana Public Service  Company,  Southern Indiana Gas
and  Electric  Company,  The Dayton  Power and Light  Company,  and Ohio  Valley
Electric Corporation.

Cinergy and PSI

PSI has a power supply  relationship with Wabash Valley Power Association,  Inc.
(WVPA) and Indiana  Municipal  Power Agency (IMPA)  through  power  coordination
agreements.  WVPA and IMPA are also parties with PSI to a joint transmission and
local facilities agreement.

Cinergy, CG&E, and ULH&P

ULH&P  does  not  own  or  operate  any  electric  generating  facilities.   Its
requirements  for electric  energy are  purchased  primarily  from CG&E at rates
regulated by the FERC.

Fuel Supply

Cinergy

Cinergy purchases approximately 25 million tons of coal annually for use by CG&E
and PSI, which historically would rank Cinergy as the sixth largest utility coal
purchaser in the United States.

Cinergy, CG&E, and PSI

A major  portion of the coal  required by CG&E and PSI is obtained  through both
long- and short-term  coal supply  agreements,  with the remaining  requirements
purchased  on the  spot  market.  The  prices  to be paid  under  most of  these
contracts  are subject to  adjustment.  In  addition,  some of these  agreements
include extension options and termination provisions pertaining to coal quality.
The coal  delivered  under these  contracts is primarily  from mines  located in
Indiana,  Illinois,  Pennsylvania,  and West Virginia for PSI and West Virginia,
Ohio, Kentucky, and Pennsylvania for CG&E.

CG&E and PSI monitor alternative sources to assure a continuing  availability of
economical  fuel  supplies.  The  companies  intend to maintain  the practice of
purchasing  a portion of their  coal  requirements  on the spot  market and will
continue to  investigate  the least cost coal options in  connection  with their
compliance  with the  Clean Air Act  Amendments  of 1990.  (See the  information
appearing  under the  caption  "Environmental  Issues" in "Item 7.  Management's
Discussion and Analysis of Financial Condition and Results of Operations.")

The companies believe they will be able to obtain sufficient coal to meet future
generating  requirements.  However,  both CG&E and PSI are unable to predict the
extent to which coal availability and price may ultimately be affected by future
environmental  requirements.  Presently, CG&E and PSI expect the cost of coal to
rise in the long run as the  supply of more  accessible  and  higher-grade  coal
diminishes  and as mining,  transportation,  and other related costs continue an
upward trend.

Cinergy, CG&E, and ULH&P

Gas Supply

In 1997, CG&E and its utility  subsidiaries,  including ULH&P,  purchased 44% of
their natural gas supply from firm supply  agreements,  with  remaining  volumes
purchased in the spot market.  These firm  contracts  feature dual levels of gas
supply: base load for continuous supply for CG&E's and its utility subsidiaries'
core requirements,  and "swing" load, which is gas available on a daily basis to
accommodate  changes in demand.  CG&E pays reservation charges for firm base and
swing  supplies.  These  charges  guarantee  delivery  from the supplier  during
extreme  weather and protect the  supplier  from  fluctuations  in daily  prices
associated with swing supplies.

As the trend of customers purchasing gas directly from gas marketers (suppliers)
and  using  CG&E's  facilities  for  transportation   increases,  CG&E  and  its
subsidiaries seek to minimize contract  commitment costs to firm suppliers,  and
reduce the amount of  reservation  charges  paid to  suppliers  for firm supply.
Accordingly,  CG&E and its subsidiaries anticipate purchasing  approximately 50%
of their gas supply in the spot  market and 50% from firm supply  agreements  in
1998.

Gas  purchased  by CG&E  and  its  subsidiaries  is  transported  on  interstate
pipelines either directly to CG&E's and its subsidiaries'  distribution systems,
or it is injected into pipeline  storage  facilities for withdrawal and delivery
in the  future.  Most of  CG&E's  and its  utility  subsidiaries'  gas  supplies
originate from the Gulf of Mexico coastal area of Texas and Louisiana.  CG&E and
its  subsidiaries  have also  obtained  a limited  supply  originating  from the
Appalachian  region and the mid-continent  (Arkansas - Oklahoma) basin, and from
methane gas recovered from an Ohio landfill. Over the long-term,  natural gas is
expected to retain its price  competitiveness  with alternative fuels.  However,
weather   conditions,   supply,   demand,  and  storage  inventories  can  cause
significant price fluctuations.

Cinergy, CG&E, PSI, and ULH&P

Competition

Refer to the information appearing under the caption "Competitive  Pressures" in
"Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations."

Cinergy, CG&E, PSI, and ULH&P

Capital Requirements

Refer to the information  appearing under the caption "Capital  Requirements" in
"Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations."

Cinergy, CG&E, and PSI

Environmental Matters

Environmental compliance construction  expenditures for 1998 for Cinergy and its
subsidiaries are forecasted to be as follows:

                    Registrant               Expenditures
                                            (in thousands)

                    CG&E and subsidiaries       $3 742
                    PSI                          3 387
                    Cinergy and subsidiaries    $7 129

In addition, refer to the information appearing under the caption "Environmental
Issues" in "Item 7. Management's  Discussion and Analysis of Financial Condition
and Results of Operations."

Employees

Cinergy

The number of  employees of Cinergy and its  subsidiaries  at December 31, 1997,
was 7,609,  of whom 4,312 belonged to bargaining  units.  These  bargaining unit
employees   were   represented  by  labor   agreements   between  CG&E  and  its
subsidiaries,  including ULH&P, or PSI and the applicable union organization. Of
Cinergy's total employees, 2,825 employees were represented by the International
Brotherhood of Electrical  Workers  (IBEW),  407 were  represented by the United
Steelworkers  of America (USWA),  and 1,080 were  represented by the Independent
Utilities Union (IUU).

Employees  assigned to Services at December 31, 1997, totaled 3,028, of whom 831
belonged to bargaining  units.  These bargaining unit employees were represented
by the labor agreements previously discussed. Of Services' total employees,  540
were  represented  by the  IUU,  1 was  represented  by the  USWA,  and 290 were
represented by the IBEW (112 were  represented by the agreement with PSI and 178
were represented by the agreement with CG&E).

Employees  assigned  to Cinergy  Resources  at  December  31,  1997,  totaled 13
non-union employees.

Cinergy and CG&E

The number of employees of CG&E and its  subsidiaries  at December 31, 1997, was
2,537,  of whom CG&E  employed  2,292,  ULH&P  employed  236,  and  Lawrenceburg
employed 9.

CG&E and its  subsidiaries  have collective  bargaining  agreements with several
union organizations.  Of CG&E's and its subsidiaries' total employees,  540 were
represented  by the IUU,  406 were  represented  by the  USWA,  and  1,177  were
represented  by the IBEW.  The current  contract  between  CG&E and the IUU will
expire in April 2001.  CG&E and its  subsidiaries  have a contract with the USWA
expiring May 15, 2002. The IBEW contract expires April 1, 2001.

Cinergy and PSI

The number of employees of PSI at December  31, 1997,  was 2,030,  of whom 1,358
were represented by the IBEW.

PSI's  collective  bargaining  agreement with the IBEW will expire at the end of
April 1999.

Cinergy and ULH&P

The number of  employees  of ULH&P at December  31,  1997,  was 236, of whom 209
belonged to bargaining  units.  These bargaining unit employees were represented
by the same labor agreements between CG&E and the applicable union organization.
Of ULH&P's total  employees,  61 employees were represented by the IBEW, 91 were
represented by the USWA, and 57 were represented by the IUU.

The current  contract between ULH&P and the IUU will expire in April 2001. ULH&P
has  agreements  with the USWA and IBEW that will expire May 15, 2002, and April
1, 2001, respectively.

<PAGE>
                               ITEM 2. PROPERTIES

Cinergy, CG&E, PSI, and ULH&P

Substantially  all  utility  plant is  subject  to the  lien of each  applicable
company's first mortgage bond indenture.

In addition to the information  discussed herein, refer to Note 13 of the "Notes
to Financial  Statements"  in "Item 8. Financial  Statements  and  Supplementary
Data."

Cinergy, CG&E, and PSI

At December 31, 1997, the Cinergy utility subsidiaries owned electric generating
plants,  or  portions  thereof in the case of  jointly  owned  plants,  with net
capabilities (winter ratings) as shown in the following table:

<TABLE>
<CAPTION>
                                                                                      Net
                                                           Percent    Principal    Capability
         Plant Name                       Location        Ownership  Fuel Source  megawatts (mw)
<S>                                <C>                    <C>         <C>         <C>

CG&E
Steam Electric Generating Plants:
Miami Fort Station (Units 5&6)     North Bend, Ohio        100.00%      Coal          243
Miami Fort Station (Units 7&8)     North Bend, Ohio         64.00       Coal          640
W.C. Beckjord Station (Units 1-5)  New Richmond, Ohio      100.00       Coal          704
W.C. Beckjord Station (Unit 6)     New Richmond, Ohio       37.50       Coal          158
J.M. Stuart Station                Aberdeen, Ohio           39.00*      Coal          913
Killen Station                     Adams County, Ohio       33.00*      Coal          198
Conesville Station                 Conesville, Ohio         40.00*      Coal          312
William H. Zimmer Generating
  Station                          Moscow, Ohio             46.50       Coal          605
East Bend Station                  Boone County, Kentucky   69.00       Coal          414

Combustion Turbines:
Dicks Creek Station                Middletown, Ohio        100.00       Gas           172
Miami Fort Gas Turbine Station     North Bend, Ohio        100.00       Oil            78
W.C. Beckjord Gas Turbine Station  New Richmond, Ohio      100.00       Oil           245
Woodsdale Generating Station       Butler County, Ohio     100.00       Gas           564

PSI
Steam Electric Generating Plants:
Gibson Generating Station:
  (Units 1-4)                      Princeton, Indiana      100.00       Coal        2,532
  (Unit 5)                         Princeton, Indiana       50.05       Coal          313
Wabash River Station               Terre Haute, Indiana    100.00       Coal          668
Cayuga Station                     Cayuga, Indiana         100.00       Coal        1,005
R.A. Gallagher Station             New Albany, Indiana     100.00       Coal          560
Edwardsport Station                Edwardsport, Indiana    100.00       Coal          160
Noblesville Station                Noblesville, Indiana    100.00       Coal           90

Combustion Turbines:
Cayuga Combustion Turbine          Cayuga, Indiana         100.00       Gas           120
Wabash River Coal Gasification
  Project                          Terre Haute, Indiana    100.00       Coal          262

Internal Combustion Units:
Connersville Peaking Station       Connersville, Indiana   100.00       Oil            98
Miami-Wabash Peaking Station       Wabash, Indiana         100.00       Oil           104
Cayuga Peaking Units               Cayuga, Indiana         100.00       Oil            11
Wabash River Peaking Units         Terre Haute, Indiana    100.00       Oil             8

Hydroelectric Generating Station:
Markland Generating Station        Markland Dam, Ohio
                                     River                 100.00       Water          45
<FN>
* Station is not operated by CG&E.
</FN>
</TABLE>
<PAGE>

Cinergy and CG&E

CG&E

CG&E's 1997 peak load (exclusive of off-system transactions),  which occurred on
July 28,  was  4,638  mw.  For the  period  1998  through  2007,  peak  load and
kilowatt-hour (kwh) sales are each forecasted to have annual growth rates of 2%.
These forecasts reflect CG&E's load growth, alternative fuel choices, population
growth, and housing starts.  These forecasts exclude non-firm power transactions
and any potential off-system, long-term firm power sales.

As of December 31, 1997,  CG&E's  transmission  system  consisted of 388 circuit
miles of 345,000 volt line,  618 circuit miles of 138,000 volt line, 523 circuit
miles of 69,000 volt line, and 116 circuit miles of lesser volt line, all within
the states of Ohio and Kentucky.  In addition,  as of December 31, 1997,  CG&E's
distribution  system  consisted of 14,736 circuit miles, all within the state of
Ohio.  As of the same  date,  CG&E's  transmission  substations  had a  combined
capacity of 14,845,106 kilovolt-amperes,  and the distribution substations had a
combined  capacity  of  5,951,348  kilovolt-amperes.  A portion of CG&E's  total
transmission  system is jointly owned,  primarily in connection with its jointly
owned electric generating units.

During 1997,  almost all of the electricity  generated by units owned by CG&E or
in which it has an  ownership  interest was  produced by  coal-fired  generating
units.  Those units generate most of the electric  requirements  of CG&E and its
utility subsidiaries.

CG&E owns two propane/air  peakshaving plants.  Associated with these plants are
two underground  caverns,  one with a seven million gallon capacity and one with
an eight million gallon capacity. Both plants and storage caverns are located in
Ohio and are used  primarily  to augment  CG&E's  supply of  natural  gas during
periods of peak demand and emergencies.  CG&E also owns natural gas distribution
systems  consisting  of 5,718 miles of mains and service  lines in  southwestern
Ohio.

Cinergy and PSI

PSI

PSI's 1997 peak load (exclusive of off-system  transactions),  which occurred on
July 14, was 5,313 mw. For the period 1998 through 2007, peak load and kwh sales
are each  forecast to have annual  growth rates of 2%. These  forecasts  reflect
PSI's load growth,  alternative  fuel choices,  population  growth,  and housing
starts.  These forecasts  exclude non-firm power  transactions and any potential
off-system, long-term firm power sales.

As of December  31, 1997,  PSI's  transmission  system  consisted of 719 circuit
miles of 345,000  volt line,  656  circuit  miles of  230,000  volt line,  1,595
circuit miles of 138,000 volt line, and 2,429 circuit miles of 69,000 volt line,
all within the state of Indiana.  In addition,  as of December  31, 1997,  PSI's
distribution  system  consisted of 19,707 circuit miles, all within the state of
Indiana.  As of the same date,  PSI's  transmission  substations  had a combined
capacity of 21,700,155 kilovolt-amperes,  and the distribution substations had a
combined capacity of 6,322,409 kilovolt-amperes.

During 1997, almost all of PSI's kwh production was obtained from coal-fired and
hydroelectric generation.

Cinergy, CG&E, and ULH&P

ULH&P

As of December 31, 1997,  ULH&P owned 105 circuit  miles of 69,000 volt electric
transmission line, an electric  distribution  system consisting of 2,516 circuit
miles,  and a gas  distribution  system  consisting  of 1,307 miles of mains and
service lines in northern  Kentucky.  ULH&P also owns a propane/air  peakshaving
plant, a seven million  gallon  capacity  underground  cavern for the storage of
liquid  propane,  and related liquid  propane feeder lines,  located in northern
Kentucky  and  adjacent to one of the gas lines that  transports  natural gas to
CG&E. The propane/air  plant and cavern are used primarily to augment CG&E's and
ULH&P's supply of natural gas during periods of peak demand and emergencies.

Cinergy and CG&E

Other Utility Subsidiaries

As of December 31, 1997, Lawrenceburg owned a gas distribution system consisting
of 172 miles of mains and service lines in Indiana  adjacent to the western part
of  CG&E's  service  area.  Lawrenceburg  is  connected  with and  sells  gas at
wholesale to the city of Aurora,  Indiana,  and is also connected within Indiana
with  the  lines  of  Texas  Gas  Transmission  Corporation  and  Texas  Eastern
Transmission Corporation.

As of December 31,  1997,  West  Harrison  owned a small  electric  distribution
system  consisting  of 10 circuit  miles in Indiana  adjacent to CG&E's  service
area.  As of the same date,  Miami owned 40 miles of 138,000  volt  transmission
line connecting the lines of LG&E with those of CG&E.

As of December 31, 1997, KO  Transmission  owned a 32.67%  interest in a 90-mile
interstate  natural gas pipeline and a 100% interest in a 2 1/4 mile natural gas
pipeline.  KO Transmission  transports gas from southeast  Kentucky northward to
the service territories of CG&E and ULH&P, their primary customers.

                         ITEM 3.  LEGAL PROCEEDINGS

Cinergy and PSI

WVPA Settlement Agreement

See Note  12(e) of the "Notes to  Financial  Statements"  in "Item 8.  Financial
Statements and Supplementary Data."

Manufactured Gas Plant Claims

See Note 12(b)(ii) of the "Notes to Financial  Statements" in "Item 8. Financial
Statements and Supplementary Data."

Cinergy and CG&E

Skinner Landfill Remediation

In the  first  quarter  of  1998,  CG&E  was  notified,  by the  Allocator  in a
Court-mandated alternative dispute resolution (ADR) proceeding, that it had been
identified  as a  potentially  responsible  party (PRP) under the  Comprehensive
Environmental Response,  Compensation and Liability Act (CERCLA) with respect to
the Skinner  Landfill  Superfund Site,  which is located  approximately 15 miles
north of Cincinnati,  Ohio. In March 1997,  the  Plaintiffs  from the underlying
CERCLA  litigation  brought  suit in the United  States  District  Court for the
Southern District of Ohio,  Western Division (the Court),  against over 80 PRPs.
In August 1997,  the Court entered an order staying the litigation and requiring
all parties to engage in a non-binding, confidential ADR process. The Allocator,
which has been given  authority by the Court to identify  other parties that may
be responsible for response costs, has informed CG&E that it was identified by a
site owner,  operator,  or worker as one that had  arranged  for the disposal of
waste at the  landfill  and has  concluded  that a  reasonable  basis exists for
CG&E's  participation in the ADR process.  The plaintiffs claim to have expended
almost $2 million in initial  response actions at the site and the Allocator has
indicated  that the present value of the total site response  costs is estimated
at  approximately  $14  million.  CG&E  is  currently  participating  in the ADR
process.  Based on  information  currently  available,  any potential  liability
allocated to CG&E would not be material to its financial condition or results of
operations.

United Scrap Lead Site

See Note  12(c) of the "Notes to  Financial  Statements"  in "Item 8.  Financial
Statements and Supplementary Data."

Cinergy, CG&E, and PSI

Enertech Litigation

See Note  12(d) of the "Notes to  Financial  Statements"  in "Item 8.  Financial
Statements and Supplementary Data."

ULH&P

ULH&P has no material pending legal proceedings.

Cinergy, CG&E, PSI, and ULH&P

In  addition  to the  above  litigation,  see  "Regulatory  Matters"  in Item 7.
Management's  Discussion  and  Analysis of  Financial  Condition  and Results of
Operations"  and  "Notes  12(b),  12(c),  and 12(f) of the  "Notes to  Financial
Statements" in "Item 8. Financial Statements and Supplementary Data."

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

Cinergy, CG&E, and PSI

None.

ULH&P

Omitted pursuant to instruction I(2)(c).
<PAGE>

EXECUTIVE OFFICERS OF THE REGISTRANTS (at February 28, 1998)

                         Age at
                        Dec. 31,
         Name             1997          Office & Date Elected or in Job

Cinergy, CG&E, and PSI

Jackson H. Randolph        67      Chairman of Cinergy, CG&E, and
                                     PSI - 1995
                                   Chairman and Chief Executive Officer
                                     of Cinergy, CG&E, and PSI - 1994
                                   Chairman, President, and Chief Executive
                                     Officer of CG&E - 1993

James E. Rogers            50      Vice Chairman, President, and Chief
                                     Executive Officer of Cinergy - 1995
                                   Vice Chairman and Chief Executive
                                     Officer of CG&E and PSI - 1995
                                   Vice Chairman, President, and Chief
                                     Operating Officer of Cinergy - 1994
                                   Vice Chairman and Chief Operating
                                     Officer of CG&E and PSI - 1994
                                   Chairman and Chief Executive Officer
                                     of Resources - 1993

Cheryl M. Foley            50      Vice President, General Counsel, and
                                     Secretary of CG&E - 1995
                                   Vice President, General Counsel, and
                                     Secretary of Cinergy - 1994
                                   Vice President, General Counsel, and
                                     Secretary of PSI and Resources - 1991

Donald B. Ingle, Jr.       48      Vice President of Cinergy, CG&E, and PSI 1/
                                     - 1997
                                   President, Energy Services Business Unit
                                     (ESBU) of Cinergy 1/ - 1997
                                   Contract Consultant - Investments - 1995
                                   President and Chief Executive Officer -
                                     CornerStone Industries, Inc. 3/ - 1992

Elizabeth K. Lanier 2/     46      Vice President and Chief of Staff of
                                     Cinergy, CG&E, and PSI - 1996
                                   Partner - Frost & Jacobs 3/ - 1984

J. Wayne Leonard           47      Vice President of Cinergy, CG&E, and PSI 4/
                                      - 1997
                                   President, Energy Commodities Business Unit
                                     of Cinergy - 1996
                                   Group Vice President and Chief
                                     Financial Officer of CG&E and PSI - 1995
                                   Group Vice President and Chief Financial
                                     Officer of Cinergy - 1994
                                   Senior Vice President and Chief Financial
                                     Officer of PSI and Resources - 1992
<PAGE>

EXECUTIVE OFFICERS OF THE REGISTRANTS (continued)

                         Age at
                        Dec. 31,
         Name             1997          Office & Date Elected or in Job

Madeleine W. Ludlow        43      Vice President and Chief Financial Officer
                                     of Cinergy, CG&E, and PSI 4/ - 1997
                                   Vice President - Enterprise Diversified
                                     Holdings Incorporated (EDHI), a subsidiary
                                     of Public Service Enterprise Group
                                     Incorporated 3/ - 1996
                                   Vice President and Treasurer - EDHI 3/ -
                                     1992

William L. Sheafer         54      Vice President and Treasurer of Cinergy,
                                     CG&E, and PSI - 1997
                                   Treasurer of Cinergy and PSI - 1994
                                   Treasurer of CG&E - 1987

John P. Steffen            45      Vice President and Comptroller of Cinergy,
                                     CG&E, and PSI - 1998
                                   Comptroller of Cinergy, CG&E, and PSI 5/ -
                                     1997
                                   Assistant Comptroller of CG&E - 1995
                                   Assistant Comptroller of Cinergy and PSI -
                                     1994
                                   Assistant Controller of CG&E - 1991

Larry E. Thomas            52      Vice President of Cinergy, CG&E, and PSI -
                                     1997
                                   President, Energy Delivery Business Unit
                                     of Cinergy - 1996
                                   Group Vice President and Chief
                                     Transformation Officer of Cinergy, CG&E,
                                     and PSI - 1995
                                   Group Vice President, Reengineering and
                                     Operations Services of CG&E and
                                     PSI - 1995
                                   Group Vice President, Reengineering
                                     and Operations Services of Cinergy - 1994
                                   Senior Vice President and Chief Operations
                                     Officer of PSI - 1992

Cinergy and CG&E

William J. Grealis 6/      52      President, ESBU of Cinergy 1/ - 1996
                                   Vice President of Cinergy - 1995
                                   President of CG&E - 1995
                                   President of Investments - 1995
                                   President, Gas Business Unit of CG&E - 1995
                                   Partner - Akin, Gump, Strauss, Hauer
                                     & Feld 3/ - 1978

<PAGE>

EXECUTIVE OFFICERS OF THE REGISTRANTS (continued)

                         Age at
                        Dec. 31,
         Name             1997          Office & Date Elected or in Job

Cinergy and PSI

John M. Mutz 7/            62      Vice President of Cinergy - 1995
                                   President of PSI - 1994
                                   President of Resources - 1993

Cinergy

John Bryant                51      Vice President of Cinergy - 1998
                                   Managing Director of MPI International
                                     Limited, Cinergy's international project
                                     development subsidiary - 1997
                                   Executive Generation Director - Midlands -
                                     1996
                                   Generation Director - Midlands - 1992

J. Joseph Hale, Jr.        48      Vice President of Cinergy - 1996
                                   General Manager, Marketing
                                     Operations of CG&E - 1995
                                   President of Cinergy Foundation, Inc. 8/ -
                                     1992

M. Stephen Harkness        49      Vice President of Cinergy - 1996
                                   Executive Vice President and Chief
                                     Operating Officer of Trigen-Cinergy 9/ -
                                     1996
                                   General Manager, Corporate Development
                                     and Financial Services of Cinergy - 1994

Jerry W. Liggett           56      Vice President of Cinergy - 1996
                                   Senior Manager, Human Resources
                                     Strategy of Cinergy - 1995
                                   General Manager, Employee Relations,
                                     Compensation & Benefits of Cinergy - 1995
                                   Executive Director, Human Resources
                                     of PSI and Resources - 1990

Michael M. Sample          45      Vice President of Cinergy - 1996
                                   General Manager, International
                                     Investments of Cinergy - 1994
                                   Vice President, Government Affairs
                                     of PSI and Resources - 1991

Charles J. Winger          52      Vice President of Cinergy - 1997
                                   Vice President and Comptroller of Cinergy,
                                     CG&E, and PSI 5/ - 1997 Comptroller of CG&E
                                   -  1995   Comptroller   of   Cinergy  -  1994
                                   Comptroller of Resources - 1988

<PAGE>

EXECUTIVE OFFICERS OF THE REGISTRANTS (continued)

ULH&P

Omitted pursuant to instruction I(2)(c).

Cinergy, CG&E, and PSI

None of the  officers are related in any manner.  Executive  officers of Cinergy
are elected to the offices set opposite  their  respective  names until the next
annual meeting of the Board of Directors and until their  successors  shall have
been duly elected and shall have been qualified.

1/    Mr. Ingle named as Acting  President  of ESBU during May 1997,  succeeding
      Mr. Grealis;  Mr. Ingle served in this capacity through September 1997, at
      which time he was named  President  of ESBU and Vice  President of each of
      Cinergy, CG&E, and PSI, all effective October 1, 1997.

2/    Prior to becoming Vice President  effective June 1, 1996, Ms. Lanier was a
      partner in the law firm of Frost & Jacobs located in Cincinnati, Ohio.

3/    Non-affiliate of Cinergy.

4/    Effective  April 22, 1997, Mr. Leonard  relinquished  additional  title of
      Chief Financial  Officer and Ms. Ludlow appointed Vice President and Chief
      Financial Officer.

5/    Effective  August 11,  1997,  Mr.  Steffen was  appointed  Comptroller  of
      Cinergy, CG&E, and PSI, succeeding Mr. Winger, who retained office of Vice
      President of Cinergy.

6/    Prior to becoming  President of Investments,  Mr. Grealis was a partner in
      the Washington,  D.C. law firm of Akin,  Gump,  Strauss,  Hauer & Feld. In
      addition,   prior  to  the  merger,  Mr.  Grealis  was  President  of  PSI
      Investments, Inc. on an interim basis beginning in 1992.

7/    Prior to becoming President of Resources,  Mr. Mutz was President of Lilly
      Endowment,   Inc.,   a  private   philanthropic   foundation   located  in
      Indianapolis, Indiana.

8/  An affiliated public benefit corporation organized and operating exclusively
    for charitable purposes.

9/ Joint venture company formed by Cinergy and Trigen Energy Corporation.

<PAGE>

                                     PART II

                     ITEM 5. MARKET FOR REGISTRANT'S COMMON
                     EQUITY AND RELATED STOCKHOLDER MATTERS

Cinergy, CG&E, PSI, and ULH&P

Cinergy's common stock is listed on the New York Stock Exchange and has unlisted
trading privileges on the Boston, Chicago, Cincinnati, Pacific, and Philadelphia
exchanges.  As of February 5, 1998,  Cinergy's most recent dividend record date,
there were 73,018 common  shareholders of record.  The following table shows the
high and low sales prices per share, if applicable,  and the dividends on common
stock declared by Cinergy, CG&E, PSI, and ULH&P for the past two years:

                              Market Price (a)          Dividends Declared
                             High          Low     (per share)   (in thousands)

         1996
          Cinergy
            4th Quarter    $34 1/4      $30 7/8       $.45
            3rd Quarter     32           29 1/8        .43
            2nd Quarter     32           27 1/2        .43
            1st Quarter     32 1/8       28 1/4        .43

          CG&E
            4th Quarter                                            $ 50 949 (b)
            3rd Quarter                                             239 909 (b)
            2nd Quarter                                              45 116 (b)
            1st Quarter                                              41 995 (b)

          PSI
            4th Quarter                                              29 713 (b)
            3rd Quarter                                              28 311 (b)
            2nd Quarter                                              28 165 (b)
            1st Quarter                                              25 887 (b)

          ULH&P
            4th Quarter                              8.50 (b)

        1997
          Cinergy
            4th Quarter     39 1/8       32           .45
            3rd Quarter     35 1/4       32 5/16      .45
            2nd Quarter     35 5/8       32           .45
            1st Quarter     35 3/4       32 5/8       .45

          CG&E
            4th Quarter                                              42 600 (b)
            3rd Quarter                                              42 600 (b)
            2nd Quarter                                              42 600 (b)
            1st Quarter                                              42 600 (b)

          PSI
            4th Quarter                                              28 400 (b)
            3rd Quarter                                              28 400 (b)
            2nd Quarter                                              28 400 (b)
            1st Quarter                                              28 400 (b)

          ULH&P
            4th Quarter                              17.00 (b)

(a)  Market price for CG&E, PSI, and ULH&P is not applicable.

(b)  All of CG&E's and PSI's  dividends  were paid to Cinergy and all of ULH&P's
     dividends were paid to CG&E.

See Note  2(b) of the  "Notes to  Financial  Statements"  in "Item 8.  Financial
Statements and  Supplementary  Data" for a brief  description of common dividend
restrictions.

All CG&E and PSI common  stock is held by Cinergy and all ULH&P  common stock is
held by CG&E;  therefore,  there is no public  trading  market for their  common
stock.

                         ITEM 6. SELECTED FINANCIAL DATA

Cinergy
                                      1997     1996     1995    1994     1993
                                      (in millions, except per share amounts)

Operating revenues (1)               $4 353   $3 243   $3 023   $2 888  $2 833
Net income before extraordinary
  item (1)                              363      335      347      191      63
Net income (2)                          253      335      347      191      63
Common stock
  Earnings per share (3)
    Net income before extraordinary
      item                             2.30     2.00     2.22     1.30     .43
    Net income                         1.61     2.00     2.22     1.30     .43
  EPS-assuming dilution (3)
    Net income before extraordinary
      item                             2.28     1.99     2.20     1.29     .43
    Net income                         1.59     1.99     2.20     1.29     .43
  Dividends declared per share         1.80     1.74     1.72     1.50    1.46

Total assets (4)                      8 858    8 725    8 103    8 037   7 696
Cumulative preferred stock of
  subsidiaries subject to mandatory
  redemption (5)                       -        -         160      210     210
Long-term debt (6)                    2 151    2 326    2 347    2 615   2 545
Long-term debt due within
  one year (6)                           85      140      202       60    -

   CG&E
                                      1997     1996     1995     1994    1993
                                                    (in millions)

Operating revenues (1)               $2 452   $1 976   $1 848   $1 788  $1 752
Net income (loss) (1)                   239      227      236      158      (9)

Total assets (4)                      4 914    4 844    5 081    5 069   5 036
Cumulative preferred stock subject
  to mandatory redemption (5)          -        -         160      210     210
Long-term debt (6)                    1 324    1 381    1 518    1 738   1 729
Long-term debt due within
  one year (6)                         -         130      152     -       -

   PSI
                                      1997     1996    1995     1994     1993
                                                    (in millions)

Operating revenues (1)               $1 958   $1 332  $1 248   $1 114   $1 092
Net income (1)                          132      126     146       82      125
Total assets (4)                      3 406    3 295   3 076    2 945    2 645
Long-term debt (6)                      826      945     828      878      816
Long-term debt due within
  one year (6)                           85       10      50       60     -

Cinergy, CG&E, and PSI

(1)  See Notes 1 and 15 of the "Notes to Financial Statements" in
     "Item 8.  Financial Statements and Supplementary Data."

(2)  See Notes 1 and 17 of the "Notes to Financial Statements" in "Item 8.
     Financial Statements and Supplementary Data."

(3)  See Note 16 of the "Notes to Financial Statements" in "Item 8.  Financial
     Statements and Supplementary Data."

(4)  See Notes 1(f) and 6 of the "Notes to Financial Statements" in "Item 8.
     Financial Statements and Supplementary Data."

(5)  See Note 3 of the "Notes to Financial Statements" in "Item 8. Financial
     Statements and Supplementary Data."

(6)  See Note 4 and 8(b) of the "Notes to Financial Statements" in "Item 8.
     Financial Statements and Supplementary Data."

In  addition,  see "Item 7.  Management's  Discussion  and Analysis of Financial
Condition  and  Results of  Operations"  and Note 12 of the "Notes to  Financial
Statements"  in  "Item 8.  Financial  Statements  and  Supplementary  Data"  for
discussions of material uncertainties for Cinergy, CG&E, and PSI.

ULH&P

Omitted pursuant to Instruction I(2)(a).

<PAGE>

                 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                  FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Cinergy, CG&E, PSI, and ULH&P

CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING INFORMATION Matters discussed in
this "Item 7.  Management's  Discussion and Analysis of Financial  Condition and
Results of Operations" reflect and elucidate the Companies'  corporate vision of
the future and, as a part of that,  outline  goals and  aspirations,  as well as
specific projections. These goals and projections are considered forward-looking
statements and are based on management's beliefs, as well as certain assumptions
made by management.  In addition to any  assumptions  and other factors that are
referred to specifically in connection with these statements, other factors that
could cause  actual  results to differ  materially  from those  indicated in any
forward-looking statements include, among others:

*    Factors  affecting utility  operations such as unusual weather  conditions;
     catastrophic   weather-related  damage;   unscheduled  generation  outages;
     unusual maintenance or repairs; unanticipated changes to fossil fuel costs,
     gas  supply  costs,  or  availability  constraints  due to  higher  demand,
     shortages,  transportation  problems or other  developments;  environmental
     incidents; or electric transmission or gas pipeline system constraints.

*    Increased competition in the electric and gas utility industries, including
     effects of: industry  restructuring;  transmission  system operation and/or
     administration; customer choice; and cogeneration.

*    Regulatory factors such as unanticipated  changes in rate-setting  policies
     or procedures;  recovery of investments made under traditional  regulation,
     and the frequency and timing of rate increases.

*    Financial or regulatory  accounting  principles or policies  imposed by the
     Financial   Accounting   Standards   Board,  the  Securities  and  Exchange
     Commission (SEC), the Federal Energy Regulatory  Commission  (FERC),  state
     public utility  commissions,  state  entities  which  regulate  natural gas
     transmission, gathering and processing and similar entities with regulatory
     oversight.

*    Economic conditions, including inflation rates and monetary fluctuations.

*    Changing market  conditions and a variety of other factors  associated with
     physical energy and financial trading activities including, but not limited
     to, price, basis, credit, liquidity,  volatility,  capacity,  transmission,
     currency exchange, interest rate, and warranty risks.

*    Availability or cost of capital, resulting from changes in: Cinergy and its
     subsidiaries,  interest rates, and securities ratings or market perceptions
     of the utility industry and energy-related industries.

*    Employee workforce factors, including changes in key executives, collective
     bargaining agreements with union employees, or work stoppages.

*    Legal and regulatory  delays and other  obstacles  associated with mergers,
     acquisitions, and investments in joint ventures.

*    Costs and other effects of legal and administrative proceedings,
     settlements, investigations, claims, and other matters, including, but not
     limited to, those described in Note 12 of the "Notes to Financial
     Statements" in "Item 8.  Financial Statements and Supplementary Data."

*    Changes   in   international,   Federal,   state,   or  local   legislative
     requirements,  such as changes in tax laws or rates; environmental laws and
     regulations.

Cinergy Corp. (Cinergy or Company) and its subsidiaries  undertake no obligation
to publicly update or revise any forward-looking statements, whether as a result
of changes in actual results, changes in assumptions, or other factors affecting
such statements.

Cinergy, CG&E, PSI, and ULH&P

THE COMPANIES

Cinergy,  a Delaware  corporation,  is a registered  holding  company  under the
Public Utility Holding  Company Act of 1935 (PUHCA).  Cinergy was created in the
October 1994 merger of PSI  Resources,  Inc. and The  Cincinnati  Gas & Electric
Company (CG&E). Cinergy is the parent holding company of PSI Energy, Inc. (PSI),
CG&E,  Cinergy  Investments,  Inc.  (Investments),  and Cinergy  Services,  Inc.
(Services). CG&E is an operating utility primarily engaged in providing electric
and gas service in the  southwestern  portion of Ohio and through its  principal
subsidiary,  The Union Light, Heat and Power Company (ULH&P),  in adjacent areas
in Kentucky. PSI is an operating utility primarily engaged in providing electric
service in north  central,  central,  and southern  Indiana.  Services  provides
management, financial, administrative, engineering, legal, and other services to
Cinergy,  CG&E, PSI, and  Investments.  Cinergy conducts its  international  and
non-regulated businesses through Investments and its subsidiaries.

FINANCIAL CONDITION

COMPETITIVE PRESSURES

ELECTRIC UTILITY INDUSTRY

Cinergy, CG&E, PSI, and ULH&P

Introduction

The electric utility industry is transitioning  from a monopoly  cost-of-service
regulated  environment to an industry in which companies will ultimately compete
to be the customers'  energy  provider.  This transition will continue to impact
the  operations,  structure,  and  profitability  of  Cinergy.  The  effects  of
competition  are already being felt in the wholesale  power  markets,  where the
increased  numbers of power  marketers  and  brokers  are  reducing  the margins
previously experienced.

Energy companies are positioning themselves for full competition through mergers
and   acquisitions,   strategic   alliances  with  other  energy  companies  and
energy-related  businesses,  and through the  development  of new  products  and
services.  Just as critical  to Cinergy  will be the  regulatory  outcome of the
deregulation  process  in each of its  three  franchise  states,  as well as the
outcome in other states where Cinergy plans to compete.

Deregulation Process

The FERC opened up the wholesale  electric  markets to  competition in 1996 with
Orders  888 and 889.  The final  rules  provided  for  mandatory  filing of open
access/comparability transmission tariffs, provided for functional unbundling of
all  services,  required  utilities to use the filed  tariffs for their own bulk
power  transactions,  established an electronic  bulletin board for transmission
availability and pricing information, and established a contract-based approach
to recover any potential "stranded" investments (explained below) as a result of
customer choice at the wholesale level.

Customer choice at the end-user (i.e., retail) level currently remains under the
jurisdiction of individual  states (see State  Developments).  The  deregulation
process has varied  greatly  from state to state.  Several  states have  enacted
customer  choice  legislation,  while  many  states  are in the early  stages of
studying  the  issues.   During  the  process  of  developing   customer  choice
legislation,  utilities  have  been  required  to  consider  issues  such as the
recovery of any stranded investment, ability to compete for incumbent customers,
and the potential forced divestiture of generating assets.  Cinergy continues to
be an advocate of competition in the electric  utility industry and continues to
pursue customer choice legislation at both the state and Federal levels.

As the deregulation process has progressed,  it has become clear that both scale
and  diversity of business are critical  factors for success.  Scale is critical
for several reasons.  A critical mass of customers allows the development of new
products and  back-office  capabilities  in a  cost-effective  manner.  A larger
balance sheet scale and diversity of commodities  (i.e., gas and electric) allow
the trading  business  to market risk  intermediation  products  without  taking
excessive  financial  risks and to  recover  back-office  costs in a low  margin
business.  Merger and acquisition  activity in the energy industry appears to be
accelerating as companies attempt to create the desired scale.

Recent Developments

Stranded  Investments  Due to excess  capacity in the industry and the declining
cost of new technology, electricity prices in a competitive market may not fully
cover  the  costs of past  commitments  made by  utilities  while  under a cost-
of-service regulated environment.  Fixed costs which cannot be recovered through
electricity  sales at market  prices are  referred to as  stranded  investments.
While  the  recovery  of  prudent  past  investments  and  commitments  has been
supported  by FERC in Order 888 and at least  partially  in the  states in which
competition-related  legislation  has been passed,  there is no  guarantee  that
Cinergy or any other  utility will receive full  recovery of potential  stranded
investments.   In  addition,   in  those  states  which  have   legislated  open
competition, many have required the divestiture of generating assets in order to
qualify and obtain recovery of stranded investments.

Midwest ISO During 1997,  Cinergy  collaborated  with other  Midwestern  utility
companies  on a plan to  join  the  transmission  systems  of the  participating
companies into a single regional system.  The plan was filed with the FERC early
in 1998 for approval. If approved, the new system would be managed independently
by an Independent  System Operator (ISO).  The formation of a Midwest ISO, as it
has become known, would ensure  non-discriminatory  open transmission access and
system  reliability,  as  well as the  development  of a  regional  transmission
tariff,  which would help eliminate the "pancaking" of  transmission  rates in a
region.

Currently,  there are eight  utilities  participating  in the filing  along with
Cinergy.  The proposed ISO  consists of 32,000 miles of  transmission  lines and
covers portions of eight Midwestern  states,  forming one of the largest ISOs in
the country. FERC's approval of the plan is anticipated to come within a year.

Repeal of the PUHCA Currently,  PUHCA creates a number of restrictions that make
preparing for deregulation more difficult.  PUHCA restricts the amount which can
be invested outside the regulated  utility,  including  foreign  investments and
investments in power plants.  It also  restricts  potential  merger  partners to
those that meet certain integration requirements.

In  1995,   the  SEC  endorsed   recommendations   for  reform  of  PUHCA.   The
recommendations   called   for   repeal   and,   pending   repeal,   significant
administrative reform of the 62-year-old statute. Since the release of the SEC's
report,  numerous bills have been introduced in both houses of the United States
(US) Congress providing for the repeal or significant amendment of PUHCA. During
1997,  a bill  repealing  PUHCA was  introduced  in the US Senate  but was never
brought to a vote. Legislation repealing PUHCA is anticipated to be reintroduced
in the US Congress in 1998.  Cinergy  supports  the repeal of this act either as
part  of  comprehensive   reform  of  the  electric   industry  or  as  separate
legislation.

Franchise  Rights During 1997,  several  states  enacted  transition  plans that
included a variety of measures  designed to create a "level  playing  field" for
new  competitors.  In some cases,  there has been a mandatory  "divestiture"  of
existing customers.  In others, the plans provide incentives which may encourage
customers to switch  suppliers by providing  "above market" credits to those who
switch  from  the  incumbent  utility.   Also,  some  states  have  put  varying
restrictions on the incumbent utility's ability to compete for these customers.

Cinergy, CG&E, PSI, and ULH&P

State Developments

As previously mentioned, certain states have enacted legislation which will lead
to complete  retail  competition  within the next  several  years.  These states
generally have required  up-front rate  reductions and the  opportunity  for all
customer classes to choose an electricity  provider. A few states have phased in
customer choice, but still provided for immediate rate reductions.

All states  passing  legislation  have included  some  mechanism for recovery of
stranded  investment.  However,  states  have  varied on the  methodology  to be
applied in  determining  the level of stranded  investment,  and  divestiture of
generation assets has been required in a few states.

As discussed  below,  the three states in which Cinergy  operates public utility
companies  have all had  legislation  introduced  which  would  provide for full
retail customer  choice.  None of these states has yet passed  legislation,  but
policymakers  and  stakeholders  continue to work to resolve  issues with an eye
toward passage.

Cinergy and PSI

Indiana A customer  choice bill (SB427) was  introduced  during the 1997 Indiana
legislative  session,  with  support  from a coalition  made up of Cinergy,  the
Indiana  Manufacturers  Association,  the Indiana  Industrial  Energy Consumers,
Inc., and one other Indiana  investor-owned  electric utility.  After amendments
were made,  essentially stripping the bill of most of its provisions and turning
it into a bill calling for the study of deregulation by a legislative  committee
known as the Regulatory  Flexibility  Committee (Study Committee),  SB427 passed
the legislature and was signed by the governor.

The Indiana Utility Regulatory  Commission (IURC) issued a report titled "Energy
Report:  Public  Policy  Considerations"  (Report)  to the  Study  Committee  in
November 1997. The scope and purpose of the Report was to provide information to
the Study  Committee  which would  enable them to answer the question of whether
retail customer choice was in the best interest of Indiana. Public policy issues
listed by the Report for the Study Committee to consider were: jurisdiction over
retail transmission; recovery of stranded investments; estimation methodology of
any  stranded  investments  allowed  to be  recovered;  method for  recovery  of
stranded  investments;  low-income  and  environmental  programs;  and impact of
deregulation on state and local taxes. The Report's conclusion was: "In the long
run,  competition  in the  electricity  market could be in the best  interest of
Indiana.  Experience  in other  states  has  shown  that the best  outcomes  and
smoothest  process to bring about customer choice in the electric  industry have
resulted from a cooperative effort led by the governor,  the legislature and the
state  commission  working  together with all  stakeholders.  Indiana  should be
prepared to respond to  competition  created by other states,  especially  those
surrounding  Indiana,  and to any Federal  legislation that requires  nationwide
competition in the electricity market." As a result of the IURC report and other
testimony to the Study  Committee,  the Study  Committee  recommended  that they
continue to study changes in the electric industry.

Another  customer  choice bill (SB 431),  sponsored by, among others,  those who
supported the customer  choice bill during 1997,  was  introduced in the Indiana
Senate in January  1998.  In the House of  Representatives,  House Bill 1190 (HB
1190) was  introduced.  This bill  calls for a study by the IURC of the  effects
deregulation  would  have on  Indiana.  Although  the  legislature  is much more
knowledgeable on the customer choice issues as a result of the Study Committee's
report and debating the 1997 customer choice bill, neither SB 431 or HB 1190 was
passed during the 1998 legislative session.

Cinergy and CG&E

Ohio  Although the Ohio  legislature  did not pass customer  choice  legislation
during  1997,  it did create the Joint  Select  Committee  on Electric  Industry
Deregulation  (Committee) to examine  competition and restructuring  issues. The
Committee heard  testimony from a variety of  stakeholders  on various  customer
choice issues  throughout the spring of 1997. In December 1997, the  Committee's
chairpersons  unveiled the outline of a plan designed to bring  competition into
Ohio's retail  electric  industry in the year 2000.  The  chairpersons'  plan is
based  on  five  basic  policies:  all  customers,  including  residential,  can
participate  from the outset;  the cost of  electricity  will  decrease from the
outset and continue to decrease at an accelerating rate for all customers during
the transition period; current low-income assistance programs will be continued;
current  reliability  and quality of service will be  maintained;  and open free
markets will be established  with lower prices driven by  competition.  The plan
would provide for  competition  among utilities to begin January 1, 2000, with a
five-year transition period.

Furthermore,   the  plan  addresses  the  tax   consequences  of  a  deregulated
environment  through the creation of a revenue-neutral  system.  The current tax
structure of Ohio  subjects  Ohio  electric  utility  companies to certain state
taxes which would not be paid by out-of-state  competitors selling power in Ohio
retail markets.  The new system attempts to remedy this  disadvantage  while not
diminishing  the amount of tax revenues  currently  being collected by state and
local governments.

The chairpersons  were not able to get their plan adopted by the full committee.
Some of the primary concerns that have been expressed are that the plan does not
adequately  address  utilities'  stranded  investment  concerns,  and  that  the
proposal to create retail  marketing  areas, or "buying  pools,"  throughout the
state during the transition  period would be unduly disruptive in that customers
who did not affirmatively  elect to remain with their incumbent utility would be
assigned to the buying  pool under a Public  Utility  Commission  of Ohio (PUCO)
designed and  administered  bidding  process.  The  chairpersons  have announced
intentions to introduce a bill in 1998.

Also in Ohio, a bill was  introduced in November 1997 (HB 625)  authorizing  the
issuance of electric utility rate reduction bonds that would permit utilities to
securitize  certain  assets.  The  bill  itself  does  not  provide  for  retail
competition but, rather,  specifies  financing issues a utility may engage in to
prepare for competition. It is uncertain whether this bill or any bill providing
for retail competition will be passed in Ohio in 1998.

Cinergy, CG&E and ULH&P

Kentucky In January 1998,  the House  Chairman of the Tourism,  Development  and
Energy  Committee  introduced  a customer  choice bill (HB 443).  The bill would
allow  persons and  businesses  in  participating  service areas to choose their
supplier of electricity  beginning  January 1, 2000. It would also ensure a rate
cap to prevent any  increase in  generation  energy  prices for six years,  with
certain exceptions.  Because of its low electric rates, Kentucky has not to date
been moving  aggressively toward retail customer choice. It is uncertain whether
HB 443 will be passed in Kentucky in 1998.

Cinergy

United Kingdom

Transition to full  competition in the United  Kingdom's  (UK) electric  utility
industry began with the industry's  privatization in 1991. When the industry was
privatized, the generation,  transmission,  and regional distribution businesses
were, in effect,  unbundled into separate companies.  The regional  distribution
companies,  including Midlands  Electricity plc (Midlands)  (Cinergy,  through a
joint  venture owns a 50%  interest in Midlands,  see Note 1(e) of the "Notes to
Financial Statements" in "Item 8. Financial Statements and Supplementary Data"),
own no  transmission  facilities  and are limited as to the amount of generation
they may own.  Third-party  access to the  transmission  and local  distribution
systems  was  also  put in  place,  enabling  licensed  suppliers  to use  these
networks.

As a result of the transition  plan,  larger users of electricity have been free
to choose  their  supplier  since  1994 or  earlier.  Full  competition  for all
customers was scheduled to be phased in beginning in April 1998. However, due to
delays with the design and testing of information  systems, the phase-in to full
competition has been delayed to September 1998.  Midlands'  service territory is
now scheduled to begin open competition in October 1998.

To date,  new entrants to the industry  have been limited to  independent  power
producers,  who compete with the  formerly  state-run  generators  by using new,
efficient  technology.  There  have been no major new  entrants  into the supply
business from outside the industry. However, new entrants are expected to emerge
as full competition opens.

A  substantial   portion  of  Midlands'  operating  profit  is  related  to  the
distribution business, which will remain a regulated monopoly.  Midlands intends
to market both gas and electric service in the supply business, as all customers
gain the ability to choose suppliers.

Cinergy, CG&E, and ULH&P

Gas Utility Industry

Customer  Choice The PUCO approved  CG&E's gas customer  choice  program  during
1997. The plan,  which made customer  choice  available to all  residential  and
small commercial customers, went into effect in November 1997. As of January 30,
1998,  approximately  7,300 customers have opted to participate in this program.
Large industrial,  commercial, and educational institution customers already had
the ability to select their own gas  supplier.  In 1997,  the PUCO  approved two
other gas customer choice programs in the state. Cinergy Resources,  Inc. (CRI),
Cinergy's gas retail marketing subsidiary, is one of many entities competing for
customer gas supply business in these programs.

CG&E  continues to provide the gas  transportation  service for all customers on
its system without regard to the supplier of the gas commodity.  CG&E receives a
transportation  charge from  customers  which is based on its current  regulated
rates.

Cinergy and CG&E

Loss of  Transportation  Customer  Late in 1997,  AK  Steel,  Cinergy's  largest
natural gas  transportation  customer,  informed CG&E that it plans to build its
own pipeline to connect  directly to an  interstate  natural gas  pipeline.  The
interruptible  contract with CG&E, which represents  approximately $7 million of
annual revenues,  will expire at the end of 1998. Under that contract,  AK Steel
purchases gas directly from other suppliers but uses CG&E's pipelines to deliver
the gas.  AK Steel is able to  pursue  this  alternative  because  of its  close
proximity to an existing interstate pipeline. With few customers being similarly
situated,  Cinergy and CG&E do not currently  anticipate  others proceeding in a
similar manner.

Cinergy, CG&E, PSI, and ULH&P

Cinergy's Response to the Changing Competitive Environment

Cinergy believes  competition will benefit electric  customers  individually and
the  economy as a whole.  Cinergy  has taken  steps to prepare  not only for the
changing  environment,  but to assure fairness and consistency in the setting of
rules  and  regulations  in the  various  markets  in  which  Cinergy  competes.
Cinergy's basic approach to the  deregulation  environment is to have set a goal
to be a top five utility in five measures of scale and productivity  within five
years. Examples of steps taken to achieve this goal include the following:

   Cinergy  reorganized its operations into four strategic business units. This
functional unbundling separated Cinergy's business into Energy Services,  Energy
Delivery,  Energy Commodities,  and International  business units. Each business
unit is responsible for business expansion in its own markets.
   Cinergy  enhanced  its  international  presence  in  1996 by  acquiring  its
interest in Midlands, an electricity  distribution company located in the UK. In
1997,  Cinergy  furthered its  international  development plans by acquiring the
development   team  and  all  rights  to  future   projects  of  Midlands  Power
International, a power development subsidiary of Midlands.
   Cinergy  formed a joint venture with Trigen Energy  Corporation  (Trigen) to
develop and operate cogeneration and trigeneration  facilities throughout the US
and Canada  which  enables  Cinergy to compete  for  customers  outside  its own
franchise territory prior to and following the arrival of retail competition.
   Cinergy  has  partnered  with two other  energy  companies  to form  Cadence
Network LLC which will provide a variety of innovative  products and services to
multi-site  national  accounts  customers.  These services include  consolidated
billing, bill auditing, and rate and usage analysis.
   Cinergy has become a major participant in the marketing of power,  resulting
in  megawatt  (mw)  sales  volume  increases  of 600% and 80% in 1997 and  1996,
respectively.
   In 1997, Cinergy acquired Greenwich Energy Partners  (Greenwich).  Greenwich
is a small proprietary trader of energy commodities.  Through its acquisition of
Greenwich,  Cinergy  became the first utility  company to hold a seat on the New
York Mercantile  Exchange  (NYMEX).  The NYMEX is the world's  largest  physical
commodity futures exchange and preeminent  trading forum for energy and precious
metals.
     In 1996, the NYMEX began trading  electricity futures and options contracts
with contract  delivery points in the western US. During the first half of 1998,
the NYMEX will begin  trading  contracts  with  delivery  points  located in the
Midwest,   Mid-Atlantic,   and  Southern  regions  of  the  country.   Cinergy's
transmission  system was selected as the delivery point for the Midwest  region.
Cinergy's  acquisition  of the NYMEX seat and its selection as a delivery  point
for electricity futures trading demonstrates Cinergy's participation as a leader
in the evolving power markets.

Cinergy, CG&E, PSI, and ULH&P

Substantial Accounting Implications

Historically,  regulated  utilities  have applied the provisions of Statement of
Financial  Accounting  Standards No. 71,  Accounting  for the Effects of Certain
Types of Regulation  (Statement 71). The accounting afforded regulated utilities
in Statement 71 is based on the  fundamental  premise that rates  authorized  by
regulators allow recovery of a utility's costs in its generation,  transmission,
and distribution operations. These principles have allowed the deferral of costs
(i.e.,  regulatory  assets)  based on assurances of a regulator as to the future
recoverability of the costs in rates charged to customers. Certain criteria must
be met  for  the  continued  application  of the  provisions  of  Statement  71,
including  regulated  rates  designed to recover the specific  utility's  costs.
Failure to satisfy the criteria in Statement  71 would  eliminate  the basis for
recognition of regulatory assets.

Based on Cinergy's current  regulatory orders and the regulatory  environment in
which it currently  operates,  the  recognition of its  regulatory  assets as of
December 31, 1997,  is fully  supported.  However,  in light of recent trends in
customer  choice  legislation,  the potential for future losses  resulting  from
discontinuance of Statement 71 does exist. Such potential losses, if any, cannot
be  determined  until such time as a legislated  plan has been  approved by each
state in which  Cinergy  operates  a  franchise  territory.  Cinergy  intends to
continue its pursuit of  competitive  strategies  which  mitigate the  potential
impact of these issues on the financial condition of the Company.

Cinergy, CG&E, PSI, and ULH&P

SECURITIES RATINGS

The current ratings provided by the major credit rating agencies;  Duff & Phelps
Credit Rating Co. (D&P), Fitch Investors Service, LP (Fitch),  Moody's Investors
Service (Moody's), and Standard and Poor's (S&P), are included in the following
table:

                                 D&P        Fitch      Moody's       S&P

Cinergy
  Corporate Credit              BBB+        BBB+        Baa2        BBB+
  Commercial Paper              D-2         F-2         P-2         A-2

CG&E
  Secured Debt                   A-          A-          A3          A-
  Senior Unsecured Debt         BBB+      Not rated     Baa1        BBB+
  Junior Unsecured Debt         BBB       Not rated     Baa2        BBB+
  Preferred Stock               BBB         BBB+        baa1        BBB+
  Commercial Paper              D-1-        F-2         P-2       Not rated

PSI
  Secured Debt                   A-          A           A3          A-
  Senior Unsecured Debt         BBB+         A-         Baa1        BBB+
  Junior Unsecured Debt         BBB         BBB+        Baa2        BBB+
  Preferred Stock               BBB         BBB+        baa1        BBB+
  Commercial Paper              D-1-        F-2         P-2       Not rated

ULH&P
  Secured Debt                   A-       Not rated      A3          A-
  Unsecured Debt              Not rated   Not rated     Baa1        BBB+

These  securities  ratings  may be revised or  withdrawn  at any time,  and each
rating should be evaluated independently of any other rating.

REGULATORY MATTERS

Cinergy and PSI

Indiana

IURC Orders - PSI's Retail Rate  Proceeding  and  Demand-Side  Management  (DSM)
Proceeding In September  1996, the IURC issued an order  (September  1996 Order)
approving an overall average retail rate increase for PSI of 7.6% ($75.7 million
annually). Among other things, the IURC authorized the inclusion in rates of the
costs of a 262-mw clean coal power  generating  facility located at Wabash River
Generating  Station  (Clean Coal  Project) and the costs of a scrubber at Gibson
Generating Station.  The order also reflects a return on common equity of 11.0%,
before the 100 basis points  additional common equity return allowed as a merger
savings  sharing  mechanism in the IURC's  February  1995 order  (February  1995
Order)  discussed  further  herein,  with an 8.21% overall rate of return on net
original cost rate base.

In October  1996,  The Office of the Utility  Consumer  Counselor  (UCC) and the
Citizens  Action  Coalition of Indiana,  Inc.  (CAC) filed a Joint  Petition for
Reconsideration  and  Rehearing  of the  September  1996 Order with the IURC.  A
settlement  agreement  with the UCC and CAC was  approved in its entirety by the
IURC in August  1997.  This  settlement  agreement  reduced  the  original  rate
increase by $2.1 million (.2%).  Major  provisions of the  settlement  agreement
include:  a) a $4.1  million  increase  in the  annual  amortization  of certain
regulatory  assets; b) a retail rate reduction of $1 million annually;  c) a $.9
million  reduction in retail  rates to reflect an August 31, 1995,  cut-off date
for costs to achieve  merger  savings  instead of an October 31,  1996,  cut-off
date; and d)  authorization  to defer for  subsequent  recovery costs to achieve
merger savings incurred between September 1, 1995, and October 31, 1996.

A  settlement  agreement  between PSI and certain  intervenors,  in a proceeding
established  to review PSI's current and proposed DSM programs,  was approved by
the IURC in December 1996 (December 1996 DSM Order).  Beginning January 1, 1997,
and continuing through December 31, 2000, the settlement agreement allows PSI to
recover $35 million per year  through a  non-bypassable  charge in PSI's  retail
rates.  The $35 million is designed to recover all previously  incurred,  but as
yet  unrecovered,  DSM costs  and all  costs  related  to  satisfying  remaining
commitments associated with a previous DSM settlement agreement. The $35 million
also includes recovery of carrying costs.  Further, the agreement authorizes PSI
to spend up to $8 million annually on ongoing DSM programs through the year 1999
and to collect such amounts currently in retail rates.

February 1995 Order - Retail Rate Proceeding and Merger Savings  Allocation Plan
The IURC's  February  1995 Order  approved a  settlement  among PSI and  certain
intervenors  authorizing  PSI to  increase  retail  rates $33.6  million  before
credits to base rates of $4.4 million in 1995 and an additional $2.2 million and
$2.4  million  in 1996 and 1997,  respectively,  to  reflect  the  sharing  with
customers of non-fuel  operation and  maintenance  expense  merger savings (Non-
fuel Merger Savings).

Additionally,  the February 1995 Order provided PSI an opportunity to earn up to
an additional 100 basis points above the common equity return  authorized in the
September 1996 Order until December 31, 1997. To be eligible for such additional
earnings, PSI had to meet certain  performance-related  standards. PSI met those
standards,  which were measured in conjunction  with  quarterly fuel  adjustment
clause filings.  Beginning January 1, 1998, the 100 basis point increment to the
authorized common equity return will be phased out over a twelve-month period.

Effective  with this  order,  PSI began  recovering  carrying  costs on  certain
environmental-related projects under construction. This recovery continues until
the date of an approved rate order  reflecting  such projects in rates.  Through
this  mechanism,  revenues  were  increased by $9 million,  $18 million,  and $2
million on an annual  basis in  February  1995,  March 1995,  and January  1996,
respectively.

Coal  Contract  Buyout  Costs In August  1996,  PSI  entered  into a coal supply
agreement with Eagle Coal Company (Eagle) for the supply of approximately  three
million tons of coal per year.  The  agreement,  which  terminates  December 31,
2000,  provides  for a buyout fee of $179  million  (including  interest)  to be
included  in the  price of coal to PSI over the term of the  contract.  This fee
represents the costs to Eagle of the buyout of the coal supply agreement between
PSI and Exxon Coal and Minerals Company.  The retail  jurisdictional  portion of
the buyout charge,  excluding the portion  applicable to joint owners,  is being
recovered through the quarterly fuel adjustment  clause,  with carrying costs on
unrecovered amounts, through December 2002. PSI has also filed a petition at the
FERC for recovery of the  wholesale  jurisdictional  portion of the buyout costs
through the wholesale fuel  adjustment  clause.  Generally,  the FERC will allow
recovery if the utility can demonstrate  there will be net benefits to customers
during the buyout cost recovery  period.  The FERC is expected to issue an order
on PSI's  petition  early in 1998.  (See  Note 1(i) of the  "Notes to  Financial
Statements" in "Item 8. Financial Statements and Supplementary Data.")

Cinergy and CG&E

Ohio

PUCO Order - CG&E's Gas Rate  Proceeding  In December  1996,  the PUCO issued an
order  (December  1996  Order)  approving  an overall  average  increase  in gas
revenues  for CG&E of 2.5% ($9.3  million  annually).  The PUCO  established  an
overall rate of return of 9.7%, including a return on common equity of 12.0%. In
developing  this  return on common  equity,  the PUCO  considered,  among  other
things, CG&E's efforts to reduce costs and increase operating efficiency and its
proposals to allow  residential  customers to choose their natural gas supplier.
The PUCO disallowed certain of CG&E's requests,  including the requested working
capital  allowance,   recovery  of  certain   capitalized   information  systems
development  costs,  and  certain   merger-related  costs.  These  disallowances
resulted in a pretax charge to earnings during the fourth quarter of 1996 of $20
million  ($15  million  net of taxes or $.10 per  share  basic,  $.09 per  share
diluted).  CG&E's request for a rehearing on the disallowed  information systems
costs and other aspects of the order was denied.

In April  1997,  CG&E filed a notice of appeal  with the  Supreme  Court of Ohio
challenging the disallowance of information  systems costs and the imputation of
certain revenues.  Cinergy and CG&E cannot predict what action the Supreme Court
of Ohio may take with respect to this appeal.

Other In April 1994, the PUCO issued an order  approving a settlement  agreement
among  CG&E  and  certain  intervenors  which,  among  other  things,   resolved
outstanding  issues  related to the  merger.  As part of this  settlement,  CG&E
agreed to a moratorium on increases in base electric rates until January 1, 1999
(except under certain  circumstances).  In return, CG&E is allowed to retain all
PUCO electric jurisdictional Non-fuel Merger Savings until 1999.

Consistent with the provisions of the settlement agreement and the December 1996
Order,  CG&E  expensed  merger  transaction  costs and costs to  achieve  merger
savings (Merger Costs) applicable to its PUCO jurisdiction of $5 million and $41
million  (including  $6 million as a result of the December  1996 Order) in 1995
and 1996,  respectively.  CG&E and its  utility  subsidiaries  have  deferred  a
portion of the Merger Costs  incurred  through  December  31,  1996,  for future
recovery in customer rates.

Additionally,  in December 1996,  the PUCO issued an order  applicable to CG&E's
DSM programs.  The order  requires CG&E to spend up to one-half of the annual $5
million  currently  included  in  retail  rates  on  PUCO-sanctioned  low-income
residential  programs.  The remaining portion of the $5 million is to be applied
to the recovery of DSM cost deferrals.  CG&E's  participation  in the low-income
programs  will be a factor  considered  by the PUCO in setting  future  rates of
return and approving competitive transition plans.

Cinergy, CG&E, and ULH&P

Kentucky In exchange for the Kentucky Public Service Commission's (KPSC) support
of the merger,  in May 1994,  ULH&P  accepted the KPSC's request for an electric
rate  moratorium  commencing  after ULH&P's next retail rate case (which has not
yet been filed) and  extending  to January 1, 2000.  In  addition,  the KPSC has
authorized  concurrent  recovery  of costs  related to various  DSM  programs of
ULH&P.

ULH&P has  deferred its portion of Merger Costs  incurred  through  December 31,
1996, for future recovery in customer rates.

KPSC Order In July 1996,  the KPSC  issued an order  authorizing  a decrease  in
ULH&P's  electric  rates of  approximately  $1.8  million  annually to reflect a
reduction in the cost of electricity purchased from CG&E.

Cinergy, CG&E, and ULH&P

Potential  Divestiture of Gas  Operations  Under the PUHCA,  the  divestiture of
CG&E's gas operations may be required. The key question under the relevant PUHCA
standards is the amount of increased  operating costs, if any, that would result
from the gas operations being divested and operated on a stand-alone basis.

In its order  approving the merger,  the SEC reserved  judgment  over  Cinergy's
ownership of CG&E's gas operations  for three years,  at the end of which period
Cinergy would be required to address the matter. In February 1998,  Cinergy made
a filing with the SEC  setting  forth its  rationale  for  retention  of the gas
operations.  The filing  includes,  among other things, a study showing that, if
divested and operated on a  stand-alone  basis,  the gas  operations  would bear
significant  increased  operating costs,  greater than those cited by the SEC in
two 1997 cases permitting  electric  registered holding companies to acquire and
retain gas properties.  For these and other reasons stated in Cinergy's  filing,
Cinergy  believes  its  retention  of CG&E's gas  properties  meets all relevant
standards under the PUHCA.

ENVIRONMENTAL ISSUES

Cinergy, CG&E, and PSI

Clean Air Act  Amendments of 1990 (CAAA) The 1990 revisions to the Clean Air Act
require  reductions  in both  sulfur  dioxide  (SO2) and  nitrogen  oxide  (NOx)
emissions  from  utility  sources.  Reductions  of  these  emissions  are  to be
accomplished in two phases.  Compliance under Phase I was required by January 1,
1995, and Phase II compliance is required by January 1, 2000. To achieve the SO2
reduction objectives of the CAAA, emission allowances have been allocated by the
US Environmental  Protection  Agency (EPA) to affected sources (e.g.,  Cinergy's
electric generating units). Each allowance permits one ton of SO2 emissions. The
CAAA  allows  compliance  to be  achieved on a national  level,  which  provides
companies  the option to achieve this  compliance by reducing  emissions  and/or
purchasing emission allowances.

Cinergy's  operating  strategy for Phase I was based upon the  compliance  plans
developed by PSI and CG&E and  approved by the IURC and the PUCO,  respectively.
All required  modifications  to  Cinergy's  generating  units to  implement  the
compliance plans were completed prior to January 1, 1995.

To comply with Phase II SO2 emission  requirements,  Cinergy's  current strategy
includes a combination of switching to lower-sulfur coal blends and utilizing an
emission  allowance banking strategy.  This  cost-effective  strategy will allow
Cinergy to meet Phase II SO2 reduction  requirements  while maintaining  optimal
flexibility to meet changes in output due to increased  customer choice, as well
as potentially significant future environmental requirements. Cinergy intends to
utilize an emission  allowance  banking strategy to the extent a viable emission
allowance  market  exists.  However,  the  availability  and  economic  value of
emission  allowances  over the  long-term is still  uncertain.  In the event the
market  price  for  emission   allowances   or   lower-sulfur   coal   increases
substantially  from the current  forecast,  Cinergy  could be forced to consider
high capital cost options.

To meet NOx reductions  required by Phase II, Cinergy may install additional low
NOx burners on certain  affected  units in addition to the use of a  system-wide
NOx emission averaging strategy.

Cinergy is  forecasting  CAAA  compliance  capital  expenditures  of $19 million
during the 1998  through  2002  period.  Of these  forecasted  expenditures,  $9
million relates to CG&E and $10 million relates to PSI. These  expenditures  are
included in the amounts provided in the "Capital  Requirements"  section herein.
In  addition,  operating  costs may  increase  due to higher  fuel costs  (e.g.,
higher-quality, lower-sulfur coal; increased use of natural gas) and maintenance
expenses.

Ambient Air Standards The EPA recently  revised the National Ambient Air Quality
Standards for ozone and fine  particulate  matter.  These new rules increase the
pressure for additional  emissions  reductions.  On September 23, 1997,  Cinergy
announced  a proposal to reduce its NOx  emissions  rate by  two-thirds  to 0.25
pounds of NOx per one  million  British  thermal  units  (MMBtu).  At that time,
Cinergy's preliminary cost estimate for the two-thirds reduction was between $74
million and $204  million  (stated in 1997  dollars).  Subsequent  to  Cinergy's
announcement,  the EPA  announced  on October 10, 1997,  its  proposed  call for
revisions to State  Implementation  Plans (SIPs) for statewide reductions in NOx
emissions,  proposing  utility NOx emissions at a rate of 0.15 pounds per MMBtu.
The EPA's  schedule  calls for all  reductions  to be in place as early as 2002.
These initiatives will force  significant  reductions in NOx emissions from many
sources.  The  EPA  has  stated  that  electric  utility  generating  facilities
specifically  are targeted.  The final total level of NOx reductions will depend
upon the outcome of the SIP revision process. Cinergy estimates that the capital
costs for  additional  NOx controls at its  facilities at the 0.15 pounds of Nox
per MMBtu rate  proposed by the EPA could  exceed $524  million  (stated in 1997
dollars) over the next five years  depending upon the final level of reductions,
details of a NOx trading program, and the time frame for implementation.

In February 1998, Cinergy joined with various utilities, labor groups, and other
organizations  from several Midwest,  Great Lakes,  Mid-Atlantic,  and Southeast
states in  forming  the  Alliance  for  Constructive  Air  Policy  (ACAP).  This
coalition  is committed to working  with  policymakers  to find  cost-effective,
equitable approaches for reducing ozone pollution in key regions of the country.
The ACAP is  developing  an  alternative  to the  EPA's  proposed  call for SIPs
revisions to reduce NOx emissions (see discussion above). The ACAP's proposal is
a two-step  process  to  achieve  reductions  in NOx  emissions.  The first step
involves NOx emission  reductions of 55 percent from 1990 levels, or a reduction
in the NOx  emission  rate to 0.35  pounds of NOx per MMBtu,  whichever  is less
stringent,  by 2004.  The second  step  involves  the  development  of  enhanced
subregional  air  quality  modeling  that  would  be  used to  determine  if any
additional reductions are necessary to reach local attainment.  These additional
reductions,  if needed, would be implemented by 2007. The ACAP is also promoting
the establishment of a subregional trading market for NOx emissions. This system
would allow for a market-based  approach to limiting emissions and would produce
cost savings and incentives for the  development of new  technologies to improve
air quality.  Capital costs  required for Cinergy to be in compliance  under the
ACAP's  proposals would be  significantly  less than those under the current EPA
proposal.  But as stated above,  final costs of  compliance  depend on the final
level of reductions  required,  details of a NOx trading  program,  and the time
frame for implementation and compliance.

The impact of the particulate  standards  cannot be determined at this time. The
EPA  estimates it will take up to five years to collect  sufficient  ambient air
monitoring   data.   The  states  will  then  determine  the  sources  of  these
particulates and determine a reduction strategy.  The ultimate effect of the new
standard could be requirements for newer and cleaner technologies and additional
controls on conventional particulates and/or reductions in SO2 and NOx emissions
from utility sources. Since these studies and determinations have not been made,
Cinergy cannot predict the outcome or effect of the new particulate standards.

Global  Climate  Change On December 11, 1997,  delegates to the United  Nations'
climate summit in Japan adopted a landmark environmental treaty (Kyoto Protocol)
to deal with global  warming.  The Kyoto Protocol  establishes  legally  binding
greenhouse  gas  emission  targets for  developed  nations.  The Kyoto  Protocol
framework lacks details related to definitions,  implementation, and enforcement
plans.  For the Kyoto Protocol to enter into force within the US it will have to
be ratified by a two-thirds  vote of the US Senate.  In July 1997, the US Senate
passed a  resolution  advising  the Clinton  Administration  that they would not
favorably consider a protocol which did not include  commitments for all nations
of the world, or that would cause harm to the US economy. The Kyoto Protocol, in
its present  form, is unlikely to be ratified by the US Senate since it does not
meet the requirements of this resolution.

Significant uncertainty exists concerning the science of climate change, and the
Clinton Administration's environmental and energy policies and how it intends to
reduce greenhouse gas emissions.  Cinergy's plan for managing the potential risk
and  uncertainty of climate change  includes:  (1)  implementing  cost-effective
greenhouse gas emission reduction and offsetting activities; (2) encouraging the
use of  alternative  fuels  for  transportation  vehicles  (a  major  source  of
greenhouse  gases);  (3) funding  research  of more  efficient  and  alternative
electric generating technologies;  (4) funding research to better understand the
causes  and  consequences  of  climate  change;  and (5)  encouraging  a  global
discussion  of the issues and how best to manage  them.  Cinergy  believes  that
voluntary  programs,  such as the US  Department  of  Energy  Climate  Challenge
Program,  which Cinergy  joined in 1995,  are the most  cost-effective  means to
limit greenhouse gas emissions.

Air Toxics The air toxics  provisions of the CAAA exempted  fossil-fueled  steam
utility plants from mandatory  reduction of air toxics until the EPA completed a
study.  The final report issued in February  1998,  confirmed  utility air toxic
emissions pose little risk to public health.  It stated mercury is the pollutant
with the greatest  potential  threat,  while others  require  further  study.  A
Mercury Study Report issued in December 1997,  stated that mercury is not a risk
to the average American and expressed  uncertainty whether reductions in current
domestic sources would reduce human mercury  exposure.  US utilities are a large
domestic source,  but they are negligible  compared to global mercury emissions.
The EPA was unable to show a feasible mercury control  technology for coal-fired
utilities.  The EPA must determine the need for regulation by April 15, 1998. If
more  air  toxics   regulations  are  issued,   the  compliance  cost  could  be
significant.  Cinergy  cannot  predict  the  outcome  or  effects  of the  EPA's
determination.

Cinergy, CG&E, PSI, and ULH&P

Other As more fully  discussed  in Note  12(b)(ii)  of the  "Notes to  Financial
Statements" in "Item 8. Financial  Statements and  Supplementary  Data", PSI has
received claims from Indiana Gas Company, Inc. (IGC) and Northern Indiana Public
Service Company (NIPSCO) that PSI is a Potentially  Responsible  Party under the
Comprehensive  Environmental  Response,  Compensation  and  Liability  Act  with
respect to certain manufactured gas plant (MGP) sites, and therefore responsible
for the costs of investigating and remediating these sites.

In August  1997,  NIPSCO  filed suit  against PSI seeking  recovery  from PSI of
NIPSCO's  past and future costs of  investigating  and  remediating  MGP related
contamination  at the Goshen,  Indiana,  MGP site.  NIPSCO  alleged  that it has
already  incurred  about  $400,000  in  response  costs  at the  site  and  that
remediation  of the site will cost about $2.7 million.  PSI denied  liability in
its answer to the complaint.  The parties are currently engaged in the discovery
process and the case has not yet been scheduled for trial.

Also, in August 1997,  PSI reached an agreement  with IGC settling  IGC's claims
that PSI should  contribute to IGC's  response costs related to 13 of the 19 MGP
sites  conveyed by PSI to IGC in 1945.  This  agreement  requires PSI and IGC to
share past and future response costs equally (50%/50%) at the 13 sites. Further,
the parties must jointly approve future management of the sites and the decision
to spend  additional  funds.  The  settlement  does not  address  five sites PSI
acquired from NIPSCO and subsequently sold to IGC.

It is premature, at this time, to predict the nature, extent, and ultimate costs
of, or PSI's responsibility for,  environmental  investigations and remediations
at MGP sites owned or previously owned by PSI or its predecessors. PSI continues
to gather  information  pertaining to each of these MGP sites,  including the 13
sites which are the subject of the agreement  with IGC and the Goshen site which
is the subject of NIPSCO's  complaint.  Reserves recorded,  based on information
currently  available,  are not  material to  Cinergy's  financial  condition  or
results  of  operations.  However,  as  further  investigation  and  remediation
activities are undertaken at these sites, the potential  liability for MGP sites
could be material to Cinergy's financial condition or results of operations.

Refer to Note 12(b) and (c) of the "Notes to Financial  Statements"  in "Item 8.
Financial  Statements and Supplementary  Data" for a more detailed discussion of
the status of certain environmental issues.

CAPITAL REQUIREMENTS

CONSTRUCTION AND OTHER INVESTING ACTIVITIES

Cinergy, CG&E, PSI, and ULH&P

Construction   expenditures   for  the  Cinergy  system  are  forecasted  to  be
approximately $375 million for 1998, and over the next five years (1998 - 2002),
are  forecasted  to aggregate  approximately  $1.7 billion.  Of these  projected
expenditures,  approximately  $191  million  and  $866  million  relate  to CG&E
(including  $37  million and $137  million for ULH&P) and $180  million and $858
million  relate to PSI,  for 1998,  and over the next five years,  respectively.
Substantially  all of these  expenditures  are for capital  improvements  to and
expansion of Cinergy's operating facilities.

Cinergy is forecasting no  investments  in new generating  facilities  under the
belief that  excess  supply in the market  will  continue  in the near term.  If
deregulation of the generation  component of the electric  utility industry does
not occur in the  manner or in the time  frame  anticipated,  and  depending  on
capacity  constraints,   franchise  demand  requirements,   and  the  regulatory
requirements dictated for Integrated Resource Planning,  Cinergy could be forced
to make capital investments in new generating facilities in lieu of relying upon
the existing market for its energy needs. (All forecasted amounts are in nominal
dollars,  exclude  capital  costs  for  additional  NOx  controls  at  Cinergy's
facilities  (see "Ambient Air Standards" in the  "Environmental  Issues" section
herein),   and  reflect   assumptions  as  to  the  economy,   capital  markets,
construction programs,  legislative and regulatory actions, frequency and timing
of rate  increases,  and other related  factors,  all or any of which may change
significantly.)

Cinergy

As discussed  in the  "Competitive  Pressures"  section,  during  1996,  Cinergy
acquired a 50% interest in  Midlands.  Cinergy and GPU,  Inc.  (GPU) formed Avon
Energy Partners  Holdings (Avon Energy),  a 50%/50% joint venture,  and acquired
the  outstanding  common stock of Midlands  through Avon  Energy's  wholly-owned
subsidiary for  approximately  $2.6 billion.  Cinergy and GPU have each invested
approximately $500 million in Avon Energy. Cinergy funded its investment through
its credit  facility.  Avon Energy  funded the  remainder of the purchase  price
through  the  issuance  of  non-recourse  debt (see  Note 1(e) of the  "Notes to
Financial Statements" in "Item 8. Financial Statements and Supplementary Data").

During 1996, Cinergy and Trigen formed a joint venture, Trigen-Cinergy Solutions
LLC  (Trigen-Cinergy).  Cinergy  may  invest  up to  $100  million  and  provide
guaranties of debt and other  obligations  in an aggregate  amount not to exceed
$250  million  at any one time  with  respect  to  energy-related  products  and
services,  including those undertaken by  Trigen-Cinergy.  (See the "Competitive
Pressures" section herein.)

With respect to international development, subject to identifying projects which
meet Cinergy's  investment  objectives,  Cinergy may invest or commit up to $100
million  during  1998.  Funding  of these  investments  or  commitments  will be
provided through  additional debt borrowings.  (See the "Competitive  Pressures"
section herein.)

Cinergy

Cinergy's  net cash  used in  investing  activities  was $377  million  in 1997,
compared to $871  million and $363 million in 1996 and 1995,  respectively.  The
decrease  in  1997  was  primarily  attributable  to  the  effect  of  Cinergy's
investment in Midlands during 1996.

CG&E and ULH&P

CG&E  and its  subsidiaries'  net cash  used in  investing  activities  was $166
million in 1997 (including $23 million for ULH&P),  compared to $156 million and
$147 million in 1996 and 1995 (including $19 million and $19 million for ULH&P),
respectively.  The increase in 1997 was primarily attributable to an increase in
the amount of construction expenditures.

PSI

PSI's net cash used in investing  activities was $152 million in 1997,  compared
to $198 million and $230 million and 1996 and 1995,  respectively.  The decrease
in 1997 was primarily  attributable  to a decrease in the amount of construction
expenditures for PSI.

OTHER COMMITMENTS

Cinergy, CG&E, PSI, and ULH&P

Securities  Redemptions  Mandatory  redemptions  of  long-term  debt  total $501
million ($341 million for CG&E and its  subsidiaries,  including $20 million for
ULH&P, and $160 million for PSI) during the period 1998 through 2002. On January
29,  1998,  PSI gave  notice of its  intention  to redeem on March 1, 1998,  all
outstanding  shares  of  its  7.44%  Series  Cumulative  Preferred  Stock  at  a
redemption  price of $25 per share.  On February 27, 1998,  CG&E  announced  its
intention to redeem on March 29,  1998,  $41 million  principal  amount of its 7
3/8% Series First Mortgage Bonds (due November 1, 2001) at a redemption price of
100.30%  and to redeem on March 30,  1998,  the entire  $100  million  principal
amount of its 8 1/2% Series First  Mortgage  Bonds (due  September 1, 2022) at a
redemption price of 100%, both through the maintenance and replacement fund (M&R
Fund)  provision of CG&E's first mortgage bond indenture.  Additionally,  on the
same  date,  CG&E  announced  its  intention  to redeem on March 30,  1998,  the
remaining $19 million principal amount of its 7 3/8% Series First Mortgage Bonds
(due  November 1, 2001) at a  redemption  price of 100.87%.  On March 24,  1998,
ULH&P  announced  its  intention  to  redeem  on April 23,  1998,  $6.3  million
principal  amount of its 8% Series First Mortgage Bonds (due October 1, 2003) at
a redemption  price of 100.85%  through the M&R Fund  provision of ULH&P's first
mortgage bond  indenture.  Additionally,  on the same date,  ULH&P announced its
intention  to redeem on April 24, 1998,  the  remaining  $3.7 million  principal
amount  of its 8%  Series  First  Mortgage  Bonds  (due  October  1,  2003) at a
redemption price of 101.73%. Cinergy will continue to evaluate opportunities for
the  refinancing  of  outstanding   securities   beyond   mandatory   redemption
requirements.

M&R Fund provisions contained in CG&E's,  PSI's, and ULH&P's first mortgage bond
indentures  require  cash  payments,  bond  retirements,  or pledges of unfunded
property  additions  each year based on an amount related to the net revenues of
the respective company.

Cinergy

Windfall  Profits Tax During the third  quarter of 1997, a windfall  profits tax
was levied against  Midlands.  Cinergy's share of the tax to be paid by Midlands
in two equal  installments,  due December 1, 1997, and 1998, is approximately 67
million  pounds  sterling  ($109 million or $.69 per share,  basic and diluted).
Midlands  borrowed the funds to finance the first  installment.  Cinergy expects
Midlands  will  borrow  funds as  necessary  to pay the  final  installment.  As
Cinergy's  management believes this charge to be unusual in nature, and does not
expect such a charge to recur, the tax was recorded as an extraordinary  item in
Cinergy's  Consolidated Statement of Income during the third quarter of 1997. No
related tax benefit was recorded  for the charge as the windfall  profits tax is
not deductible for corporate  income tax purposes in the UK, and Cinergy expects
that  benefits,  if  any,  derived  for US  Federal  income  taxes  will  not be
significant.

Cinergy, CG&E, PSI, and ULH&P

Year 2000  Costs  Cinergy,  like most  owners of  information  systems,  will be
required  to  modify   significant   portions  of  its  systems  to  accommodate
requirements  brought  about by the turn of the century.  During  1997,  Cinergy
incurred costs of approximately  $5 million to modify existing  computer systems
and  applications.  Preliminary  estimates  of the  remaining  total costs to be
incurred prior to 2000 are approximately $8 million. Maintenance or modification
costs will be  expensed as  incurred,  while the costs of new  software  will be
capitalized and amortized over the software's useful life.

CAPITAL RESOURCES

Cinergy, CG&E, PSI, and ULH&P

Cinergy,  CG&E and its  subsidiaries  (including  ULH&P),  and PSI forecast that
their need for external funds during the 1998 through 2002 period will primarily
be for the refinancing of existing  securities.  (This forecast reflects nominal
dollars  and  assumptions  as to  the  economy,  capital  markets,  construction
programs,  legislative  and  regulatory  actions,  frequency  and timing of rate
increases,   and  other  related  factors,  all  or  any  of  which  may  change
significantly.)

INTERNAL FUNDS

Cinergy, CG&E, PSI, and ULH&P

General  Currently,  the majority of Cinergy's  revenues and corresponding  cash
flows are derived from cost-of-service regulated operations. Cinergy believes it
is likely that the generation  component of the electric  utility  industry will
ultimately be deregulated.  However,  the timing and nature of the  deregulation
and  restructuring  of the  industry  is  uncertain.  In the  interim,  revenues
provided by cost-of-service  regulated operations are anticipated to continue as
the primary  source of funds for Cinergy.  As a result of its low-cost  position
and market strategy,  over the long term, Cinergy believes it will be successful
in a more  competitive  environment.  However,  as  the  industry  becomes  more
competitive,  future cash flows from Cinergy's  operations could be subject to a
higher degree of volatility than under the present regulatory structure.

Cinergy

For the year ended  December 31, 1997,  Cinergy's  cash provided from  operating
activities  was $753  million  compared to $855 million and $736 million in 1996
and 1995,  respectively.  The decrease in 1997 was  primarily  due to CG&E's and
ULH&P's sales of accounts  receivable  during 1996. The decrease was offset,  in
part,  by  PSI's  payment  in  1996 of $80  million  in  accordance  with a 1989
settlement  agreement  between PSI and Wabash  Valley  Power  Association,  Inc.
(WVPA).  (See Notes 6 and 12(e) of the "Notes to Financial  Statements" in "Item
8. Financial Statements and Supplementary Data.")

CG&E and ULH&P

For the year ended December 31, 1997, CG&E and its  subsidiaries'  cash provided
from  operating  activities  was $439 million  (including $40 million for ULH&P)
compared  to $680  million in 1996  (including  $42  million for ULH&P) and $446
million in 1995  (including  $37 million for  ULH&P).  The  decrease in 1997 was
primarily due to CG&E's and ULH&P's sales of accounts receivable during 1996.

PSI

For the year ended  December  31,  1997,  PSI's  cash  provided  from  operating
activities was $332 million compared to $262 million in 1996 and $284 million in
1995.  The increase in 1997 was primarily due to the reflection in 1996 of PSI's
payment of $80 million in accordance  with a 1989 settlement  agreement  between
PSI and WVPA. (See Note 12(e) of the "Notes to Financial Statements" in "Item 8.
Financial Statements and Supplementary Data.")

Cinergy, CG&E, PSI, and ULH&P

Merger Savings As previously discussed in the "Regulatory Matters" section, CG&E
currently  has a regulatory  order in effect which  provides a mechanism for the
retention of a portion of net Non-fuel Merger Savings.

COMMON STOCK

Cinergy

During 1997, 1996, and 1995,  Cinergy issued 66 thousand,  15 thousand,  and 2.6
million new  shares,  respectively,  of common  stock  pursuant to its  dividend
reinvestment and stock purchase plan and various stock-based  employee plans. In
addition,  Cinergy  purchased  1.7 million  and 1.2  million  shares on the open
market  to  satisfy   substantially  all  of  its  1997  and  1996  obligations,
respectively,  under  these  plans.  Cinergy  plans  to  continue  using  market
purchases  of  common  stock  to  satisfy  all  or at  least  a  portion  of its
obligations under these plans.

LONG-TERM DEBT

Cinergy, CG&E, PSI, and ULH&P

As of December 31, 1997, CG&E, PSI, and ULH&P had state regulatory authority for
long-term  debt  issuances  of $300  million,  $300  million,  and $50  million,
respectively. Regulatory approval to issue additional amounts of securities will
be requested as needed.  On March 19,  1998,  PSI issued $100 million  principal
amount of its 7.25% JUnior Maturing Principal Securities (JUMPS). The JUMPS will
mature on March 15, 2028.  Proceeds from the sale were used to repay  short-term
indebtedness incurred in connection with the redemption on March 1, 1998, of all
outstanding  shares  of  PSI's  7.44%  Series  Cumulative  Preferred  Stock at a
redemption price of $25 per share.

SHORT-TERM DEBT

Cinergy, CG&E, PSI, and ULH&P

Cinergy's  utility  subsidiaries  had regulatory  authority to borrow up to $853
million ($453 million for CG&E and its  subsidiaries,  including $50 million for
ULH&P,  and $400 million for PSI) as of December 31, 1997.  In  connection  with
this authority, committed lines have been established which permit borrowings of
up to $270 million  ($85  million for CG&E and $185  million for PSI),  of which
$140 million ($20 million for CG&E and $120 million for PSI) remained unused and
available at December 31, 1997.  Also,  pursuant to this authority,  uncommitted
lines  (short-term  borrowings with various banks on an "as offered" basis) have
been established. Under these arrangements,  $154 million ($100 million for CG&E
and $54 million for PSI) was unused and available at December 31, 1997. CG&E and
PSI also have the capability to issue  commercial  paper which must be supported
by  committed  lines  (unsecured  lines of  credit) of the  respective  company.
Neither CG&E nor PSI issued commercial paper in 1997 or 1996.

To better  manage  cash and  working  capital  requirements,  Cinergy's  utility
subsidiaries,  including  CG&E,  PSI, and ULH&P,  participate in a money pooling
arrangement.  Under this  arrangement,  Cinergy  system  companies  with surplus
short-term funds, whether from internal or external sources,  provide short-term
loans to other  system  companies  at rates that reflect (1) the actual costs of
the external  borrowing and/or (2) the costs of the internal funds which are set
at the 30-day Federal Reserve "AA" industrial  commercial  paper rate. The SEC's
approval of the money pool, pursuant to the PUHCA,  extends through December 31,
2002. For amounts  outstanding under this money pool arrangement at December 31,
1997, and December 31, 1996, see "Notes payable to affiliated  companies" on the
Consolidated Balance Sheets of CG&E and PSI and the Balance Sheets of ULH&P.

Cinergy

In 1997, Cinergy amended its existing credit facility. At year-end,  Cinergy had
two separate credit facilities, a $350 million acquisition commitment and a $400
million  revolving credit facility,  which provides credit support for Cinergy's
newly instituted  commercial paper program (see below). As of December 31, 1997,
approximately $111 million of the $400 million revolving facility, excluding the
amount reserved for commercial paper support, remained unused and available.

Cinergy's  newly  instituted  commercial  paper  program is limited to a maximum
outstanding  principal  amount  of  $200  million.  As  of  December  31,  1997,
approximately  $161  million  of  commercial  paper was  outstanding  under this
program.  The  majority  of the  proceeds  were used to reduce  the  acquisition
commitment to the year-end  level of $350  million.  The entire $350 million was
utilized  to fund the  acquisition  of  Midlands  through  Avon  Energy  and its
wholly-owned subsidiary.

In  addition,  Cinergy  UK,  Inc.,  a  subsidiary  of  Investments,  which holds
Cinergy's 50% investment in Avon Energy, entered into a $40 million non-recourse
credit  agreement  in 1996,  which  was  terminated  in  October  of 1997.  This
agreement was replaced by a one year $115 million non-recourse  revolving credit
agreement, which had $81 million unused as of December 31, 1997.

On January 20, 1998, the SEC issued an order under the PUHCA permitting  Cinergy
to issue and sell from time to time through  December 31,  2002:  1)  short-term
notes and  commercial  paper in an aggregate  principal  amount not to exceed $2
billion  outstanding  at  any  time;  and  2) up  to  approximately  30  million
additional  shares of  Cinergy  common  stock.  Cinergy  intends  to use the net
proceeds  from the  issuance  and sale of the  above  mentioned  securities  for
general corporate purposes.

Net cash used in financing  activities totaled $343 million in 1997, as compared
to $110 thousand and $410 million in 1996 and 1995, respectively.  The change in
cash flow from financing  activities  for 1997  primarily  resulted from Cinergy
borrowing under its credit facility in 1996 to fund the acquisition of Midlands.

CG&E and ULH&P

CG&E and its  subsidiaries' net cash used in financing  activities  totaled $275
million  (including $17 million for ULH&P) for 1997, as compared to $521 million
(including  $23  million  for ULH&P) for 1995 and $339  million  (including  $17
million for ULH&P) for 1994. The change in cash flow from  financing  activities
for 1997 was primarily attributable to CG&E's payments of common stock dividends
to Cinergy during 1996.

PSI

PSI's net cash used in financing  activities  totaled $165 million for 1997,  as
compared to $77  million  for 1996 and $45 million for 1995.  The change in cash
flow from  financing  activities  for 1997 was primarily  attributable  to PSI's
issuance of long-term debt in 1996.

SALE OF ACCOUNTS RECEIVABLE

Cinergy, CG&E, PSI, and ULH&P

In January  1996,  CG&E,  PSI, and ULH&P entered into an agreement to sell, on a
revolving  basis,  undivided  percentage  interests in certain of their accounts
receivable  up to an aggregate  maximum of $350  million,  of which $252 million
($167 million by CG&E and its subsidiaries,  including $29 million by ULH&P, and
$85 million by PSI), net of reserves, has been sold as of December 31, 1997. The
Consolidated Balance Sheets of Cinergy,  CG&E, and PSI and the Balance Sheets of
ULH&P are net of the amounts sold at December 31, 1997 and 1996.

MARKET RISK SENSITIVE INSTRUMENTS AND POSITIONS

Cinergy, CG&E, PSI, and ULH&P

The following  discussions about Cinergy's market risk sensitive instruments and
positions and risk management activities include forward-looking information and
statements that involve risks and uncertainties. The forward-looking information
and  statements  presented  are only  estimates of what may occur in the future,
assuming  certain adverse market  conditions,  due to their  dependence on model
characteristics and assumptions.  As a result,  actual future results may differ
materially from those presented. These disclosures are not precise indicators of
expected  future losses,  rather they merely  present  indications of reasonably
possible losses.

Energy Commodities Sensitivity

Cinergy, CG&E, and PSI

During 1996 Cinergy functionally  reorganized its operations into four strategic
business  units,  including  an energy  commodities  business  unit.  The energy
commodities  business  unit  includes  Cinergy's  power  marketing  and  trading
function,  which was formally  established in 1995 and was the natural successor
of CG&E's and PSI's existing bulk power operations.

At present, the competitive electric power market is dominated by a small number
of large participants  (primarily utilities and a few power marketers),  trading
liquidity is limited,  and pricing is not transparent.  However,  similar to the
development  of natural  gas  markets,  the market for  trading  electricity  is
expected to develop rapidly and Cinergy plans to be a major participant.

The transactions  associated with Cinergy's power marketing and trading function
give rise to various risks,  including  market risk.  Market risk represents the
potential  risk of  loss  from  changes  in the  market  value  of a  particular
commitment  arising from adverse  changes in market rates and prices.  Cinergy's
power marketing and trading  operations are actively conducted in all regions of
the  US.  These  operations  subject  Cinergy  to  the  risks  and  volatilities
associated with the energy  commodities (e.g.,  primarily  electricity) which it
markets and trades. The wholesale power marketing and trading business continues
to be very  competitive and, as a result,  margins have declined  throughout the
year. As Cinergy continues to develop and expand its power marketing and trading
business  (and due to its  substantial  investment in  generating  assets),  its
exposure to movements in the price of electricity  and other energy  commodities
will become greater.  As a result,  Cinergy may be subject to increased earnings
volatility.

Cinergy's  power  marketing  and  trading  activities   principally  consist  of
marketing  and trading  over-the-counter  contracts for the purchase and sale of
electricity.  The majority of these contracts commit Cinergy to purchase or sell
electricity at fixed prices in the future (i.e.,  fixed-price  forward  purchase
and sales contracts).  Cinergy also markets and trades  over-the-counter  option
contracts. The majority of these forward and option contracts require settlement
by  physical  delivery  of  electricity  or are  netted out in  accordance  with
industry  trading  standards.  The use of  these  types  of  physical  commodity
instruments  is  designed to allow  Cinergy to manage and hedge its  contractual
commitments,  reduce its  exposure  relative  to the  volatility  of cash market
prices,  and take  advantage  of selected  arbitrage  opportunities.  The use of
derivative  commodity  instruments  intended  to be  settled  in  cash  was  not
significant during 1997.

Cinergy values its portfolio of  over-the-counter  forward and option  contracts
using the  aggregate  lower of cost or market  method.  To the extent  there are
estimated  net  aggregate  losses in the  portfolio,  Cinergy  reserves for such
losses. As these contracts are settled,  actual gains and losses may differ from
the estimated  gains and losses  utilized in calculating  the aggregate lower of
cost or market reserve due to changing market conditions.

Cinergy  structures and modifies its net position to capture expected changes in
future  demand,   seasonal  market  pricing   characteristics,   overall  market
sentiment,  and price  relationships  between different time periods and trading
regions.  Therefore,  at times,  Cinergy creates a net open position or allows a
net open  position to continue  when it  believes  future  changes in prices and
market conditions will make the positions  profitable.  Position  imbalances may
also occur because of the basic lack of liquidity in the wholesale  power market
itself.  To the extent net open positions exist,  Cinergy is exposed to the risk
that  fluctuating  market prices of electric  power may  potentially  impact its
financial condition or results of operations  adversely if prices do not move in
the manner or direction expected.

Cinergy  measures the risk  inherent in its  portfolio  utilizing  value-at-risk
analysis  and  other  methodologies,  which  simulate  forward  price  curves in
electric power markets to quantify estimates of the magnitude and probability of
potential   future  losses  related  to  open  contract   positions.   Cinergy's
value-at-risk expresses the potential loss in fair value of its forward contract
and  option  position  over a  particular  period  of  time,  with  a  specified
likelihood of occurrence,  due to an adverse market  movement.  Cinergy  reports
value-at-risk  as a  percentage  of  its  earnings,  based  on a 95%  confidence
interval,  utilizing one day holding periods.  On a one day basis as of December
31, 1997, Cinergy's value-at-risk for its power marketing and trading activities
was less than 2% of Cinergy's  "Income Before Interest and Other  Charges".  The
value-at-risk model uses the variance-covariance  statistical modeling technique
and historical  volatilities and correlations over the past 200 day period.  The
estimated  market  prices used to value  these  transactions  for  value-at-risk
purposes  reflect the use of  established  pricing  models and  various  factors
including  quotations  from  exchanges  and  over-the-counter   markets,   price
volatility factors, the time value of money, and location differentials.

Cinergy

Cinergy  Capital  &  Trading,   Inc.   (CC&T),   a  subsidiary  of  Investments,
specializing in energy risk  management,  marketing,  and proprietary  arbitrage
trading,  actively trades derivative commodity instruments,  customarily settled
in cash,  including  futures,  forwards,  swaps, and options.  CRI also utilizes
derivative  commodity  instruments,   customarily  settled  in  cash,  to  hedge
purchases  and sales of natural gas. The trading and hedging  activities of CC&T
and the hedging  activities of CRI were not  significant to Cinergy's  financial
condition or results of operations.

Cinergy, CG&E, PSI, and ULH&P

Credit  risk  represents  the risk of loss  which  would  occur  as a result  of
nonperformance  by  counterparties  pursuant  to the terms of their  contractual
obligations  with  the  Company.   Concentrations   of  credit  risk  relate  to
significant   customers   or   counterparties,   or  groups  of   customers   or
counterparties,  possessing  similar economic or industry  characteristics  that
would  cause  their  ability to meet  contractual  obligations  to be  similarly
affected by changes in economic or other conditions.

Concentration of credit risk with respect to Cinergy's trade accounts receivable
from electric and gas retail  customers is limited due to Cinergy's large number
of customers and  diversified  customer  base of  residential,  commercial,  and
industrial  customers.  Sales for resale customers on Cinergy's  electric system
include traditional electric cooperatives and municipalities with which CG&E and
PSI have  long-standing  relationships.  Contracts for sales of electricity  for
resale outside of Cinergy's system are principally  with power marketers,  other
investor owned  utilities,  electric  cooperatives,  and  municipalities.  As of
December 31, 1997,  approximately  65% of Cinergy's  power marketing and trading
activity  represents  commitments with 10 counterparties.  The majority of these
contracts are for terms of one year or less. As the  competitive  electric power
market expands,  counterparties  will increasingly  include new market entrants,
such as other power marketers,  brokers, and commodities traders. This increased
level of new market  entrants,  as well as competitive  pressures on the utility
market  participants,  could increase  Cinergy's  exposure to credit risk. As of
December 31, 1997, Cinergy's  management believes  nonperformance of contractual
obligations by any one  counterparty  of Cinergy's  power  marketing and trading
function  would not  result in losses  which are  significant  to the  financial
condition or results of operations of Cinergy.

Cinergy, CG&E, and PSI

Cinergy's  energy  commodities  business unit has  established a risk management
function and has implemented  active risk management  policies and procedures to
manage and  minimize its  exposure to price risks and  associated  volatilities,
other market risks,  and credit risk.  Cinergy  maintains  credit  policies with
regard to its  counterparties  in order to manage and  minimize  its exposure to
credit risk.  These policies  include  requiring  parent company  guaranties and
various forms of collateral  under certain  circumstances  and the use of mutual
netting/closeout  agreements.  Cinergy manages, on a portfolio basis, the market
risks  inherent  in its power  marketing  and  trading  transactions  subject to
parameters  established  by Cinergy's  Risk Policy  Committee.  Market risks are
monitored by the Risk Management Group of Cinergy's energy commodities  business
unit,  which  operates  separately  from the units which  originate  or actively
manage the market risk exposures,  to ensure  compliance  with Cinergy's  stated
risk  management  policies and  procedures.  These  policies and  procedures are
reviewed and monitored on a continuous basis to ensure their  responsiveness  to
changing  market and business  conditions.  In addition,  efforts are ongoing to
develop  systems to improve the timeliness and quality of market and credit risk
information.

Exchange Rate Sensitivity

Cinergy

Cinergy has exposure to fluctuations in the US dollar/UK pound sterling exchange
rate  through its  investment  in  Midlands.  Cinergy  used  dollar  denominated
variable interest rate debt to fund this investment, and has hedged the exchange
rate exposure  related to this  transaction  through a currency swap executed in
February 1997.  Under the swap,  Cinergy  exchanged $500 million for 330 million
pounds  sterling.  When the swap terminates in the year 2002, these amounts will
be  re-exchanged;  that is,  Cinergy  will be repaid  $500  million  and will be
obligated to repay to the counterparty 330 million pounds sterling. To fund this
repayment, Cinergy could buy 330 million pounds sterling in the foreign exchange
market at the prevailing spot rate or enter into a new currency swap.

The  purpose  of this  swap is to hedge  the value of  Cinergy's  investment  in
Midlands  against changes in the  dollar/sterling  exchange rate. When the pound
sterling  weakens  relative  to  the  dollar,  the  dollar  value  of  Cinergy's
investment in Midlands as shown on its books declines; however, the value of the
swap increases,  offsetting the decline in the  investment.  The reverse is true
when the pound  sterling  appreciates  relative to the dollar.  The  translation
gains and losses related to the principal  exchange on the swap and on Cinergy's
original  investment in Midlands are recorded in the cumulative foreign currency
translation adjustment which is reported as a separate component of common stock
equity in the Consolidated Financial Statements.

In connection with this swap, Cinergy must pay semi-annual interest on its pound
sterling  obligation and will receive interest on the dollar notional amount. At
December  31,  1997,  the fair value of this swap,  reflecting  the  semi-annual
interest  obligations  through February 2002, and the final principal  exchange,
was $(48) million. This was largely offset by a $41 million currency translation
gain to date on Cinergy's investment in Midlands.

The  following  table  summarizes  the  details of the swap.  (For  presentation
purposes, the pound sterling payment obligation has been converted to US dollars
using the  dollar/sterling  spot exchange rate at December 31, 1997, of 1.64515.
The interest  rates are based on the  six-month  London  Interbank  Offered Rate
(LIBOR) implied forward rates at December 31, 1997.)

                                      Expected Maturity Date
                                                            There-
                         1998   1999  2000   2001    2002   after   Total
Currency Swap                         ($US Equivalent in millions)

Receive principal ($US)  $ -    $ -   $ -    $ -     $500   $ -     $500
Average interest
  receive rate             - %    - %   - %    - %   6.1%     - %   6.1%

Pay principal (pound
  sterling UK)           $ -    $ -   $ -    $ -     $543   $ -     $543
Average interest
  pay rate                 - %    - %   - %    - %   7.0%     - %   7.0%

Interest Rate Sensitivity

Cinergy, CG&E, PSI, and ULH&P

Cinergy's  net  exposure  to changes in  interest  rates  primarily  consists of
short-term debt instruments with floating interest rates that are benchmarked to
US  short-term  money market  indices.  At December 31, 1997,  this included (i)
short-term  bank loans and commercial  paper totaling $870 million ($105 million
for CG&E and $131  million  for PSI),  (ii) $244  million of  pollution  control
related debt ($184 million for CG&E and $60 million for PSI) which is classified
as other  short-term  obligations  on Cinergy's,  CG&E's,  and PSI's  respective
Balance  Sheets,  and (iii) a $252  million  sale of accounts  receivable  ($167
million sold by CG&E and its subsidiaries,  including $29 million sold by ULH&P,
and $85 million sold by PSI) (Cinergy's,  CG&E's,  PSI's, and ULH&P's respective
Balance  Sheets are net of this sale).  At December 31, 1997,  interest rates on
bank loans,  commercial paper, and the sale of accounts receivable  approximated
6%, and the interest rate on the pollution control debt approximated 4%. Current
forward yield curves  project no  significant  change in  applicable  short-term
interest rates over the next five years.

The following table presents the principal cash repayments and related  weighted
average  interest  rates by maturity date for Cinergy and certain of its utility
subsidiaries'   long-term   fixed-rate   debt,  other  debt  and  capital  lease
obligations as of December 31, 1997:

<TABLE>
<CAPTION>
                                        Expected Maturity Date
                                                                There-          Fair
                             1998   1999   2000   2001   2002   after   Total   Value
                                                  (in millions)
<S>                          <C>    <C>    <C>    <C>    <C>   <C>     <C>      <C>
Liabilities

Cinergy and Subsidiaries
Long-term Debt (a)
  Fixed rate                 $ 35   $186   $ 31   $100   $149  $1 650  $2 151   $2 240
  Average interest rate (b)   5.3%   6.3%   5.7%   6.1%   7.3%    7.2%    7.1%

  Other (c)                  $ -    $ -    $ -    $ -    $ -   $  100  $  100   $   97
  Average interest rate (b)    -%     -%     -%     -%     -%     6.5%    6.5%

Capital Lease
  Variable rate              $ -    $ -    $ -    $ 22   $ -   $ -     $   22   $   22
  Average interest rate (b)    -%     -%     -%    5.6%    -%    -%       5.6%

CG&E and Subsidiaries
Long-term Debt (a)
  Fixed rate                 $ -    $180   $ -    $ 61   $100  $  892  $1 233   $1 258
  Average interest rate (b)    -%    6.3%    -%    7.4%   7.3%    7.2%    7.1%

  Other (c)                  $ -    $ -    $ -    $ -    $ -   $  100  $  100   $   97
  Average interest rate (b)    -%     -%     -%     -%     -%     6.5%    6.5%

Capital Lease
  Variable rate              $ -    $ -    $ -    $ 22   $ -   $ -     $   22   $   22
  Average interest rate (b)    -%     -%     -%    5.6%    -%    -%       5.6%

PSI
Long-term Debt (a)
  Fixed rate                 $ 35   $  6   $ 31   $ 39   $ 49  $  758  $  918   $  982
  Average interest rate (b)   5.3%   7.2%   5.7%   4.0%   7.3%    7.3%    7.1%

ULH&P
Long-term Debt (a)
  Fixed rate                 $ -    $ 20   $ -    $ -    $ -   $   25  $   45   $   46
  Average interest rate (b)    -%    6.5%    -%     -%     -%     7.8%    7.2%

<FN>
(a)     Includes amounts reflected as long-term debt due within one year.

(b)     For the long-term debt obligations, the weighted average interest rate
        is based on the coupon rates of the debt that is maturing in the year
        reported.  For the capital lease, the interest rate is based on a spread
        over 3-month LIBOR, and averaged to be approximately 6% in 1997.  For
        the variable rate Liquid Asset Notes with Coupon Exchange (LANCEs), the
        current forward yield curve suggests the interest rate on these notes
        would be fixed at 6.50% commencing October 1, 1999.

(c)     Variable rate LANCEs.
</FN>
</TABLE>

Cinergy, CG&E, and PSI

To manage  Cinergy's  exposure to  fluctuations  in interest  rates and to lower
funding costs,  Cinergy  constantly  evaluates the use of, and has entered into,
several  interest  rate swaps.  Under these swaps,  Cinergy or its  subsidiaries
agree with counterparties to exchange,  at specified  intervals,  the difference
between  fixed-rate and floating-rate  interest amounts  calculated on an agreed
notional amount.  This interest  differential  paid or received is recognized in
the Consolidated Statements of Income as a component of interest expense.

Through two interest rate swap  agreements,  Cinergy has  effectively  fixed the
interest  rate on the  pound  sterling  denominated  obligation  created  by the
currency  swap  discussed   above.   Each  contract   requires  Cinergy  to  pay
semi-annually  a fixed rate and receive a floating rate through  February  2002.
The  combined  notional  amount of both swaps is 330  million  pounds  sterling.
Translation gains and losses related to Cinergy's interest obligation,  which is
payable in pounds sterling, are recognized as a component of interest expense in
the Consolidated Statements of Income.

At December 31, 1997, PSI had two interest rate swap agreements outstanding with
notional amounts of $1OO million each. One contract,  with three years remaining
of a four-year  term,  requires  PSI to pay a floating  rate and receive a fixed
rate. The second  contract,  with a six-month term,  requires PSI to pay a fixed
rate and receive a floating  rate. In both cases,  the floating rate is based on
applicable  LIBOR. The following table presents  notional  principal amounts and
weighted average  interest rates by contractual  maturity dates for the interest
rate  swaps of Cinergy  and PSI.  The  variable  rates are the  average  implied
forward  rates during the  contract  based on the six month LIBOR yield curve at
December 31,  1997.  Although  Cinergy's  swaps  require  payments to be made in
pounds sterling, the table reflects the dollar equivalent notional amounts based
on spot market foreign currency exchange rates at December 31, 1997.

                                      Expected Maturity Date
                                                         There-        Fair
                        1998   1999  2000  2001  2002    after  Total  Value
Interest Rate                        ($US Equivalent in millions)
Derivatives
Interest Rate Swaps
  Receive fixed/pay
    variable ($US)      $ -    $ -   $100  $ -   $ -     $ -    $100    $ -
  Average pay rate       5.9%   6.0%  6.1%   - %   - %     - %   6.0%
  Average receive rate   6.1%   6.1%  6.1%   - %   - %     - %   6.1%

  Receive variable/pay
    fixed ($US)         $100   $ -   $ -   $ -   $ -     $ -    $100    $ -
  Average pay rate       6.0%    - %   - %   - %   - %     - %   6.0%
  Average receive rate   5.9%    - %   - %   - %   - %     - %   5.9%
  Receive variable/pay
    fixed (pound
    sterling UK)        $ -    $ -   $ -   $ -   $543(a) $ -    $543(a) $(3)
  Average pay rate        - %    - %   - %   - %  7.1%     - %   7.1%
  Average receive rate    - %    - %   - %   - %  6.9%     - %   6.9%

(a) Notional  converted to US dollars  using the Sterling  spot exchange rate at
    December 31, 1997, of 1.64515.

INFLATION

Cinergy, CG&E, PSI, and ULH&P

Cinergy  believes that the recent  inflation rates do not materially  affect its
financial condition or results of operations. However, under existing regulatory
practice,  only the historical cost of plant is recoverable from customers. As a
result,  cash flows designed to provide  recovery of historical  plant costs may
not be adequate to replace plant in future years.

DIVIDEND RESTRICTIONS

Cinergy, CG&E, and PSI

See Note  2(b) of the  "Notes to  Financial  Statements"  in "Item 8.  Financial
Statements and Supplementary Data."


RESULTS OF OPERATIONS

Cinergy, CG&E, PSI, and ULH&P

Reference is made to "Item 8.  Financial Statements and Supplementary Data."


       ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Cinergy, CG&E, PSI, and ULH&P

Reference  is made to the "Market  Risk  Sensitive  Instruments  and  Positions"
section in "Item 7. Management's  Discussion and Analysis of Financial Condition
and Results of Operations."

<PAGE>

        Index to Financial Statements and Financial Statement Schedules

                                                                  Page Number
Financial Statements

  Cinergy, CG&E, PSI, and ULH&P
     Report of Independent Public Accountants . . . . . . .
  Cinergy
     Consolidated Statements of Income for the
       three years ended December 31, 1997. . . . . . . . .
     Consolidated Balance Sheets at
       December 31, 1997 and 1996 . . . . . . . . . . . . .
     Consolidated Statements of Changes in
       Common Stock Equity for the three years
       ended December 31, 1997. . . . . . . . . . . . . . .
     Consolidated Statements of Cash Flows
       for the three years ended December 31, 1997. . . . .
     Results of Operations. . . . . . . . . . . . . . . . .
  CG&E
     Consolidated Statements of Income for the
       three years ended December 31, 1997. . . . . . . . .
     Consolidated Balance Sheets at
       December 31, 1997 and 1996 . . . . . . . . . . . . .
     Consolidated Statements of Changes in
       Common Stock Equity for the three years
       ended December 31, 1997. . . . . . . . . . . . . . .
     Consolidated Statements of Cash Flows
       for the three years ended December 31, 1997. . . . .
     Results of Operations. . . . . . . . . . . . . . . . .
  PSI
     Consolidated Statements of Income for the
       three years ended December 31, 1997. . . . . . . . .
     Consolidated Balance Sheets at
       December 31, 1997 and 1996 . . . . . . . . . . . . .
     Consolidated Statements of Changes in
       Common Stock Equity for the three years
       ended December 31, 1997. . . . . . . . . . . . . . .
     Consolidated Statements of Cash Flows
       for the three years ended December 31, 1997. . . . .
     Results of Operations. . . . . . . . . . . . . . . . .
  ULH&P
     Statements of Income for the three years ended
       December 31, 1997. . . . . . . . . . . . . . . . . .
     Balance Sheets at December 31, 1997 and 1996 . . . . .
     Statements of Changes in Common Stock Equity
       for the three years ended December 31, 1997. . . . .
     Statements of Cash Flows for the three years
       ended December 31, 1997. . . . . . . . . . . . . . .
     Results of Operations. . . . . . . . . . . . . . . . .

  Notes to Financial Statements . . . . . . . . . . . . . .

Financial Statement Schedules

     Schedule II - Valuation and Qualifying Accounts
       Cinergy . . . . . . . . . . . . . . . . . . . . . .
       CG&E. . . . . . . . . . . . . . . . . . . . . . . .
       PSI . . . . . . . . . . . . . . . . . . . . . . . .
       ULH&P . . . . . . . . . . . . . . . . . . . . . . .


The information required to be submitted in schedules other than those indicated
above has been included in the balance sheets, the statements of income, related
schedules,  the  notes  thereto,  or  omitted  as not  required  by the Rules of
Regulation S-X.

<PAGE>

               ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of  Directors  of  Cinergy  Corp.,  The  Cincinnati  Gas & Electric
Company, PSI Energy, Inc., and The Union Light, Heat and Power Company:

We  have  audited  the  financial   statements  of  Cinergy  Corp.  (a  Delaware
Corporation),  The Cincinnati Gas & Electric Company (an Ohio Corporation),  PSI
Energy,  Inc.  (an Indiana  Corporation),  and The Union  Light,  Heat and Power
Company (a Kentucky Corporation), as of December 31, 1997 and 1996, and for each
of the three years in the period ended December 31, 1997, as listed in the index
on page 53. These financial  statements and the schedules  referred to below are
the responsibility of management. Our responsibility is to express an opinion on
these financial statements and schedules based on our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all material  respects,  the financial position of Cinergy Corp., The Cincinnati
Gas & Electric  Company,  PSI Energy,  Inc., and The Union Light, Heat and Power
Company as of December  31, 1997 and 1996,  and the results of their  operations
and their cash flows for each of the three  years in the period  ended  December
31, 1997, in conformity with generally accepted accounting principles.

Our  audits  were  made for the  purpose  of  forming  an  opinion  on the basic
financial  statements  taken as a whole. The  supplemental  financial  statement
schedules  listed in the index on page 54 pursuant to Item 14, are presented for
purposes of complying with the Securities  and Exchange  Commission's  Rules and
Regulations  under the  Securities  Exchange  Act of 1934 and are not a required
part of the basic financial  statements.  The supplemental  financial  statement
schedules have been subjected to the auditing  procedures  applied in our audits
of the basic financial  statements and, in our opinion, are fairly stated in all
material  respects  in  relation to the basic  financial  statements  taken as a
whole.




Arthur Andersen LLP
Cincinnati, Ohio
January 27, 1998

<PAGE>

Cinergy Corp.
  and Subsidiaries

<PAGE>

<TABLE>
<CAPTION>
                                  CINERGY CORP.

                        CONSOLIDATED STATEMENTS OF INCOME

                                           1997           1996           1995
                                        (in thousands, except per share amounts)
<S>                                     <C>    <C>     <C>            <C>
Operating Revenues
  Electric                              $3 861 698     $2 768 706     $2 612 579
  Gas                                      491 145        474 034        410 852
                                         4 352 843      3 242 740      3 023 431

Operating Expenses
  Fuel used in electric production         693 435        713 250        716 754
  Gas purchased                            266 158        249 116        206 250
  Purchased and exchanged power          1 219 358        158 838         47 632
  Other operation                          637 945        598 434        520 590
  Maintenance                              176 471        193 908        182 180
  Depreciation                             289 077        282 763        279 759
  Amortization of phase-in deferrals        13 483         13 598          9 091
  Post-in-service deferred operating
    expenses - net                           4 362         (1 509)        (2 500)
  Income taxes (Note 11)                   248 937        218 269        221 429
  Taxes other than income taxes            265 024        257 815        255 533
                                         3 814 250      2 684 482      2 436 718

Operating Income                           538 593        558 258        586 713

Other Income and Expenses - Net
  Allowance for equity funds used
    during construction                         98          1 225          1 964
  Post-in-service carrying costs              -             1 223          3 186
  Phase-in deferred return                   8 008          8 372          8 537
  Equity in earnings of unconsolidated
    subsidiaries (Note 1(e))                60 392         25 430           -
  Income taxes (Note 11)                    35 937         19 536          7 358
  Other - net                              (31 502)       (40 464)        (3 051)
                                            72 933         15 322         17 994

Income Before Interest and Other Charges   611 526        573 580        604 707

Interest and Other Charges
  Interest on long-term debt               181 772        190 617        213 911
  Other interest                            59 947         31 169         20 826
  Allowance for borrowed funds used
    during construction                     (5 400)        (6 183)        (8 065)
  Preferred dividend requirements of
    subsidiaries                            12 569         23 180         30 853
                                           248 888        238 783        257 525

Net Income Before Extraordinary Item    $  362 638     $  334 797     $  347 182
Extraordinary Item - Equity Share of
  Windfall Profits Tax (Less Applicable
  Income Taxes of $0) (Note 17)           (109 400)          -              -
Net Income                              $  253 238     $  334 797     $  347 182

Average Common Shares Outstanding          157 685        157 678        156 620

Earnings Per Common Share (Note 16)
  Net income before extraordinary item       $2.30          $2.00          $2.22
  Net income                                 $1.61          $2.00          $2.22

Earnings Per Common Share - Assuming
Dilution (Note 16)
  Net income before extraordinary item       $2.28          $1.99          $2.20
  Net income                                 $1.59          $1.99          $2.20

Dividends Declared Per Common Share          $1.80          $1.74          $1.72
<FN>
The  accompanying  notes are an integral  part of these  consolidated  financial
statements.
</FN>
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
                                  CINERGY CORP.

                           CONSOLIDATED BALANCE SHEETS

ASSETS

                                                             December 31
                                                        1997           1996
                                                       (dollars in thousands)
<S>                                                  <C>            <C>
Utility Plant - Original Cost
  In service
    Electric                                         $8 981 182     $8 809 786
    Gas                                                 746 903        713 829
    Common                                              186 078        185 255
                                                      9 914 163      9 708 870
  Accumulated depreciation                            3 800 322      3 591 858
                                                      6 113 841      6 117 012
  Construction work in progress                         183 262        172 614
      Total utility plant                             6 297 103      6 289 626

Current Assets
  Cash and temporary cash investments                    53 310         19 327
  Restricted deposits                                     2 319          1 721
  Accounts receivable less accumulated provision
    for doubtful accounts of $10,382 in 1997 and
    $10,618 in 1996 (Note 6)                            413 626        199 361
  Materials, supplies, and fuel - at average cost
    Fuel for use in electric production                  57 916         71 730
    Gas stored for current use                           29 174         32 951
    Other materials and supplies                         76 066         80 292
  Prepayments and other                                  38 171         37 049
                                                        670 582        442 431

Other Assets
  Regulatory assets (Note 1(f))
    Amounts due from customers - income taxes           374 456        377 194
    Post-in-service carrying costs and deferred
      operating expenses                                178 504        186 396
    Coal contract buyout costs                          122 485        138 171
    Deferred demand-side management costs               109 596        134 742
    Phase-in deferred return and depreciation            89 689         95 163
    Deferred merger costs                                90 346         93 999
    Unamortized costs of reacquiring debt                66 242         70 518
    Other                                                45 533         72 483
  Investments in unconsolidated
    subsidiaries (Note 1(e))                            537 720        592 660
  Other                                                 275 897        231 551
                                                      1 890 468      1 992 877

                                                     $8 858 153     $8 724 934
<FN>
The  accompanying  notes are an integral  part of these  consolidated  financial
statements.
</FN>
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
                                  CINERGY CORP.

CAPITALIZATION AND LIABILITIES

                                                             December 31
                                                         1997          1996
                                                       (dollars in thousands)
<S>                                                  <C>           <C>
Common Stock Equity (Note 2)
  Common stock - $.01 par value;
    authorized shares - 600,000,000;
    outstanding shares - 157,744,658 in 1997
    and 157,679,129 in 1996                          $    1 577    $    1 577
  Paid-in capital                                     1 573 064     1 590 735
  Retained earnings                                     965 084       992 273
  Cumulative foreign currency
    translation adjustment                                 (525)         (131)
      Total common stock equity                       2 539 200     2 584 454

Cumulative Preferred Stock of Subsidiaries (Note 3)
  Not subject to mandatory redemption                   177 989       194 232

Long-term Debt (Note 4)                               2 150 902     2 326 378
      Total capitalization                            4 868 091     5 105 064

Current Liabilities
  Long-term debt due within one year (Note 4)            85 000       140 000
  Notes payable and other short-term
    obligations (Note 5)                              1 114 028       922 217
  Accounts payable                                      488 716       305 420
  Accrued taxes                                         187 033       199 479
  Accrued interest                                       46 622        55 590
  Other                                                  79 193       114 653
                                                      2 000 592     1 737 359

Other Liabilities
  Deferred income taxes (Note 11)                     1 248 543     1 146 263
  Unamortized investment tax credits                    166 262       175 935
  Accrued pension and other postretirement
    benefit costs (Notes 9 and 10)                      297 142       263 319
  Other                                                 277 523       296 994
                                                      1 989 470     1 882 511
Commitments and Contingencies (Note 12)
                                                     $8 858 153    $8 724 934
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
                                  CINERGY CORP.

            CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCK EQUITY


                                                                             Cumulative
                                                                              Foreign
                                                                              Currency
                                     Common       Paid-in      Retained      Translation    Total Common
                                      Stock       Capital      Earnings      Adjustment     Stock Equity
                                                       (dollars in thousands)
<S>                                  <C>         <C>           <C>             <C>          <C>
Balance December 31, 1994            $1 552      $1 535 658    $877 061        $  -         $2 414 271
Net income                                                      347 182                        347 182
Issuance of 2,472,103 shares of
  common stock - net                     25          60 343                                     60 368
Common stock issuance expenses                         (229)                                      (229)
Dividends on common stock (see
  page 57 for per share amounts)                               (268 851)                      (268 851)
Other                                                 1 278      (5 176)                        (3 898)

Balance December 31, 1995             1 577       1 597 050     950 216           -          2 548 843
Net income                                                      334 797                        334 797
Issuance of 8,988 shares of
  common stock - net                                    311                                        311
Treasury shares purchased                (4)        (14 887)                                   (14 891)
Treasury shares reissued                  4           8 599                                      8 603
Dividends on common stock (see
  page 57 for per share amounts)                               (274 358)                      (274 358)
Translation adjustments                                                         (131)             (131)
Costs of reacquisition of
  preferred stock of subsidiary                                 (18 391)                       (18 391)
Other                                                  (338)          9          ____             (329)

Balance December 31, 1996             1 577       1 590 735     992 273         (131)        2 584 454
Net income                                                      253 238                        253 238
Issuance of 65,529 shares of
  common stock - net                                  2 066                                      2 066
Treasury shares purchased               (11)        (46 199)                                   (46 210)
Treasury shares reissued                 11          26 729                                     26 740
Dividends on common stock (see
  page 57 for per share amounts)                               (283 866)                      (283 866)
Translation adjustments                                                         (394)             (394)
Other                                                  (267)      3 439                          3 172

Balance December 31, 1997            $1 577      $1 573 064    $965 084        $(525)       $2 539 200

<FN>
The  accompanying  notes are an integral  part of these  consolidated  financial statements.
</FN>
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
                                  CINERGY CORP.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                                                         1997          1996        1995
                                                                  (in thousands)
<S>                                                    <C>           <C>         <C>
Operating Activities
  Net income                                           $253 238      $334 797    $347 182
  Items providing or (using) cash:
    Depreciation                                        289 077       282 763     279 759
    Deferred income taxes and investment
      tax credits - net                                  67 638        47 912      28 411
    Equity in earnings of unconsolidated
      subsidiaries                                      (35 239)      (25 430)       -
    Extraordinary item - equity share of windfall
      profits tax                                       109 400          -           -
    Allowance for equity funds used during
      construction                                          (98)       (1 225)     (1 964)
    Regulatory assets - net                              71 310        39 282      33 324
    Changes in current assets and current
      liabilities
        Restricted deposits                                (598)         (358)     (1 035)
        Accounts receivable, net of reserves
          on receivables sold                          (217 157)      132 749     (71 641)
        Materials, supplies, and fuel                    21 817        44 005      51 214
        Accounts payable                                183 296        37 281       1 672
        Litigation settlement                              -          (80 000)       -
        Accrued taxes and interest                      (21 414)       (1 289)     52 233
    Other items - net                                    32 175        44,604      16 538

        Net cash provided by operating activities       753 445       855 091     735 693

Financing Activities
  Issuance of common stock                                2 066           311      60 139
  Issuance of long-term debt                            100 062       150 217     260 280
  Funds on deposit from issuance of long-term debt         -              973       9 987
  Retirement of preferred stock of subsidiaries         (16 269)     (212 487)    (93 466)
  Redemption of long-term debt                         (336 312)     (237 183)   (398 833)
  Change in short-term debt                             191 811       572 417      20 900
  Dividends on common stock                            (283 866)     (274 358)   (268 851)

        Net cash used in financing activities          (342 508)         (110)   (409 844)

Investing Activities
  Construction expenditures (less allowance for
    equity funds used during construction)             (328 055)     (323 013)   (324 905)
  Deferred demand-side management costs                 (19 867)      (44 344)    (57 571)
  Investments in unconsolidated subsidiaries            (29 032)     (503 349)       -
  Equity investments in Argentine utilities                -             -         19 799

        Net cash used in investing activities          (376 954)     (870 706)   (362 677)

Net increase (decrease) in cash and temporary
  cash investments                                       33 983       (15 725)    (36 828)
Cash and temporary cash investments at beginning
  of period                                              19 327        35 052      71 880
Cash and temporary cash investments at end of
  period                                               $ 53 310      $ 19 327    $ 35 052

Supplemental Disclosure of Cash Flow Information
  Cash paid during the year for:
    Interest (net of amount capitalized)               $235 948      $207 393    $218 357
    Income taxes                                        140 655       141 917     140 189

<FN>
The  accompanying  notes are an integral  part of these  consolidated  financial statements.
</FN>
</TABLE>

<PAGE>

RESULTS OF OPERATIONS - CINERGY

Kilowatt-Hour (kwh) Sales

Increased  activity in Cinergy's power  marketing and trading  operations led to
higher  non-firm  power sales for resale and  significantly  contributed  to the
increase  in total kwh sales of 78.7%,  as  compared  to 1996.  The  increase in
retail  sales,  which  reflects  a  higher  average  number  of  commercial  and
industrial customers,  was partially offset by a decline in residential sales as
a result of mild weather.  (See Note 1(c) of the "Notes to Financial Statements"
in "Item 8. Financial  Statements and  Supplementary  Data" and the "Market Risk
Sensitive  Instruments and Positions" section for discussions on Cinergy's power
marketing and trading operations.)

Cinergy's  total  kwh  sales in 1996,  as  compared  to  1995,  increased  11.0%
reflecting an increase in sales to all customer classes.  Increased  activity in
Cinergy's  power  marketing and trading  operations led to higher non-firm power
sales for resale.  The increase in retail sales which  reflects a higher average
number of  residential  and  commercial  customers was  partially  offset by the
return to more normal weather in 1996. The increase in industrial  sales was due
to growth in the primary metals sector.

As compared to 1994,  total kwh sales in 1995 increased 4.1%  reflecting  higher
sales  to all  retail  customer  classes.  Contributing  significantly  to  this
increase were higher  residential  and  commercial  sales due to warmer  weather
during the 1995  summer  cooling  season and  colder  weather  during the fourth
quarter  of  1995.  Additionally,   increased  sales  to  industrial  customers,
reflecting  growth in the primary metals and chemicals  sectors,  contributed to
the  increased  kwh sales level.  These  increases  were offset,  in part,  by a
decline in non-firm power sales for resale.

Year-to-year  changes in kwh sales for each major class of  customers  are shown
below:

                                         Increase (Decrease) from Prior Year

                                             1997        1996       1995
   Retail
     Residential                            (3.8)%       2.4%       5.8%
     Commercial                              1.6         1.3        4.3
     Industrial                              2.9         3.3        4.6

   Total retail                               .3         2.4        4.9

   Sales for resale
     Firm power obligations                 15.5        10.5        1.7
     Non-firm power transactions           460.3        82.0       (1.3)

   Total sales for resale                  363.9        59.6        (.4)

   Total sales                              78.7        11.0        4.1

Cinergy  currently  forecasts a 2% annual compound growth rate in kwh sales over
the 1998 through 2002 period.  This forecast  excludes  non-firm power sales for
resale and any potential new off-system, long-term firm power sales.

Thousand Cubic Feet (Mcf) Sales and Transportation

The milder weather  experienced in 1997 contributed to a decrease in residential
and  commercial  gas sales  volumes  and led to an 8.2%  decrease in total sales
volumes  and a 1.1%  decrease  in total  sales and  transportation  volumes,  as
compared to 1996.  An increase  in gas  transportation  volumes and a decline in
industrial sales resulted from customers  electing to purchase gas directly from
suppliers using transportation services provided by Cinergy.

Mcf gas sales and transportation  volumes increased 8.4% in 1996, as compared to
1995.  Colder  weather in the first half of 1996 led to  increased  gas sales to
residential and commercial customers. Also contributing to the increase in total
sales was an increase in the number of  residential  and  commercial  customers.
Industrial sales decreased and gas transported  increased as customers continued
to purchase gas directly from suppliers.

Total gas sales and  transportation  volumes increased 8.6% in 1995, as compared
to 1994. Increased sales to residential customers, resulting from colder weather
during the fourth  quarter of 1995 and an increase  in the number of  customers,
contributed  to the higher sales levels.  Additionally,  increases in commercial
and industrial transportation volumes, which resulted from customers electing to
purchase gas directly from  suppliers,  more than offset  declines in industrial
and commercial sales.


Year-to-year  changes in Mcf sales for each  major  class of  customers  and Mcf
transportation volumes are shown below:

                                         Increase (Decrease) from Prior Year

                                              1997       1996        1995

   Retail
     Residential                             (6.4)%       3.6%       10.5%
     Commercial                              (9.7)        7.8        (2.0)
     Industrial                              (8.8)      (13.3)      (26.6)

   Total sales                               (8.2)        2.1         1.5

   Gas transported                           10.1        19.8        24.4

   Total gas sold and transported            (1.1)        8.4         8.6

Operating Revenues

ELECTRIC OPERATING REVENUES

Increased kwh sales,  as previously  discussed,  a full year's  effects of PSI's
retail rate increases approved in the September 1996 Order, as amended in August
1997,  and the  December  1996 DSM  Order  significantly  contributed  to the $1
billion (39%) increase in electric  operating  revenues,  when compared to 1996.
Also contributing to the increase was the return of approximately $13 million to
customers in 1996 in accordance with the February 1995 Order.  The February 1995
Order required all retail  operating income above a certain rate of return to be
refunded to customers. Partially offsetting these increases was the operation of
CG&E's fuel adjustment  clauses  reflecting a lower average cost of fuel used in
electric production.

The $156 million (6%) increase in 1996 electric operating revenues,  as compared
to 1995,  is due, in large  part,  to the  increase  in kwh sales as  previously
discussed.  Also  contributing to the increase was the effect of PSI's September
1996 Order,  as well as, a full year's effect of PSI's 4.3% retail rate increase
approved in the February 1995 Order and PSI's 1.9%  increase for carrying  costs
on  construction  work in progress  property  which was  approved by the IURC in
March 1995. These rate increases were offset by the return of approximately  $10
million to PSI's  customers  in  accordance  with the February  1995 Order,  the
operation of CG&E's fuel adjustment  clauses  reflecting a lower average cost of
fuel used in  electric  production,  and a decrease  in ULH&P's  electric  rates
reflecting a reduction in the cost of electricity purchased from CG&E.

Higher retail kwh sales, PSI's electric rate increases which became effective in
February 1995 and March 1995,  and a full year's effect of CG&E's  electric rate
increase which became  effective in May 1994,  significantly  contributed to the
$167  million  (7%)  increase  in electric  operating  revenues  for 1995,  when
compared to 1994.

An  analysis of electric  operating  revenues  for the past three years is shown
below:

                                                 1997        1996      1995
                                                   (dollars in millions)

Previous year's electric
  operating revenues                            $2 769      $2 613    $2 446
Increase (Decrease) due to change in:
  Price per kwh
    Retail                                           9          (1)       54
    Sales for resale
      Firm power obligations                       (10)         (4)       (1)
      Non-firm power transactions                  113           -         4
  Total change in price per kwh                    112          (5)       57

  Kwh sales
    Retail                                           7          56       109
    Sales for resale
      Firm power obligations                        14           9         1
      Non-firm power transactions                  956          94        (1)
  Total change in kwh sales                        977         159       109

  Other                                              4           2         1

Current year's electric
  operating revenues                            $3 862      $2 769    $2 613

GAS OPERATING REVENUES

The  increasing  trend of  industrial  customers  purchasing  gas directly  from
producers and using CG&E facilities to transport the gas (see the "Mcf Sales and
Transportation"  section)  continues to put downward  pressure on gas  operating
revenues.  Since providing transportation services does not necessitate recovery
of the cost of gas purchased,  the revenue per Mcf  transported is less than the
revenue per Mcf sold. As a result,  a higher  relative volume of gas transported
to gas sold translates into lower gas operating revenues.

CG&E's gas rate increase of 2.5% ($9 million  annually)  approved by the PUCO in
the  December  1996 Order and the  operation of a gas cost  recovery  mechanism,
reflecting a higher  average cost per Mcf of gas  purchased,  contributed to the
$17 million (4%) increase in gas operating  revenues as compared to 1996.  These
increases were partially offset by the previously  discussed  changes in Mcf gas
sales.

In 1996,  gas operating  revenues  increased $63 million  (15%),  as compared to
1995.   This  increase  is  attributable  to  the  increase  in  gas  sales  and
transportation  volumes.  Also contributing to the increase was the operation of
fuel  adjustment  clauses,  reflecting  a  higher  average  cost  per Mcf of gas
purchased.

Gas operating  revenues  declined $32 million (7%) in 1995, as compared to 1994,
as a result of the aforementioned trend toward increased transportation services
and the operation of fuel  adjustment  clauses,  reflecting a lower average cost
per Mcf of gas purchased.

Operating Expenses

FUEL

Fuel Used in Electric  Production  Electric fuel costs declined $20 million (3%)
when compared to 1996.

An analysis of fuel costs for the past three years is shown below:

                                                     1997      1996      1995
                                                           (in millions)

Previous year's fuel expense                         $713      $717      $713
Increase (Decrease) due to change in:
  Price of fuel                                         7       (48)      (23)
  Deferred fuel cost                                  (55)       42        (2)
  Kwh generation                                       28         2        29

Current year's fuel expense                          $693      $713      $717

Gas Purchased The increase in gas purchased expense of $17 million (7%) in 1997,
as compared to 1996,  reflects a higher  average cost per Mcf of gas  purchased.
This increase was partially offset by a decline in the volumes of gas purchased.

Gas purchased  increased $43 million (21%) in 1996, as compared to 1995,  due to
an  increase  in  volumes  purchased  and a higher  average  cost per Mcf of gas
purchased.

In 1995, gas purchased expense decreased $42 million (17%), as compared to 1994,
primarily reflecting a decline in the average cost per Mcf of gas purchased.

PURCHASED AND EXCHANGED POWER

Purchased and exchanged  power  increased  $1.1 billion and $111 million in 1997
and 1996, respectively. These increases primarily reflect increased purchases of
non-firm  power  for  resale to others  as a result  of  increased  activity  in
Cinergy's power marketing and trading  operations.  (See Note 1(c) of the "Notes
to Financial  Statements"  in "Item 8. Financial  Statements  and  Supplementary
Data" and the "Market Risk  Sensitive  Instruments  and  Positions"  section for
discussions on Cinergy's power marketing and trading operations.)

OTHER OPERATION

Other  operation  expenses  increased  $40 million (7%) in 1997,  as compared to
1996. This increase is primarily due to higher other  operation  expenses of PSI
relating to the Clean Coal Project,  amortization of deferred DSM expenses,  and
amortization of deferred expenses associated with the Clean Coal Project, all of
which are being  recovered  in revenues  pursuant to either the  September  1996
Order or the December 1996 DSM Order. The effect of PSI  discontinuing  deferral
of certain  DSM-related costs in accordance with provisions of the December 1996
DSM Order also added to the increase.  Further  contributing  to the increase is
the effect of CG&E curtailing certain deferrals associated with its DSM programs
for new  participants  after  December 31, 1996,  due to the December 1996 Order
that changed the  benefit/cost  tests that DSM programs  must surpass in Ohio in
order for certain DSM-related costs to be eligible for deferral. These increases
were partially  offset by the effect of charges in 1996 for early retirement and
severance programs and the December 1996 Order (see below).

Other  operation  expenses  increased  $78 million (15%) in 1996, as compared to
1995.  This  increase  is  due  to a  number  of  factors,  including  increased
administrative and general expenses reflecting,  in part, charges of $35 million
for voluntary early  retirement and severance  programs and charges  totaling $6
million related to the December 1996 Order.

In 1995,  other  operation  expenses  decreased $29 million (5%), as compared to
1994.  Charges of $62  million in 1994 for Merger  Costs and other  expenditures
which  cannot be  recovered  from  customers  under the merger  savings  sharing
mechanisms authorized by regulators  significantly  contributed to the decrease.
In addition,  emphasis on achieving merger savings and other cost reductions led
to lower operating costs for 1995.  These decreases were partially offset by the
recognition of postretirement  benefit costs on an accrual basis, an increase in
the  ongoing  level  of  DSM  expenses,   and  the   amortization   of  deferred
postretirement benefit costs, deferred Merger Costs, and deferred DSM costs, all
of which are being recovered in revenues pursuant to the February 1995 Order.

MAINTENANCE

In 1997, maintenance costs decreased $17 million (9%), as compared to 1996. This
decrease is primarily  attributable  to reduced outage related charges and other
maintenance   costs  associated  with  PSI's  and  CG&E's  electric   production
facilities.   Reduced   maintenance   costs   associated   with  PSI's  electric
transmission  and  distribution  facilities also contributed to the decrease for
1997.

An increase of $12 million (6%) in  maintenance  costs for 1996,  as compared to
1995, is primarily  attributable  to increased  maintenance  associated with the
Clean Coal Project which began commercial  operation in November 1995. Increased
transmission and  distribution  expenses also contributed to the higher level of
maintenance expense.

Maintenance  costs  decreased  $19  million  (9%) in 1995,  as compared to 1994,
primarily  due  to  improved  scheduling  of  routine  maintenance  on  electric
generating  units.  Lower  maintenance  costs on gas and  electric  distribution
facilities also contributed to this decrease.

DEPRECIATION

In 1995, depreciation expense decreased $15 million (5%), when compared to 1994,
due in large part to the adoption of lower  depreciation rates for PSI effective
in March 1995. This decrease was partially  offset by the effect of additions to
utility plant.

AMORTIZATION OF PHASE-IN DEFERRALS AND PHASE-IN DEFERRED RETURN

Amortization  of phase-in  deferrals and phase-in  deferred  return  reflect the
PUCO-ordered  phase-in plan for the Wm. H. Zimmer  Generating  Station (Zimmer).
(See Note 1(k) of the  "Notes to  Financial  Statements"  in "Item 8.  Financial
Statements and Supplementary Data.")

POST-IN-SERVICE DEFERRED OPERATING EXPENSES - NET

Post-in-service  deferred  operating expenses - net reflect various deferrals of
depreciation,  operation and maintenance expenses (exclusive of fuel costs), and
property  taxes on certain  generating  units and other  utility  plant from the
in-service  date until the related  plant is reflected in retail  rates,  net of
amortization of these deferrals as they are recovered through retail rates. (See
Note  1(h)  of the  "Notes  to  Financial  Statements"  in  "Item  8.  Financial
Statements and Supplementary Data.")

TAXES OTHER THAN INCOME TAXES

Taxes other than income taxes increased $12 million (5%) in 1995,  primarily due
to increased  property  taxes  resulting  from a greater  investment  in taxable
property and higher property tax rates.

Other Income and Expenses - Net

POST-IN-SERVICE CARRYING COSTS

Post-in-service carrying costs reflect the deferral of carrying costs on certain
generating  units and other  utility  plant from the  in-service  date until the
related  plant is  reflected  in retail  rates.  (See Note 1(h) of the "Notes to
Financial Statements" in "Item 8. Financial Statements and Supplementary Data.")

EQUITY IN EARNINGS OF UNCONSOLIDATED SUBSIDIARIES

The increase in equity in earnings of unconsolidated subsidiaries of $35 million
for 1997,  as compared to 1996,  primarily  reflects a full year's effect of the
investment  in Midlands.  Midlands was  purchased  during the second  quarter of
1996.

OTHER - NET

The $9 million  change in other - net for 1997,  as compared to 1996, is due, in
part,  to charges  in 1996 of  approximately  $14  million  associated  with the
December 1996 Order, a gain of approximately $4 million in 1997 on the sale of a
PSI investment,  and a loss of approximately $5 million in 1996 on the sale of a
foreign subsidiary.  These items were partially offset by gains of approximately
$6 million in 1996 related to the sale of certain CG&E assets,  approximately $2
million of  increased  expenses  in 1997  associated  with the sales of accounts
receivable for PSI, CG&E, and ULH&P,  and expenses of  approximately  $4 million
resulting from the inclusion of the Greenwich acquisition in 1997.

In 1996,  other - net changed $37 million,  as compared to 1995, due to a number
of factors  including  $4 million of interest  received in 1995 on an income tax
refund related to prior years,  charges totaling $14 million associated with the
December  1996 Order,  expenses  associated  with  CG&E's and  ULH&P's  sales of
accounts receivable in 1996, and the effect of a $10 million gain in 1995 on the
sale of Cinergy's investment in an Argentine utility.

The $31 million  change in other - net in 1995,  as compared to 1994, is due, in
part,  to interest on the income tax refund and the $10 million  gain  discussed
above  and  charges  of  $17  million  in  1994  for  merger-related  and  other
expenditures which cannot be recovered from customers.

Interest and Other Charges

INTEREST ON LONG-TERM DEBT

Interest on long-term  debt  decreased $23 million (11%) in 1996, as compared to
1995, due to the refinancing and redemptions of long-term debt by CG&E, PSI, and
ULH&P during 1995 and 1996.

OTHER INTEREST

The $29 million  increase in other  interest,  as compared to 1996, is primarily
due to interest expense on increased  short-term  borrowings used to fund CG&E's
redemption of first  mortgage bonds and Cinergy's  investments in  non-regulated
companies, including Avon Energy.

In 1996,  other  interest  increased  $10  million  (50%),  as compared to 1995,
primarily reflecting increased interest expense on short-term borrowings used to
fund Cinergy's investment in Avon Energy.

PREFERRED DIVIDEND REQUIREMENTS OF SUBSIDIARIES

Preferred dividend requirements of subsidiaries  decreased $11 million (46%) and
$8 million (25%) in 1997 and 1996, respectively.  These decreases were primarily
attributable  to the  reacquisition  of  approximately  90%  of the  outstanding
preferred stock of CG&E,  pursuant to Cinergy's tender offer.  (See Note 3(b) of
the  "Notes  to  Financial  Statements"  in "Item 8.  Financial  Statements  and
Supplementary Data.")

Extraordinary Item - Equity Share of Windfall Profits Tax

Extraordinary  item - equity share of windfall  profits tax  represents the one-
time charge for the windfall  profits tax levied against Midlands as recorded in
the third quarter of 1997.  (See Note 17 of the "Notes to Financial  Statements"
in "Item 8. Financial Statements and Supplementary Data.")

<PAGE>

The Cincinnati
Gas & Electric
Company
and subsidiaries

<PAGE>

<TABLE>
<CAPTION>

                      THE CINCINNATI GAS & ELECTRIC COMPANY

                        CONSOLIDATED STATEMENTS OF INCOME

                                          1997           1996           1995
                                                    (in thousands)
<S>                                     <C>            <C>            <C>

Operating Revenues
  Electric
    Non-affiliated companies            $1 920 915     $1 458 828     $1 407 119
    Affiliated companies                    35 341         43 180         30 104
  Gas
    Non-affiliated companies               491 145        474 034        410 852
    Affiliated companies                     4 475              7           -
                                         2 451 876      1 976 049      1 848 075

Operating Expenses
  Fuel used in electric production         300 487        349 197        327 353
  Gas purchased                            266 123        249 116        206 250
  Purchased and exchanged power
    Non-affiliated companies               583 065         46 333         13 870
    Affiliated companies                    12 473         21 921         42 575
  Other operation                          308 239        330 169        291 874
  Maintenance                               90 097         96 205         94 688
  Depreciation                             163 418        160 951        158 986
  Amortization of phase-in deferrals        13 483         13 598          9 091
  Amortization of post-in-service
    deferred operating expenses              3 290          3 290          3 290
  Income taxes (Note 11)                   172 047        145 075        136 386
  Taxes other than income taxes            211 303        207 904        203 680
                                         2 124 025      1 623 759      1 488 043

Operating Income                           327 851        352 290        360 032

Other Income and Expenses - Net
  Allowance for equity funds
    used during construction                    98          1 225          1 790
  Phase-in deferred return                   8 008          8 372          8 537
  Income taxes (Note 11)                    33 286          9 139          4 587
  Other - net                              (14 262)       (21 296)         4 221
                                            27 130         (2 560)        19 135

Income Before Interest                     354 981        349 730        379 167

Interest
  Interest on long-term debt               110 134        123 616        143 334
  Other interest                            10 327          2 793          3 486
  Allowance for borrowed funds
    used during construction                (4 633)        (3 859)        (3 854)
                                           115 828        122 550        142 966

Net Income                                 239 153        227 180        236 201
Preferred Dividend Requirement                 868         10 643         17 673
Costs of Reacquisition of
  Preferred Stock (Note 3(b))                 -            18 391           -
Net Income Applicable to
  Common Stock                          $  238 285     $  198 146     $  218 528

<FN>
The  accompanying  notes are an integral  part of these  consolidated  financial
statements.
</FN>
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
                      THE CINCINNATI GAS & ELECTRIC COMPANY

                           CONSOLIDATED BALANCE SHEETS

ASSETS

                                                            December 31
                                                         1997          1996
                                                       (dollars in thousands)
<S>                                                  <C>            <C>

Utility Plant - Original Cost
  In service
    Electric                                         $4 700 631     $4 631 605
    Gas                                                 746 903        713 829
    Common                                              186 078        185 255
                                                      5 633 612      5 530 689
  Accumulated depreciation                            2 008 005      1 868 579
                                                      3 625 607      3 662 110
  Construction work in progress                         118 133         95 984
      Total utility plant                             3 743 740      3 758 094

Current Assets
  Cash and temporary cash investments                     2 349          5 120
  Restricted deposits                                     1 173          1 171
  Notes receivable from affiliated companies             27 193         31 740
  Accounts receivable less accumulated
    provision for doubtful accounts of $9,199 in
    1997 and $9,178 in 1996 (Note 6)                    193 549        117 912
  Accounts receivable from affiliated companies          35 507          2 453
  Materials, supplies, and fuel - at average cost
    Fuel for use in electric production                  29 682         29 865
    Gas stored for current use                           29 174         32 951
    Other materials and supplies                         49 111         52 023
  Prepayments and other                                  31 827         32 433
                                                        399 565        305 668

Other Assets
  Regulatory assets (Note 1(f))
    Amounts due from customers - income taxes           350 515        344 126
    Post-in-service carrying costs and deferred
      operating expenses                                134 672        141 492
    Phase-in deferred return and depreciation            89 689         95 163
    Deferred demand-side management costs                38 318         33 534
    Deferred merger costs                                16 557         17 709
    Unamortized costs of reacquiring debt                36 575         38 439
    Other                                                 1 439         19 545
  Other                                                 103 368         89 908
                                                        771 133        779 916

                                                     $4 914 438     $4 843 678

<FN>
The  accompanying  notes are an integral  part of these  consolidated  financial
statements.
</FN>
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
                      THE CINCINNATI GAS & ELECTRIC COMPANY

CAPITALIZATION AND LIABILITIES

                                                            December 31
                                                         1997          1996
                                                       (dollars in thousands)
<S>                                                  <C>           <C>

Common Stock Equity (Note 2)
  Common stock - $8.50 par value;
    authorized shares - 120,000,000;
    outstanding shares - 89,663,086 in 1997 and
    89,663,086 in 1996                               $  762 136    $  762 136
  Paid-in capital                                       534 649       536 276
  Retained earnings                                     313 803       247 403
      Total common stock equity                       1 610 588     1 545 815

Cumulative Preferred Stock (Note 3)
  Not subject to mandatory redemption                    20 793        21 146

Long-term Debt (Note 4)                               1 324 432     1 381 108
      Total capitalization                            2 955 813     2 948 069

Current Liabilities
  Long-term debt due within one year (Note 4)              -          130 000
  Notes payable and other short-term
    obligations (Note 5)                                289 000       214 488
  Notes payable to affiliated companies                  12 253           103
  Accounts payable                                      249 538       166 064
  Accounts payable to affiliated companies               10 821        12 726
  Accrued taxes                                         149 129       144 261
  Accrued interest                                       25 430        30 570
  Other                                                  29 950        32 191
                                                        766 121       730 403

Other Liabilities
  Deferred income taxes (Note 11)                       794 396       767 085
  Unamortized investment tax credits                    116 966       123 185
  Accrued pension and other postretirement
    benefit costs (Notes 9 and 10)                      180 566       165 282
  Other                                                 100 576       109 654
                                                      1 192 504     1 165 206
Commitments and Contingencies (Note 12)
                                                     $4 914 438    $4 843 678
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
                      THE CINCINNATI GAS & ELECTRIC COMPANY

            CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCK EQUITY

                                     Common      Paid-in       Retained     Total Common
                                      Stock      Capital       Earnings     Stock Equity
                                                 (dollars in thousands)
<S>                                 <C>         <C>            <C>           <C>

Balance December 31, 1994           $762 136     $337 874      $432 962      $1 532 972
Net income                                                      236 201         236 201
Dividends on preferred stock                                    (17 673)        (17 673)
Dividends on common stock                                      (219 550)       (219 550)
Other                                               1 227        (4 714)         (3 487)

Balance December 31, 1995            762 136      339 101       427 226       1 528 463
Net income                                                      227 180         227 180
Dividends on preferred stock                                    (10 643)        (10 643)
Dividends on common stock                                      (377 969)       (377 969)
Contribution from parent company                  197 207                       197 207
Costs of reacquisition of
  preferred stock                                               (18 391)        (18 391)
Other                                                 (32)                          (32)

Balance December 31, 1996            762 136      536 276       247 403       1 545 815
Net income                                                      239 153         239 153
Dividends on preferred stock                                       (871)           (871)
Dividends on common stock                                      (170 400)       (170 400)
Other                                              (1 627)       (1 482)         (3 109)

Balance December 31, 1997           $762 136     $534 649      $313 803      $1 610 588

<FN>
The  accompanying  notes are an integral  part of these  consolidated  financial statements.
</FN>
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
                      THE CINCINNATI GAS & ELECTRIC COMPANY

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                                                         1997         1996         1995
                                                                 (in thousands)
<S>                                                    <C>          <C>          <C>

Operating Activities
  Net income                                           $239 153     $227 180     $236 201
  Items providing or (using) cash:
    Depreciation                                        163 418      160 951      158 986
    Deferred income taxes and investment
      tax credits - net                                  16 443       18 929       26 938
    Allowance for equity funds used during
      construction                                          (98)      (1 225)      (1 790)
    Regulatory assets - net                              32 822       39 561       21 454
    Changes in current assets and current
      liabilities
        Restricted deposits                                  (2)         (27)      (1 046)
        Accounts and notes receivable, net of
          reserves on receivables sold                 (105 829)     156 182      (65 350)
        Materials, supplies, and fuel                     6 872        2 437       14 039
        Accounts payable                                 81 569       19 587       38 386
        Accrued taxes and interest                         (272)      10 165       17 533
    Other items - net                                     4 629       46 601          297

        Net cash provided by operating activities       438 705      680 341      445 648

Financing Activities
  Issuance of long-term debt                            100 062         -         260 280
  Retirement of preferred stock                            (234)        -         (93 450)
  Redemption of long-term debt                         (290 612)    (162 583)    (338 378)
  Change in short-term debt                              86 662       30 591       69 500
  Dividends on preferred stock                             (871)     (10 643)     (17 673)
  Dividends on common stock                            (170 400)    (377 969)    (219 550)

        Net cash used in financing activities          (275 393)    (520 604)    (339 271)

Investing Activities
  Construction expenditures (less allowance for
    equity funds used during construction)             (156 499)    (142 053)    (138 325)
  Deferred demand-side management costs                  (9 584)     (19 176)     (13 956)

        Net cash used in investing activities          (166 083)    (161 229)    (152 281)

Net decrease in cash and temporary cash investments      (2 771)      (1 492)     (45 904)
Cash and temporary cash investments at beginning
  of period                                               5 120        6 612       52 516
Cash and temporary cash investments at end of
  period                                               $  2 349     $  5 120     $  6 612

Supplemental Disclosure of Cash Flow Information
  Cash paid during the year for:
    Interest (net of amount capitalized)               $115 801     $117 848     $137 892
    Income taxes                                        106 154      109 034       79 769

<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
</TABLE>

<PAGE>

RESULTS OF OPERATIONS - CG&E

Kwh Sales

Increased  activity in Cinergy's power  marketing and trading  operations led to
higher  non-firm  power sales for resale and  significantly  contributed  to the
increase in total kwh sales of 72.6%, as compared to 1996.  Partially offsetting
this increase was a decline in residential  sales,  as a result of mild weather.
Kwh sales (and related revenues and expenses)  outside of Cinergy's control area
resulting from Cinergy's  power  marketing and trading  operations are allocated
50%/50%  between  CG&E  and PSI.  (See  Note  1(c) of the  "Notes  to  Financial
Statements" in "Item 8. Financial  Statements  and  Supplementary  Data" and the
"Market Risk Sensitive  Instruments  and Positions"  section for  discussions on
Cinergy's power marketing and trading operations.)

CG&E's total kwh sales increased 10.6% in 1996, as compared to 1995,  reflecting
an increase in sales to all  customer  classes.  The  increase in retail  sales,
which reflects a higher average number of residential and commercial  customers,
was partially  offset by the return to more normal weather in 1996. The increase
in industrial  sales was due to growth in the primary metals  sector.  Increased
activity in  Cinergy's  power  marketing  and trading  operations  led to higher
non-firm power sales for resale.

Kwh sales for 1995 increased 15.3% over 1994,  reflecting increased sales to all
customer  classes.  Significantly  contributing  to this  increase  were  higher
non-firm  power sales for resale  primarily due to increased  sales to PSI, as a
result of the coordination of CG&E's and PSI's electric dispatch systems. Higher
residential and commercial  sales resulted  primarily from warmer weather during
the 1995 summer  cooling  season and colder weather during the fourth quarter of
1995.  Additionally,   increased  sales  to  industrial  customers  were  mainly
attributable to growth in the primary metals and chemicals sectors.

Year-to-year  changes in kwh sales for each major class of  customers  are shown
below:

                                   Increase (Decrease) from Prior Year

                                       1997      1996      1995
   Retail
     Residential                      (6.8)%      4.7%      3.8%
     Commercial                        1.9        2.3       3.4
     Industrial                        4.1        3.4       3.9

   Total retail                        (.5)       3.3       3.8

   Sales for resale
     Firm power obligations           (8.4)       3.7       6.3
     Non-firm power transactions     356.5       51.7     211.8

   Total sales for resale            337.5       48.1     172.6

   Total sales                        72.6       10.6      15.3

CG&E currently  forecasts a 2% annual compound growth rate in kwh sales over the
1998 through 2002 period. This forecast excludes non-firm power sales for resale
and any potential new off-system, long-term firm power sales.

Mcf Sales and Transportation

The milder weather  experienced in 1997 contributed to a decrease in residential
and  commercial  gas sales  volumes  and led to an 8.2%  decrease in total sales
volumes  and a 1.1%  decrease  in total  sales and  transportation  volumes,  as
compared to 1996.  An increase  in gas  transportation  volumes and a decline in
industrial sales resulted from customers  electing to purchase gas directly from
suppliers, using transportation services provided by CG&E.

Mcf gas sales and transportation  volumes increased 8.4% in 1996, as compared to
1995.  Colder  weather in the first half of 1996 led to  increased  gas sales to
residential and commercial customers. Also contributing to the increase in total
sales was an increase in the number of  residential  and  commercial  customers.
Industrial sales decreased and gas transported  increased as customers continued
to purchase gas directly from suppliers.

Total gas sales and  transportation  volumes increased 8.6% in 1995, as compared
to 1994. Increased sales to residential customers, resulting from colder weather
during the fourth  quarter of 1995 and an increase  in the number of  customers,
contributed  to the higher sales levels.  Additionally,  increases in commercial
and industrial transportation volumes, which resulted from customers electing to
purchase gas directly from  suppliers,  more than offset  declines in industrial
and commercial sales.

Year-to-year  changes in Mcf sales for each  major  class of  customers  and Mcf
transportation volumes are shown below:

                                 Increase (Decrease) from Prior Year

                                     1997      1996      1995

   Retail
     Residential                     (6.4)%     3.6%     10.5%
     Commercial                      (9.7)      7.8      (2.0)
     Industrial                      (8.8)    (13.3)    (26.6)

   Total sales                       (8.2)      2.1       1.5

   Gas transported                   10.1      19.8      24.4

   Total gas sold and transported    (1.1)      8.4       8.6

Operating Revenues

ELECTRIC OPERATING REVENUES

Electric  operating  revenues  increased by $454  million  (30%) in 1997 and $65
million (5%) in 1996. These increases primarily reflect the increased kwh sales,
as previously discussed.  Partially offsetting these increases was the operation
of the fuel  adjustment  clause  reflecting a lower average cost of fuel used in
electric production.

Electric  operating  revenues increased $91 million (7%) in 1995, as compared to
1994. This increase reflects the higher kwh sales, as previously discussed and a
full year's effect of CG&E's  electric rate increase  which became  effective in
May 1994. This increase was partially offset by the operation of fuel adjustment
clauses reflecting a lower average cost of fuel used in electric production.

An  analysis of electric  operating  revenues  for the past three years is shown
below:

                                          1997      1996      1995
                                                (in millions)
Previous year's electric
  operating revenues                     $1 502    $1 437    $1 346
Increase (Decrease) due to change in:
  Price per kwh
    Retail                                  (44)      (13)      (10)
    Sales for resale
      Firm power obligations               -         -            1
      Non-firm power transactions           107       (10)       (9)
  Total change in price per kwh              63       (23)      (18)

  Kwh sales
    Retail                                   (8)       44        49
    Sales for resale
      Firm power obligations                 (1)        1         1
      Non-firm power transactions           395        41        60
  Total change in kwh sales                 386        86       110

  Other                                       5         2        (1)
Current year's electric
  operating revenues                     $1 956    $1 502    $1 437

GAS OPERATING REVENUES

The  increasing  trend of  industrial  customers  purchasing  gas directly  from
producers and using CG&E facilities to transport the gas (see the "Mcf Sales and
Transportation"  section)  continues to put downward  pressure on gas  operating
revenues.  Since providing transportation services does not necessitate recovery
of the cost of gas purchased,  the revenue per Mcf  transported is less than the
revenue per Mcf sold. As a result,  a higher  relative volume of gas transported
to gas sold translates into lower gas operating revenues.

CG&E's gas rate increase of 2.5% ($9 million  annually)  approved by the PUCO in
the  December  1996 Order and the  operation of a gas cost  recovery  mechanism,
reflecting a higher  average cost per Mcf of gas  purchased,  contributed to the
$22 million (5%) increase in gas operating  revenues as compared to 1996.  These
increases were partially offset by the previously  discussed  changes in Mcf gas
sales.

Gas operating revenues increased $63 million (15%) in 1996, as compared to 1995.
This increase is  attributable  to the increase in gas sales and  transportation
volumes.  Also  contributing  to the  increase  was the  operation  of the  fuel
adjustment clause, reflecting a higher average cost per Mcf of gas purchased.

In 1995, gas operating  revenues declined $32 million (7%), as compared to 1994,
as a result of the aforementioned trend toward increased transportation services
and the operation of the fuel adjustment clause, reflecting a lower average cost
per Mcf of gas purchased.

Operating Expenses

FUEL

Fuel Used in Electric Production Electric fuel costs decreased $49 million (14%)
in 1997, when compared to 1996.

An analysis of fuel costs for the past three years is shown below:

                                              1997      1996     1995
                                                   (in millions)

Previous year's fuel expense                  $349      $327     $325
Increase (Decrease) due to change in:
  Price of fuel                                  8       (38)     (10)
  Deferred fuel cost                           (50)       34      (10)
  Kwh generation                                (7)       26       22

Current year's fuel expense                   $300      $349     $327

Gas Purchased The increase in gas purchased expense of $17 million (7%) in 1997,
as compared to 1996,  reflects a higher  average cost per Mcf of gas  purchased.
This increase was partially offset by a decline in the volumes of gas purchased.

Gas purchased  increased $43 million (21%) in 1996, as compared to 1995,  due to
an  increase  in  volumes  purchased  and a higher  average  cost per Mcf of gas
purchased.

In 1995, gas purchased expense decreased $42 million (17%), as compared to 1994,
primarily reflecting a decline in the average cost per Mcf of gas purchased.

PURCHASED AND EXCHANGED POWER

Purchased and exchanged power increased $527 million and $12 million in 1997 and
1996,  respectively.  These increases  primarily reflect increased  purchases of
non-firm  power  for  resale to others  as a result  of  increased  activity  in
Cinergy's power marketing and trading  operations.  (See Note 1(c) of the "Notes
to Financial  Statements"  in "Item 8. Financial  Statements  and  Supplementary
Data" and the "Market Risk  Sensitive  Instruments  and  Positions"  section for
discussion on Cinergy's power marketing and trading operations.)

Purchased and exchanged  power costs  increased $36 million in 1995, as compared
to 1994, reflecting increased purchases from PSI resulting from the coordination
of PSI's and CG&E's  electric  dispatch  systems.  This  increase was  partially
offset by a decline in third-party, short-term power sales to other utilities.

OTHER OPERATION

Other  operation  expenses  decreased  $22 million (7%) in 1997,  as compared to
1996.  This decrease is primarily due to the effect of charges in 1996 for early
retirement and severance programs and the December 1996 Order (see below).  This
decrease is partially offset by the effect of CG&E curtailing  certain deferrals
associated with its DSM programs for new  participants  after December 31, 1996,
due to the  December  1996 Order that  changed the  benefit/cost  tests that DSM
programs  must  surpass  in Ohio in order for  certain  DSM-related  costs to be
eligible for deferral.

Other  operation  increased $38 million (13%) in 1996, as compared to 1995. This
increase  is  attributable  to  higher   administrative   and  general  expenses
reflecting,  in part,  charges of $30 million for voluntary early retirement and
severance  programs and charges totaling $6 million related to the December 1996
Order. The increase is partially  offset by a decrease in electric  distribution
expenses.

In 1995,  other operation  expenses  decreased $44 million (13%), as compared to
1994.  Charges of $52 million in 1994 for Merger  Costs and other  expenditures,
which  cannot be  recovered  from  customers  under the merger  savings  sharing
mechanism authorized by the PUCO, significantly  contributed to the decrease. In
addition,  emphasis on achieving merger savings and other cost reductions led to
lower  operating  costs for  1995.  The  decrease  was  partially  offset by the
write-off of obsolete inventory in December 1995.

MAINTENANCE

In 1997,  maintenance costs decreased $6 million (6%), as compared to 1996. This
decrease is primarily  attributable  to reduced outage related charges and other
maintenance  costs  associated  with  electric  production  facilities.  Reduced
maintenance  costs  associated  with  electric   distribution   facilities  also
contributed to the decrease for 1997.

The decrease in maintenance expense of $12 million (11%) in 1995, as compared to
1994, was primarily  attributable to improved  scheduling of routine maintenance
on  electric  generating  units.  Lower  maintenance  costs on gas and  electric
distribution facilities also contributed to the decline.

AMORTIZATION OF PHASE-IN DEFERRALS AND PHASE-IN DEFERRED RETURN

Amortization  of phase-in  deferrals and phase-in  deferred  return  reflect the
PUCO-ordered phase-in plan for Zimmer. (See Note 1(k) of the "Notes to Financial
Statements" in "Item 8. Financial Statements and Supplementary Data.")

AMORTIZATION OF POST-IN-SERVICE DEFERRED OPERATING EXPENSES

Amortization  of   post-in-service   deferred  operating  expenses  reflect  the
amortization  of certain  deferrals as they are recovered  through retail rates.
These  deferrals  include  depreciation,   operation  and  maintenance  expenses
(exclusive of fuel costs),  and property taxes on certain  generating  units and
other  utility  plant  from the  in-service  date  until  the  related  plant is
reflected in retail rates. (See Note 1(h) of the "Notes to Financial Statements"
in "Item 8. Financial Statements and Supplementary Data.")

Other Income and Expenses - Net

OTHER - NET

The $7  million  change in other - net for 1997,  as  compared  to 1996,  is due
primarily to charges in 1996 of  approximately  $14 million  associated with the
December  1996  Order.   These  charges  were  partially   offset  by  gains  of
approximately $6 million in 1996 related to the sale of certain CG&E assets, and
approximately $2 million of increased expenses in 1997 associated with the sales
of accounts receivable for CG&E and ULH&P.

The change in other - net of $26 million in 1996, as compared to 1995, is due to
a number of factors  including  $4 million of  interest  received  in 1995 on an
income  tax  refund  related  to  prior  years,  charges  totaling  $14  million
associated with the December 1996 Order, and expenses associated with CG&E's and
ULH&P's sales of accounts receivable in 1996.

The increase in other - net of $11 million in 1995, as compared to 1994, is due,
in part, to interest on the income tax refund discussed above and charges of $12
million  in 1994 for  merger-related  and  other  expenditures  which  cannot be
recovered from customers.

Interest and Other Charges

INTEREST ON LONG-TERM DEBT

In 1997,  interest on long-term debt decreased $13 million (11%), as compared to
1996,  primarily due to the redemptions and maturities of long-term debt in 1996
and 1997.

Interest on long-term  debt  decreased $20 million (14%) in 1996, as compared to
1995, due to the refinancing and redemptions of long-term debt in 1996 and 1995.

OTHER INTEREST

The $8 million increase in other interest, as compared to 1996, is primarily due
to  interest  expense on  increased  short-term  borrowings  used to fund CG&E's
redemption of first mortgage bonds.

PREFERRED DIVIDEND REQUIREMENT

Preferred dividend requirements decreased $10 million (92%) and $7 million (40%)
in 1997 and 1996,  respectively.  These decreases were primarily attributable to
the  reacquisition  of approximately  90% of the outstanding  preferred stock of
CG&E,  pursuant  to  Cinergy's  tender  offer.  (See Note 3(b) of the  "Notes to
Financial Statements" in "Item 8. Financial Statements and Supplementary Data.")

In 1995, CG&E's preferred  dividend  requirement  decreased $5 million (21%), as
compared to 1994.  The  decrease was  attributable  to the early  redemption  of
preferred stock in April 1994 and July 1995.

<PAGE>

PSI Energy, Inc.
and Subsidiaries

<PAGE>

<TABLE>
<CAPTION>
                                PSI ENERGY, INC.

                        CONSOLIDATED STATEMENTS OF INCOME


                                           1997           1996           1995
                                                     (in thousands)
<S>                                     <C>            <C>            <C>

Operating Revenues
  Non-affiliated companies              $1 940 783     $1 309 878     $1 205 460
  Affiliated companies                      17 686         22 084         42 575
                                         1 958 469      1 331 962      1 248 035

Operating Expenses
  Fuel                                     392 948        364 053        389 401
  Purchased and exchanged power
    Non-affiliated companies               636 293        112 505         33 762
    Affiliated companies                    29 932         43 343         30 104
  Other operation                          344 878        268 478        228 508
  Maintenance                               86 374         97 703         87 492
  Depreciation                             125 659        121 812        120 773
  Post-in-service deferred operating
    expenses - net                           1 072         (4 799)        (5 790)
  Income taxes (Note 11)                    76 890         73 194         85 043
  Taxes other than income taxes             53 721         49 911         51 853
                                         1 747 767      1 126 200      1 021 146

Operating Income                           210 702        205 762        226 889

Other Income and Expenses - Net
  Allowance for equity funds
    used during construction                  -              -               174
  Post-in-service carrying costs              -             1 223          3 186
  Income taxes (Note 11)                    (1 039)        (3 997)           941
  Other - net                                6 997          1 878         (3 188)
                                             5,958           (896)         1 113

Income Before Interest                     216 660        204 866        228 002

Interest
  Interest on long-term debt                71 638         67 001         70 577
  Other interest                            13 584         14 511         15 821
  Allowance for borrowed funds
    used during construction                  (767)        (2 324)        (4 211)
                                            84 455         79 188         82 187

Net Income                                 132 205        125 678        145 815

Preferred Dividend Requirement              11 701         12 537         13 180

Net Income Applicable to Common Stock   $  120 504     $  113 141     $  132 635

<FN>
The accompanying notes are an integral part of these consolidated financial
statements.
</FN>
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
                                PSI ENERGY, INC.

                           CONSOLIDATED BALANCE SHEETS

ASSETS

                                                            December 31
                                                         1997          1996
                                                       (dollars in thousands)
<S>                                                  <C>            <C>

Electric Utility Plant - Original Cost
  In service                                         $4 280 551     $4 178 181
  Accumulated depreciation                            1 792 317      1 723 279
                                                      2 488 234      2 454 902
  Construction work in progress                          65 129         76 630
      Total electric utility plant                    2 553 363      2 531 532

Current Assets
  Cash and temporary cash investments                    18 169          2 911
  Restricted deposits                                     1 146            550
  Notes receivable from affiliated companies             21 998              3
  Accounts receivable less accumulated provision
    for doubtful accounts of $1,183 in 1997 and
    $1,269 in 1996 (Note 6)                             198 008         74 289
  Accounts receivable from affiliated companies           6 384          4 016
  Materials, supplies, and fuel - at average cost
    Fuel                                                 28 234         41 865
    Other materials and supplies                         26 955         28 268
  Prepayments and other                                   4 438          3 184
                                                        305 332        155 086

Other Assets
  Regulatory assets (Note 1(f))
    Amounts due from customers - income taxes            23 941         33 068
    Post-in-service carrying costs and deferred
      operating expenses                                 43 832         44 904
    Coal contract buyout costs                          122 485        138 171
    Deferred demand-side management costs                71 278        101 208
    Deferred merger costs                                73 789         76 290
    Unamortized costs of reacquiring debt                29 667         32 079
    Other                                                44 094         52 938
  Other                                                 138 650        129 667
                                                        547 736        608 325

                                                     $3 406 431     $3 294 943

<FN>
The accompanying notes are an integral part of these consolidated financial
statements.
</FN>
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
                                PSI ENERGY, INC.

CAPITALIZATION AND LIABILITIES

                                                             December 31
                                                         1997          1996
                                                       (dollars in thousands)
<S>                                                  <C>            <C>

Common Stock Equity (Note 2)
  Common stock - without par value; $.01 stated
    value; authorized shares - 60,000,000;
    outstanding shares - 53,913,701 in 1997 and 1996 $      539     $      539
  Paid-in capital                                       400 893        402 947
  Retained earnings                                     636 228        626 089
      Total common stock equity                       1 037 660      1 029 575

Cumulative Preferred Stock (Note 3)
  Not subject to mandatory redemption                   157 196        173 086
Long-term Debt (Note 4)                                 826 470        945 270
      Total capitalization                            2 021 326      2 147 931

Current Liabilities
  Long-term debt due within one year (Note 4)            85 000         10 000
  Notes payable and other short-term
    obligations (Note 5)                                190 600        171 729
  Notes payable to affiliated companies                  16 435         13 186
  Accounts payable                                      212 833        114 330
  Accounts payable to affiliated companies               41 326         12 850
  Accrued taxes                                          69 304         73 206
  Accrued interest                                       21 369         24 045
  Other                                                   2 560         17 107
                                                        639 427        436 453

Other Liabilities
  Deferred income taxes (Note 11)                       403 535        372 997
  Unamortized investment tax credits                     49 296         52 750
  Accrued pension and other postretirement
    benefit costs (Notes 9 and 10)                      116 576         98 037
  Other                                                 176 271        186 775
                                                        745 678        710 559
Commitments and Contingencies (Note 12)
                                                     $3 406 431     $3 294 943
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
                                PSI ENERGY, INC.

            CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCK EQUITY

                                     Common      Paid-in      Retained      Total Common
                                      Stock      Capital      Earnings      Stock Equity
                                                     (dollars in thousands)
<S>                                   <C>        <C>           <C>            <C>
Balance December 31, 1994             $539       $389 309      $493 103       $  882 951
Net income                                                      145 815          145 815
Dividends on preferred stock                                    (13 181)         (13 181)
Contribution from parent company                   13 926                         13 926
Other                                                  18          (462)            (444)

Balance December 31, 1995              539        403 253       625 275        1 029 067
Net income                                                      125 678          125 678
Dividends on preferred stock                                    (12 629)         (12 629)
Dividends on common stock                                      (112 076)        (112 076)
Other                                                (306)         (159)            (465)

Balance December 31, 1996              539        402 947       626 089        1 029 575
Net income                                                      132 205          132 205
Dividends on preferred stock                                    (11 795)         (11 795)
Dividends on common stock                                      (113 600)        (113 600)
Other                                              (2 054)        3 329            1 275

Balance December 31, 1997             $539       $400 893      $636 228       $1 037 660

<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
                                PSI ENERGY, INC.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                                                        1997        1996       1995
                                                               (in thousands)
<S>                                                   <C>        <C>         <C>

Operating Activities
  Net income                                          $132 205   $125 678    $145 815
  Items providing or (using) cash:
    Depreciation                                       125 659    121 812     120 773
    Deferred income taxes and investment
      tax credits - net                                 35 661     29 925       5 201
    Allowance for equity funds used during
      construction                                        -          -           (174)
    Regulatory assets - net                             38 488       (279)     11 870
    Changes in current assets and current
      liabilities
        Restricted deposits                               (596)      (336)         16
        Accounts and notes receivable, net of
          reserves on receivables sold                (149 290)     2 722     (57 926)
        Materials, supplies, and fuel                   14 944     41 343      31 748
        Accounts payable                               126 979     10 363     (25 958)
        Litigation settlement                             -       (80 000)       -
        Accrued taxes and interest                      (6 578)     6 704      34 078
    Other items - net                                   14 630      3 813      18 714

        Net cash provided by operating activities      332 102    261 745     284 157

Financing Activities
  Issuance of long-term debt                              -       150 217        -
  Funds on deposit from issuance of long-term debt        -           973       9 987
  Retirement of preferred stock                        (16 035)   (15 116)        (16)
  Redemption of long-term debt                         (45 700)   (74 600)    (60 455)
  Change in short-term debt                             22 120    (13 616)      4 958
  Dividends on preferred stock                         (11 795)   (12 629)    (13 181)
  Dividends on common stock                           (113 600)  (112 076)       -
  Capital contribution from parent company                -          -         13 926

        Net cash provided by (used in) financing
          activities                                  (165 010)   (76 847)    (44 781)

Investing Activities
  Construction expenditures (less allowance for
    equity funds used during construction)            (141 552)  (172 341)   (186 580)
  Deferred demand-side management costs                (10 282)   (25 168)    (43 615)

        Net cash used in investing activities         (151 834)  (197 509)   (230 195)

Net increase (decrease) in cash and temporary
  cash investments                                      15 258    (12 611)      9 181
Cash and temporary cash investments at beginning
  of period                                              2 911     15 522       6 341
Cash and temporary cash investments at end of
  period                                              $ 18 169   $  2 911    $ 15 522

Supplemental Disclosure Of Cash Flow Information
  Cash paid during the year for:
    Interest (net of amount capitalized)              $ 82 959   $ 76 655    $ 80 465
    Income taxes                                        58 671     37 048      60 148

<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
</TABLE>

<PAGE>

RESULTS OF OPERATIONS - PSI

Kwh Sales

Increased  activity in Cinergy's power  marketing and trading  operations led to
higher  non-firm  power sales for resale and  significantly  contributed  to the
increase  in total kwh sales of 69.1%,  as  compared  to 1996.  The  increase in
retail sales  reflects a higher  average  number of  commercial  and  industrial
customers,  which was partially offset by a decrease in residential  sales, as a
result of mild weather. Kwh sales (and related revenues and expenses) outside of
Cinergy's  control area  resulting from  Cinergy's  power  marketing and trading
operations  are  allocated  50%/50%  between CG&E and PSI. (See Note 1(c) of the
"Notes  to  Financial   Statements"  in  "Item  8.   Financial   Statements  and
Supplementary  Data" and the "Market Risk Sensitive  Instruments  and Positions"
section for discussions on Cinergy's power marketing and trading operations.)

PSI's total kwh sales  increased  11.0% in 1996, as compared to 1995.  Increased
activity in  Cinergy's  power  marketing  and trading  operations  led to higher
non-firm power sales for resale.  The increase in retail sales, which reflects a
higher  average number of residential  and industrial  customers,  was partially
offset by the return to more normal  weather in 1996. The increase in industrial
sales was due to growth  in the  primary  metals  and  transportation  equipment
sectors.

As  compared  to 1994,  total  kwh  sales  in 1995  increased  6.3%,  reflecting
increased  sales to all customer  classes.  Contributing  significantly  to this
increase were higher  residential  and  commercial  sales due to warmer  weather
during the 1995 summer cooling season,  colder weather during the fourth quarter
of 1995, and an increase in the number of residential and commercial  customers.
Increased  sales to  industrial  customers,  reflecting  growth  in the  primary
metals,  chemicals, and food products sectors, also contributed to the increased
kwh sales level.  This increase also reflects  higher  non-firm  power sales for
resale  resulting from an increase in sales to CG&E reflecting the  coordination
of PSI's and CG&E's electric dispatch systems.

Year-to-year  changes in kwh sales for each major class of  customers  are shown
below:

                                         Increase (Decrease) from Prior Year

                                            1997         1996        1995
   Retail
     Residential                             (.5)%         - %        7.9%
     Commercial                              1.3          0.4         5.2
     Industrial                              2.1          3.3         5.1

   Total retail                              1.1          1.5         6.0

   Sales for resale
     Firm power obligations                 18.7         11.4         1.1
     Non-firm power transactions           277.9         51.6        10.2

   Total sales for resale                  219.1         40.2         7.4

   Total sales                              69.1         11.0         6.3

PSI currently  forecasts a 3% annual  compound growth rate in kwh sales over the
1998 through 2002 period. This forecast excludes non-firm power sales for resale
and any potential new off-system, long-term firm power sales.

Operating Revenues

Increased kwh sales,  as previously  discussed,  a full year's  effects of PSI's
retail rate increases approved in the September 1996 Order, as amended in August
1997,  and the December  1996 DSM Order  significantly  contributed  to the $626
million (47%) increase in electric  operating  revenues,  when compared to 1996.
Also contributing to the increase was the return of approximately $13 million to
customers in 1996 in accordance with the February 1995 Order.  The February 1995
Order required all retail  operating income above a certain rate of return to be
refunded to customers.

Operating revenues increased $84 million (7%) in 1996, as compared to 1995, due,
in large  part,  to the  increase  in kwh sales as  previously  discussed.  Also
contributing  to the  increase  was the effect of a 7.6%  retail  rate  increase
approved in the September 1996 Order,  as well as a full year's effect of a 4.3%
retail rate increase approved in the February 1995 Order and a 1.9% increase for
carrying  costs on  construction  work in  progress  (CWIP)  property  which was
approved by the IURC in March 1995. Partially offsetting these increases was the
return of approximately $10 million to customers in accordance with the February
1995 Order.

Higher kwh sales and electric rate increases which became  effective in February
1995 and March 1995 significantly contributed to the $134 million (12%) increase
in operating revenues for 1995, when compared to 1994.

An analysis of operating revenues for the past three years is shown below:

                                                    1997       1996     1995
                                                          (in millions)

Previous year's operating revenues                 $1 332     $1 248   $1 114
Increase (Decrease) due to change in:
  Price per kwh
    Retail                                             56          8       68
    Sales for resale
      Firm power obligations                          (10)        (3)      (1)
      Non-firm power transactions                      93       -           1
  Total change in price per kwh                       139          5       68

  Kwh sales
    Retail                                             12         16       55
    Sales for resale
      Firm power obligations                           14          8        1
      Non-firm power transactions                     451         55        9
  Total change in kwh sales                           477         79       65

  Other                                                10       -           1

Current year's operating revenues                  $1 958     $1 332   $1 248

Operating Expenses

FUEL

Electric fuel costs increased $29 million (8%) in 1997, when compared to 1996.


An analysis of fuel costs for the past three years is shown below:

                                                     1997      1996      1995
                                                          (in millions)

Previous year's fuel expense                         $364      $389      $387
Increase (Decrease) due to change in:
  Price of fuel                                        (2)      (10)      (13)
  Deferred fuel cost                                   (5)        8         8
  Kwh generation                                       36       (23)        7

Current year's fuel expense                          $393      $364      $389

PURCHASED AND EXCHANGED POWER

Purchased and exchanged power increased $510 million and $92 million in 1997 and
1996,  respectively.  These increases  primarily reflect increased  purchases of
non-firm  power  for  resale to others  as a result  of  increased  activity  in
Cinergy's power marketing and trading  operations.  (See Note 1(c) of the "Notes
to Financial  Statements"  in "Item 8. Financial  Statements  and  Supplementary
Data" and the "Market Risk  Sensitive  Instruments  and  Positions"  section for
discussions on Cinergy's power marketing and trading operations.)

Purchased and exchanged  power  increased $22 million (54%) in 1995, as compared
to  1994,   reflecting  increased  purchases  from  CG&E  as  a  result  of  the
coordination of PSI's and CG&E's electric  dispatch  systems.  This increase was
partially  offset by a decline in third party,  short-term  power sales to other
utilities.

OTHER OPERATION

Other  operation  expenses  increased  $76 million (28%) in 1997, as compared to
1996. This increase is primarily due to higher other operation expenses relating
to  the  Clean  Coal  Project,   amortization  of  deferred  DSM  expenses,  and
amortization of deferred expenses associated with the Clean Coal Project, all of
which are being  recovered  in revenues  pursuant to either the  September  1996
Order or the December 1996 DSM Order.  The effect of  discontinuing  deferral of
certain DSM-related costs in accordance with provisions of the December 1996 DSM
Order also added to the increase.  These increases were partially  offset by the
effect of charges in 1996 for early retirement and severance programs.

Other operation expenses  increased  approximately $40 million (17%) in 1996, as
compared to 1995.  This  increase  was due to a number of factors,  including an
increase  related to the ongoing level and  amortization  of DSM expenses and an
increase in production expenses associated with the operations of the Clean Coal
Project,  all of which are being recovered in revenues  pursuant to the February
1995 and September 1996 Orders.  Charges related to voluntary  early  retirement
and severance programs and increased  transmission costs also contributed to the
higher level of other operation expenses.

In 1995,  other  operation  expenses  increased $15 million (7%), as compared to
1994. This increase was due to a number of factors, including the recognition of
postretirement  benefit  costs on an accrual  basis,  an increase in the ongoing
level of DSM expenses,  and the amortization of deferred  postretirement benefit
costs,  deferred  Merger Costs,  and deferred DSM costs,  all of which are being
recovered in revenues pursuant to the February 1995 Order.  These increases were
partially  offset by charges of $10  million in 1994 for  severance  benefits to
former officers of PSI which cannot be recovered from customers under the merger
savings  sharing  mechanisms  authorized by the IURC.  In addition,  emphasis on
achieving  merger savings and other cost  reductions  also partially  offset the
increase in other operation expenses.

MAINTENANCE

In 1997,  maintenance  costs  decreased $11 million (12%),  as compared to 1996.
This decrease is primarily  attributable  to reduced outage related  charges and
other maintenance costs associated with electric production facilities.  Reduced
maintenance  costs  associated  with  electric   transmission  and  distribution
facilities also contributed to the decrease for 1997.

An increase of $10 million  (12%) in  maintenance  costs in 1996, as compared to
1995, is primarily  attributable  to increased  maintenance  associated with the
Clean Coal Project which began commercial  operation in November 1995. Increased
transmission  and  distribution  costs also  contributed  to the higher level of
maintenance costs.

Maintenance  costs  decreased  $7 million  (7%) in 1995,  as  compared  to 1994,
primarily due to improved  scheduling of routine maintenance on generating units
and lower maintenance costs on transmission and distribution facilities.

DEPRECIATION

In 1995,  depreciation  expense  decreased $17 million  (12%),  when compared to
1994, due, in large part, to the adoption of lower  depreciation rates effective
in March 1995. This decrease was partially  offset by the effect of additions to
utility plant.

POST-IN-SERVICE DEFERRED OPERATING EXPENSES - NET

Post-in-service  deferred  operating  expenses - net  reflect  the  deferral  of
depreciation on certain major projects,  primarily environmental in nature, from
the  in-service  date until the related  projects are reflected in retail rates,
net of amortization of these deferrals as they are recovered.  (See Note 1(h) of
the  "Notes  to  Financial  Statements"  in "Item 8.  Financial  Statements  and
Supplementary Data.")

TAXES OTHER THAN INCOME TAXES

Taxes other than income taxes  increased $4 million (8%) in 1997, as compared to
1996, primarily due to an increase in the Indiana Corporate Gross Income Tax.

Taxes other than income taxes increased $6 million (12%) in 1995, as compared to
1994,  primarily  due to  increased  property  taxes  resulting  from a  greater
investment in taxable property.

Other Income and Expenses - Net

POST-IN-SERVICE CARRYING COSTS

Post-in-service carrying costs reflect the deferral of carrying costs on certain
major  projects,  primarily  environmental  in nature,  from the in-service date
until the related projects are reflected in retail rates.  (See Note 1(h) of the
"Notes  to  Financial   Statements"  in  "Item  8.   Financial   Statements  and
Supplementary Data.")

OTHER - NET

The $5 million change in other - net for 1997, as compared to 1996, is primarily
due to a gain in 1997 on the sale of a PSI investment.

Interest and Other Charges

INTEREST ON LONG-TERM DEBT

In 1997,  interest on  long-term  debt  increased $5 million (7%) over the prior
year. The increase was primarily due to the net issuance of  approximately  $100
million of long-term debt during 1996 and 1997.

Interest on long-term  debt  decreased  $4 million (5%) in 1996,  as compared to
1995,  due to the redemption of $135 million of long-term debt during the period
from August 1995 through December 1996.

ALLOWANCE FOR BORROWED FUNDS USED DURING CONSTRUCTION

Allowance for borrowed funds used during construction decreased $2 million (45%)
in 1996,  as compared to 1995.  This  decrease is  primarily  attributable  to a
decrease in the average  balance of CWIP,  resulting from the Clean Coal Project
being completed at the end of 1995.

Allowance for borrowed funds used during construction decreased $5 million (55%)
in 1995, as compared to 1994, primarily as a result of a decrease in the average
balance of CWIP, which was partially offset by an increase in the debt component
of the AFUDC rate.

<PAGE>

The Union Light,
Heat and Power
Company

<PAGE>

<TABLE>
<CAPTION>
                     THE UNION LIGHT, HEAT AND POWER COMPANY

                              STATEMENTS OF INCOME

                                           1997           1996           1995
                                                     (in thousands)
<S>                                      <C>            <C>            <C>

Operating Revenues
  Electric                               $192 774       $190 900       $187 180
  Gas                                      78 848         76 868         70 288
                                          271 622        267 768        257 468
Operating Expenses
  Electricity purchased from parent
    company for resale                    145 906        143 839        142 308
  Gas purchased                            44 354         41 185         36 745
  Other operation                          31 153         30 934         30 712
  Maintenance                               5 764          4 997          4 580
  Depreciation                             12 369         11 909         11 438
  Income taxes (Note 11)                    9 586          9 834          7 887
  Taxes other than income taxes             4 055          4 036          3 968
                                          253 187        246 734        237 638

Operating Income                           18 435         21 034         19 830

Other Income and Expenses - Net
  Allowance for equity funds used
    during construction                        97             (8)            71
  Income taxes (Note 11)                    1 100           (352)           (44)
  Other - net                              (1 947)        (1 417)             6
                                             (750)        (1 777)            33

Income Before Interest                     17 685         19 257         19 863

Interest
  Interest on long-term debt                3 523          4 016          7 161
  Other interest                            1 396            703            728
  Allowance for borrowed funds used
    during construction                      (151)           (58)          (198)
                                            4 768          4 661          7 691

Net Income                               $ 12 917       $ 14 596       $ 12 172


<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
                     THE UNION LIGHT, HEAT AND POWER COMPANY

                                 BALANCE SHEETS

ASSETS

                                                            December 31
                                                         1997          1996
                                                       (dollars in thousands)
<S>                                                    <C>           <C>

Utility Plant - Original Cost
  In service
    Electric                                           $204 111      $195 053
    Gas                                                 155 167       148 203
    Common                                               19 073        19 285
                                                        378 351       362 541
  Accumulated depreciation                              133 213       122 310
                                                        245 138       240 231
  Construction work in progress                          14 346         9 050
      Total utility plant                               259 484       249 281

Current Assets
  Cash and temporary cash investments                       546         1 197
  Notes receivable from affiliated companies               -              100
  Accounts receivable less accumulated provision
    for doubtful accounts of $996 in 1997 and
    $1,024 in 1996 (Note 6)                               7 308        12 763
  Accounts receivable from affiliated companies             446           620
  Materials, supplies, and fuel - at average cost
    Gas stored for current use                            5 401         6 351
    Other materials and supplies                            693           716
  Income tax refundable                                    -            1 670
  Prepayments and other                                     385           370
                                                         14 779        23 787
Other Assets
  Regulatory assets (Note 1(f))
    Deferred merger costs                                 5 213         5 218
    Unamortized costs of reacquiring debt                 3 590         3 764
    Other                                                 2 262         2 357
  Other                                                   6 262         5 146
                                                         17 327        16 485

                                                       $291 590      $289 553

<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
                     THE UNION LIGHT, HEAT AND POWER COMPANY

CAPITALIZATION AND LIABILITIES

                                                            December 31
                                                         1997          1996
                                                       (dollars in thousands)
<S>                                                    <C>           <C>

Common Stock Equity (Note 2)
  Common stock - $15.00 par value;
    authorized shares - 1,000,000;
    outstanding shares - 585,333 in 1997
    and 1996                                           $  8 780      $  8 780
  Paid-in capital                                        18 683        18 839
  Retained earnings                                      95 450        92 484
      Total common stock equity                         122 913       120 103

Long-term Debt (Note 4)                                  44 671        44 617
      Total capitalization                              167 584       164 720

Current Liabilities
  Notes payable to affiliated companies                  23 487        30 649
  Accounts payable                                       11 097        12 018
  Accounts payable to affiliated companies               19 712        16 771
  Accrued taxes                                           6 332            84
  Accrued interest                                        1 286         1 284
  Other                                                   4 364         5 248
                                                         66 278        66 054

Other Liabilities
  Deferred income taxes (Note 11)                        26 211        33 463
  Unamortized investment tax credits                      4 516         4 797
  Accrued pension and other postretirement
    benefit costs (Notes 9 and 10)                       14 044        12 983
  Income taxes refundable through rates                   6 566         5 121
  Other                                                   6 391         2 415
                                                         57 728        58 779
Commitments and Contingencies (Note 12)
                                                       $291 590      $289 553

</TABLE>

<PAGE>

<TABLE>
<CAPTION>
                     THE UNION LIGHT, HEAT AND POWER COMPANY

                  STATEMENTS OF CHANGES IN COMMON STOCK EQUITY

                                     Common      Paid-in       Retained     Total Common
                                      Stock      Capital       Earnings     Stock Equity
                                                    (dollars in thousands)
<S>                                  <C>         <C>           <C>            <C>

Balance December 31, 1994            $8 780      $18 839       $74 203        $101 822
Net income                                                      12 172          12 172
Dividends on common stock                                       (3 512)         (3 512)

Balance December 31, 1995             8 780       18 839        82 863         110 482
Net income                                                      14 596          14 596
Dividends on common stock                                       (4 975)         (4 975)

Balance December 31, 1996             8 780       18 839        92 484         120 103
Net income                                                      12 917          12 917
Dividends on common stock                                       (9 951)         (9 951)
Other                                  -            (156)         -               (156)

Balance December 31, 1997            $8 780      $18 683       $95 450        $122 913

<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
                     THE UNION LIGHT, HEAT AND POWER COMPANY

                            STATEMENTS OF CASH FLOWS

                                                         1997        1996       1995
                                                                (in thousands)
<S>                                                     <C>        <C>         <C>

Operating Activities
  Net income                                            $12 917    $14 596     $12 172
  Items providing or (using) cash:
    Depreciation                                         12 369     11 909      11 438
    Deferred income taxes and investment
      tax credits - net                                  (6 124)     9 857         652
    Allowance for equity funds used during
      construction                                          (97)         8         (71)
    Regulatory assets                                       100     (1 500)        170
    Changes in current assets and current
      liabilities
        Accounts and notes receivable, net
          of reserves on receivables sold                 4 507     20 758      (4 003)
        Materials, supplies, and fuel                       973     (1 339)      1 894
        Accounts payable                                  2 020     (4 690)     11 824
        Accrued taxes and interest                        7 920     (1 494)     (1 607)
    Other items - net                                     5 343     (6 554)      4 412

        Net cash provided by operating activities        39 928     41 551      36 881

Financing Activities
  Issuance of long-term debt                               -          -         14 704
  Redemption of long-term debt                             -       (26 083)    (37 036)
  Change in short-term debt                              (7 162)     7 606       8 543
  Dividends on common stock                              (9 951)    (4 975)     (3 512)

        Net cash used in financing activities           (17 113)   (23 452)    (17 301)

Investing Activities
  Construction expenditures (less allowance for
    equity funds used during construction)              (23 466)   (18 652)    (18 901)

        Net cash used in investing activities           (23 466)   (18 652)    (18 901)

Net increase (decrease) in cash and temporary
  cash investments                                         (651)      (553)        679
Cash and temporary cash investments at beginning
  of period                                               1 197      1 750       1 071
Cash and temporary cash investments at end of
  period                                                $   546    $ 1 197     $ 1 750

Supplemental Disclosure of Cash Flow Information
  Cash paid during the year for:
    Interest (net of amount capitalized)                $ 4 490    $ 4 667     $ 8 121
    Income taxes                                          2 859      1 240       7 727

<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>

<PAGE>

RESULTS OF OPERATIONS - ULH&P

Kwh Sales

Kwh sales  decreased by 1.2%,  compared to 1996.  This  decrease was a result of
mild  weather.  This decline was  partially  offset by an increase in commercial
sales, which reflects a higher average number of customers.

In 1996,  total  kwh  sales  increased  5.8% as  compared  to  1995,  reflecting
increased  sales to all customer  classes.  The increase in retail sales,  which
reflects a higher average number of residential  and commercial  customers,  was
partially  offset by the return to more normal  weather in 1996.  The  increased
industrial sales primarily reflect growth in the food products sector.

Total  kwh  sales in  1995,  as  compared  to 1994,  increased  7.2%  reflecting
increased  sales to all  customer  classes.  The  increase  in  residential  and
commercial  kwh sales was due to warmer  weather  during the 1995 summer cooling
season and colder  weather  during the fourth quarter of 1995 and an increase in
the average  number of  customers.  The  increased  industrial  sales  primarily
reflect growth in the primary metals sector.

ULH&P currently forecasts a 2% annual compound growth rate in kwh sales over the
1998 through 2002 period.

Mcf Sales and Transportation

Mcf gas sales and  transportation  volumes  decreased  slightly,  as compared to
1996.  The milder  weather  experienced  in 1997  contributed  to a decrease  in
residential  and commercial  sales.  Gas  transportation  volumes  increased and
industrial gas sales  decreased as customers  continued to purchase gas directly
from suppliers using transportation services provided by ULH&P.

Mcf gas sales and  transportation  volumes  increased 6.6%, as compared to 1995.
Colder weather in the first quarter of 1996, cooler than normal weather early in
the second quarter of 1996, and increases in the average number of customers led
to increased  sales to residential and commercial  customers.  This increase was
partially  offset by a decrease in  industrial  sales as customers  continued to
purchase gas directly from suppliers.

Total gas sales and  transportation  volumes increased 8.6% in 1995, as compared
to 1994.  The  colder  weather  during  the  fourth  quarter  of 1995  primarily
attributed to the increase in residential and commercial sales.  These increases
were partially  offset by a decline in industrial sales resulting from customers
electing to purchase  directly from suppliers,  creating  additional  demand for
transportation services.

Operating Revenues

ELECTRIC OPERATING REVENUES

Electric  operating  revenues increased $2 million (1%) in 1997, $4 million (2%)
in 1996, and $10 million (5%) in 1995. The increase in 1997 was partially due to
the effect of an order issued by the Kentucky Public Service  Commission in July
1996. This order  authorized a decrease in electric  rates,  retroactive to July
1995,  reflecting a reduction in the cost of  electricity  purchased  from CG&E.
Partially  offsetting  this  increase was a decline in kwh sales,  as previously
discussed.  Increases  in 1996 and 1995  reflect  higher  kwh  sales,  which was
partially offset by the lower average cost of electricity purchased.

GAS OPERATING REVENUES

The  increasing  trend of  industrial  customers  purchasing  gas directly  from
producers  and using ULH&P  facilities  to transport the gas (see the "Mcf Sales
and Transportation" section) continues to put downward pressure on gas operating
revenues.  Since providing transportation services does not necessitate recovery
of gas purchased costs, the revenue per Mcf transported is less than the revenue
per Mcf sold. As a result,  a higher  relative  volume of gas transported to gas
sold translates into lower gas operating revenues.

The $2 million (3%) increase in gas  operating  revenues in 1997, as compared to
1996, was due to the operation of the fuel adjustment clause reflecting a higher
average cost per Mcf of gas purchased.

Gas operating  revenues  increased $7 million (9%) in 1996, as compared to 1995.
The increase was primarily  attributable to the operation of the fuel adjustment
clause  reflecting  an increase in the average cost per Mcf of gas purchased and
an increase in total volumes sold and transported.

In 1995, gas operating  revenues  declined $2 million (2%), as compared to 1994,
as a result of the aforementioned trend toward increased transportation services
and the operation of the fuel adjustment  clause reflecting a lower average cost
per Mcf of gas purchased.

Operating Expenses

ELECTRICITY PURCHASED FROM PARENT COMPANY FOR RESALE

Electricity  purchased  increased $7 million (6%) in 1995,  as compared to 1994,
due to an increase in volumes purchased.

GAS PURCHASED

The increase in gas purchased expense of $3 million (8%) in 1997, as compared to
1996,  reflects a higher average cost per Mcf of gas purchased  partially offset
by a decline in the volumes of gas purchased.

Gas purchased increased $4 million (12%) in 1996, as compared to 1995, due to an
increase  in  volumes  purchased  and a  higher  average  cost  per  Mcf  of gas
purchased, as previously discussed.

In 1995, gas purchased expense decreased $4 million (9%) from 1994 primarily due
to a decrease in the average cost per Mcf of gas purchased.

OTHER OPERATION

In 1995, other operation expense decreased $2 million (5%), as compared to 1994,
due, in part, to decreased gas and electric  distribution expenses and decreased
gas production expenses.

MAINTENANCE

In 1997, maintenance costs increased $1 million (15%), as compared to 1996. This
increase is primarily  attributable to increased  maintenance  costs on electric
distribution facilities.

In 1996,  maintenance  costs  increased  $.4  million  (9%) as compared to 1995,
primarily as a result of increased transmission and distribution costs.

Maintenance  costs  decreased  $1 million  (16%) in 1995,  as  compared to 1994,
primarily  as a  result  of  reduced  maintenance  costs  on  gas  and  electric
distribution facilities.

DEPRECIATION

Depreciation  expense  increased $1 million  (8%) in 1995,  as compared to 1994,
primarily due to additions to electric and gas plant in service.

Other Income and Expenses - Net

OTHER - NET

The $.5  million  change  in other - net for  1997,  as  compared  to  1996,  is
primarily due to increased  expenses  associated  with ULH&P's sales of accounts
receivable.

The  decrease  in other - net of $1 million in 1996,  as  compared  to 1995,  is
primarily  attributable  to  expenses  associated  with the  sales  of  accounts
receivables in 1996.

Interest and Other Charges

INTEREST ON LONG-TERM DEBT

The $.5 million  (12%)  decrease in interest on long-term  debt,  as compared to
1996,  is primarily due to the  redemption  of $25 million of long-term  debt in
1996.

Interest on long-term  debt  decreased $3 million  (44%) in 1996, as compared to
1995,  due to the redemption of $25 million and $35 million of long-term debt in
1996 and 1995, respectively.

OTHER INTEREST

The $1 million increase in other interest, as compared to 1996, is primarily due
to increased  short-term  borrowings from affiliated companies through Cinergy's
money pool arrangement.

<PAGE>

NOTES TO FINANCIAL STATEMENTS

1.  Summary of Significant Accounting Policies

Cinergy, CG&E, PSI, and ULH&P

(a) Nature of Operations  Cinergy  Corp.,  a Delaware  corporation,  (Cinergy or
Company),  is a registered  holding  company  under the Public  Utility  Holding
Company Act of 1935  (PUHCA).  Cinergy was created in the October 1994 merger of
PSI  Resources,  Inc.  (Resources)  and The  Cincinnati  Gas & Electric  Company
(CG&E).  Cinergy's  utility  subsidiaries  are CG&E and PSI Energy,  Inc. (PSI).
CG&E, an Ohio combination  electric and gas utility,  and its five  wholly-owned
utility  subsidiaries  (including  The Union Light,  Heat and Power  Company,  a
Kentucky combination electric and gas utility (ULH&P)), are primarily engaged in
the production,  transmission,  distribution, and sale of electric energy and/or
the sale and  transportation of natural gas in the southwestern  portion of Ohio
and adjacent areas in Kentucky and Indiana. PSI, an Indiana electric utility and
previously  Resources'  utility  subsidiary,   is  engaged  in  the  production,
transmission,  distribution,  and sale of  electric  energy  in  north  central,
central,  and southern Indiana. The majority of Cinergy's operating revenues are
derived from the sale of electricity and the sale and  transportation of natural
gas.

Cinergy's non-utility  subsidiaries are Cinergy Investments,  Inc. (Investments)
and Cinergy Services, Inc. (Services). Investments, a Delaware corporation, is a
non-utility  subholding  company  that was formed to hold and operate  Cinergy's
non-utility businesses and interests.  Investments' principal activities include
investments in Midlands Electricity plc (Midlands),  Cinergy Global Power, Inc.,
and Trigen-Cinergy Solutions LLC (Trigen-Cinergy).  (See Note 1(e) for a further
discussion  of  Midlands.)  Services,  a Delaware  corporation,  is the  service
company for the Cinergy  system,  providing  member  companies with a variety of
administrative, management, and support services.

Cinergy, CG&E, PSI, and ULH&P

(b) Presentation The accompanying  Consolidated Financial Statements of Cinergy,
CG&E, and PSI include the accounts of Cinergy, CG&E, and PSI, respectively,  and
their wholly-owned  subsidiaries.  Investments in business entities in which the
Company  does not have  control,  but has the  ability to  exercise  significant
influence  over  operating  and  financial  policies  (generally,   20%  to  50%
ownership)  are  accounted  for  using  the  equity  method.   All   significant
intercompany transactions and balances have been eliminated.

The preparation of financial  statements in conformity  with generally  accepted
accounting   principles  (GAAP)  requires   management  to  make  estimates  and
assumptions  that affect the reported  amounts of assets and liabilities and the
disclosure of  contingent  assets and  liabilities  at the date of the financial
statements  and the  reported  amounts  of  revenues  and  expenses  during  the
reporting  period.  Actual results could differ from those estimates.  (See Note
12.)

Certain  reclassifications  of prior  years' data have been made to conform with
the current year's presentation.

Cinergy, CG&E, and PSI

(c) Power Marketing and Trading  Cinergy's power marketing and trading  function
actively  markets and trades  over-the-counter  forward and option contracts for
the  purchase  and sale of  electricity.  The  majority of these  contracts  are
settled via physical  delivery of electricity  or netted out in accordance  with
industry  trading  standards.  Option  premiums are deferred and included in the
Consolidated  Balance Sheets and amortized to "Operating Revenues - Electric" or
"Purchased and exchanged  power" in the  Consolidated  Statements of Income over
the  term  of  the   option   contract.   Cinergy   values  its   portfolio   of
over-the-counter  forward and option contracts using the aggregate lower of cost
or market method. To the extent there are net aggregate losses in the portfolio,
Cinergy reserves for such losses. Net gains are recognized when realized. Due to
the lack of liquidity  and the  volatility  currently  experienced  in the power
markets,  significant  assumptions  must be made by the Company when  estimating
current  market  values for  purposes of the  aggregate  lower of cost or market
comparison.  It is possible  that the actual gains and losses from the Company's
power marketing and trading activities could differ substantially from the gains
and losses estimated currently.

Cinergy, CG&E, and PSI

(d) Financial  Derivatives Cinergy and its subsidiaries use derivative financial
instruments to hedge exposures to foreign currency exchange rates, lower funding
costs, and manage exposures to fluctuations in interest rates.  Instruments used
as hedges must be  designated  as a hedge at the  inception  of the contract and
must be  effective  at reducing  the risk  associated  with the  exposure  being
hedged.  Accordingly,  changes in market values of designated hedge  instruments
must be highly correlated with changes in market values of the underlying hedged
items at inception of the hedge and over the life of the hedge contract.

Cinergy  utilizes a currency swap to hedge its pound  sterling  denominated  net
investment in Avon Energy  Partners  Holdings  (Avon Energy).  Accordingly,  any
translation  gains or losses  related to the principal  exchange on the currency
swap are recorded in the  cumulative  foreign  currency  translation  adjustment
which is a separate  component of common  stock  equity.  Aggregate  translation
losses  related to the principal  exchange of the currency swap are reflected in
"Current Liabilities - Other" in the Consolidated Balance Sheets.

Interest  rate swaps are accounted  for under the accrual  method.  Accordingly,
gains and losses  based on any  interest  differential  between  fixed-rate  and
floating-rate  interest  amounts,  calculated on agreed upon notional  principal
amounts, are recognized in the Consolidated  Statements of Income as a component
of interest expense as realized over the life of the agreement.

Cinergy

(e) Investments in Unconsolidated Subsidiaries

Except for Cinergy's  investment in Avon Energy,  investments in  unconsolidated
subsidiaries  are not significant.  In May 1996,  Cinergy and GPU, Inc. (GPU), a
Pennsylvania  corporation,  entered into a 50%/50% joint  venture  agreement and
formed Avon Energy,  incorporated  in London,  England.  Avon Energy,  through a
wholly-owned  subsidiary,  immediately  began acquiring the  outstanding  common
stock of Midlands,  a United Kingdom (UK) regional electric company.  During the
third quarter of 1996, Avon Energy  completed the  acquisition of  substantially
all of the outstanding common stock of Midlands. The total consideration paid by
Avon Energy was  approximately 1.7 billion pounds sterling ($2.6 billion at then
existing currency  exchange rates).  The funds for the acquisition were obtained
from Cinergy's and GPU's investment in Avon Energy of approximately  330 million
pounds  sterling each ($500 million each),  with the remainder being obtained by
Avon  Energy  through  the  issuance of  non-recourse  debt.  As a result of the
allocation  of  the  purchase  price,  Avon  Energy  has  recorded  goodwill  of
approximately  1.4 billion pounds  sterling ($2 billion) in connection  with its
acquisition  of  Midlands.  The goodwill is being  amortized on a  straight-line
basis over 40 years.

Summarized financial information for Avon Energy is as follows:

                                                    December 31, 1997
                                                       Avon Energy
Assets                                                (in millions)
    Property, plant, and equipment                       $1 890
    Current assets                                          676
    Other assets                                          2 148
      Total assets                                       $4 714
Capitalization and Liabilities
    Total common shareholders' equity                    $1 006
    Long-term debt                                        1 533
    Other liabilities                                     2 175
      Total capitalization and
        liabilities                                      $4 714

Cinergy's investments in unconsolidated
   subsidiaries:          Avon Energy                    $  505
                          Other companies                    33
      Total investments in unconsolidated
      subsidiaries                                       $  538

                                                        Year Ended
                                                    December 31, 1997
                                                       Avon Energy
                                                      (in millions)
Operating revenues                                       $2 176
Net income before extraordinary item                     $  127
Extraordinary item - windfall profits
  tax (less applicable income taxes of $0)               $ (219)
Net loss                                                 $  (92)

Cinergy's equity in earnings of Avon Energy
  before extraordinary item                              $   63
Cinergy's equity in extraordinary item                   $ (109)

Cinergy's equity in earnings of: Avon Energy             $  (46)
                                 Other companies             (3)
Total equity in the earnings of unconsolidated
  subsidiaries                                           $  (49)

During 1997, Cinergy received $25 million of dividends from Avon Energy.

The pro forma  financial  information  for 1996 presented  below assumes 100% of
Midlands  was  acquired on January 1, 1996.  The pro forma  adjustments  include
recognition  of equity in the estimated  earnings of Avon Energy,  an adjustment
for  interest  expense on debt  associated  with  Cinergy's  investment  in Avon
Energy,  and related income taxes. The estimated earnings of Avon Energy include
the  historical  earnings of Midlands  prior to its  acquisition by Avon Energy,
adjusted  for  the  estimated  effect  of  purchase  accounting  (including  the
amortization  of goodwill) and  conversion to United States (US) GAAP,  interest
expense on debt  issued by Avon  Energy  associated  with the  acquisition,  and
related  income taxes.  The equity in earnings of Avon Energy has been converted
from pounds  sterling to dollars  using the  average  exchange  rate for 1996 of
$1.53/pound sterling.

                                              Year Ended December 31, 1996

                                              Net    Earnings Per Share(1)
                                             Income     Basic     Diluted
                                                  (in millions, except
                                                   per share amounts)

    Cinergy                                  $335     $2.00(2)   $1.99(2)
    Pro forma adjustments:
      Equity in earnings of Avon Energy        20
      Interest expense                        (14)
      Income taxes                              6
    Pro forma results                        $347     $2.08      $2.06

(1)  See Note 16.

(2)  Earnings  per  share  after a  charge  of $.12  per  share  for the cost of
     reacquiring preferred stock of CG&E through a tender offer.

Cinergy, CG&E, PSI, and ULH&P

(f)  Regulation  Cinergy,  its utility  subsidiaries  (CG&E,  together  with its
subsidiaries,  and PSI), and certain of its non-utility subsidiaries are subject
to regulation by the Securities and Exchange  Commission  (SEC) under the PUHCA.
Cinergy's  utility  subsidiaries  are also subject to  regulation by the Federal
Energy  Regulatory  Commission  (FERC)  and the  state  utility  commissions  of
Indiana, Kentucky, and Ohio.

The  accounting  policies  of  Cinergy's  utility  subsidiaries  conform  to the
accounting requirements and ratemaking practices of these regulatory authorities
and to GAAP,  including  the  provisions  of Statement  of Financial  Accounting
Standards  No. 71,  Accounting  for the Effects of Certain  Types of  Regulation
(Statement 71).

Under the  provisions  of Statement 71,  regulatory  assets  represent  probable
future  revenue  associated  with deferred  costs to be recovered from customers
through the  ratemaking  process.  Certain  criteria must be met for  regulatory
assets to be recorded and for the  continued  application  of the  provisions of
Statement  71,  including  regulated  rates  designed  to recover  the  specific
utility's costs. Failure to satisfy the criteria in Statement 71 would eliminate
the basis for recognition of regulatory assets.

Based on Cinergy's current  regulatory orders and the regulatory  environment in
which it currently  operates,  the  recognition of its  regulatory  assets as of
December 31, 1997, is fully supported. The regulatory assets of PSI and CG&E and
its utility subsidiaries as of December 31 are as follows:

<TABLE>
<CAPTION>
                                              1997                 1996
                                       PSI CG&E 1/Cinergy   PSI CG&E 1/Cinergy
                                                    (in millions)
<S>                                   <C>  <C>   <C>       <C>  <C>   <C>

Amounts due from customers -
  income taxes (Note 1(g))            $ 24 $350  $  374    $ 33 $344  $  377
Post-in-service carrying costs and
  deferred operating expenses
  (Note 1(h))                           44  135     179      45  141     186
Coal contract buyout costs (Note 1(i)) 122   -      122     138   -      138
Deferred demand-side management (DSM)
  costs (Note 1(j))                     71   39     110     102   33     135
Phase-in deferred return and
  depreciation (Note 1(k))              -    90      90      -    95      95
Deferred merger costs (Note 1(l))       74   16      90      76   18      94
Unamortized costs of reacquiring
  debt (Note 1(m))                      30   36      66      32   39      71
Coal gasification services expenses
  (Note 1(n))                           22   -       22      25   -       25
Other                                   22    2      24      28   20      48

  Total                               $409 $668  $1 077    $479 $690  $1 169

<FN>
1/ Includes $11 million related to ULH&P at both December 31, 1997, and 1996.
</FN>
</TABLE>

PSI has previously  received  regulatory orders authorizing the recovery of $399
million of its total regulatory assets at December 31, 1997. CG&E has previously
received  regulatory orders  authorizing the recovery of $595 million (including
$4 million for ULH&P) of its total regulatory  assets at December 31, 1997. Both
PSI and CG&E (including  ULH&P) will request  recovery of additional  amounts in
future  proceedings,  which  could  include  proceedings,  if  any,  related  to
transition to customer choice in each applicable jurisdiction.

Cinergy, CG&E, PSI, and ULH&P

(g)  Federal  and State  Income  Taxes  Under the  provisions  of  Statement  of
Financial  Accounting  Standards No. 109, Accounting for Income Taxes (Statement
109),  deferred tax assets and  liabilities  are  recognized  for the income tax
consequences of transactions treated differently for financial reporting and tax
return  purposes,  measured on the basis of statutory tax rates.  Investment tax
credits  utilized to reduce  Federal income taxes payable have been deferred for
financial  reporting  purposes and are being  amortized over the useful lives of
the property which gave rise to such credits.

Income tax  provisions  reflected in customer rates are regulated by the various
regulatory  commissions  overseeing  the regulated  business  operations of PSI,
CG&E,  and CG&E's  utility  subsidiaries.  In accordance  with the provisions of
Statement 71, Cinergy,  PSI, and CG&E have recorded a regulatory asset, "Amounts
due from  customers - income  taxes,"  representing  the probable  recovery from
customers of additional  income taxes established under Statement 109. ULH&P has
recorded  a  regulatory   liability  "Income  taxes  refundable  through  rates"
representing  the probable  repayment  to customers of income taxes  established
under  Statement  109 to the extent  deferred  income  taxes  recovered in rates
exceed amounts payable in future periods.

Cinergy, CG&E, and PSI

(h) Post-in-service Carrying Costs and Deferred Operating Expenses CG&E received
various  orders  from the  Public  Utilities  Commission  of Ohio  (PUCO)  which
permitted  the  deferral  of  carrying  costs and  non-fuel  operating  expenses
(including  depreciation) for the Wm. H. Zimmer Generating  Station (Zimmer) and
Woodsdale Generating Station (Woodsdale) units.  Effective with the dates of the
PUCO's  orders  reflecting  the  units  in  customer  rates,  the  deferrals  of
post-in-service  carrying  costs  are  being  recovered  over  the  lives of the
applicable  units  and  the  deferred  non-fuel  operating  expenses  are  being
recovered over a 10-year period.

PSI received authority from the Indiana Utility Regulatory Commission (IURC) for
the accrual of the debt component of carrying costs (to the extent not recovered
currently in retail rates) and the deferral of  depreciation  expense on certain
major  projects  which are primarily  environmental  in nature.  These  projects
include a  262-megawatt  clean coal  power  generating  facility  located at the
Wabash River  Generating  Station  (Clean Coal Project) and a scrubber at Gibson
Generating Station (Gibson).  In a February 1995 order (February 1995 Order) and
a September 1996 order (September 1996 Order),  the IURC authorized the recovery
of deferred costs incurred prior to August 31, 1995. These deferred costs are to
be recovered over the remaining lives of the related assets.  Deferrals incurred
after this date will be  requested  for  recovery in future  proceedings.  These
proceedings could include proceedings, if any, related to transition to customer
choice.

Cinergy and PSI

(i) Coal  Contract  Buyout Costs In August 1996,  PSI entered into a coal supply
agreement with Eagle Coal Company (Eagle) for the supply of approximately  three
million tons of coal per year.  The  agreement,  which  terminates  December 31,
2000,  provides  for a buyout fee of $179  million  (including  interest)  to be
included  in the  price of coal to PSI over the term of the  contract.  This fee
represents the costs to Eagle of the buyout of the coal supply agreement between
PSI and Exxon Coal and Minerals Company.  The retail  jurisdictional  portion of
the buyout charge,  excluding the portion  applicable to joint owners,  is being
recovered through the quarterly fuel adjustment  clause,  with carrying costs on
unrecovered amounts, through December 2002. PSI has also filed a petition at the
FERC for recovery of the  wholesale  jurisdictional  portion of the buyout costs
through the wholesale fuel  adjustment  clause.  Generally,  the FERC will allow
recovery if the utility can demonstrate  there will be net benefits to customers
during the buyout cost recovery  period.  The FERC is expected to issue an order
on PSI's petition early in 1998.

Cinergy, CG&E, PSI, and ULH&P

(j) DSM A  settlement  agreement  between  PSI  and  certain  intervenors,  in a
proceeding  established  to review PSI's current and proposed DSM programs,  was
approved by the IURC in December 1996. Beginning January 1, 1997, and continuing
through  December 31, 2000, the settlement  agreement  allows PSI to recover $35
million per year through a non-bypassable  charge in PSI's retail rates. The $35
million is designed to recover all previously incurred,  but as yet unrecovered,
DSM costs and all costs related to satisfying remaining  commitments  associated
with a previous DSM settlement agreement. The $35 million also includes recovery
of carrying  costs.  Further,  the  agreement  authorizes  PSI to spend up to $8
million  annually on ongoing DSM  programs  through the year 1999 and to collect
such amounts currently in retail rates.

Additionally,  in December 1996,  the PUCO issued an order  applicable to CG&E's
DSM programs.  The order  requires CG&E to spend up to one-half of the annual $5
million  currently  included  in  retail  rates  on  PUCO-sanctioned  low-income
residential  programs.  The remaining portion of the $5 million is to be applied
to the recovery of DSM cost deferrals.  CG&E's  participation  in the low-income
programs  will be a factor  considered  by the PUCO in setting  future  rates of
return and approving competitive transition plans.

The Kentucky  Public Service  Commission has authorized  concurrent  recovery of
costs related to various DSM programs of ULH&P.

Cinergy and CG&E

(k) Phase-in  Deferred  Return and  Depreciation In May 1992, the PUCO issued an
order (May 1992 Order)  establishing  a rate  phase-in  plan for Zimmer.  In the
first three years of the rate phase-in plan,  rates charged to customers did not
fully recover depreciation expense and return on investment.  In accordance with
the provisions of the May 1992 Order,  this  deficiency has been recognized as a
regulatory asset and is being recovered over a seven-year  period which began in
May 1995.

Cinergy, CG&E, PSI, and ULH&P

(l) Deferred  Merger  Costs CG&E and its utility  subsidiaries  have  deferred a
portion  of  merger  transaction  costs  and  costs to  achieve  merger  savings
(collectively,  Merger Costs)  incurred  through  December 31, 1996,  for future
recovery in customer rates.

In accordance  with various IURC orders,  PSI has deferred Merger Costs incurred
through  October 31, 1996, and is recovering $44 million of these deferred costs
incurred through August 31, 1995, over a ten-year period.

CG&E and PSI completed  voluntary  workforce reduction and severance programs in
1996.  The pre-tax costs of these  programs and the related  accounting  were as
follows:

                                     1996 Programs
                                     (in millions)
                                    CG&E 1/     PSI

       Costs expensed                $30        $ 5
       Costs deferred                  9         33
                                     $39        $38

1/ Includes $2 million related to ULH&P.

The above amounts  reflect  approximately  $61 million ($31 million for CG&E and
$30  million  for PSI) of costs  associated  with  additional  pension  benefits
further discussed in Note 9.

Cinergy, CG&E, PSI, and ULH&P

(m) Debt Discount,  Premium, and Issuance Expenses and Costs of Reacquiring Debt
Debt discount,  premium, and issuance expenses on outstanding  long-term debt of
Cinergy's  utility  subsidiaries  are amortized over the lives of the respective
issues.

In  accordance  with  established   ratemaking   practices,   Cinergy's  utility
subsidiaries   have  deferred  costs   (principally   call  premiums)  from  the
reacquisition  of long-term  debt and are  amortizing  such amounts over periods
ranging from 1 to 24 years (4 to 24 years for CG&E and its subsidiaries, 1 to 24
years for PSI, and 11 to 23 for ULH&P).

Cinergy and PSI

(n) Coal  Gasification  Services  Expenses In  November  1995,  upon  commercial
operation of the Clean Coal Project,  PSI and Destec Energy, Inc. (Destec) began
a 25-year contractual agreement for the provision of coal gasification services.
The agreement  requires PSI to pay Destec a base monthly fee  including  certain
monthly  operating  expenses.  Over the next five years (1998 through 2002), the
base monthly fees and expenses are expected to total $201 million.  PSI received
authorization  in the September 1996 Order for the inclusion of the costs of the
Clean Coal Project in retail rates.  PSI also received  authorization  to defer,
for  subsequent  recovery in retail  rates,  the base  monthly fees and expenses
incurred prior to the effective date of the September 1996 Order.

Cinergy, CG&E, PSI, and ULH&P

(o) Utility Plant Utility plant is stated at the original cost of  construction,
which  includes an allowance  for funds used during  construction  (AFUDC) and a
proportionate  share of overhead  costs.  Construction  overhead  costs  include
salaries, payroll taxes, fringe benefits, and other expenses.

Substantially  all  utility  plant is  subject  to the  lien of each  applicable
company's first mortgage bond indenture.

Cinergy, CG&E, PSI, and ULH&P

(p) AFUDC Cinergy's  utility  subsidiaries  capitalize  AFUDC, a non-cash income
item,  which is defined in the regulatory  system of accounts  prescribed by the
FERC as including "the net cost for the period of construction of borrowed funds
used for  construction  purposes  and a  reasonable  rate on other funds when so
used." AFUDC accrual rates were as follows and are compounded semi-annually:

                                         1997     1996     1995

          Cinergy average                6.3%     7.1%     7.9%
          CG&E and its utility
            subsidiaries average         6.4      8.7      8.8
          ULH&P average                  6.9      8.8      7.0
          PSI average                    5.9      5.4      7.0

Cinergy, CG&E, PSI, and ULH&P

(q) Depreciation  and Maintenance  Provisions for depreciation are determined by
using the  straight-line  method  applied  to the cost of  depreciable  plant in
service.  The rates are based on periodic studies of the estimated service lives
and net cost of removal of the properties.  The average  depreciation  rates for
utility plant are:

                                                  1997    1996    1995

         PSI                                      3.0%    3.0%    3.1%
         CG&E and its utility subsidiaries
           Electric                               2.9     2.9     2.9
           Gas                                    2.9     2.8     2.8
           Common                                 3.0     3.0     3.4
         ULH&P
           Electric                               3.3     3.3     3.3
           Gas                                    3.1     3.1     3.1
           Common                                 5.0     5.1     5.1

For Cinergy's  utility  subsidiaries,  maintenance and repairs of property units
and replacements of minor items of property are charged to maintenance  expense.
The costs of replacements of property units are  capitalized.  The original cost
of the  property  retired  and  the  related  costs  of  removal,  less  salvage
recovered, are charged to accumulated depreciation.

Cinergy, CG&E, PSI, and ULH&P

(r) Operating Revenues and Fuel Costs Cinergy's utility  subsidiaries  recognize
revenues  for  electric  and gas service  rendered  during the month,  including
revenues  associated with sales unbilled at the end of each month.  The costs of
electricity  and gas purchased and the cost of fuel used in electric  production
are expensed as recovered through revenues. Any portion of these costs which are
recoverable  or  refundable  in future  periods is deferred in the  accompanying
Balance Sheets.  PSI's recovery of fuel costs is subject to a determination that
such  recovery will not result in PSI earning a return in excess of that allowed
in the September  1996 Order.  Prior to January 1, 1998,  this earnings test was
calculated in accordance with the settlement  agreement approved in the February
1995  Order and the  Indiana  statute  in  effect at the time of the  settlement
agreement.  Effective  January 1, 1998,  PSI will follow the  provisions  of the
current Indiana  statute,  which are generally less stringent with regard to the
earnings test.

Cinergy, CG&E, and ULH&P

(s) Order 636 In 1992,  the FERC issued order 636 (Order 636).  CG&E and certain
of its  utility  subsidiaries  are  subject  to  Order  636  which  restructured
operations  between  interstate gas pipelines and their  customers for gas sales
and  transportation  services.  Order 636 also allowed pipelines to recover from
customers  transition  costs incurred in complying with the order. In July 1994,
the  PUCO  issued  an  order  approving  a  stipulation  between  CG&E  and  its
residential  and  industrial  customer  groups  providing  for recovery of these
pipeline transition costs. CG&E is presently recovering its Order 636 transition
costs pursuant to a PUCO-approved tariff. CG&E's utility subsidiaries, including
ULH&P,  recover such costs  through their gas cost  recovery  mechanisms.  These
costs are deferred as incurred by CG&E and its applicable  utility  subsidiaries
and amortized as recovered from customers.

Cinergy, CG&E, PSI, and ULH&P

(t) Statements of Cash Flows All temporary cash  investments  with maturities of
three months or less, when acquired, are reported as cash equivalents. See Notes
3(b) and 8(a)(i) for  information  concerning  non-cash  investing  transactions
during 1996.

Cinergy

(u) Translation of Foreign  Currency All assets and liabilities  reported in the
balance sheets of foreign  subsidiaries whose functional  currency is other than
the US dollar are  translated  at year-end  exchange  rates;  income and expense
items are translated at the average  exchange rate  prevailing  during the month
the respective transactions occur.  Translation gains and losses are accumulated
as a separate component of common stock equity.

2.  Common Stock

(a)  Changes in Common Stock Outstanding

Cinergy

The following  table  reflects the shares of Cinergy  common stock  reserved for
issuance at December 31, 1997, and shares issued in 1997, 1996, and 1995 for the
Company's stock-based plans.

<TABLE>
<CAPTION>
                                  Shares
                                Reserved at              Shares Issued
                               Dec. 31, 1997     1997       1996       1995
<S>                              <C>            <C>        <C>        <C>

401(k) Savings Plans             6 469 373        -          -      1 222 379

Dividend Reinvestment and
  Stock Purchase Plan            1 798 486        -          -        935 711

Directors' Deferred
  Compensation Plan                200 000        -          -           -

Performance Shares Plan (PSP)      771 301        -           492      28 207

Employee Stock Purchase
  and Savings Plan               1 932 384        -          -          1 010

Stock Option Plan                4 558 777      22 219     15 007     403 997

1996 Long-term Incentive
  Compensation Plan (LTIP)       6 956 386      43 614       -           -
</TABLE>

Cinergy  retired 304, 6,511,  and 119,211 shares of common stock in 1997,  1996,
and 1995,  respectively,  primarily  representing shares tendered as payment for
the exercise of previously  granted stock  options.  In 1995,  Cinergy issued 10
shares of common stock,  representing  the  remainder of a non-officer  employee
award program granted in 1994.

ULH&P

All of ULH&P's common stock is held by CG&E.

Cinergy, CG&E, and PSI

(b) Dividend  Restrictions Cinergy owns all of the common stock of CG&E and PSI.
The  ability  of  Cinergy to pay  dividends  to  holders of its common  stock is
principally  dependent on the ability of CG&E and PSI to pay common dividends to
Cinergy.  CG&E and PSI cannot  purchase  or  otherwise  acquire for value or pay
dividends on their common stock if dividends  are in arrears on their  preferred
stock.  The amount of common stock  dividends that each company can pay also may
be limited by certain capitalization and earnings requirements. Currently, these
requirements  do not impact the ability of either  company to pay  dividends  on
common stock.

Cinergy

(c) Stock-based  Compensation  Plans Cinergy has four  stock-based  compensation
plans: the LTIP, the Stock Option Plan, the PSP, and the Employee Stock Purchase
and Savings Plan. Cinergy ceased accrual of incentive compensation under the PSP
as of December 31, 1996, and on January 1, 1997, implemented the LTIP.

Cinergy  accounts  for  its  stock-based  compensation  plans  under  Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, under
which stock option-type  awards are recorded at intrinsic value. For 1997, 1996,
and 1995, compensation cost related to Cinergy's stock-based compensation plans,
before income taxes,  recognized in the Consolidated Statements of Income was $6
million, $2 million, and $1 million, respectively.

Net  income  and  earnings  per  share  for  1997,  1996,  and  1995,   assuming
compensation cost for these plans had been determined at fair value,  consistent
with the  provisions  of Statement of Financial  Accounting  Standards  No. 123,
Accounting for Stock-Based Compensation (Statement 123), would have
been as follows:

                                         1997        1996         1995
                                 (in millions, except per share amounts)

Net income - as reported                 $253        $335         $347
           - pro forma                   $251        $334         $346

Earnings per share - as reported         $1.61       $2.00        $2.22
                   - pro forma           $1.59       $1.99        $2.21

Diluted earnings per share - as reported $1.59       $1.99        $2.20
                           - pro forma   $1.58       $1.99        $2.20

In accordance  with the provisions of Statement 123, in estimating the pro forma
amounts,  the fair value method of accounting was not applied to options granted
prior to January 1, 1995.  As a result,  the pro forma  effect on net income and
earnings per share may not be representative  of future years. In addition,  the
pro forma amounts  reflect certain  assumptions  used in estimating fair values.
These fair value assumptions are described under each applicable plan discussion
below.

     (i)LTIP In 1996,  Cinergy  adopted the LTIP.  Under this plan,  certain key
employees may be granted stock options and  restricted  shares of Cinergy common
stock.  Stock  options are granted at the fair market value of the shares on the
date of grant. These options vest in three years and expire in 10 years from the
date of grant.  None of the stock  options were  exercisable  as of December 31,
1997.  Restricted  shares are granted at the fair market  value of the shares on
the date of grant, discounted to reflect the inability to sell the shares during
the  three-year  restriction  period.  In  addition  to the  stock  options  and
restricted  shares,  participants may earn additional  shares if Cinergy's Total
Shareholder  Return  (TSR)  exceeds that of the average  annual  median TSR of a
selected peer group.  Conversely,  if Cinergy's TSR falls below that of the peer
group,  participants would lose some or all of the restricted shares.  Dividends
on any restricted stock awards and additional performance shares will be paid in
shares of common  stock during the payout  period in the years 2000 to 2002.  No
stock-based  awards  were made  under the LTIP prior to 1997.  In 1997,  425,938
performance-based  restricted  shares at a weighted  average price of $29.95 and
369,600  stock  options  at a weighted  average  exercise  price of $33.60  were
granted to certain  key  employees.  The number of shares of common  stock to be
awarded under the LTIP is limited in the aggregate to 7,000,000 shares.

LTIP stock option activity for 1997 is summarized as follows:

                                                        1997
                                                            Weighted
                                                            Average
                                                            Exercise
                                                Number       Price

Outstanding, beginning of year                     -           -

  Granted                                       369 600      $33.60

Outstanding, end of year                        369 600      $33.60

Exercisable, end of year                           -           -

Weighted average fair value of
  options granted during the year                      $3.71

The fair values of options  granted were estimated as of the date of grant using
a Black-Scholes  option pricing model. The weighted averages for the assumptions
used in determining the fair values of options granted were as follows:

                                            1997

Risk-free interest rate                     6.2%
Expected dividend yield                     5.4%
Expected lives                              6.5 yrs.
Expected common stock variance              1.7%

     (ii) Stock  Option Plan The Cinergy  Stock Option Plan is designed to align
executive compensation with shareholder interests.  Under the Stock Option Plan,
incentive and non-qualified stock options, stock appreciation rights (SARs), and
SARs in tandem with stock options may be granted to key employees, officers, and
outside directors. Options are granted at the fair market value of the shares on
the date of grant.  Options  vest over five  years at a rate of 20% per year and
expire  10 years  from the date of grant.  The total  number of shares of common
stock available under the Stock Option Plan may not exceed 5,000,000  shares. No
stock options may be granted under the plan after October 24, 2004.

Stock Option Plan activity for 1997, 1996, and 1995 is summarized as follows (no
SARs have been granted under this plan):

<TABLE>
<CAPTION>
                                         1997                  1996                   1995
                                             Weighted              Weighted              Weighted
                                             Average               Average               Average
                                             Exercise              Exercise              Exercise
                                  Number      Price     Number      Price      Number     Price
<S>                              <C>          <C>      <C>          <C>       <C>         <C>

Outstanding, beginning of year   3 359 508    $23.61   3 652 956    $22.47    2 409 453   $19.74

  Granted                            -           -       220 000     29.75    1 672 500    24.91
  Exercised                       (380 162)    21.71    (513 448)    18.16     (403 997)   16.16
  Forfeited                          -           -          -          -        (25 000)   24.31

Outstanding, end of year         2 979 346    $23.85   3 359 508    $23.61    3 652 956   $22.47

Exercisable, end of year         1 259 859    $22.62     989 021    $21.12      895 456   $17.47

Weighted average fair value of
  options granted during the year         $ -                 $3.07                  $2.41
</TABLE>

The fair values of options  granted were estimated as of the date of grant using
a Black-Scholes  option pricing model. The weighted averages for the assumptions
used in  determining  the fair  values of  options  granted in 1996 and 1995 (no
options were granted during 1997), were as follows:

                                                1996            1995

Risk-free interest rate                         6.3%            7.3%
Expected dividend yield                         5.8%            6.9%
Expected lives                                  6.5 yrs.        6.5 yrs.
Expected common stock variance                  1.8%            1.8%

Price ranges,  along with certain  other  information,  for options  outstanding
under the Stock Option Plan at December 31, 1997, are as follows:

                              Outstanding                     Exercisable
                                  Weighted    Weighted               Weighted
                                  Average     Average                Average
Exercise                          Exercise    Contractual            Exercise
Price Range        Number         Price       Life         Number    Price

$13.14 - $17.35      234 179      $15.13      2.0 yrs.     234 179   $15.13
$22.88 - $25.19    2 311 744      $23.72      7.0 yrs.     897 257   $23.63
$28.81 - $31.56      433 423      $29.29      8.1 yrs.     128 423   $29.13

     (iii) PSP Cinergy's PSP is a long-term  incentive  plan developed to reward
officers and other key employees for achieving  corporate and individual  goals.
Under the PSP,  participants  are granted  contingent  shares of common stock. A
percentage of these contingent shares is earned with respect to each participant
based on the level of goal attainment at the completion of a performance  cycle.
Performance cycles consist of overlapping four-year periods, beginning every two
years. Awards earned under the PSP are paid in two installments: one-half of the
award is paid in the year immediately following the end of the performance cycle
and  one-half of the award is paid in the  subsequent  year.  The most  recently
commenced  four-year  performance cycle under the PSP began January 1, 1996, and
was  scheduled  to end  December  31, 1999.  As  previously  discussed,  Cinergy
implemented the LTIP effective  January 1, 1997, and ceased accrual of incentive
compensation  under the PSP as of December 31, 1996.  The total number of shares
of common stock available  under this plan may not exceed 800,000 shares.  Final
payouts  for  performance  cycle four that began  January 1, 1992,  were made in
1997.  Final  payouts for cycles five and six,  which began in January  1994 and
January 1996, respectively, will be made in 1999.

The following table provides certain  information  regarding  contingent  shares
granted under the PSP for the performance cycle which began January 1, 1996:

                                                           1996
Number of contingent shares granted                      166 280
Fair value at date of grant (dollars in thousands)       $ 3 508
Weighted average per share amounts                        $24.47

The fair values of contingent  shares and the weighted average per share amounts
are measured at the market price of a share of common stock as if it were vested
and  issued on the date of grant,  adjusted  for  expected  forfeitures  and the
estimated  present value of dividends  foregone  during the related  performance
cycle.

(iv) Employee Stock Purchase and Savings Plan Cinergy's  Employee Stock Purchase
and Savings Plan allows essentially all full-time, regular employees to purchase
shares of common stock  pursuant to a stock option  feature.  Under the Employee
Stock  Purchase  and  Savings  Plan,   after-tax   funds  are  withheld  from  a
participant's  compensation  during a 26-month offering period and are deposited
in an interest-bearing account. At the end of the offering period,  participants
may apply amounts deposited in the account,  plus interest,  toward the purchase
of shares of common stock at a purchase  price equal to the fair market value of
a share of common  stock on the first  date of the  offering  period,  less five
percent. Any funds not applied toward the purchase of shares are returned to the
participant.  A participant may elect to terminate  participation in the plan at
any time. Participation also will terminate if the participant's employment with
Cinergy  ceases.  Upon  termination  of  participation,   all  funds,  including
interest, are returned to the participant without penalty. A new offering period
began January 1, 1997,  and will end February 28, 1999. The purchase price under
this offering is $31.825.  The most  recently  completed  offering  period ended
December 31, 1996.  The purchase  price under this  offering was  $21.7312.  The
total  number of  shares of common  stock  available  under the  Employee  Stock
Purchase and Savings Plan may not exceed 2,000,000.

Employee  Stock  Purchase and Savings Plan activity for 1997,  1996, and 1995 is
summarized as follows:

<TABLE>
<CAPTION>
                                    1997                  1996                   1995
                                       Weighted               Weighted                Weighted
                                       Average                Average                 Average
                                       Exercise               Exercise                Exercise
                             Number     Price       Number    Price        Number     Price

<S>                          <C>       <C>         <C>         <C>          <C>        <C>
Outstanding, beginning
  of year                       -      $  -         490 787    $21.73       217 604    $21.73

  Granted                    338 947    31.83          -          -         328 362     21.73
  Exercised                      (95)   31.83      (414 284)    21.73        (1 010)    21.73
  Forfeited                  (12 485)   31.83       (76 503)    21.73       (54 169)    21.73

Outstanding, end of year     326 367   $31.83          -       $  -         490 787    $21.73

Weighted average fair value of
  options granted during the year  $3.08                   $ -                    $2.42
</TABLE>

The fair values of options  granted were estimated as of the date of grant using
a Black-Scholes  option pricing model. The weighted averages for the assumptions
used in determining the fair values of options granted were as follows:

                                       1997            1995

Risk-free interest rate                5.9%            7.7%
Expected dividend yield                5.4%            7.3%
Expected lives                         2.0 yrs.        2.0 yrs.
Expected common stock variance         1.6%            1.7%

3.  Preferred Stock of Subsidiaries

Cinergy, CG&E, and PSI

(a)  Schedule of Cumulative Preferred Stock

<TABLE>
<CAPTION>
                                                                                December 31
CG&E                                                                         1997         1996
<S>                                                                        <C>          <C>
  Authorized 6,000,000 shares                                              (dollars in thousands)
  Not subject to mandatory redemption
    Par value $100 per share - outstanding
      4%     Series 169,834 shares in 1997 and 169,835 shares in 1996      $ 16 983     $ 16 984
      4 3/4% Series  38,096 shares in 1997 and 41,621 shares in 1996          3 810        4 162
          Total                                                              20 793       21 146

PSI
  Not subject to mandatory redemption
    Par value $25 per share - authorized 5,000,000 shares - outstanding
      4.32%  Series   169,161 shares in 1997 and 169,162 in 1996              4 229        4 229
      4.16%  Series   148,763 shares in 1997 and 1996                         3 719        3 719
      7.44%  Series 3,408,712 shares in 1997 and 1996                        85 218       85 218
    Par value $100 per share - authorized 5,000,000 shares - outstanding
      3 1/2% Series    40,302 shares in 1997 and 40,567 shares in 1996        4 030        4 056
      6 7/8% Series   600,000 shares in 1997 and 1996                        60 000       60 000
      7.15%  Series   158,640 shares in 1996                                   -          15 864
          Total                                                             157 196      173 086

Total - Cinergy
  Total not subject to mandatory redemption                                $177 989     $194 232
</TABLE>

Cinergy, CG&E, and PSI

(b)  Changes in Cumulative Preferred Stock Outstanding

Changes in cumulative  preferred stock outstanding  during 1997, 1996, and 1995,
were as follows:

<TABLE>
<CAPTION>
                                                     Shares         Par
                                                     Retired       Value
                                                                (dollars in
                                                                 thousands)
<S>                                                   <C>        <C>
1997
  Not subject to mandatory redemption
    Par value $100 per share
      CG&E
        4%     Series                                       1    $     1
        4 3/4% Series                                   3 525        352
      PSI
        3 1/2% Series                                     265         26
        7.15%  Series                                 158 640     15 864
    Par value $25 per share
      PSI
        4.32% Series                                        1      -

1996
  Not subject to mandatory redemption
    Par value $100 per share
      CG&E
        4%     Series                                 100 165    $10 016
        4 3/4% Series                                  88 379      8 838
      PSI
        3 1/2% Series                                     276         29
    Par value $25 per share
      PSI
        7.44%  Series                                 591 288     14 782
  Subject to mandatory redemption
    Par value $100 per share
      CG&E
        7 7/8% Series                                 800 000     80 000
        7 3/8% Series                                 800 000     80 000

1995
  Not subject to mandatory redemption
    Par value $100 per share
      CG&E
        7.44% Series                                  400 000    $40 000
      PSI
        3 1/2% Series                                     329         32
  Subject to mandatory redemption
    Par value $100 per share
      CG&E
        9.15% Series                                  500 000     50 000
</TABLE>

Cinergy and CG&E

During the third quarter of 1996, Cinergy commenced an offer to purchase any and
all outstanding shares of preferred stock of CG&E.  Cinergy purchased  1,788,544
shares of  preferred  stock and made a capital  contribution  to CG&E of all the
shares it acquired and CG&E  canceled the shares.  The cost of  reacquiring  the
preferred stock, totaling $18 million, represents the difference between the par
value of the preferred  stock  purchased and the price paid (including fees paid
to tender  agents) and is reflected  as a charge to  "Retained  Earnings" in the
Consolidated  Statements  of Changes in Common  Stock  Equity and as a deduction
from "Net  Income" in the  Consolidated  Statements  of Income for  purposes  of
determining  net income and  earnings per share  applicable  to common stock for
Cinergy.  The 4 3/4% Series no longer meets listing requirements of the New York
Stock Exchange (NYSE) and has been delisted.

Cinergy, CG&E, PSI, and ULH&P

4.  Long-term Debt

(a)   Schedule of Long-term Debt (excluding amounts reflected in current
      liabilities)
<TABLE>
<CAPTION>

                                                                              December 31
                                                                          1997           1996
CG&E and Subsidiaries                                                     (dollars in thousands)
<S>                                                                    <C>            <C>
  CG&E
    First Mortgage Bonds
       5.80% Series due February 15, 1999                              $  110 000     $  110 000
       7 3/8% Series due May 1, 1999                                       50 000         50 000
       7 3/8% Series due November 1, 2001                                  60 000         60 000
       7 1/4% Series due September 1, 2002                                100 000        100 000
       8 1/8% Series due August 1, 2003                                      -            60 000
       6.45% Series due February 15, 2004                                 110 000        110 000
       8.95% Series due December 15, 2021                                    -           100 000
       8 1/2% Series due September 1, 2022                                100 000        100 000
       7.20% Series due October 1, 2023                                   300 000        300 000
       5.45% Series due January 1, 2024 (Pollution Control)                46 700         46 700
       5 1/2% Series due January 1, 2024 (Pollution Control)               48 000         48 000
          Total first mortgage bonds                                      924 700      1 084 700

    Pollution Control Notes
       6.50% due November 15, 2022                                         12 721         12 721

    Other Long-term Debt
       6.90% Debentures due June 1, 2025
        (Redeemable at the option of the holders on June 1, 2005)         150 000        150 000
       8.28% Junior subordinated debentures due July 1, 2025              100 000        100 000
       Variable rate Liquid Asset Notes with Coupon Exchange
        (LANCEs) due October 1, 2007
        (Redeemable at the option of CG&E)
        (Variable interest rate sets at 6.50% commencing
         October 1, 1999)
        (Holders of not less than 66 2/3% in an
         aggregate principal amount of the LANCEs have the one-time
         right to convert from the 6.50% fixed rate to a LIBOR-
         based floating rate at any interest rate payment date
         between October 1, 1999 and October 1, 2002)                     100 000           -
          Total other long-term debt                                      350 000        250 000

    Unamortized Premium and Discount - Net                                 (8 860)       (12 130)
          Total - CG&E                                                  1 278 561      1 335 291

  ULH&P
    First Mortgage Bonds
       6 1/2% Series due August 1, 1999                                    20 000         20 000
       8% Series due October 1, 2003                                       10 000         10 000
          Total first mortgage bonds                                       30 000         30 000

    Other Long-term Debt
       7.65% Debentures due July 15, 2025                                  15 000         15 000

    Unamortized Premium and Discount - Net                                   (329)          (383)
          Total - ULH&P                                                    44 671         44 617

  Lawrenceburg Gas Company (Lawrenceburg)
    First Mortgage Bonds
       9 3/4% Series due October 1, 2001                                    1 200          1 200
          Total - CG&E and subsidiaries                                $1 324 432     $1 381 108

PSI
    First Mortgage Bonds
       Series S,       7%, due January 1, 2002                         $   26 429     $   26 429
       Series Y,   7 5/8%, due January 1, 2007                             24 140         24 140
       Series NN,   7.60%, due March 15, 2012 (Pollution Control)            -            35 000
       Series QQ,  8 1/4%, due June 15, 2013 (Pollution Control)           23 000         23 000
       Series TT,  7 3/8%, due March 15, 2012 (Pollution Control)          10 000         10 000
       Series UU,  7 1/2%, due March 15, 2015 (Pollution Control)          14 250         14 250
       Series YY,   5.60%, due February 15, 2023 (Pollution Control)       29 945         29 945
       Series ZZ,  5 3/4%, due February 15, 2028 (Pollution Control)       50 000         50 000
       Series AAA, 7 1/8%, due February 1, 2024                            50 000         50 000
          Total first mortgage bonds                                      227 764        262 764

    Secured Medium-term Notes
       Series A, 7.15% to 8.88%, due January 6, 1999 to
         June 1, 2022                                                     290 000        290 000
       Series B, 5.22% to 8.26%, due September 17, 1998
         to August 22, 2022                                               195 000        230 000
         (Series A and B, 7.66% weighted average interest rate
         and 14 year weighted average remaining life)
          Total secured medium-term notes                                 485 000        520 000

    Other Long-term Debt
       Series 1994A Promissory Note, non-interest bearing,
        due January 3, 2001                                                19 825         19 825
       6.25%, due December 15, 2005
         (Notes are callable and/or putable on December 15, 1998)            -            50 000
       6.35% Debentures due November 15, 2006
         (Redeemable in whole or in part at the option of the
         holders on November 15, 2000)                                    100 000        100 000
          Total other long-term debt                                      119 825        169 825

     Unamortized Premium and Discount - Net                                (6 119)        (7 319)
          Total - PSI                                                  $  826 470     $  945 270

Total - Cinergy
  First Mortgage Bonds                                                 $1 183 664     $1 378 664
  Secured Medium-term Notes                                               485 000        520 000
  Pollution Control Notes                                                  12 721         12 721
  Other Long-term Debt                                                    484 825        434 825
  Unamortized Premium and Discount - Net                                  (15 308)       (19 832)
          Total long-term debt                                         $2 150 902     $2 326 378
</TABLE>

(b)  Mandatory Redemption and Other Requirements

Long-term  debt  maturities  for the next five years  (excluding  $50 million of
6.25%  notes,  due  December 15,  2005,  which are  callable  and/or  putable on
December 15, 1998) are as follows:

                 Cinergy and     CG&E and
                 Subsidiaries  Subsidiaries       PSI         ULH&P
                                    (in millions)

1998                 $ 35          $  -          $ 35          $ -
1999                  186           180             6           20
2000                   31             -            31            -
2001                  100            61            39            -
2002                  149           100            49            -
                     $501          $341          $160          $20

On February 27, 1998,  CG&E announced its intention to redeem on March 29, 1998,
$41 million  principal  amount of its 7 3/8% Series  First  Mortgage  Bonds (due
November  1, 2001) at a  redemption  price of 100.30% and to redeem on March 30,
1998,  the entire  $100  million  principal  amount of its 8 1/2%  Series  First
Mortgage  Bonds (due  September  1, 2022) at a  redemption  price of 100%,  both
through the  maintenance  and  replacement  fund (M&R Fund)  provision of CG&E's
first mortgage bond  indenture.  Additionally,  on the same date, CG&E announced
its intention to redeem on March 30, 1998,  the remaining $19 million  principal
amount of its 7 3/8% Series  First  Mortgage  Bonds (due  November 1, 2001) at a
redemption price of 100.87%. M&R Fund provisions contained in CG&E's, PSI's, and
ULH&P's first mortgage bond indentures require cash payments,  bond retirements,
or pledges of unfunded  property  additions each year based on an amount related
to the net revenues of the respective company.

5.  Notes Payable and Other Short-term Obligations

Cinergy, CG&E, PSI, and ULH&P

Obligations   representing  notes  payable  and  other  short-term   obligations
(excluding notes payable to affiliated  companies) and weighted average interest
rates were as follows:

Cinergy

<TABLE>
<CAPTION>
                             December 31, 1997                December 31, 1996
                                              Weighted                         Weighted
                       Established             Average  Established             Average
                          Lines    Outstanding  Rate       Lines    Outstanding  Rate
                                (in millions)                    (in millions)
<S>                       <C>        <C>        <C>        <C>         <C>       <C>
Cinergy
  Committed lines
    Acquisition line      $  350     $  350     6.25%      $  500      $477      5.96%
    Revolving line           400         89     6.27          100        32      5.95
  Commercial paper            -         161     6.19           -         -        -
Utility subsidiaries
  Committed lines            270         30     6.09          280        99      5.92
  Uncommitted lines          360        206     6.19          285        78      6.03
  Pollution control notes    244        244     4.08          209       209      3.96
Cinergy UK, Inc.             115         34     7.20           40        27      6.91

Total                     $1 739     $1 114     5.78%      $1 414      $922      5.53%

CG&E

                             December 31, 1997                December 31, 1996
                                              Weighted                         Weighted
                       Established             Average  Established             Average
                          Lines    Outstanding  Rate       Lines    Outstanding  Rate
                                (in millions)                    (in millions)

Committed lines           $ 85         $ 15     6.13%      $ 80         $ 15       5.85%
Uncommitted lines          190           90     6.19        140           15       6.11
Pollution control notes    184          184     4.08        184          184       3.96

Total                     $459         $289     4.85%      $404         $214       4.25%

PSI

Committed lines           $185       $ 15       6.06%      $200         $ 84       5.94%
Uncommitted lines          170        116       6.19        145           63       6.01
Pollution control notes     60         60       4.08         25           25       3.99

Total                     $415       $191       5.52%      $370         $172       5.69%
</TABLE>

Cinergy, CG&E, and PSI

Cinergy's  committed lines are comprised of an acquisition  line and a revolving
line and are maintained by commitment fees which were immaterial during the 1995
through  1997  period.  The  established  revolving  line (as shown in the above
table) also provides credit support for the newly  instituted  commercial  paper
program.  Such program is limited to a maximum  outstanding  principal amount of
$200 million.  The majority of the proceeds from the commercial paper sales were
used to reduce the acquisition line to the year-end level of $350 million.  CG&E
and PSI also have the capacity to issue  commercial paper that must be supported
by  committed  lines  (unsecured  lines of  credit) of the  respective  company.
Neither CG&E nor PSI issued commercial paper in 1997 or 1996.

Cinergy, CG&E, PSI, and ULH&P

Cinergy's  utility  subsidiaries  had regulatory  authority to borrow up to $853
million ($453 million for CG&E and its  subsidiaries,  including $50 million for
ULH&P,  and $400 million for PSI) as of December 31, 1997.  In  connection  with
this authority,  committed  lines,  as well as,  uncommitted  lines  (short-term
borrowings with various banks on an "as offered" basis) have been arranged.  The
established  committed  lines (as shown in the above table) include $100 million
designated as backup for certain of the uncommitted  lines at December 31, 1997.
Further,  the committed  lines are  maintained by  commitment  fees,  which were
immaterial during the 1995 through 1997 period.

Cinergy

In addition,  Cinergy UK, Inc. (Cinergy UK), a subsidiary of Investments,  which
holds  Cinergy's  50%  investment  in Avon  Energy,  entered  into a $40 million
non-recourse  credit agreement in 1996, which was terminated in October of 1997.
This  agreement was replaced by a one-year $115 million  non-recourse  revolving
credit  agreement.  The commitment fees paid for these lines were immaterial for
the 1996 through 1997 period.

Cinergy, CG&E, PSI, and ULH&P

Amounts   outstanding   of  the  committed   lines  for  Cinergy,   the  utility
subsidiaries,  and  Cinergy  UK would  become  immediately  due upon an event of
default which includes  non-payment,  default under other  agreements  governing
company  indebtedness,  bankruptcy,  or insolvency.  Certain of the  uncommitted
lines have similar default provisions.

Cinergy, CG&E, and PSI

Both CG&E and PSI have issued variable rate pollution control notes.  Holders of
these pollution  control notes have the right to put their notes on any business
day.  Accordingly,  these  issuances are reflected in the  Consolidated  Balance
Sheets as "Notes payable and other short-term obligations."

Cinergy, CG&E, PSI, and ULH&P

To better  manage  cash and  working  capital  requirements,  Cinergy's  utility
subsidiaries,  including  CG&E,  PSI, and ULH&P,  participate in a money pooling
arrangement.  Under this  arrangement,  Cinergy  system  companies  with surplus
short-term funds, whether from internal or external sources,  provide short-term
loans to other  system  companies  at rates that reflect (1) the actual costs of
the external  borrowing and/or (2) the costs of the internal funds which are set
at the 30-day Federal Reserve "AA" industrial  commercial  paper rate. The SEC's
approval of the money pool, pursuant to the PUHCA,  extends through December 31,
2002. For amounts  outstanding under this money pool arrangement at December 31,
1997 and December 31, 1996, see "Notes  payable to affiliated  companies" on the
Consolidated Balance Sheets for CG&E and PSI and the Balance Sheets for ULH&P.

Cinergy, CG&E, PSI, and ULH&P

6.  Sale of Accounts Receivable

In January  1996,  CG&E,  PSI, and ULH&P entered into an agreement to sell, on a
revolving  basis,  undivided  percentage  interests in certain of their accounts
receivable  up to an aggregate  maximum of $350  million,  of which $252 million
($167 million by CG&E and its subsidiaries,  including $29 million by ULH&P, and
$85 million by PSI), net of reserves, has been sold as of December 31, 1997. The
Consolidated  Balance Sheets of Cinergy,  CG&E and PSI and the Balance Sheets of
ULH&P are net of the amounts sold at December 31, 1997 and 1996.

7.  Leases

Cinergy, CG&E, PSI, and ULH&P

(a)  Operating Leases

Cinergy and its  subsidiaries  have  entered  into  operating  lease  agreements
covering various facilities and properties, including office space and computer,
communications, and transportation equipment. Total rental payments on operating
leases for each of the past three years were are follows:

                                        1997       1996       1995
                                               (in millions)
     Cinergy and subsidiaries            $36        $31        $36
     CG&E and subsidiaries                18         18         22
     PSI                                  18         13         14
     ULH&P                                 1          2          5

Future minimum lease payments  required under  operating  leases with remaining,
non-cancelable lease terms in excess of one year as of December 31, 1997, are as
follows:

                    Cinergy and           CG&E and
                    Subsidiaries        Subsidiaries        PSI        ULH&P*
                                (in millions, ULH&P in thousands)

     1998               $ 36                $ 9             $11        $124
     1999                 29                  9               7         110
     2000                 22                  7               5          59
     2001                 13                  5               3           -
     2002                  7                  4               2           -
  After 2002              26                 22               3           -
                        $133                $56             $31        $293

* Excludes amounts applicable to CG&E's non-cancelable leases allocated to
  ULH&P.

Cinergy and CG&E

(b)  Capital Lease

In November  1996,  CG&E entered  into a  sale-leaseback  agreement  for certain
equipment at Woodsdale.  The lease is a capital lease with an initial lease term
of five years. At the end of the initial lease term, the lease may be renewed at
mutually  agreed upon terms or the equipment may be  repurchased  by CG&E at the
original sale amount. The monthly lease payment,  comprised of interest only, is
based on the applicable  London Interbank  Offered Rate (LIBOR) and,  therefore,
the capital lease  obligation will not be amortized over the initial lease term.
The property  under the capital lease is  depreciated at the same rate as if the
property were still owned by CG&E.  CG&E recorded a capital lease  obligation of
$22  million,  which  represented  the net book  value of the  equipment  at the
beginning of the lease.

8.  Financial Instruments

Cinergy, CG&E, and PSI

(a)  Financial   Derivatives  Cinergy  has  entered  into  financial  derivative
contracts for the purposes described below.

Cinergy

     (i) Foreign Exchange Hedging Activity Cinergy has hedged its pound sterling
denominated  investment in Midlands  through a currency  swap. The currency swap
requires  Cinergy to exchange a series of pound sterling  denominated cash flows
for a series  of  dollar  denominated  cash  flows  based on  Cinergy's  initial
exchange of $500 million for 330 million pounds sterling.  Translation gains and
losses related to the principal exchange on the currency swap have been recorded
in the cumulative foreign currency translation adjustment which is reported as a
separate  component  of  common  stock  equity  in  the  Consolidated  Financial
Statements of Cinergy. At December 31, 1997, translation losses of approximately
$43 million  related to the  principal  exchange of the currency  swap have been
reflected in "Current Liabilities - Other" in the Consolidated Balance Sheets of
Cinergy.

Cinergy, CG&E, and PSI

(ii)  Interest  Rate Risk  Management  Cinergy and its  subsidiaries  enter into
interest rate swaps to lower funding costs and manage  exposures to fluctuations
in interest rates. Under these interest rate swaps, Cinergy and its subsidiaries
agree with counterparties to exchange,  at specified  intervals,  the difference
between  fixed-rate and floating-rate  interest amounts  calculated on an agreed
notional  principal amount. At December 31, 1997,  Cinergy has effectively fixed
the  interest  rate  applicable  to the pound  sterling  denominated  leg of its
currency swap through two interest rate swap agreements. These contracts require
Cinergy to pay a fixed rate and receive a floating  rate.  Both of the  interest
rate swaps are forward  starting  swaps that  effectively  fix the interest rate
applicable to the ensuing four year period of the currency swap. These contracts
have  a  total  notional  principal  amount  of  330  million  pounds  sterling.
Translation gains and losses related to Cinergy's interest obligation,  which is
payable in pounds sterling, are recognized as a component of interest expense in
the  Consolidated  Statements  of Income.  At  December  31,  1997,  PSI had two
interest rate swap agreements  outstanding with notional amounts of $100 million
each. One contract,  with three years remaining from a four-year term,  requires
PSI to pay a floating rate and receive a fixed rate. The second contract, with a
six-month term, requires PSI to pay a fixed rate and receive a floating rate. In
all cases,  the floating rate is based on the applicable  LIBOR and the interest
differential  paid or received is recognized in the  Consolidated  Statements of
Income as a component of interest expense.  The fair values of the interest rate
swap agreements at December 31, 1997, were not significant.

Cinergy, CG&E, PSI, and ULH&P

(b)  Fair Value of Other Financial Instruments

The estimated  fair values of Cinergy's and its  subsidiaries'  other  financial
instruments were as follows (this information does not purport to be a valuation
of the companies as a whole):

<TABLE>
<CAPTION>
                                                 December 31           December 31
                                                     1997                  1996
                                              Carrying   Fair       Carrying   Fair
                                               Amount    Value       Amount    Value
Financial Instruments                             (in millions; ULH&P in thousands)
<S>                                           <C>       <C>         <C>       <C>

Cinergy and Subsidiaries
First mortgage bonds and
    other long-term debt (includes
    amounts reflected as long-term
    debt due within one year)                 $ 2 236   $ 2 337     $ 2 466   $ 2 472

CG&E and Subsidiaries
First mortgage bonds and
    other long-term debt (includes
    amounts reflected as long-term
    debt due within one year)                 $ 1 324   $ 1 355     $ 1 511   $ 1 508

PSI
First mortgage bonds and
    other long-term debt (includes
    amounts reflected as long-term
    debt due within one year)                 $   912   $   982     $   955   $   964

ULH&P
First mortgage bonds and
    other long-term debt                      $44 671   $45 591     $44 617   $44 668
</TABLE>

The following  methods and assumptions  were used to estimate the fair values of
each major class of financial instruments:

Cash and Temporary Cash Investments,  Restricted Deposits, and Notes Payable and
Other Short-Term  Obligations Due to the short period to maturity,  the carrying
amounts reflected on the Balance Sheets approximate fair values.

First Mortgage Bonds and Other  Long-Term Debt The fair values of long-term debt
issues were estimated based on the latest quoted market prices or, if not listed
on the NYSE, on the present value of future cash flows.  The discount rates used
approximate the incremental borrowing costs for similar instruments.

Cinergy, CG&E, PSI, and ULH&P

(c)  Concentrations of Credit Risk

Credit  risk  represents  the risk of loss  which  would  occur  as a result  of
nonperformance  by  counterparties  pursuant  to the terms of their  contractual
obligations  with  the  Company.   Concentrations   of  credit  risk  relate  to
significant   customers   or   counterparties,   or  groups  of   customers   or
counterparties,  possessing  similar economic or industry  characteristics  that
would  cause  their  ability to meet  contractual  obligations  to be  similarly
affected by changes in economic or other conditions.

Concentration of credit risk with respect to Cinergy's trade accounts receivable
from electric and gas retail  customers is limited due to Cinergy's large number
of customers and  diversified  customer  base of  residential,  commercial,  and
industrial  customers.  Sales for resale customers on Cinergy's  electric system
include traditional electric cooperatives and municipalities with which CG&E and
PSI have  long-standing  relationships.  Contracts for sales of electricity  for
resale outside of Cinergy's system are principally  with power marketers,  other
investor owned  utilities,  electric  cooperatives,  and  municipalities.  As of
December 31, 1997,  approximately  65% of Cinergy's  power marketing and trading
activity  represents  commitments with 10 counterparties.  The majority of these
contracts are for terms of one year or less. As the  competitive  electric power
market expands,  counterparties  will increasingly  include new market entrants,
such as other power marketers,  brokers, and commodities traders. This increased
level of new market  entrants,  as well as competitive  pressures on the utility
market  participants,  could increase  Cinergy's  exposure to credit risk. As of
December 31, 1997, Cinergy's  management believes  nonperformance of contractual
obligations by any one  counterparty  of Cinergy's  power  marketing and trading
function  would not  result in losses  which are  significant  to the  financial
condition or results of operations of Cinergy.

Potential  exposure to credit risk also exists from  Cinergy's  use of financial
derivatives  such as  currency  swaps and  interest  rate swaps.  Because  these
financial   instruments   are  transacted   only  with  highly  rated  financial
institutions,   Cinergy  does  not  anticipate  nonperformance  by  any  of  the
counterparties.

9.  Pension Plans

Cinergy, CG&E, PSI, and ULH&P

Cinergy's  defined  benefit  pension  plans cover  substantially  all  employees
meeting  certain  minimum  age  and  service  requirements.  Plan  benefits  are
determined  under a final  average pay formula  with  consideration  of years of
participation,  age at retirement,  and the applicable  average Social  Security
wage base or benefit amount.

Cinergy's funding policy is to contribute  annually to the plans an amount which
is not less than the minimum amount required by the Employee  Retirement  Income
Security Act of 1974 and not more than the maximum amount  deductible for income
tax  purposes.  Contributions  applicable  to the last three plan years are:  $8
million  for 1997,  $7 million  for 1996,  and $18  million  for 1995.  Of these
amounts, CG&E and its subsidiaries had contributions of $4 million applicable to
the 1997 plan year and $7 million  applicable  to each of the 1996 and 1995 plan
years. PSI had contributions of $4 million  applicable to the 1997 plan year, no
contributions  for the 1996 plan year, and  contributions of $11 million for the
1995 plan year.  The plans' assets  consist of  investments  in equity and fixed
income securities.

Effective  January 1, 1998,  Cinergy  reconfigured  its defined  benefit pension
plans. The reconfigured plans cover the same employees as the previous plans and
established  a uniform  final  average pay formula  for all  employees.  When an
employee  retires,  he or she will  receive the  greater of the benefit  accrued
under the previous  plan as of December 31, 1997,  or the benefit  accrued under
the new plan as of the retirement date. The reconfiguration of the pension plans
is not  expected  to  have a  significant  impact  on  the  Company's  financial
condition or results of operations.

Cinergy

Cinergy's  pension  cost  for  1997,  1996,  and  1995  included  the  following
components:
                                                    1997     1996     1995
                                                        (in millions)

Benefits earned during the period                  $ 19.8    $21.2   $ 18.5
Interest accrued on projected
  benefit obligations                                67.8     61.6     61.4
Return on plans' assets
  Actual                                           (186.6)   (75.6)  (119.3)
  Deferred gain                                     123.8     14.4     58.8
Net amortizations                                     2.8      2.9      2.3
Net periodic pension cost                          $ 27.6    $24.5   $ 21.7

CG&E and ULH&P

CG&E's and its  subsidiaries'  (including  ULH&P's) pension cost for 1997, 1996,
and 1995 included the following components:

                                                    1997     1996     1995
                                                        (in millions)

Benefits earned during the period                  $ 10.5    $11.2    $ 9.8
Interest accrued on projected
  benefit obligations                                41.2     38.6     38.8
Return on plans' assets
  Actual                                           (108.3)   (53.8)   (71.9)
  Deferred gain                                      71.2     17.2     34.0
Net amortizations                                     1.8      2.1      1.5

Net periodic pension cost                          $ 16.4    $15.3    $12.2

PSI

PSI's pension cost for 1997, 1996, and 1995 included the following components:

                                                    1997     1996     1995
                                                        (in millions)

Benefits earned during the period                   $ 9.3    $10.0    $ 8.7
Interest accrued on projected
  benefit obligations                                26.6     23.0     22.6
Return on plans' assets
  Actual                                            (78.3)   (21.8)   (47.4)
  Deferred gain (loss)                               52.6     (2.8)    24.8
Net amortizations                                     1.0      0.8      0.8

Net periodic pension cost                           $11.2    $ 9.2    $ 9.5

Cinergy, CG&E, PSI, and ULH&P

During  1996,  CG&E  and  its  subsidiaries   (including  ULH&P)  recognized  an
additional $31 million of accrued  pension cost in accordance  with Statement of
Financial Accounting Standards No. 88, Employers' Accounting for Settlements and
Curtailments  of Defined  Benefit  Pension  Plans and for  Termination  Benefits
(Statement  88).  Additionally,  during 1996,  PSI  recognized an additional $30
million of accrued  pension cost in accordance  with Statement 88. These amounts
represent the costs associated with additional  benefits  extended in connection
with voluntary workforce reduction programs (see Note 1(l)).

                                                   1997     1996     1995
Actuarial Assumptions:
For determination of projected benefit
  obligations
    Discount rate                                  7.5%     8.0%     7.5%
    Rate of increase in future compensation        4.5      5.0      4.5

For determination of pension cost
  Rate of return on plans' assets
    PSI                                            9.0      9.0      9.0
    CG&E and subsidiaries                          9.0      9.0      9.5

Cinergy

The following table reconciles the plans' funded status with amounts recorded in
the  Consolidated  Financial  Statements  of Cinergy.  Under the  provisions  of
Statement of Financial  Accounting  Standards No. 87, Employers'  Accounting for
Pensions  (Statement  87),  certain  assets  and  obligations  of the  plans are
deferred and recognized in the Consolidated  Financial  Statements of Cinergy in
later years.

<TABLE>
<CAPTION>
                                            1997                   1996
                                           Plans'           Plans'         Plan's
                                       Assets Exceed    Assets Exceed   Accumulated
                                        Accumulated      Accumulated     Benefits
                                          Benefits         Benefits    Exceed Assets
                                                        (in millions)
<S>                                       <C>              <C>            <C>
Actuarial present value
  of benefits
    Vested benefits                       $(731.6)         $(423.1)       $(241.6)
    Non-vested benefits                     (35.5)           (33.5)         (10.1)

      Accumulated benefit
        obligations                        (767.1)          (456.6)        (251.7)

    Effect of future
      compensation
      increases                            (193.2)          (121.7)         (53.3)

      Projected benefit
        obligations                        (960.3)          (578.3)        (305.0)

Plans' assets at fair value                 888.1            531.6          234.1

Projected benefit
  obligations in excess of
  plans' assets                             (72.2)           (46.7)         (70.9)

Remaining balance of plans'
  net assets existing at
  date of initial application
  of Statement 87 to be
  recognized as a reduction
  of pension cost in future
  periods                                    (8.5)            (6.7)          (3.1)

Unrecognized net gain
  resulting from experience
  different from that
  assumed and effects of
  changes in assumptions                   (134.6)           (48.4)         (28.1)

Prior service cost not
  yet recognized in net
  periodic pension cost                      46.6             33.6           23.2

Accrued pension cost at
  December 31                             $(168.7)         $ (68.2)       $ (78.9)
</TABLE>

CG&E and ULH&P

The following table reconciles the plans' funded status with amounts recorded in
the Consolidated Financial Statements of CG&E. Under the provisions of Statement
87, certain  assets and  obligations of the plans are deferred and recognized in
the Consolidated Financial Statements in later years.

<TABLE>
<CAPTION>
                                   1997                     1996
                                  Plans'           Plan's           Plan's
                              Assets Exceed     Assets Exceed     Accumulated
                               Accumulated       Accumulated       Benefits
                                 Benefits         Benefits       Exceed Assets
                                               (in millions)
<S>                              <C>              <C>              <C>
Actuarial present value
  of benefits
    Vested benefits              $(437.2)         $(160.3)         $(241.6)
    Non-vested benefits            (17.6)           (17.0)           (10.1)

      Accumulated benefit
        obligations               (454.8)          (177.3)          (251.7)

    Effect of future
      compensation
      increases                   (111.7)           (53.2)           (53.3)

      Projected benefit
        obligations               (566.5)          (230.5)          (305.0)

Plans' assets at fair
  value                            528.1            223.3            234.1

Projected benefit
  obligations in excess of
  plans' assets                    (38.4)            (7.2)           (70.9)

Remaining balance of plans'
  net assets existing at
  date of initial application
  of Statement 87 to be
  recognized as a reduction
  of pension cost in future
  periods                           (4.9)            (2.4)            (3.1)

Unrecognized net gain
  resulting from experience
  different from that
  assumed and effects of
  changes in assumptions          (110.3)           (40.1)           (28.1)

Prior service cost not
  yet recognized in net
  periodic pension cost             30.7             16.1             23.2
Accrued pension cost at
  December 31                    $(122.9)         $ (33.6)         $ (78.9)
</TABLE>

PSI

The following table reconciles the plan's funded status with amounts recorded in
the Consolidated  Financial Statements of PSI. Under the provisions of Statement
87,  certain  assets and  obligations of the plan are deferred and recognized in
the Consolidated Financial Statements in later years.

<TABLE>
<CAPTION>
                                                   1997            1996
                                                       (in millions)
<S>                                              <C>             <C>
Actuarial present value of benefits
  Vested benefits                                $(294.4)        $(262.8)
  Non-vested benefits                              (17.9)          (16.5)

    Accumulated benefit obligation                (312.3)         (279.3)

  Effect of future compensation
    increases                                      (81.5)          (68.5)

    Projected benefit obligation                  (393.8)         (347.8)

Plan's assets at fair value                        360.0           308.3

Projected benefit obligation in
  excess of plan's assets                          (33.8)          (39.5)

Remaining balance of plan's net
  assets existing at date of initial
  application of Statement 87 to be
  recognized as a reduction of
  pension cost in future periods                    (3.6)           (4.3)

Unrecognized net (gain) resulting
  from experience different from that
  assumed and effects of changes in
  assumptions                                      (24.3)           (8.3)

Prior service cost not yet recognized
  in net periodic pension cost                      15.9            17.5

Accrued pension cost
  at December 31                                 $ (45.8)        $ (34.6)
</TABLE>

10.  Other Postretirement Benefits

Cinergy, CG&E, PSI, and ULH&P

Cinergy  provides  certain  health care and life  insurance  benefits to retired
employees who have met minimum age and service  requirements  and their eligible
dependents.  The health care benefits include medical coverage, dental coverage,
and  prescription  drugs  and  are  subject  to  certain  limitations,  such  as
deductibles  and  co-payments.  Prior to January 1, 1997, CG&E and PSI employees
were covered under separate plans. Effective January 1, 1997, all Cinergy active
employees are eligible to receive  essentially  the same  postretirement  health
care  benefits.  Certain  classes  of  employees,  based on age,  as well as all
retirees,  have been  grandfathered  under benefit  provisions in place prior to
January 1, 1997.  Neither CG&E and its subsidiaries  nor PSI currently  pre-fund
their obligations for these postretirement benefits; however, PSI, in connection
with the settlement  which resulted in the February 1995 Order,  agreed to begin
pre-funding.  Implementation  of  pre-funding  is  subject  to  the  outcome  of
negotiations  with The Office of the Utility Consumer  Counselor and approval by
the IURC.

Postretirement  benefit cost for 1997,  1996,  and 1995  included the  following
components:

Cinergy

                                              Health     Life
                                               Care    Insurance  Total
                                                     (in millions)
1997
Benefits earned during the period             $ 3.0      $ .1     $ 3.1
Interest accrued on Accumulated Post-
  retirement Benefit Obligation (APBO)         14.1       2.2      16.3
Net amortization and deferral                    .2        .1        .3
Amortization of transition obligations          4.7        .3       5.0
Net periodic postretirement benefit cost      $22.0      $2.7     $24.7

1996
Benefits earned during the period             $ 5.7      $ .1     $ 5.8
Interest accrued on APBO                       16.5       2.2      18.7
Net amortization and deferral                    .3        -         .3
Amortization of transition obligations          8.1        .3       8.4
Net periodic postretirement benefit cost      $30.6      $2.6     $33.2

1995
Benefits earned during the period             $ 4.4      $ .1     $ 4.5
Interest accrued on APBO                       15.6       2.2      17.8
Amortization of transition obligations          8.1        .3       8.4
Net periodic postretirement benefit cost      $28.1      $2.6     $30.7

CG&E and ULH&P

                                              Health     Life
                                               Care    Insurance  Total
                                                     (in millions)

1997
Benefits earned during the period              $1.4      $ .1     $ 1.5
Interest accrued on APBO                        5.0       2.0       7.0
Net amortization and deferral                    .2        .1        .3
Amortization of transition obligation           1.5        .4       1.9

Net periodic postretirement benefit cost       $8.1      $2.6     $10.7

1996
Benefits earned during the period              $ .7      $ .1     $  .8
Interest accrued on APBO                        4.9       2.0       6.9
Amortization of transition obligation           2.6        .4       3.0

Net periodic postretirement benefit cost       $8.2      $2.5     $10.7

1995
Benefits earned during the period              $ .4      $ .1     $  .5
Interest accrued on APBO                        4.5       2.0       6.5
Amortization of transition obligation           2.6        .4       3.0


Net periodic postretirement benefit cost       $7.5      $2.5     $10.0

PSI

                                              Health     Life
                                               Care    Insurance  Total
                                                     (in millions)

1997
Benefits earned during the period             $ 1.6      $ -      $ 1.6
Interest accrued on APBO                        9.1        .2       9.3
Amortization of transition obligation           3.2       (.1)      3.1

Net periodic postretirement benefit cost      $13.9      $ .1     $14.0

1996
Benefits earned during the period             $ 5.0      $ -      $ 5.0
Interest accrued on APBO                       11.6        .2      11.8
Net amortization and deferral                    .3        -         .3
Amortization of transition obligation           5.5       (.1)      5.4

Net periodic postretirement benefit cost      $22.4      $ .1     $22.5

1995
Benefits earned during the period             $ 4.0      $ -      $ 4.0
Interest accrued on APBO                       11.1        .2      11.3
Amortization of transition obligation           5.5       (.1)      5.4

Net periodic postretirement benefit cost      $20.6      $ .1     $20.7

Cinergy, CG&E, PSI, and ULH&P

The following  table  reconciles  the APBO of the health care and life insurance
plans with amounts recorded in the Financial Statements. Under the provisions of
Statement of Financial Accounting  Standards No. 106, Employers'  Accounting for
Postretirement  Benefits Other Than Pensions,  certain  obligations of the plans
are deferred and recognized in the Financial Statements in later years.

Cinergy
                                               Health      Life
                                                Care     Insurance   Total
                                                       (in millions)
1997
Actuarial present value of benefits
  Fully eligible active plan participants     $  (9.9)    $ (2.3)   $ (12.2)
  Other active plan participants                (66.3)      (1.1)     (67.4)
  Retirees and beneficiaries                   (113.6)     (28.7)    (142.3)
    Projected APBO                             (189.8)     (32.1)    (221.9)
Unamortized transition obligations               70.7         .2       70.9
Unrecognized net loss resulting from
  experience different from that assumed
  and effects of changes in assumptions          21.1        1.5       22.6
Accrued postretirement benefit obligations
  at December 31, 1997                        $ (98.0)    $(30.4)   $(128.4)

1996
Actuarial present value of benefits
  Fully eligible active plan participants     $ (13.7)    $ (1.6)   $ (15.3)
  Other active plan participants                (49.8)      (1.5)     (51.3)
  Retirees and beneficiaries                   (118.0)     (26.4)    (144.4)
    Projected APBO                             (181.5)     (29.5)    (211.0)
Unamortized transition obligations               75.4         .4       75.8
Unrecognized net loss (gain) resulting from
  experience different from that assumed
  and effects of changes in assumptions          19.5        (.5)      19.0
Accrued postretirement benefit obligations
  at December 31, 1996                        $ (86.6)    $(29.6)   $(116.2)

Increasing the health care cost trend rate by one percentage  point in each year
would  increase the APBO by  approximately  $24 million for 1997 and $21 million
for 1996,  and the aggregate of the service and interest cost  components of the
postretirement benefit cost by approximately $2 million for 1997, $4 million for
1996, and $3 million for 1995.

CG&E and ULH&P

                                               Health      Life
                                                Care     Insurance    Total
                                                       (in millions)

1997
Actuarial present value of benefits
  Fully eligible active plan participants     $  (5.3)    $ (2.2)    $  (7.5)
  Other active plan participants                (32.9)       (.9)      (33.8)
  Retirees and beneficiaries                    (30.2)     (25.8)      (56.0)
    Projected APBO                              (68.4)     (28.9)      (97.3)
Unamortized transition obligation                23.0        2.1        25.1
Unrecognized prior service cost                    -          .2          .2
Unrecognized net loss resulting from
  experience different from that assumed
  and effects of changes in assumptions          13.6         .7        14.3
Accrued postretirement benefit obligation
  at December 31, 1997                        $ (31.8)    $(25.9)    $ (57.7)


1996
Actuarial present value of benefits
  Fully eligible active plan participants     $ (10.8)    $ (1.6)    $ (12.4)
  Other active plan participants                (24.2)      (1.3)      (25.5)
  Retirees and beneficiaries                    (28.7)     (23.6)      (52.3)
    Projected APBO                              (63.7)     (26.5)      (90.2)
Unamortized transition obligation                24.5        2.5        27.0
Unrecognized prior service cost                    -          .3          .3
Unrecognized net loss (gain) resulting from
  experience different from that assumed
  and effects of changes in assumptions          11.5       (1.4)       10.1
Accrued postretirement benefit obligation
  at December 31, 1996                        $ (27.7)    $(25.1)    $ (52.8)

Increasing the health care cost trend rate by one percentage  point in each year
would increase the APBO by  approximately $9 million and $7 million for 1997 and
1996 respectively, and the aggregate of the service and interest cost components
of the  postretirement  benefit cost by approximately $1 million for 1997, 1996,
and 1995.

PSI

                                               Health      Life
                                                Care     Insurance    Total
                                                       (in millions)

1997
Actuarial present value of benefits
  Fully eligible active plan participants     $  (4.6)    $  (.1)    $  (4.7)
  Other active plan participants                (33.4)       (.2)      (33.6)
  Retirees and beneficiaries                    (83.4)      (2.9)      (86.3)
    Projected APBO                             (121.4)      (3.2)     (124.6)
Unamortized transition obligation                47.7       (1.9)       45.8
Unrecognized prior service cost                    -         (.2)        (.2)
Unrecognized net loss resulting from
  experience different from that assumed
  and effects of changes in assumptions           7.5         .7         8.2
Accrued postretirement benefit obligation
  at December 31, 1997                        $ (66.2)    $ (4.6)    $ (70.8)


1996
Actuarial present value of benefits
  Fully eligible active plan participants     $  (2.9)    $   -      $  (2.9)
  Other active plan participants                (25.6)       (.2)      (25.8)
  Retirees and beneficiaries                    (89.3)      (2.8)      (92.1)
    Projected APBO                             (117.8)      (3.0)     (120.8)
Unamortized transition obligation                50.9       (2.1)       48.8
Unrecognized prior service cost                    -         (.3)        (.3)
Unrecognized net loss resulting from
  experience different from that assumed
  and effects of changes in assumptions           8.0         .9         8.9
Accrued postretirement benefit obligation
  at December 31, 1996                        $ (58.9)    $ (4.5)    $ (63.4)

Increasing the health care cost trend rate by one percentage  point in each year
would  increase the APBO by  approximately  $15 million and $14 million for 1997
and 1996,  respectively,  and the  aggregate  of the service and  interest  cost
components of the  postretirement  benefit cost for each of 1997, 1996, and 1995
by approximately $1 million, $3 million, and $2 million, respectively.

Cinergy, CG&E, PSI, and ULH&P

The following assumptions were used to determine the APBO:

                                         1997          1996          1995
    Discount rate                        7.5%          8.0%          7.5%

    Health care cost trend rate,
      gradually declining to 5%
        CG&E                           7.0-8.0%      7.0-9.0%      8.0-11.0%
        PSI                            7.0-8.0       7.0-9.0       8.0-10.0

    Year ultimate trend rates achieved
        CG&E                             2004          2004          2002
        PSI                              2004          2004          2007

11.  Income Taxes

Cinergy

Cinergy  complies with the provisions of Statement  109.  Statement 109 requires
recognition of deferred tax assets and  liabilities  for the expected future tax
consequences  of existing  differences  between the financial  reporting and tax
reporting bases of assets and liabilities.

The  significant  components of Cinergy's  net deferred  income tax liability at
December 31, 1997, and 1996, are as follows:

                                                       1997            1996
                                                           (in millions)

Deferred Income Tax Liability
  Utility plant                                      $1 076.8        $1 061.3
  Unamortized costs of reacquiring debt                  24.4            23.2
  Deferred operating expenses
    and carrying costs                                   70.4            73.5
  Amounts due from customers - income taxes             129.4           129.4
  Deferred DSM costs                                     31.7            43.4
  Investment in unconsolidated subsidiary                55.0            13.5
  Other                                                  47.9            41.3
    Total deferred income tax liability               1 435.6         1 385.6

Deferred Income Tax Asset
  Unamortized investment tax credits                     60.5            63.9
  Deferred fuel costs                                    -               12.9
  Accrued pension and other benefit costs                63.3            60.4
  Other                                                  63.3           102.1
    Total deferred income tax asset                     187.1           239.3

Net Deferred Income Tax Liability                    $1 248.5        $1 146.3

CG&E

CG&E and its subsidiaries comply with the provisions of Statement 109. Statement
109 requires recognition of deferred tax assets and liabilities for the expected
future tax consequences of existing  differences between the financial reporting
and tax reporting bases of assets and liabilities.

The  significant  components  of CG&E's net  deferred  income tax  liability  at
December 31, 1997, and 1996, are as follows:

                                                         1997           1996
                                                            (in millions)

Deferred Income Tax Liability
  Utility plant                                         $683.3         $671.6
  Unamortized costs of reacquiring debt                   11.1           11.2
  Deferred operating expenses
    and carrying costs                                    62.0           73.5
  Amounts due from customers - income taxes              121.9          120.7
  Deferred DSM costs                                      11.7            6.0
  Other                                                   43.9           40.9
    Total deferred income tax liability                  933.9          923.9

Deferred Income Tax Asset
  Unamortized investment tax credits                      41.7           43.9
  Accrued pension and other benefit costs                 39.2           31.4
  Other                                                   58.6           81.5

    Total deferred income tax asset                      139.5          156.8


Net Deferred Income Tax Liability                       $794.4         $767.1

PSI

PSI and its subsidiaries  comply with the provisions of Statement 109. Statement
109 requires recognition of deferred tax assets and liabilities for the expected
future tax consequences of existing  differences between the financial reporting
and tax reporting bases of assets and liabilities.

The  significant  components  of PSI's net  deferred  income  tax  liability  at
December 31, 1997, and 1996, are as follows:
<TABLE>
<CAPTION>
                                                               1997           1996
                                                            (in millions)
<S>                                                     <C>            <C>
Deferred Income Tax Liability
  Electric utility plant                                $393.5         $389.7
  Unamortized costs of reacquiring debt                   13.3           12.0
  Amounts due from customers - income taxes                7.5            8.7
  Deferred operating expenses
    and accrued carrying costs                             8.4             -
  Deferred DSM costs                                      20.0           37.4
  Other                                                    3.7             -
    Total deferred income tax liability                  446.4          447.8

Deferred Income Tax Asset
  Unamortized investment tax credits                      18.8           20.0
  Accrued pension and other benefit costs                 24.1           29.0
  Deferred fuel costs                                       -             7.1
  Other                                                     -            18.7
    Total deferred income tax asset                       42.9           74.8

Net Deferred Income Tax Liability                       $403.5         $373.0
</TABLE>

ULH&P

ULH&P  complies  with the  provisions of Statement  109.  Statement 109 requires
recognition of deferred tax assets and  liabilities  for the expected future tax
consequences  of existing  differences  between the financial  reporting and tax
reporting bases of assets and liabilities.

The  significant  components  of ULH&P's net  deferred  income tax  liability at
December 31, 1997, and 1996, are as follows:
                                                              1997          1996
                                                          (in thousands)

Deferred Income Tax Liability
  Utility plant                                       $34 001       $33 872
  Unamortized costs of reacquiring debt                 1 463           996
  Deferred fuel costs                                    -            5 459
  Other                                                 2 546         3 732
    Total deferred income tax liability                38 010        44 059

Deferred Income Tax Asset
  Unamortized investment tax credits                    1 832         1 946
  Amounts due to customers - income taxes               2 650         2 067
  Deferred fuel costs                                     508          -
  Accrued pension and other benefit costs               2 397         2 482
  Other                                                 4 412         4 101
    Total deferred income tax asset                    11 799        10 596

Net Deferred Income Tax Liability                     $26 211       $33 463

Cinergy, CG&E, PSI, and ULH&P

Cinergy and its  subsidiaries  will  participate in the filing of a consolidated
Federal  income tax return for the year ended December 31, 1997. The current tax
liability is allocated  among the members of the group pursuant to a tax sharing
agreement consistent with Rule 45(c) of the PUHCA.

A summary of Federal and state income taxes charged (credited) to income and the
allocation of such amounts is as follows:

Cinergy

                                                   1997       1996      1995
                                                        (in millions)

Current Income Taxes
  Federal                                         $133.3     $143.4    $175.3
  State                                             12.1        7.5      10.4
      Total current income taxes                   145.4      150.9     185.7
Deferred Income Taxes
  Federal
    Depreciation and other utility plant-
      related items                                 26.7       61.6      53.8
    DSM costs                                       (8.5)      (1.9)     12.0
    Pension and other benefit costs                   .9      (28.2)    (21.8)
    Litigation settlement                            1.8       26.2        -
    Fuel costs                                       4.4        8.8        .3
    Other items - net                               49.5      (15.4)     (7.5)
      Total deferred Federal income taxes           74.8       51.1      36.8

  State                                              2.4        6.5       1.7
      Total deferred income taxes                   77.2       57.6      38.5

Investment Tax Credits - Net                        (9.6)      (9.8)    (10.1)

      Total Income Taxes                          $213.0     $198.7    $214.1

Allocated to:
  Operating income                                $248.9     $218.2    $221.4
  Other income and expenses - net                  (35.9)     (19.5)     (7.3)
                                                  $213.0     $198.7    $214.1

CG&E

                                                    1997      1996      1995
                                                         (in millions)

Current Income Taxes
  Federal                                          $117.1    $115.5    $102.4
  State                                               5.2       1.5       2.5
      Total current income taxes                    122.3     117.0     104.9

Deferred Income Taxes
  Federal
    Depreciation and other utility plant-
      related items                                  13.6      36.6      33.9
    DSM costs                                         7.5        .6       3.6
    Pension and other benefit costs                  (2.8)    (17.0)    (10.7)
    Fuel costs                                       (5.5)     10.8       6.3
    Other items - net                                10.8      (8.1)     (1.0)
      Total deferred Federal income taxes            23.6      22.9      32.1

  State                                              (1.0)      2.2        .8
      Total deferred income taxes                    22.6      25.1      32.9

Investment Tax Credits - Net                         (6.2)     (6.2)     (6.0)

      Total Income Taxes                           $138.7    $135.9    $131.8

Allocated to:
  Operating income                                 $172.0    $145.0    $136.4
  Other income and expenses - net                   (33.3)     (9.1)     (4.6)
                                                   $138.7    $135.9    $131.8

PSI

                                                    1997      1996      1995
                                                         (in millions)

Current Income Taxes
  Federal                                          $35.5     $41.3     $71.4
  State                                              6.8       6.0       7.5
      Total current income taxes                    42.3      47.3      78.9

Deferred Income Taxes
  Federal
    Depreciation and other electric utility
      plant-related items                           13.3      25.0      19.9
    DSM costs                                      (16.1)     (2.5)      8.4
    Pension and other benefit costs                  3.7     (11.2)    (11.1)
    Litigation settlement                            6.2      26.2        -
    Fuel costs                                       9.9      (2.0)     (6.0)
    Coal contract buyout                             5.5        -         -
    Destec payments                                  7.7        -         -
    Other items - net                                5.6      (6.3)     (3.0)
      Total deferred Federal income taxes           35.8      29.2       8.2

  State                                              3.3       4.3       1.1
      Total deferred income taxes                   39.1      33.5       9.3

Investment Tax Credits - Net                        (3.5)     (3.6)     (4.1)

      Total Income Taxes                           $77.9     $77.2     $84.1

Allocated to:
  Operating income                                 $76.9     $73.2     $85.0
  Other income and expenses - net                    1.0       4.0       (.9)
                                                   $77.9     $77.2     $84.1

ULH&P
                                                     1997      1996     1995
                                                          (in thousands)

Current Income Taxes
  Federal                                          $11 607   $   416   $5 955
  State                                              3 002       (87)   1 324
      Total current income taxes                    14 609       329    7 279

Deferred Income Taxes
  Federal
    Depreciation and other utility plant-
      related items                                    847     1 506    1 382
    Pension and other benefit costs                   -         (277)    (381)
    Fuel costs                                      (5 486)    6 111     (534)
    Unamortized costs of reacquiring debt             (122)      458      808
    Other items - net                                   12       291     (556)
      Total deferred Federal income taxes           (4 749)    8 089      719

  State
    Depreciation and other utility plant-
      related items                                    287       425      390
    Fuel costs                                      (1 404)    1 570     (137)
    Other items - net                                   23        55      (35)
      Total deferred state income taxes             (1 094)    2 050      218

      Total deferred income taxes                   (5 843)   10 139      937

Investment Tax Credits - Net                          (280)     (282)    (285)

      Total Income Taxes                           $ 8 486   $10 186   $7 931


Allocated to:
  Operating income                                 $ 9 586   $ 9 834   $7 887
  Other income and expenses - net                   (1 100)      352       44
                                                   $ 8 486   $10 186   $7 931

Cinergy, CG&E, PSI, and ULH&P

Federal income taxes, computed by applying the statutory Federal income tax rate
to book income before  extraordinary item and Federal income tax, are reconciled
to Federal income tax expense reported in the Consolidated  Statements of Income
of Cinergy, CG&E, and PSI and the Statements of Income of ULH&P as follows:

Cinergy
                                                 1997       1996       1995
                                                       (in millions)

Statutory Federal income tax provision          $196.4     $181.8     $192.2
Increases (Reductions) in taxes resulting from:
  Amortization of investment tax credits          (9.6)      (9.8)     (10.1)
  Depreciation and other utility plant-
    related differences                           11.7       14.1        9.0
  Preferred dividend requirements of
    subsidiaries                                   4.4        8.5       10.8
  Foreign tax adjustments                        (13.2)     (11.1)        -
  Other - net                                      8.8        1.2         .1
Federal income tax expense                      $198.5     $184.7     $202.0

CG&E
                                                 1997       1996       1995
                                                        (in millions)

Statutory Federal income tax provision          $130.8     $125.8     $127.6
Increases (Reductions) in taxes resulting from:
  Amortization of investment tax credits          (6.2)      (6.2)      (6.0)
  Depreciation and other utility plant-
    related differences                            9.8       11.7        9.0
  Preferred dividends                               -          -         6.2
  Other - net                                       .1         .9       (8.3)
Federal income tax expense                      $134.5     $132.2     $128.5

PSI
                                                 1997       1996       1995
                                                        (in millions)

Statutory Federal income tax provision          $ 70.0     $ 67.4     $ 77.5
Increases (Reductions) in taxes resulting from:
  Amortization of investment tax credits          (3.5)      (3.6)      (4.1)
  Other - net                                      1.3        3.1        2.1
Federal income tax expense                      $ 67.8     $ 66.9     $ 75.5

ULH&P
                                                 1997       1996       1995
                                                       (in thousands)

Statutory Federal income tax provision          $6 823     $7 987     $6 496
Increases (Reductions) in taxes resulting from:
  Amortization of investment tax credits          (280)      (282)      (285)
  Depreciation and other utility plant-
    related differences                             96        358        219
  Other - net                                      (61)       160        (41)
Federal income tax expense                      $6 578     $8 223     $6 389

12.  Commitments and Contingencies

(a)  Construction

Cinergy, CG&E, PSI, and ULH&P

Cinergy  currently  forecasts the aggregate  expenditures  for its  construction
program for the 1998 through 2002 period to be $1.7 billion.  Of these projected
expenditures,  approximately  $866 million relates to CG&E and its subsidiaries,
including $137 million for ULH&P, and $858 million relates to PSI.

(b)  Manufactured Gas Plant (MGP) Sites

Cinergy, CG&E, PSI, and ULH&P

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

Cinergy and PSI

     (ii)  PSI Coal tar  residues,  related  hydrocarbons,  and  various  metals
associated  with MGP sites  have  been  found at  former  MGP sites in  Indiana,
including at least 21 MGP sites which PSI or its predecessors  previously owned.
In 1945, PSI sold 19 of these sites to Indiana Gas and Water Company,  Inc. (now
Indiana Gas Company, Inc. (IGC)),  including the Shelbyville and Lafayette sites
(discussed  below).  PSI or its predecessors  acquired seven of the 21 MGP sites
from Northern Indiana Public Service Company (NIPSCO),  five of which were among
the 19 sites  PSI sold to IGC.  The other two sites  acquired  from  NIPSCO  are
located in Goshen (discussed below) and Warsaw, Indiana.

PSI  has  received  claims  from  IGC  and  NIPSCO  that  PSI  is a  Potentially
Responsible  Party  (PRP)  under  the  Comprehensive   Environmental   Response,
Compensation  and Liability  Act (CERCLA) with respect to the 21 MGP sites,  and
therefore  responsible  for the costs of  investigating  and  remediating  these
sites.

The  Shelbyville MGP site has been the subject of an  investigation  and cleanup
enforcement action by the Indiana Department of Environmental  Management (IDEM)
against  IGC and PSI.  Pursuant  to an  agreement,  PSI and IGC  have  conducted
investigation and remediation activities at the Shelbyville site and are sharing
the costs of these activities.  In 1997, PSI and IGC submitted a proposed agreed
order to IDEM relative to the Shelbyville site, which, if accepted by IDEM, will
result in a determination of whether the activities previously undertaken at the
site are  sufficient  to adequately  protect  human health and the  environment.
Based upon environmental  investigations and remediation  completed to date, PSI
believes that any further  investigation and remediation  required for this site
will not have a material adverse effect on its financial condition or results of
operations.

In 1992, the IDEM issued an order to IGC,  naming IGC as a PRP as defined in the
CERCLA, which requires  investigation and remediation of the Lafayette MGP site.
IGC  entered  into  an  agreed  order  with  the  IDEM  for the  removal  of MGP
contamination at that site.

In August  1997,  NIPSCO filed suit  against PSI in the United  States  District
Court for the  Northern  District of  Indiana,  South Bend  Division,  claiming,
pursuant  to CERCLA,  recovery  from PSI of  NIPSCO's  past and future  costs of
investigating and remediating MGP related  contamination at the Goshen MGP site.
NIPSCO alleged that it has already  incurred about $400,000 in response costs at
the site and that  remediation  of the site will cost  about $2.7  million.  PSI
denied  liability  in its answer to the  complaint.  The parties  are  currently
engaged in the  discovery  process and the case has not yet been  scheduled  for
trial.

Also, in August 1997,  PSI reached an agreement  with IGC settling  IGC's claims
that PSI  contribute to IGC's  response  costs related to 13 of the 19 MGP sites
conveyed by PSI to IGC in 1945.  This  agreement  requires  PSI and IGC to share
past and future response costs equally (50%/50%) at the 13 sites.  Further,  the
parties must jointly approve future management of the sites and the decisions to
spend  additional  funds.  The  settlement  does not  address the five sites PSI
acquired  from NIPSCO and  subsequently  sold to IGC  (including  the  Lafayette
site).

PSI has placed its insurance carriers on notice of IGC's,  NIPSCO's,  and IDEM's
claims.

In May 1995,  the IURC denied IGC's  request for  recovery of costs  incurred in
complying with Federal,  state, and local  environmental  regulations related to
MGP sites in which IGC has an interest,  including  sites acquired from PSI. IGC
appealed this  decision,  which IGC contended was contrary to decisions  made by
other state utility commissions with respect to this issue. In January 1997, the
Indiana Court of Appeals (Court of Appeals) affirmed the IURC's decision denying
IGC's  request for recovery of MGP costs.  IGC  petitioned  the Indiana  Supreme
Court to review the Court of  Appeals  decision.  In August  1997,  the  Indiana
Supreme Court denied  transfer of this case.  Accordingly,  the IURC's  decision
denying rate  recovery for these costs by IGC remains  intact.  The IURC granted
PSI's motion establishing a sub-docket to PSI's last retail rate proceeding,  in
which the IURC issued an order in  September  1996,  to consider its request for
rate  recovery  of any MGP  site-related  costs it may  incur.  PSI is unable to
predict  the  extent to which it will be able to recover  through  rates any MGP
site investigation and remediation costs ultimately incurred.

PSI  continues  to gather  information  pertaining  to each of these MGP  sites,
including the 13 sites which are the subject of the  agreement  with IGC and the
Goshen site which is the subject of NIPSCO's complaint. Reserves recorded, based
on  information  currently  available,  are not material to Cinergy's  financial
condition  or results of  operations.  However,  as  further  investigation  and
remediation  activities are undertaken at these sites,  the potential  liability
for MGP sites could be material to Cinergy's  financial  condition or results of
operations.

Cinergy, CG&E, and ULH&P

     (iii)  CG&E  and its  Utility  Subsidiaries  Lawrenceburg,  a  wholly-owned
subsidiary of CG&E, also has a MGP site. In May 1995,  Lawrenceburg and the IDEM
reached  an  agreement  to  include  the  Lawrenceburg  MGP  site in the  IDEM's
voluntary cleanup program.  Lawrenceburg implemented a remediation plan, and, on
September 20, 1996, received a certificate of completion on the cleanup from the
IDEM.  The total costs  incurred  for the  cleanup  program  were  approximately
$273,000.

CG&E and its utility  subsidiaries  are aware of other potential sites where MGP
activities  may have  occurred at some time in the past.  None of these sites is
known to present a risk to the  environment.  CG&E and its utility  subsidiaries
have undertaken  preliminary site  assessments to obtain more information  about
some of the other potential MGP sites.

Cinergy and CG&E

(c)  United Scrap Lead Site

The United States  Environmental  Protection Agency (EPA) alleges that CG&E is a
PRP under the CERCLA  liable for cleanup of the United  Scrap Lead site in Troy,
Ohio. CG&E was one of approximately  200 companies so named. CG&E believes it is
not a PRP and  should not be  responsible  for  cleanup  of the site.  Under the
CERCLA,  CG&E could be  jointly  and  severally  liable  for costs  incurred  in
cleaning  up the site,  estimated  by the EPA to be $27  million,  of which CG&E
estimates its portion to be immaterial to its financial  condition or results of
operations.  In January 1998, CG&E executed a de minimis  settlement  agreement,
which if accepted by the Federal  District Court will resolve  CG&E's  potential
liability for the site. Action on the proposed settlement is expected by the end
of 1998.

Cinergy, CG&E, and PSI

(d)  Enertech Associates, Inc. (Enertech) Litigation

In October 1995, a suit was filed in the Federal District Court for the Southern
District of Ohio by three former  employees of  Enertech,  formerly  named Power
International, Inc., a subsidiary of Investments, naming as defendants Enertech,
Cinergy,  Investments,  CG&E, PSI, James E. Rogers, and William J. Grealis. (Mr.
Rogers  and/or Mr.  Grealis  are  officers  and/or  directors  of the  foregoing
companies.)  The lawsuit,  which stems from the termination of employment of the
three former employees, alleges that they entered into employment contracts with
Enertech  based on the  opportunity  to  participate  in potential  profits from
future  investments in energy projects in central and eastern  Europe.  The suit
alleges causes of action based upon,  among other  theories,  breach of contract
related to the events  surrounding the termination of their employment and fraud
and  misrepresentation  related  to the level of  financial  support  for future
projects.  The suit  alleges  compensatory  damages of $154  million  based upon
assumed future success of potential  future  investments and punitive damages of
three times that amount.  All defendants are  vigorously  defending  against the
charges based upon meritorious defenses.  Cinergy is currently unable to predict
the outcome of this litigation.

Cinergy and PSI

(e)  Wabash Valley Power Association, Inc. (WVPA)

In February  1989,  PSI and WVPA entered into a settlement  agreement to resolve
all  claims  related  to  Marble  Hill,  a  nuclear  project  canceled  in 1984.
Implementation  of the  settlement  was  contingent  upon a  number  of  events,
including the conclusion of WVPA's bankruptcy proceeding, negotiation of certain
terms and conditions  with WVPA,  the Rural  Utilities  Service  (RUS),  and the
National Rural Utilities  Cooperative  Finance  Corporation  (CFC),  and certain
regulatory  approvals.  In December  1996,  following  the  resolution of issues
associated with WVPA's bankruptcy  proceeding,  PSI, on behalf of itself and its
officers,  paid $80  million  on behalf of WVPA to the RUS and the CFC.  The $80
million  obligation,  net of insurance proceeds,  other credits,  and applicable
income tax effects,  was charged to income in 1988.  In January  1997,  an order
dismissing the WVPA  litigation  against PSI and its officers with prejudice was
entered  by the  United  States  District  Court for the  Southern  District  of
Indiana.  Negotiations  among PSI, WVPA, the RUS, and the CFC continue regarding
certain  additional terms and conditions of the settlement  agreement.  Based on
the  current  status of  negotiations,  the Company  believes it has  adequately
reserved  for any loss that would be  material  to its  financial  condition  or
results of operations. However, the Company cannot currently predict the outcome
of these  negotiations.  Depending of the form of the final negotiated terms and
conditions  and the  form of any  regulatory  approvals,  the  Company  could be
required to  recognize  additional  losses of up to $90  million for  accounting
purposes.  The  recognition  of this loss is not  expected to have an  immediate
impact on Cinergy's cash flow. The Company believes that  negotiations  could be
concluded and the final terms and conditions determined during 1998.

Cinergy, CG&E, and ULH&P

(f)  Potential Divestiture of Gas Operations

Under the PUHCA,  the divestiture of CG&E's gas operations may be required.  The
key  question  under the  relevant  PUHCA  standards  is the amount of increased
operating  costs,  if any,  that  would  result  from the gas  operations  being
divested and operated on a stand-alone basis.

In its order  approving the merger,  the SEC reserved  judgment  over  Cinergy's
ownership of CG&E's gas operations  for three years,  at the end of which period
Cinergy would be required to address the matter. In February 1998,  Cinergy made
a filing with the SEC  setting  forth its  rationale  for  retention  of the gas
operations.  The filing  includes,  among other things, a study showing that, if
divested and operated on a  stand-alone  basis,  the gas  operations  would bear
significant  increased  operating costs,  greater than those cited by the SEC in
two 1997 cases permitting  electric  registered holding companies to acquire and
retain gas properties.  For these and other reasons stated in Cinergy's  filing,
Cinergy  believes  its  retention  of CG&E's gas  properties  meets all relevant
standards under the PUHCA.

Cinergy, CG&E, and PSI

13.  Jointly Owned Plant

PSI is a joint owner of Gibson Unit 5 with WVPA and the Indiana  Municipal Power
Agency  (IMPA).  Additionally,  PSI is a co-owner  with WVPA and IMPA of certain
transmission property and local facilities.  These facilities constitute part of
the  integrated  transmission  and  distribution  systems which are operated and
maintained by PSI. CG&E,  Columbus Southern Power Company,  and The Dayton Power
and Light  Company  have  constructed  electric  generating  units  and  related
transmission  facilities on varying common  ownership  bases.  The  Consolidated
Statements of Income  reflect PSI's and CG&E's  portions of all operating  costs
associated with the commonly owned facilities.

PSI's and CG&E's investments in jointly owned plant are as follows:

<TABLE>
<CAPTION>
                                                             1997
                                            Utility Plant    Accumulated      Construction
                                 Share       in Service      Depreciation   Work in Progress
                                                     (dollars in millions)
<S>                              <C>           <C>               <C>               <C>
PSI
Production
  Gibson (Unit 5)                50.05%        $  205            $ 97              $ 1
Transmission and local
  facilities                     94.28          1 918             673               32

CG&E
Production
  Miami Fort Station
    (Units 7 and 8)              64               208             117                4
  W.C. Beckjord Station
    (Unit 6)                     37.5              41              25                1
  J.M. Stuart Station            39               273             121                1
  Conesville Station
    (Unit 4)                     40                72              37                2
  Zimmer                         46.5           1 216             239                5
  East Bend Station              69               330             164                2
  Killen Station                 33               187              85                -
Transmission                     Various           63              31                1
</TABLE>

14.  Quarterly Financial Data (unaudited)

Cinergy
<TABLE>
<CAPTION>
                                                     Basic      Diluted
                                                    Earnings    Earnings
               Operating  Operating      Net        (Loss)      (Loss)
Quarter Ended  Revenues    Income    Income(Loss)  Per Share   Per Share
                        (in millions, except per share amounts)
<S>             <C>         <C>          <C>         <C>         <C>

1997
March 31        $1 030      $152         $114        $ .72       $ .71
June 30            865       105           55          .35         .35
September 30     1 355       140          (27)(a)     (.16)(a)    (.17)(a)
December 31      1 103       142          111          .70         .70
  Total         $4 353      $539         $253 (a)    $1.61 (a)   $1.59 (a)

1996
March 31        $  884      $169         $110        $ .70       $ .69
June 30            717       113           56(b)       .35(b)      .35 (b)
September 30       766       150           98          .51(c)      .51 (c)
December 31        876       126           71(b)       .44(b)      .44 (b)
  Total         $3 243      $558         $335(b)     $2.00(b)(c) $1.99 (b)(c)

<FN>
(a)  For a discussion of the windfall profits tax levied against Midlands, which
     was recorded in the third quarter as an  extraordinary  item,  see Note 17.
     Net income,  basic earnings per share and diluted earnings per share during
     the third quarter of 1997, before the extraordinary item, were $83 million,
     $.53, and $.52,  respectively.  Total net income, basic earnings per share,
     and diluted  earnings per share for 1997,  before the  extraordinary  item,
     were $363 million, $2.30, and $2.28, respectively.

(b)  In 1996,  Cinergy  recognized  charges to  earnings  of  approximately  $55
     million ($38  million,  net of taxes or $.24 per share,  basic and diluted)
     primarily for charges related to voluntary  early  retirement and severance
     programs and  disallowances  associated with the PUCO's December 1996 Order
     in CG&E's gas rate proceeding. Of these charges, approximately $11 million,
     net of taxes or $.07 per share (basic and diluted),  was  recognized in the
     second quarter,  and  approximately  $27 million,  net of taxes or $.17 per
     share (basic and diluted),  was  recognized in the fourth  quarter.  Of the
     total $55 million charge, $41 million is reflected in "Operating Expenses -
     Other operation" and $14 million is reflected in "Other Income and Expenses
     - Net."

(c)  In the third quarter of 1996, Cinergy incurred costs of $18 million or $.12
     per share  (basic  and  diluted),  related to the  reacquisition  of 90% of
     CG&E's preferred stock through a tender offer. (See Note 3(b).)
</FN>
</TABLE>

CG&E
                              Operating       Operating           Net
Quarter Ended                 Revenues         Income           Income
                                            (in millions)
1997
March 31                       $  614           $ 99             $ 68
June 30                           487             65               37
September 30                      712             78               52
December 31                       639             86               82
  Total                        $2 452           $328             $239

1996
March 31                       $  575           $120             $ 92
June 30                           437             69(a)            39(a)
September 30                      431             90               62
December 31                       533             73(a)            34(a)
  Total                        $1 976           $352             $227

(a)  In 1996, CG&E recognized  charges to earnings of approximately  $50 million
     ($35  million,  net of taxes)  primarily  for charges  related to voluntary
     early retirement and severance  programs and disallowances  associated with
     the PUCO's  December  1996 Order in CG&E's  gas rate  proceeding.  Of these
     charges,  approximately  $10 million,  net of taxes,  was recognized in the
     second quarter, and approximately $25 million, net of taxes, was recognized
     in the fourth  quarter.  Of the total $50  million  charge,  $36 million is
     reflected  in  "Operating  Expenses - Other  operation"  and $14 million is
     reflected in "Other Income and Expenses - Net."

PSI
                              Operating       Operating          Net
Quarter Ended                 Revenues         Income           Income
                                            (in millions)

1997
March 31                       $  424           $ 54             $ 33
June 30                           390             41               23
September 30                      651             61               41
December 31                       493             55               35
  Total                        $1 958           $211             $132

1996
March 31                       $  328           $ 50             $ 27
June 30                           290             44(a)            25(a)
September 30                      348             61               43
December 31                       366             51(a)            31(a)
  Total                        $1 332           $206             $126


(a)  In 1996, PSI recognized charges to earnings of approximately $5 million ($3
     million,  net of taxes)  primarily for charges  related to voluntary  early
     retirement  and severance  programs.  Of these  charges,  approximately  $1
     million,   net  of  taxes,  was  recognized  in  the  second  quarter,  and
     approximately  $2  million,  net of taxes,  was  recognized  in the  fourth
     quarter.  The $5 million charge is reflected in "Operating Expenses - Other
     operation."

15.  Financial Information by Business Segment

Cinergy

                                      Operating    Provision
                Operating  Operating   Income         for       Construction
Year Ended      Revenues    Income      Taxes     Depreciation  Expenditures
                                 (in millions)
1997
  Electric       $3 862       $505       $229         $266          $247
  Gas               491         34         20           23            44
Total            $4 353       $539       $249         $289          $291

1996
  Electric       $2 769       $520       $204         $260          $276
  Gas               474         38         14           23            32
Total            $3 243       $558       $218         $283          $308

1995
  Electric       $2 612       $548       $209         $258          $286
  Gas               411         39         12           22            36
Total            $3 023       $587       $221         $280          $322


                                                   December 31
                                         1997         1996          1995
                                                 (in millions)
Property, Plant, and Equipment - net
  Electric                              $5 724       $5 737        $5 718
  Gas                                      573          553           532
                                         6 297        6 290         6 250
Other Corporate Assets                   2 561        2 435         1 853
    Total Assets                        $8 858       $8 725        $8 103

For a discussion of the potential divestiture of CG&E's gas operations, see Note
12(f).

CG&E
                                        Operating
                  Operating   Operating   Income  Provision for  Construction
Year Ended        Revenues(1)  Income     Taxes   Depreciation   Expenditures
                                      (in millions)
1997
  Electric          $1 956      $290      $152        $140           $105
  Gas                  496        38        20          23             44
Total               $2 452      $328      $172        $163           $149

1996
  Electric          $1 502      $314      $131        $138           $109
  Gas                  474        38        14          23             32
Total               $1 976      $352      $145        $161           $141

1995
  Electric          $1 437      $321      $124        $137           $101
  Gas                  411        39        12          22             36
Total               $1 848      $360      $136        $159           $137

                                                       December 31
                                            1997          1996          1995
                                                      (in millions)
Property, Plant, and Equipment - net
  Electric                                 $3 171        $3 205        $3 244
  Gas                                         573           553           532
                                            3 744         3 758         3 776
Other Corporate Assets                      1 170         1 086         1 305
    Total Assets                           $4 914        $4 844        $5 081

For a discussion of the potential divestiture of CG&E's,  including ULH&P's, gas
operations, see Note 12(f).

ULH&P

                                      Operating
                Operating  Operating   Income    Provision for   Construction
Year Ended      Revenues    Income     Taxes     Depreciation    Expenditures
                                   (in thousands)
1997
  Electric      $192 774    $10 427    $6 549       $ 7 193        $14 115
  Gas             78 848      8 008     3 037         5 176          9 448
    Total       $271 622    $18 435    $9 586       $12 369        $23 563

1996
  Electric      $190 900    $12 558    $5 644       $ 6 935        $ 9 571
  Gas             76 868      8 476     4 190         4 974          9 073
    Total       $267 768    $21 034    $9 834       $11 909        $18 644

1995
  Electric      $187 180    $11 425    $4 500       $ 6 679        $10 909
  Gas             70 288      8 405     3 387         4 759          8 063
    Total       $257 468    $19 830    $7 887       $11 438        $18 972

                                                      December 31
                                           1997          1996          1995
                                                    (in thousands)
Property, Plant, and Equipment - net
  Electric                               $147 869      $142 490      $138 482
  Gas                                     111 615       106 791       104 749
                                          259 484       249 281       243 231
Other Corporate Assets                     32 106        40 272        54 911
    Total Assets                         $291 590      $289 553      $298 142

For a discussion of the potential  divestiture  of ULH&P's gas  operations,  see
Note 12(f).

Cinergy

16.  Earnings Per Share

Effective  December 31, 1997,  Cinergy  adopted the  provisions  of Statement of
Financial  Accounting  Standards No. 128,  Earnings Per Share  (Statement  128).
Statement 128 replaces the calculation of primary and fully diluted earnings per
share under previous  accounting  standards with basic and diluted  earnings per
share amounts. Previously reported earnings per share amounts have been restated
to comply with the provisions of Statement 128.

The after-tax earnings per share impact of the extraordinary item - equity share
of windfall profits tax in 1997 was $.69 for both basic and diluted earnings per
share.

Presented below is a reconciliation of earnings per common share (basic EPS) and
earnings per common share assuming dilution (diluted EPS).

<TABLE>
<CAPTION>
                                                Income        Shares       Earnings
                                              (Numerator)  (Denominator)   Per Share
                                             (In thousands, except per share amounts)
<S>                                            <C>             <C>           <C>
   1997
     Earnings per common share:
        Net income before extraordinary item   $362 638        157 685       $2.30

     Effect of dilutive securities:
        Common stock options                                       928
        Contingently issuable common stock                         204

     EPS--assuming dilution:
        Net income before extraordinary
         item plus assumed conversions         $362 638        158 817       $2.28

     1996
     Net income                                $334 797
     Less:  costs of reacquisition of
            preferred stock of subsidiary        18 391

     Earnings per common share:
        Net income applicable to common
         stock                                  316 406        157 678       $2.00

     Effect of dilutive securities:
        Common stock options                                       923
        Contingently issuable common stock                         314

     EPS--assuming dilution:
        Net income applicable to common
         stock plus assumed conversions        $316 406        158 915       $1.99

     1995
     Earnings per common share:
        Net income                             $347 182        156 620       $2.22

     Effect of dilutive securities:
        Common stock options                                       586
        Contingently issuable common stock                         316

     EPS--assuming dilution:
        Net income plus assumed conversions    $347 182        157 522       $2.20
</TABLE>

     Options to  purchase  shares of common  stock that were  excluded  from the
     calculation of EPS--assuming  dilution because the exercise prices of these
     options  were greater  than the average  market price of the common  shares
     during the year are summarized below:
                                                      Average
                                                      Exercise
                       Year              Shares        Price

                       1997               22 300       $35.25
                       1996               45 000        31.56
                       1995              215 000        28.81

Cinergy

17.  Extraordinary Item - Equity Share of Windfall Profits Tax

In May 1997,  general elections were held in Great Britain which resulted in the
Labour  Party  gaining  control  of the  government.  In July  1997,  the Labour
Government  announced  a  windfall  profits  tax to be levied  against a limited
number of British companies, including Midlands, which had previously been owned
and operated by the  government.  The tax, which was enacted into law during the
third quarter of 1997,  was intended to be a recovery of funds by the government
due to the  undervaluing  of the  companies  subject  to the tax when  they were
privatized by the government via public stock offerings several years ago.

Cinergy's share of the tax to be paid by Midlands in two equal installments, due
December 1, 1997 and 1998, is  approximately  67 million  pounds  sterling ($109
million or $.69 per share,  basic and diluted).  Midlands  borrowed the funds to
finance the first  installment.  Cinergy  expects  Midlands will borrow funds as
necessary to pay the final installment.  As Cinergy's  management  believes this
charge to be unusual in nature,  and does not expect such a charge to recur, the
tax was recorded as an extraordinary item in Cinergy's Consolidated Statement of
Income during the third quarter of 1997. No related tax benefit was recorded for
the charge as the windfall  profits tax is not deductible  for corporate  income
tax purposes in the UK, and Cinergy expects that benefits,  if any,  derived for
US Federal income taxes will not be significant.

18.  Subsequent Events (Unaudited)

ULH&P

(a)  Redemption  of 8% Series  First  Mortgage  Bonds On March 24,  1998,  ULH&P
announced  its  intention  to redeem on April 23, 1998,  $6.3 million  principal
amount  of its 8%  Series  First  Mortgage  Bonds  (due  October  1,  2003) at a
redemption  price of 100.85%  through the M&R Fund  Provision  of ULH&P's  first
mortgage bond  indenture.  Additionally,  on the same date,  ULH&P announced its
intention  to redeem on April 24, 1998,  the  remaining  $3.7 million  principal
amount  of its 8%  Series  First  Mortgage  Bonds  (due  October  1,  2003) at a
redemption price of 101.73%.

PSI

(b) Issuance of 7.25% JUnior Maturing Principal  Securities (JUMPS) On March 19,
1998,  PSI issued $100 million  principal  amount of its 7.25% JUMPS.  The JUMPS
will  mature  on March  15,  2028.  Proceeds  from the sale  were  used to repay
short-term  indebtedness  incurred in connection with the redemption on March 1,
1998, of all outstanding shares of PSI's 7.44% Series Cumulative Preferred Stock
at a redemption price of $25 per share.

<PAGE>

              ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
                     ON ACCOUNTING AND FINANCIAL DISCLOSURE

Cinergy, CG&E, PSI, and ULH&P

None.

                                    PART III

          ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTS

Board of Directors

Cinergy

Reference  is made to  Cinergy  Corp.'s,  a  Delaware  corporation  (Cinergy  or
Company),  1998 Proxy Statement with respect to  identification of directors and
their current principal occupations.

CG&E

The directors of The  Cincinnati  Gas & Electric  Company (CG&E) at February 28,
1998, included:

Jackson H. Randolph Mr. Randolph,  age 67, is Chairman of CG&E. He has served as
a director of CG&E since 1983,  and his current term as director  expires  April
21, 1998.

James E. Rogers Mr. Rogers, age 50, is Vice Chairman and Chief Executive Officer
of CG&E. He has served as a director of CG&E since 1994, and his current term as
director expires April 21, 1998.

William J. Grealis Mr. Grealis, age 52, is President of CG&E. He has served as a
director of CG&E since 1995, and his current term expires April 21, 1998.

PSI

Reference is made to PSI Energy,  Inc.'s (PSI) 1998  Information  Statement with
respect to identification of directors and their current principal occupations.

ULH&P

Omitted pursuant to Instruction I(2)(c).

Executive Officers

Cinergy, CG&E, and PSI

The  information  included in Part I of this report on pages 18 through 20 under
the caption  "Executive  Officers of the  Registrants" is referenced in reliance
upon  General  Instruction  G to Form 10-K and  Instruction  3 to Item 401(b) of
Regulation S-K.

ULH&P

Omitted pursuant to Instruction I(2)(c).

<PAGE>

                         ITEM 11. EXECUTIVE COMPENSATION

Cinergy

Reference is made to Cinergy's  1998 Proxy  Statement  with respect to executive
compensation.

CG&E

Reference is made to Cinergy's  1998 Proxy  Statement  with respect to executive
compensation,  except  as to  information  pertaining  to  the  compensation  of
directors and to the performance graph, which information is set forth below.

Compensation of Directors

Directors  who are not  employees  (non-employee  directors)  receive  an annual
retainer  fee of $8,000  plus a fee of $1,000 for each CG&E board of  directors'
meeting attended;  however, any non-employee director of CG&E who also serves as
a  non-employee  director  of Cinergy  or any of its  affiliates  shall  neither
receive such annual  retainer fee, nor any  compensation  for  attendance at any
CG&E board meeting that is held concurrently or consecutively  with a meeting of
the board of directors of Cinergy.  Directors who are also  employees of Cinergy
or any of its subsidiaries (Messrs.  Randolph, Rogers, and Grealis) will receive
no remuneration for their services as directors.

Under  Cinergy's  Directors'  Deferred   Compensation  Plan,  each  non-employee
director  of  Cinergy  or any of its  subsidiaries  may defer fees and have them
accrued either in cash or in units representing  shares of Cinergy common stock.
If deferred in such units,  the stock will be distributed to the director at the
time of retirement from the appropriate board.  Amounts deferred in cash will be
paid at the same time.

Under Cinergy's Retirement Plan for Directors,  non-employee directors with five
or more years of service  will  receive  annual  retirement  compensation  in an
amount equal to the annual  Cinergy board  retainer fee in effect at the time of
termination  of  service  as a  director,  plus the  product of the fee paid for
attendance  at  a  Cinergy  board   meeting   multiplied  by  five.   Retirement
compensation  is paid for as many years as the  director  served on the  Cinergy
board.  This  plan  covers  non-employee  directors  serving  on the  boards  of
directors of Cinergy,  Services,  CG&E, or PSI.  Prior  service by  non-employee
directors of CG&E, PSI, or Resources is credited under this plan.

Performance Graph

The following line graph compares the cumulative total shareholder return of the
common  stock of CG&E with the  cumulative  total  returns  during the same time
period of the Standard & Poor's (S&P) Electric  Utilities  Index and the S&P 500
Stock Index. The graph tracks  performance from January 1, 1993, through October
24, 1994,  the final trading date of CG&E's  common  stock.  The graph assumes a
$100 investment on January 1, 1993, and reinvestment of all dividends.

Omitted is a line graph illustrating the following data.

                                 1/1/93      1/1/94      10/24/94

CG&E Common Stock               $100.00     $117.80      $103.70

S&P Electric Utilities Index    $100.00     $112.60      $ 93.00

S&P 500 Stock Index             $100.00     $110.10      $111.10

PSI

Reference is made to PSI's 1998 Information  Statement with respect to executive
compensation.

ULH&P

Omitted pursuant to Instruction I(2)(c).

                ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
                              OWNERS AND MANAGEMENT

Cinergy

Reference is made to  Cinergy's  1998 Proxy  Statement  with respect to security
ownership of certain beneficial owners and management.

CG&E

Cinergy owns all the  outstanding  shares of common  stock of CG&E.  Pursuant to
Section 13(d) of the  Securities  Exchange Act of 1934, a beneficial  owner of a
security  is any person  who  directly  or  indirectly  has or shares  voting or
investment  power  over  such  security.  No  person  or  group  is known by the
management of CG&E to be the beneficial owner of more than 5% of CG&E's class of
cumulative preferred stock as of December 31, 1997.

CG&E's  directors and executive  officers did not beneficially own shares of any
series of the class of CG&E's  cumulative  preferred  stock as of  December  31,
1997. The beneficial  ownership of Cinergy's  common stock held by each director
and  named  executive  officer  as of  December  31,  1997,  is set forth in the
following table.

                                                    Amount and Nature
               Name of Beneficial Owner(1)       of Beneficial Ownership (2)

               William J. Grealis                    86,313  shares
               J. Wayne Leonard                     140,961  shares
               Jackson H. Randolph                  152,426  shares
               James E. Rogers                      339,254  shares
               Larry E. Thomas                      130,366  shares

               All directors and executive        1,050,910  shares (2)
               officers as a group           (representing 0.67% of the class)


(1)   No  individual  listed   beneficially   owned  more  than  0.215%  of  the
      outstanding shares of Cinergy common stock.

(2)   Includes  shares which there is a right to acquire within 60 days pursuant
      to the exercise of stock options in the following  amounts:  Mr. Grealis -
      55,887; Mr. Leonard - 97,611; Mr. Randolph - 50,000; Mr. Rogers - 145,629;
      Mr. Thomas - 74,104; and all directors and executive officers as a group -
      497,698.

PSI

Reference is made to PSI's 1998  Information  Statement with respect to security
ownership of certain beneficial owners and management.

ULH&P

Omitted pursuant to Instruction I(2)(c).

          ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Cinergy, CG&E, and PSI

None.

ULH&P

Omitted pursuant to Instruction I(2)(c).

                                    PART IV

    ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a)  Financial Statements and Schedules.

Cinergy, CG&E, PSI, and ULH&P

Refer to the  page  captioned  "Index  to  Financial  Statements  and  Financial
Statement  Schedules",  pages  53 and 54 of this  report,  for an  index  of the
financial statements and financial statement schedules included in this report.

(b) Reports on Form 8-K.

Cinergy, CG&E, PSI, and ULH&P

None

(c)  Exhibits.

Copies of the documents  listed below which are identified  with an asterisk (*)
have heretofore been filed with the Securities and Exchange Commission (SEC) and
are incorporated herein by reference and made a part hereof. Exhibits identified
with a pound sign (#) are being filed herewith by the  registrant  identified in
the exhibit  discussion  below and are  incorporated  herein by  reference  with
respect to any other designated registrant. Exhibits not so identified are filed
herewith:

  Exhibit
Designation                           Nature of Exhibit

Cinergy

   3-a          *Certificate of Incorporation of Cinergy
                 Corp., a Delaware corporation (Cinergy or
                 Company).  (Exhibit to Cinergy's 1993 Form
                 10-K in File No. 1-11377.)

   3-b           By-laws of Cinergy as amended December 18,
                 1997.

CG&E

   3-c          *Amended  Articles of  Incorporation  of The Cincinnati
                 Gas & Electric  Company  (CG&E)  effective  October 23,
                 1996.  (Exhibit to CG&E's September 30, 1996, Form 10-Q
                 in File No. 1-1232.)

   3-d          *Regulations  of  CG&E  as  amended,  April  25,  1996.
                 (Exhibit to CG&E's  March 31,  1996,  Form 10-Q in File
                 No. 1-1232.)

PSI

   3-e          *Amended Articles of Consolidation of PSI Energy,  Inc.
                 (PSI), as amended to April 20, 1995.  (Exhibit to PSI's
                 June 30, 1995, Form 10-Q in File No. 1-3543.)

   3-f           Amendment  to  Article  D of the  Amended  Articles  of
                 Consolidation of PSI Energy,  Inc.,  effective July 10,
                 1997.

<PAGE>

  Exhibit
Designation                          Nature of Exhibit

   3-g          *By-laws of PSI, as amended to December 17,
                 1996.  (Exhibit to PSI's March 31, 1997,  Form 10-Q
                 in File No. 1-3543.)

ULH&P

   3-h          *Restated  Articles of Incorporation made effective May
                 7, 1976.  (Exhibit to The Union  Light,  Heat and Power
                 Company's (ULH&P) Form 8-K, May 1976.)

   3-i          *By-laws of ULH&P as amended, adopted May 8,
                 1996.  (Exhibit to ULH&P's March 31, 1996
                 Form 10-Q in File No. 2-7793.)

   3-j           Amendment  to  Restated  Articles of  Incorporation  of
                 ULH&P  (Article  Third) and Amendment to the By-laws of
                 ULH&P (Article 1), both effective July 24, 1997.

Cinergy and PSI

   4-a          *Original Indenture (First Mortgage Bonds)
                 dated September 1, 1939, between PSI and The
                 First National Bank of Chicago, as Trustee
                 (Exhibit A-Part 3 in File No. 70-258), and
                 LaSalle National Bank as Successor Trustee
                 (Supplemental Indenture dated March 30,
                 1984).

   4-b          *Nineteenth  Supplemental Indenture between PSI and The
                 First  National  Bank of Chicago dated January 1, 1972.
                 (Exhibit to File No. 2-42545.)

   4-c          *Twenty-third  Supplemental  Indenture  between PSI and
                 The First  National  Bank of Chicago  dated  January 1,
                 1977. (Exhibit to File No.
                 2-57828.)

   4-d          *Twenty-fifth Supplemental Indenture between
                 PSI and The First National Bank of Chicago
                 dated September 1, 1978.  (Exhibit to File
                 No. 2-62543.)

   4-e          *Thirty-fifth  Supplemental  Indenture  between PSI and
                 The First  National  Bank of  Chicago  dated  March 30,
                 1984.  (Exhibit  to PSI's  1984  Form  10-K in File No.
                 1-3543.)

   4-f          *Forty-first  Supplemental  Indenture  between  PSI and
                 LaSalle National Bank dated June 15, 1988.  (Exhibit to
                 PSI's 1988 Form 10-K in File No. 1-3543.)

<PAGE>

  Exhibit
Designation                           Nature of Exhibit

   4-g          *Forty-second  Supplemental  Indenture  between PSI and
                 LaSalle National Bank dated August 1, 1988. (Exhibit to
                 PSI's 1988 Form 10-K in File No. 1-3543.)

   4-h          *Forty-fourth  Supplemental  Indenture  between PSI and
                 LaSalle National Bank dated March 15, 1990. (Exhibit to
                 PSI's 1990 Form 10-K in File No. 1-3543.)

   4-i          *Forty-fifth  Supplemental  Indenture  between  PSI and
                 LaSalle National Bank dated March 15, 1990. (Exhibit to
                 PSI's 1990 Form 10-K in File No. 1-3543.)

   4-j          *Forty-sixth  Supplemental  Indenture  between  PSI and
                 LaSalle  National Bank dated June 1, 1990.  (Exhibit to
                 PSI's 1991 Form 10-K in File No. 1-3543.)

   4-k          *Forty-seventh  Supplemental  Indenture between PSI and
                 LaSalle National Bank dated July 15, 1991.  (Exhibit to
                 PSI's 1991 Form 10-K in File No. 1-3543.)

   4-l          *Forty-eighth  Supplemental  Indenture  between PSI and
                 LaSalle National Bank dated July 15, 1992.  (Exhibit to
                 PSI's 1992 Form 10-K in File No. 1-3543.)

   4-m          *Forty-ninth  Supplemental  Indenture  between  PSI and LaSalle
                 national Bank dated  February 15, 1993.  (Exhibit to PSI's 1992
                 Form 10-K in File No. 1-3543.)

   4-n          *Fiftieth   Supplemental   Indenture  between  PSI  and
                 LaSalle National Bank dated February 15, 1993. (Exhibit
                 to PSI's 1992 Form 10-K in File No. 1-3543.)

   4-o          *Fifty-first  Supplemental  Indenture  between  PSI and
                 LaSalle National Bank dated February 1, 1994.  (Exhibit
                 to PSI's 1993 Form 10-K in File No. 1-3543.)

   4-p          *Indenture (Secured Medium-term Notes, Series A), dated
                 July 15, 1991,  between PSI and LaSalle  National Bank,
                 as Trustee.  (Exhibit to PSI's Form  10-K/A,  Amendment
                 No. 2, dated July 15, 1993, in File No. 1-3543.)

   4-q          *Indenture (Secured Medium-term Notes, Series B), dated
                 July 15, 1992,  between PSI and LaSalle  National Bank,
                 as Trustee.  (Exhibit to PSI's Form  10-K/A,  Amendment
                 No. 2, dated July 15, 1993, in File No. 1-3543.)

<PAGE>

  Exhibit
Designation                           Nature of Exhibit

   4-r          *Loan Agreement  between PSI and the City of Princeton,
                 Indiana dated as of November 7, 1996. (Exhibit to PSI's
                 September 30, 1996, Form 10-Q in File No. 1-3543.)

   4-s          *Loan Agreement between PSI and the City of
                 Princeton, Indiana dated as of February 1,
                 1997.  (Exhibit to Cinergy's 1996 Form 10-K
                 in File No. 1-11377.)

   4-t          *Indenture dated November 15, 1996, between PSI and The
                 Fifth Third Bank,  as  Trustee.  (Exhibit to  Cinergy's
                 1996 Form 10-K in File No. 1-11377.)

   4-u          *First Supplemental  Indenture dated November 15, 1996,
                 between  PSI and The  Fifth  Third  Bank,  as  Trustee.
                 (Exhibit  to  Cinergy's  1996  Form  10-K in  File  No.
                 1-11377.)

   4-v          *Second Supplemental Indenture dated December 15, 1996,
                 between  PSI and The  Fifth  Third  Bank,  as  Trustee.
                 (Exhibit  to  Cinergy's  1996  Form  10-K in  File  No.
                 1-11377.)

   4-w           Third  Supplemental  Indenture  dated as of  March  15,
                 1998, between PSI and The Fifth Third Bank, as Trustee.

Cinergy and CG&E

   4-x          *Original Indenture (First Mortgage Bonds) between CG&E
                 and The  Bank of New  York  (as  Trustee)  dated  as of
                 August  1,  1936.   (Exhibit  to  CG&E's   Registration
                 Statement No. 2-2374.)

   4-y          *Eleventh Supplemental Indenture between CG&E
                 and The Bank of New York dated as of May 1,
                 1969.  (Exhibit to CG&E's Registration
                 Statement No. 2-32063.)

   4-z          *Thirteenth Supplemental Indenture between
                 CG&E and The Bank of New York dated as of
                 November 1, 1971.  (Exhibit to CG&E's
                 Registration Statement No. 2-41974.)

   4-aa         *Fourteenth Supplemental Indenture between CG&E
                 and The Bank of New York dated as of November 2,
                 1972.  (Exhibit to CG&E's Registration Statement
                 No. 2-60961.)

   4-bb         *Thirty-third  Supplemental Indenture between CG&E and The Bank
                 of New York dated as of September 1, 1992.  (Exhibit to CG&E's
                 Registration Statement No. 33-53578.)

<PAGE>

  Exhibit
Designation                           Nature of Exhibit

   4-cc         *Thirty-fourth  Supplemental Indenture between CG&E and
                 The  Bank of New  York  dated as of  October  1,  1993.
                 (Exhibit to CG&E's  September  30,  1993,  Form 10-Q in
                 File No. 1-1232.)

   4-dd         *Thirty-fifth Supplemental Indenture between
                 CG&E and The Bank of New York dated as of
                 January 1, 1994.  (Exhibit to CG&E's
                 Registration Statement No. 33-52335.)

   4-ee         *Thirty-sixth Supplemental Indenture between
                 G&E and The Bank of New York dated as of
                 February 15, 1994.  (Exhibit to CG&E's
                 Registration Statement No. 33-52335.)

   4-ff         *Thirty-seventh Supplemental Indenture
                 between CG&E and The Bank of New York dated
                 as of October 14, 1996.  (Exhibit to
                 Cinergy's 1996 Form 10-K in File No. 1-11377.)

   4-gg         *Loan  Agreement  between CG&E and the County of Boone,
                 Kentucky  dated as of  February  1, 1985.  (Exhibit  to
                 CG&E's 1984 Form 10-K in File No. 1-1232.)

   4-hh         *Repayment  Agreement between CG&E and The Dayton Power
                 and  Light  Company  dated  as of  December  23,  1992.
                 (Exhibit to CG&E's 1992 Form 10-K in File No. 1-1232.)

   4-ii         *Loan  Agreement  between CG&E and the County of Boone,
                 Kentucky  dated as of  January  1,  1994.  (Exhibit  to
                 CG&E's 1993 Form 10-K in File No. 1-1232.)

   4-jj         *Loan Agreement  between CG&E and the State of Ohio Air
                 Quality  Development  Authority dated as of December 1,
                 1985.  (Exhibit  to  CG&E's  1985 Form 10-K in File No.
                 1-1232.)

   4-kk         *Loan Agreement  between CG&E and the State of Ohio Air
                 Quality  Development  Authority dated as of December 1,
                 1985.  (Exhibit  to  CG&E's  1985 Form 10-K in File No.
                 1-1232.)

   4-ll         *Loan Agreement  between CG&E and the State of Ohio Air Quality
                 Development  Authority dated as of September 13, 1995. (Exhibit
                 to CG&E's September 30, 1995, Form 10-Q in File No. 1-1232.)

<PAGE>

  Exhibit
Designation                           Nature of Exhibit

   4-mm         *Loan Agreement  between CG&E and the State of Ohio Air Quality
                 Development  Authority dated as of September 13, 1995. (Exhibit
                 to CG&E's September 30, 1995, Form 10-Q in File No.
                 1-1232.)

   4-nn         *Loan  Agreement  between  CG&E  and the  State of Ohio
                 Water  Development  Authority  dated as of  January  1,
                 1994.  (Exhibit  to  CG&E's  1993 Form 10-K in File No.
                 1-1232.)

   4-oo         *Loan Agreement  between CG&E and the State of Ohio Air
                 Quality  Development  Authority  dated as of January 1,
                 1994.  (Exhibit  to  CG&E's  1993 Form 10-K in File No.
                 1-1232.)

   4-pp         *Original Indenture (Unsecured Debt Securities) between
                 CG&E and The Fifth Third Bank dated as of May 15, 1995.
                 (Exhibit  to CG&E's  Form 8-A dated July 24,  1995,  in
                 File No. 1-1232.)

   4-qq         *First  Supplemental  Indenture  between  CG&E  and The
                 Fifth Third Bank dated as of June 1, 1995.  (Exhibit to
                 CG&E's June 30, 1995, Form 10-Q in File No. 1-1232.)

   4-rr         *Second  Supplemental  Indenture  between  CG&E and The
                 Fifth Third Bank dated as of June 30, 1995. (Exhibit to
                 CG&E's  Form  8-A  dated  July  24,  1995,  in File No.
                 1-1232.)

   4-ss         *Third  Supplemental  Indenture  between  CG&E  and The
                 Fifth Third Bank dated as of October 9, 1997.  (Exhibit
                 to CG&E'S  September  30,  1997,  Form 10-Q in File No.
                 1-1232.)

Cinergy, CG&E, and ULH&P

   4-tt         *Original  Indenture  (First  Mortgage  Bonds)  between
                 ULH&P and The Bank of New York dated as of  February 1,
                 1949.  (Exhibit to ULH&P's  Registration  Statement No.
                 2-7793.)

   4-uu         *Seventh Supplemental Indenture between ULH&P
                 and The Bank of New York dated as of October
                 1, 1973.  (Exhibit to CG&E's Registration
                 Statement No. 2-60961.)

<PAGE>

  Exhibit
Designation                           Nature of Exhibit

   4-vv         *Thirteenth  Supplemental  Indenture  between ULH&P and
                 The  Bank of New  York  dated  as of  August  1,  1992.
                 (Exhibit to ULH&P's 1992 Form 10-K in File No. 2-7793.)

   4-ww         *Original Indenture (Unsecured Debt Securities) between
                 ULH&P  and the  Fifth  Third  Bank  dated as of July 1,
                 1995.  (Exhibit to ULH&P's June 30, 1995,  Form 10-Q in
                 File No. 2-7793)

   4-xx         *First  Supplemental  Indenture  between  ULH&P and The
                 Fifth Third Bank dated as of July 15, 1995. (Exhibit to
                 ULH&P's June 30, 1995, Form 10-Q in File No. 2-7793.)

Cinergy, CG&E, and PSI

   10-a         *+Amended and Restated Employment Agreement
                 dated October 24, 1994, among CG&E, Cinergy
                 Corp. (an Ohio corporation), Cinergy, PSI
                 Resources, Inc., PSI, and Jackson H.
                 Randolph.  (Exhibit to Cinergy's 1994 Form
                 10-K in File No. 1-11377.)

   10-b         *+Amended and Restated Employment  Agreement dated July
                 2, 1993, among PSI Resources, Inc., PSI, CG&E, Cinergy,
                 Cinergy Sub, Inc., and James E. Rogers, Jr. (Exhibit to
                 Cinergy's Amendment No. 3 to Form S-4, filed October 8,
                 1993.)

   10-c         *+First Amendment to Amended and Restated
                 Employment Agreement dated December 12,
                 1995, retroactively effective to October 24,
                 1994, amended and restated July 2, 1993,
                 among Cinergy, Cinergy Services, Inc.
                 (Services), CG&E, PSI, and James E. Rogers.
                 (Exhibit to Cinergy's, 1995 Form 10-K in
                 File No. 1-11377.)

   10-d         *+Employment Agreement dated January 1, 1995,
                 among Cinergy, CG&E, Services, Cinergy
                 Investments, Inc. (Investments), PSI, and
                 William J. Grealis. (Exhibit to Cinergy's
                 1994 Form 10-K in File No. 1-11377.)

   10-e         +First Amendment to Employment  Agreement dated January
                 1, 1997, among Cinergy,  CG&E,  Services,  Investments,
                 PSI, and William J. Grealis.

<PAGE>

  Exhibit
Designation                           Nature of Exhibit

   10-f         *+Employment Agreement dated October 24,
                 1994, among Cinergy, Services, CG&E, PSI,
                 and Larry E. Thomas. (Exhibit to Cinergy's
                 1995 Form 10-K in File No. 1-11377.)

   10-g         *+First Amendment to Employment Agreement
                 dated October 24, 1994, among Cinergy,
                 Services, CG&E, PSI, and Larry E. Thomas.
                 (Exhibit to Cinergy's 1995 Form 10-K in File
                 No. 1-11377.)

   10-h         *+Employment Agreement dated October 24,
                 1994, among Cinergy, Services, CG&E, PSI,
                 and J. Wayne Leonard.  (Exhibit to Cinergy's
                 1995 Form 10-K in File No. 1-11377.)

   10-i         *+First Amendment to Employment Agreement
                 dated October 24, 1994, among Cinergy,
                 Services, CG&E, PSI, and J. Wayne Leonard.
                 (Exhibit to Cinergy's 1995 Form 10-K in File
                 No. 1-11377.)

   10-j         *+Employment Agreement dated October 24,
                 1994, among Cinergy, Services, CG&E, PSI,
                 and Cheryl M. Foley. (Exhibit to Cinergy's,
                 1995 Form 10-K in File No. 1-11377.)

   10-k         *+First Amendment to Employment Agreement
                 dated October 24, 1994, among Cinergy,
                 Services, CG&E, PSI, and Cheryl M. Foley.
                 (Exhibit to Cinergy's 1995 Form 10-K in File
                 No. 1-11377.)

   10-l         *+Employment Agreement dated June 1, 1996,
                 among Cinergy, Services, CG&E, PSI, and
                 Elizabeth K. Lanier.  (Exhibit to Cinergy's
                 1996 Form 10-K in File No. 1-11377.)

   10-m         +Employment Agreement dated April 22, 1997,
                 among Cinergy, Services, CG&E, PSI, and
                 Madeleine W. Ludlow.

   10-n         +Employment Agreement dated October 1, 1997,
                 among Cinergy, Services, CG&E, PSI, and
                 Donald B. Ingle, Jr.

Cinergy and PSI

   10-o         *+Employment Agreement dated October 4, 1993,
                 among Cinergy, PSI, and John M. Mutz.
                 (Exhibit to PSI Resources, Inc.'s September
                 30, 1993, Form 10-Q in File No. 1-9941.)

<PAGE>

 Exhibit
Designation                           Nature of Exhibit

   10-p         *+First Amendment to Employment Agreement
                 dated August 30, 1996, among Cinergy, PSI,
                 and John M. Mutz.  (Exhibit to Cinergy's
                 1996 Form 10-K in File No. 1-11377.)

   10-q         *+Deferred Compensation Agreement, effective
                 as of January 1, 1992, between PSI and James
                 E. Rogers, Jr.  (Exhibit to PSI's Form 10-
                 K/A in File No. 1-3543, Amendment No. 1,
                 dated April 29, 1993.)

   10-r         *+Split Dollar Life Insurance Agreement,
                 effective as of January 1, 1992, between PSI
                 and James E. Rogers, Jr.  (Exhibit to PSI's
                 Form 10-K/A in File No. 1-3543, Amendment
                 No. 1, dated April 29, 1993.)

   10-s         *+First Amendment to Split Dollar Life
                 Insurance Agreement between PSI and James E.
                 Rogers, Jr. dated December 11, 1992.
                 (Exhibit to PSI's Form 10-K/A in File No. 1-
                 3543, Amendment No. 1, dated April 29,
                 1993.)

   10-t         *+PSI Union  Employees'  401(k) Savings Plan as amended
                 and restated January 1, 1992. (Exhibit to PSI Resources
                 1992 Form 10-K in File No. 1-9941.)

   10-u         *Amendment to PSI Union Employees' 401(k) Savings Plan,
                 amended and restated  December  17, 1996,  with various
                 effective  dates.  (Exhibit to Cinergy's 1996 Form 10-K
                 in File No. 1-11377.)

   10-v         *+First  Amendment to the PSI Union  Employees'  401(k)
                 Savings  Plan,  dated  December 31,  1995.  (Exhibit to
                 Cinergy's 1995 Form 10-K in File No. 1-11377.)

   10-w         *+PSI  Employees'  401(k)  Savings  Plan as amended and
                 restated  January 1, 1992.  (Exhibit  to PSI  Resources
                 1992 Form 10-K in File No. 1-9941.)

   10-x         *Amendment  to  PSI  Employees'  401(k)  Savings  Plan,
                 amended and restated  December  17, 1996,  with various
                 effective  dates.  (Exhibit to Cinergy's 1996 Form 10-K
                 in File No. 1-11377.)

<PAGE>

  Exhibit
Designation                           Nature of Exhibit

   10-y         *+First Amendment to the PSI Employees'
                 401(k) Savings Plan, dated December 31,
                 1995.  (Exhibit to Cinergy's 1995 Form 10-K
                 in File No. 1-11377.)

   10-z         *+PSI Supplemental Retirement Plan amended and restated
                 December 16, 1992,  retroactively  effective January 1,
                 1989. (Exhibit to PSI's 1992 Form 10-K in File No.
                 1-3543.)

   10-aa        *+PSI  Excess   Benefit   Plan,   formerly   named  the
                 Supplemental   Pension   Plan,   amended  and  restated
                 December 16, 1992,  retroactively  effective January 1,
                 1989.  (Exhibit  to PSI's  1992  Form  10-K in File No.
                 1-3543.)

Cinergy and CG&E

   10-bb        *+Deferred  Compensation  Agreement  between  CG&E  and
                 Jackson H. Randolph dated January 1, 1992.  (Exhibit to
                 CG&E's 1992 Form 10-K in File No. 1-1232.)

   10-cc        *+Split Dollar Insurance Agreement, effective
                 as of May 1, 1993, between CG&E and Jackson
                 H. Randolph.  (Exhibit to Cinergy's 1994
                 Form 10-K in File No. 1-11377.)

   10-dd        *+Amended and Restated Supplemental
                 Retirement Income Agreement between CG&E and
                 Jackson H. Randolph.  (Exhibit to Cinergy's,
                 1995 Form 10-K in File No. 1-11377.)

   10-ee        *CG&E Deferred Compensation and Investment
                 Plan, as amended and restated, effective
                 January 1, 1995.  (Exhibit to Cinergy's 1996
                 Form 10-K in File No. 1-11377.)

   10-ff        *CG&E Savings Incentive Plan, as amended and
                 restated, effective January 1, 1995.
                 (Exhibit to Cinergy's 1996 Form 10-K in File
                 No. 1-11377.)

   10-gg        +Amended and Restated Supplemental Executive Retirement
                 Income  Agreement  between  CG&E and certain  executive
                 officers.

   10-hh        *+Executive   Severance   Agreement  between  CG&E  and
                 certain  executive  officers.  (Exhibit  to CG&E's 1989
                 Form 10-K in File No. 1-1232.)


<PAGE>

  Exhibit
Designation                           Nature of Exhibit

Cinergy

   10-ii        *+Amendment to Executive Severance Agreement
                 between CG&E and certain executive officers.
                 (Exhibit to CG&E's 1992 Form 10-K in File
                 No. 1-1232.)

   10-jj        +1997 Amendments to Various Compensation and
                 Benefit Plans of Cinergy Corp., adopted
                 January 30, 1997.

   10-kk        *+Cinergy Stock Option Plan,  adopted October 18, 1994,
                 effective October 24, 1994.  (Exhibit to Cinergy's Form
                 S-8, filed October 19, 1994, in File No. 1-11377.)

   10-ll        *+Amendment  to  Cinergy  Stock  Option  Plan,  amended
                 October 22, 1996,  effective November 1, 1996. (Exhibit
                 to Cinergy's  September 30, 1996, Form 10-Q in File No.
                 1-11377.)

   10-mm        *+Cinergy  Performance Shares Plan, adopted October 18,
                 1994, effective October 24, 1994. (Exhibit to Cinergy's
                 Form S-8, filed October 19, 1994, in File No. 1-11377.)

   10-nn        *+Amendment to Cinergy Performance Shares Plan, amended
                 October 22, 1996,  effective November 1, 1996. (Exhibit
                 to Cinergy's  September 30, 1996, Form 10-Q in File No.
                 1- 11377.)

   10-oo        *+Cinergy  Annual  Incentive Plan,  adopted October 18,
                 1994, effective October 24, 1994. (Exhibit to Cinergy's
                 1994 Form 10-K in File No. 1-11377.)

   10-pp        *+Amendment to Cinergy Annual  Incentive Plan,  amended
                 January 25, 1996,  effective January 1, 1996.  (Exhibit
                 to Cinergy's 1996 10-K in File No. 1-11377.)

   10-qq        *Cinergy  Employee  Stock  Purchase  and Savings  Plan,
                 adopted October 18, 1994,  effective  October 24, 1994.
                 (Exhibit  to  Cinergy's  Form S-8,  filed  October  19,
                 1994.)

   10-rr        *Amendment  to Cinergy's  Employee  Stock  Purchase and
                 Savings Plan, adopted April 26, 1996, effective January
                 1, 1996. (Exhibit to Cinergy's June 30, 1996, Form 10-Q
                 in File No. 1-11377.)

<PAGE>

  Exhibit
Designation                           Nature of Exhibit

   10-ss        *Amendment  to Cinergy's  Employee  Stock  Purchase and
                 Savings  Plan,  adopted  October  22,  1996,  effective
                 November 1, 1996.  (Exhibit to Cinergy's  September 30,
                 1996, Form 10-Q in File No. 1-11377.)

   10-tt        *+Cinergy   Directors'   Deferred   Compensation  Plan,
                 adopted October 18, 1994,  effective  October 24, 1994.
                 (Exhibit  to  Cinergy's  Form S-8,  filed  October  19,
                 1994.)

   10-uu        *+Amendment to Cinergy's Directors' Deferred Compensation Plan,
                 adopted October 22, 1996.  (Exhibit to Cinergy's  September 30,
                 1996, Form 10-Q in File No. 1-11377.)

   10-vv        *+Cinergy   Retirement  Plan  for  Directors,   adopted
                 October 18, 1994,  effective October 24, 1994. (Exhibit
                 to Cinergy's 1994 Form 10-K in File No. 1-11377.)

   10-ww        *+Cinergy Executive Supplemental Life
                 Insurance Program adopted October 18, 1994,
                 effective October 24, 1994, consisting of
                 Defined Benefit Deferred Compensation
                 Agreement, Executive Supplemental Life
                 Insurance Program Split Dollar Agreement I,
                 and Executive Supplemental Life Insurance
                 Program Split Dollar Agreement II.  (Exhibit
                 to Cinergy's 1994 Form 10-K in File No. 1-
                 11377.)

   10-xx        *+Cinergy's 1996 Long-Term Incentive Compensation Plan,
                 adopted April 26, 1996.  (Exhibit to Cinergy's Schedule
                 14A Definitive Proxy Statement filed March 13, 1996, in
                 File No. 1-11377.)

   10-yy        *+Amendment  to  Cinergy's  1996  Long-Term   Incentive
                 Compensation Plan, adopted October 22, 1996,  effective
                 November 1, 1996.  (Exhibit to Cinergy's  September 30,
                 1996, Form 10-Q in File No. 1-11377.)

   10-zz        *+Cinergy's 401(k) Excess Plan, adopted
                 December 17, 1996.  (Exhibit to Cinergy's
                 1996 Form 10-K in File No. 1-11377.)



<PAGE>








  Exhibit
Designation                           Nature of Exhibit

   10-aaa       *+Cinergy's Nonqualified Deferred Incentive
                 Compensation Plan, adopted December 17,
                 1996.  (Exhibit to Cinergy's 1996 Form 10-K
                 in File No. 1-11377.)

Cinergy, CG&E, and PSI

   21            Subsidiaries of Cinergy, CG&E, and PSI

Cinergy, CG&E, PSI, and ULH&P

   23            Consent of Independent Public Accountants.

   24            Power of Attorney.

   27            Financial Data Schedules (included in
                 electronic submission only).

+  Management  contract,  compensation plan, or arrangement required to be filed
   as an exhibit pursuant to Item 14(c) of Form 10-K.


<PAGE>

<TABLE>
<CAPTION>
                                                            CINERGY CORP.
                                              SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
                                                FOR THE THREE YEARS ENDED DECEMBER 31, 1997

                 Col. A                        Col. B             Col. C                      Col. D            Col. E
                                                                Additions                   Deductions
                                                                                     For Purposes
                                             Balance at                  Charged       For Which              Balance at
                                             Beginning     Charged to    to Other    Reserves Were             Close of
              Description                    of Period       Income      Accounts      Created        Other     Period
                                                                           (in thousands)
<S>                                           <C>           <C>          <C>           <C>           <C>        <C>
Accumulated Provisions Deducted from
 Applicable Assets

  Allowance for Doubtful Accounts

    1997                                      $10 618       $12 582      $ 5 609       $ 18 427      $  -       $10 382

    1996                                      $94 409       $22 341      $ 9 503       $115 635      $  -       $10 618

    1995                                      $90 547       $33 921      $(8 489)      $ 21 570      $  -       $94 409 1/












<FN>
  1/  Includes $84,049 for the WVPA Marble Hill receivable.  See Note 12(e) of the "Notes to Financial Statements" in
      "Item 8.  Financial Statements and Supplementary Data."
</FN>
</TABLE>

<PAGE>
<TABLE>
<CAPTION>
                                              THE CINCINNATI GAS AND ELECTRIC COMPANY
                                          SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
                                            FOR THE THREE YEARS ENDED DECEMBER 31, 1997

                 Col. A                        Col. B             Col. C                      Col. D              Col. E _
                                                                 Additions                  Deductions
                                                                                     For Purposes
                                             Balance at                  Charged       For Which               Balance at
                                             Beginning     Charged to    to Other    Reserves Were              Close of
              Description                    of Period       Income      Accounts      Created        Other      Period
                                                                           (in thousands)
<S>                                            <C>          <C>          <C>            <C>          <C>         <C>
Accumulated Provisions Deducted from
 Applicable Assets

  Allowance for Doubtful Accounts

    1997                                       $9 178       $ 6 484      $ 5 609        $12 072      $  -        $9 199

    1996                                       $9 615       $17 297      $ 6 669        $24 403      $  -        $9 178

    1995                                       $8 999       $27 623      $(8 496)       $18 511      $  -        $9 615


















</TABLE>

<PAGE>
<TABLE>
<CAPTION>


                                                          PSI ENERGY, INC.
                                           SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
                                             FOR THE THREE YEARS ENDED DECEMBER 31, 1997

                 Col. A                       Col. B             Col. C                      Col. D              Col. E
                                                               Additions                   Deductions
                                                                                    For Purposes
                                            Balance at                  Charged       For Which               Balance at
                                            Beginning     Charged to    to Other    Reserves Were              Close of
              Description                   of Period       Income      Accounts      Created        Other      Period
                                                                           (in thousands)
<S>                                          <C>            <C>          <C>           <C>          <C>        <C>
Accumulated Provisions Deducted from
 Applicable Assets

  Allowance for Doubtful Accounts

    1997                                     $ 1 269        $6 098       $  -          $ 6 184      $  -       $ 1 183

    1996                                     $84 517        $5 041       $2 834        $91 123      $  -       $ 1 269

    1995                                     $81 272        $6 100       $    7        $ 2 862      $  -       $84 517 1/














<FN>
  1/  Includes $84,049 for the WVPA Marble Hill receivable.  See Note 12(e) of the "Notes to Financial Statements" in "Item 8.
      Financial Statements and Supplementary Data."
</FN>
</TABLE>

<PAGE>

<TABLE>
<CAPTION>








                                               THE UNION LIGHT, HEAT AND POWER COMPANY
                                           SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
                                                FOR THE YEAR ENDED DECEMBER 31, 1997

                 Col. A                        Col. B             Col. C                      Col. D              Col. E
                                                                 Additions                  Deductions
                                                                                     For Purposes
                                             Balance at                  Charged       For Which               Balance at
                                             Beginning     Charged to    to Other    Reserves Were              Close of
              Description                    of Period       Income      Accounts      Created        Other      Period _
                                                                           (in thousands)
<S>                                            <C>           <C>          <C>           <C>          <C>         <C>
Accumulated Provisions Deducted from
 Applicable Assets

  Allowance for Doubtful Accounts

    1997                                       $1 024        $1 579       $  691        $2 298       $  -        $  996

    1996                                       $1 035        $1 862       $1 577        $3 450       $  -        $1 024

    1995                                       $  457        $3 010       $  -          $2 432       $  -        $1 035








</TABLE>







<PAGE>



                                 SIGNATURES

     Pursuant  to the  requirements  of  Section  13 or 15(d) of the  Securities
Exchange Act of 1934, Cinergy Corp., The Cincinnati Gas & Electric Company,  PSI
Energy,  Inc., and The Union Light, Heat and Power Company have each duly caused
this  report to be  signed on its  behalf  by the  undersigned,  thereunto  duly
authorized.

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

Dated:  March 26, 1998

                                    By         /s/ James E. Rogers
                                                 James E. Rogers
                                                  Vice Chairman


<PAGE>







     Pursuant to the  requirements of the Securities  Exchange Act of 1934, this
report  has  been  signed  below  by the  following  persons  on  behalf  of the
Registrants and in the capacities and on the dates indicated.

       Signature                       Title                     Date
Cinergy, CG&E, PSI, and ULH&P
  Jackson H. Randolph          Chairman

Cinergy
  Neil A. Armstrong            Director
  Phillip R. Cox               Director
  Kenneth M. Duberstein        Director
  George C. Juilfs             Director
  Melvin Perelman              Director
  Thomas E. Petry              Director
  John J. Schiff, Jr.          Director
  Philip R. Sharp              Director
  Dudley S. Taft               Director
  Oliver W. Waddell            Director

Cinergy and PSI
  James K. Baker               Director
  Michael G. Browning          Director
  John A. Hillenbrand II       Director
  Van P. Smith                 Director

CG&E and ULH&P
  William J. Grealis           President and Director

PSI
  John M. Mutz                 President and Director

ULH&P
  Cheryl M. Foley              Vice President, General Counsel,
                                   Secretary, and Director
  J. Wayne Leonard             Vice President and Director
  Larry E. Thomas              Vice President and Director


Cinergy, CG&E, PSI, and ULH&P


    /s/James E. Rogers             Vice Chairman, Chief         March 26, 1998
      James E. Rogers         Executive Officer, and Director
  Attorney-in-fact for all         President of Cinergy
   the foregoing persons       (Principal Executive Officer)


   /s/Madeleine W. Ludlow           Vice President and          March 26, 1998
    Madeleine W. Ludlow           Chief Financial Officer
                                     Director of ULH&P
                               (Principal Financial Officer)


     /s/John P. Steffen       Vice President and Comptroller    March 26, 1998
      John P. Steffen         (Principal Accounting Officer)