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, 1998

                                      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) 421-9500

  1-1232          THE CINCINNATI GAS & ELECTRIC COMPANY        31-0240030
                         (An Ohio Corporation)
                         139 East Fourth Street
                         Cincinnati, Ohio  45202
                             (513) 421-9500

  1-3543                     PSI ENERGY, INC.                  35-0594457
                         (An Indiana Corporation)
                          1000 East Main Street
                        Plainfield, Indiana  46168
                              (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) 421-9500

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     New York Stock Exchange
  & Electric Company      4%
                        Junior Subordinated            New York Stock Exchange
                          Debentures 8.28%

PSI Energy, Inc.        Cumulative Preferred Stock     New York Stock Exchange
                          4.32%, 4.16%, 6 7/8%

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. (X)

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 January 31, 1999,  the aggregate  market value of the voting and nonvoting
common equity of Cinergy Corp. held by nonaffiliates was $4.9 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 January 31, 1999,  shares of Common Stock  outstanding for each registrant
were as listed:

                              Company                                  Shares   
Cinergy  Corp.,  par  value  $.01 per share                          158,681,157
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 15, 1999, and the Information
Statement  of PSI  Energy,  Inc.  dated  March 22,  1999,  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>



47

                                TABLE OF CONTENTS
 Item                                                                  Page
Number                                                                Number

                                     PART I
  1      Business
           Organization . . . . . . . . . . . . . . . . . . . . . .       4
           ECBU . . . . . . . . . . . . . . . . . . . . . . . . . .       5
           EDBU . . . . . . . . . . . . . . . . . . . . . . . . . .       6
           ESBU . . . . . . . . . . . . . . . . . . . . . . . . . .       7
           IBU. . . . . . . . . . . . . . . . . . . . . . . . . . .       8
           Regulation . . . . . . . . . . . . . . . . . . . . . . .       9
           Competitive Pressures, Capital Resources, and
             Year 2000. . . . . . . . . . . . . . . . . . . . . . .      10
           Employees. . . . . . . . . . . . . . . . . . . . . . . .      10
  2      Properties . . . . . . . . . . . . . . . . . . . . . . . .      11
           ECBU . . . . . . . . . . . . . . . . . . . . . . . . . .      11
           EDBU . . . . . . . . . . . . . . . . . . . . . . . . . .      12
           IBU. . . . . . . . . . . . . . . . . . . . . . . . . . .      12
  3      Legal Proceedings
           Manufactured Gas Plant Claims. . . . . . . . . . . . . .      13
           United Scrap Lead Site . . . . . . . . . . . . . . . . .      13
  4      Submission of Matters to a Vote of Security Holders. . . .      13
         Executive Officers of the Registrants. . . . . . . . . . .      14

                                     PART II

  5      Market for Registrant's Common Equity
           and Related Stockholder Matters. . . . . . . . . . . . .      19
  6      Selected Financial Data. . . . . . . . . . . . . . . . . .      19
  7      Management's Discussion and Analysis of Financial
           Condition and Results of Operations. . . . . . . . . . .      21
  7A     Quantitative and Qualitative Disclosures About
           Market Risk. . . . . . . . . . . . . . . . . . . . . . .      47
         Index to Financial Statements and Financial Statement
           Schedules. . . . . . . . . . . . . . . . . . . . . . . .      48
  8      Financial Statements and Supplementary Data. . . . . . . .      49
  9      Changes in and Disagreements with Accountants on
           Accounting and Financial Disclosure. . . . . . . . . . .     130

                                    PART III

 10      Directors and Executive Officers of the Registrants. . . .     130
 11      Executive Compensation . . . . . . . . . . . . . . . . . .     131
 12      Security Ownership of Certain Beneficial Owners
           and Management . . . . . . . . . . . . . . . . . . . . .     143
 13      Certain Relationships and Related Transactions . . . . . .     144

                                     PART IV

 14      Exhibits, Financial Statement Schedules, and
           Reports on Form 8-K
             Financial Statements and Schedules . . . . . . . . . .     144
             Reports on Form 8-K. . . . . . . . . . . . . . . . . .     144
             Exhibits . . . . . . . . . . . . . . . . . . . . . . .     144
         Signatures . . . . . . . . . . . . . . . . . . . . . . . .     159



<PAGE>



                                     PART I

                                ITEM 1. BUSINESS

ORGANIZATION

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

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 The  Cincinnati Gas & Electric
Company  ("CG&E") and PSI Resources,  Inc. Cinergy is the parent holding company
of PSI Energy, Inc. ("PSI"),  CG&E, Cinergy Investments,  Inc.  ("Investments"),
Cinergy Global Resources, Inc. ("Global Resources"),  and Cinergy Services, Inc.
("Services").

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.

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

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
3,200 square  miles,  has an estimated  population  of 2.0 million  people,  and
includes the cities of Cincinnati and Middletown in Ohio,  Covington and Newport
in Kentucky, and Lawrenceburg in Indiana.

ULH&P 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 322,000 people, and includes the cities of Covington
and Newport in Kentucky.

Investments holds virtually all of Cinergy's domestic non-utility businesses and
interests.  Global  Resources,  formed  in  1998,  principally  holds  Cinergy's
international  businesses  and certain  other  interests.  Services is a service
company for the Cinergy  system,  providing  member  companies with a variety of
administrative, management, and support services.

Cinergy conducts its operations through various subsidiaries and affiliates. The
Company is functionally organized into four business units through which many of
its activities are conducted:  Energy Commodities Business Unit ("ECBU"), Energy
Delivery Business Unit ("EDBU"), Energy Services Business Unit ("ESBU"), and the
International  Business Unit  ("IBU").  The  traditional,  vertically-integrated
utility  functions  have been  realigned  into the ECBU,  EDBU,  and ESBU.  Each
business unit and its  responsibilities as of December 31, 1998, is described in
detail below. As the industry continues its evolution,  Cinergy will continually
analyze its operating  structure and make  adjustments as appropriate.  In early
1999,  certain  organizational  changes were begun to further align the business
units to reflect Cinergy's strategic vision. Reference is made to Note 15 of the
"Notes  to  Financial   Statements"  in  "Item  8.   Financial   Statements  and
Supplementary  Data" for a discussion on financial  information by business unit
as of December 31, 1998.


<PAGE>



ECBU

Cinergy, CG&E, and PSI

The ECBU operates and maintains  the majority of Cinergy's  domestic  generating
assets  which  are  owned by CG&E and PSI and  located  in  Ohio,  Indiana,  and
Kentucky. These generating plants are mostly coal-fired and have the capacity to
generate  approximately  11,000 megawatts  ("MW") of electricity.  (Reference is
made to "Item 2.  Properties" for a discussion on these  generating  sites.) The
ECBU produces energy for CG&E, PSI, and ULH&P native load customers.

The ECBU is also involved in energy risk management,  wholesale energy marketing
and trading, and financial  restructuring  services.  Wholesale energy marketing
and trading  operations  are conducted  through CG&E and PSI, as well as through
Cinergy Capital & Trading,  Inc. ("CC&T"), a subsidiary of Investments,  and its
subsidiaries.  In 1998, CC&T acquired Producers Energy Marketing, LLC, a natural
gas marketing and trading  operation.  In 1997, CC&T acquired  Greenwich  Energy
Partners,   which  specializes  in  energy  risk  management,   marketing,   and
proprietary  arbitrage.  For  information  on the risks  associated  with  these
activities  see "Market Risk  Sensitive  Instruments  and Positions" in "Item 7.
Management's  Discussion  and  Analysis of  Financial  Condition  and Results of
Operations."

Fuel Supply

Cinergy, CG&E, and PSI

Approximately 27 million tons of coal are purchased annually for use by CG&E and
PSI. The majority of the coal required is obtained through long-term coal supply
agreements,  with the  remaining  requirements  purchased on the spot market and
through short-term supply agreements.  The coal delivered under these agreements
is  primarily  from  mines  located  in  West  Virginia,   Ohio,  Kentucky,  and
Pennsylvania for CG&E, and Indiana,  Illinois,  Pennsylvania,  and West Virginia
for PSI.

Alternative sources of fuel are monitored to assure a continuing availability of
economical fuel supplies. Cinergy's practice of purchasing a portion of its coal
requirements  on  the  spot  market  and  the  continued  investigation  of  the
least-cost coal options in connection with its compliance with the Clean Air Act
Amendments of 1990 will be maintained.  (See the information appearing under the
caption "Environmental Issues" in "Item 7. Management's  Discussion and Analysis
of Financial Condition and Results of Operations.")

It is  believed  that  sufficient  coal  can be  obtained  to  meet  the  future
generating  requirements  of CG&E and PSI.  However,  the ability to predict the
extent to which coal availability and price may ultimately be affected by future
environmental requirements is uncertain.

Gas Supply

Cinergy, CG&E, and ULH&P

The purchase of natural gas by CG&E and its  subsidiaries  is coordinated by the
ECBU. The EDBU is responsible for the subsequent  delivery of such gas to native
load  customers.  In 1998, 45% of the natural gas supply was purchased 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 to meet its core  requirements,  and "swing" load, which is gas available
on a daily basis to accommodate changes in demand.  Reservation charges are paid
for firm-base and swing  supplies.  These  charges  guarantee  delivery from the
supplier during extreme weather.



<PAGE>



As the trend of customers purchasing gas directly from gas marketers (suppliers)
and using CG&E and its subsidiaries'  facilities for  transportation  increases,
the companies seek to minimize contract commitment costs to firm suppliers,  and
minimize the amount of  reservation  charges paid to suppliers  for firm supply.
Accordingly,  it is anticipated that not more than 50% of the gas supply will be
purchased  from  firm  supply  agreements  in 1999.  (Refer  to the  information
appearing under the caption  "Customer  Choice" in the  "Competitive  Pressures"
section of "Item 7. Management's  Discussion and Analysis of Financial Condition
and  Results of  Operations"  for a  discussion  of CG&E's  gas  customer-choice
program.)

Gas purchased is  transported  on interstate  pipelines  either  directly to the
distribution  systems,  or it is injected into pipeline  storage  facilities for
withdrawal  and  delivery  in the  future.  The  majority  of the  gas  supplies
originates  from the Gulf of  Mexico  coastal  area of Texas and  Louisiana.  In
addition,  limited  supplies  originate  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.

Environmental Matters

Cinergy, CG&E, and PSI

The  coal-fired   generation  of  the  utility   subsidiaries   faces  potential
restrictions  on carbon dioxide and nitrogen oxide ("NOx")  emissions.  Proposed
NOx limits could require capital costs currently  estimated at approximately $38
million for 1999, and $500 million to $700 million (in 1998 dollars) between now
and 2003.

For additional information,  see "Environmental Issues" in "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations."

EDBU

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

The EDBU is  comprised  of  Cinergy's  domestic  transmission  and  distribution
operations.  Through the EDBU they plan, design,  build,  operate,  and maintain
wire and pipe systems on behalf of Cinergy's domestic utility companies designed
to deliver energy commodities to customers.  Approximately  45,000 circuit miles
of  electric  lines  were  operated  to  provide   regulated   transmission  and
distribution  service to 1.4 million  customers  as of December  31,  1998,  and
approximately  7,000  miles of gas mains and  service  lines  were  operated  to
provide regulated distribution service to approximately 470,000 customers at the
end of 1998.  (Reference is made to "Item 2. Properties" for a discussion on the
transmission  and  distribution  lines that Cinergy  owns through its  regulated
subsidiaries.) The EDBU provides  transmission and distribution  services to the
ESBU on behalf of CG&E,  PSI, and ULH&P for delivery of gas and  electricity  to
the end-use customer.

Electric Operations

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

The EDBU,  through  Cinergy's  domestic utility  subsidiaries,  as well as other
non-affiliated  utilities in an  eight-state  region,  participates  in the East
Central Area Reliability  Coordination  Agreement ("ECAR  Agreement").  The ECAR
Agreement  coordinates the planning and operation of generating and transmission
facilities,  which  provides  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 is interconnected with the electric systems of Indiana
Michigan Power Company,  Columbus  Southern  Power Company  ("CSP"),  Ohio Power
Company (all doing business as American Electric Power Company,  Inc.),  Central
Illinois  Public  Service  Company (doing  business as Ameren  Corp.),  Kentucky
Utilities  Company and Louisville Gas & Electric Company (both doing business as
LG&E Energy Corp.), East Kentucky Power Cooperative,  Inc., Hoosier Energy Rural
Electric  Cooperative,  Inc.,  Indianapolis  Power and Light  Company,  Northern
Indiana Public Service Company,  Southern Indiana Gas and Electric Company,  The
Dayton Power and Light Company ("DP&L"), and Ohio Valley Electric Corporation.

Cinergy, CG&E, and PSI

CG&E,  CSP,  and DP&L have  constructed  electric  generating  units and related
transmission  facilities  on varying  common  ownership  bases.  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.  (Refer to Note 13 of the "Notes to Financial Statements"
in "Item 8.  Financial  Statements and  Supplementary  Data" for a discussion on
CG&E's and PSI's jointly owned plants.)

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 Federal Energy Regulatory Commission ("FERC").

Other Activities of the EDBU

Cinergy

Various  Cinergy  subsidiaries,  through the EDBU,  are  entering  non-regulated
businesses related to its core business. These businesses include:  locating and
constructing underground facilities;  constructing and owning telecommunications
infrastructure;  and  engineering,   procuring,  constructing,   operating,  and
maintaining electric and gas equipment for others.

ESBU

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

The ESBU is  responsible  for  Cinergy's  relationships  with retail  customers,
including  gas and  electric  sales and  marketing to both native load and other
retail customers,  meter reading, order completion,  billing,  credit collection
services, and account problem solving.



<PAGE>



Customer, Sales Territory, and Revenue Data

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

The percent of operating  revenues  derived from the sale of electricity and the
sale and  transportation  of natural gas for each registrant for the years ended
December 31 are as follows:

                                           Operating Revenues
Registrant                       1998             1997             1996
                             Electric  Gas    Electric  Gas    Electric  Gas
Cinergy and subsidiaries        81%    18%       88%    11%       85%    14%
CG&E and subsidiaries           86%    14%       80%    20%       76%    24%
PSI                            100%    n/a      100%    n/a      100%    n/a
ULH&P                           74%    26%       71%    29%       71%    29%

Regulated operations are conducted through Cinergy's regulated subsidiaries. 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.  The area served by PSI is a  residential,
agricultural,  and widely  diversified  industrial  territory.  No one  customer
accounts for more than 10% of operating revenues for PSI, 10% of electric or gas
operating revenues for CG&E and its utility subsidiaries,  or 10% of electric or
gas operating revenues for ULH&P.

Electric  sales are  seasonal,  due to increased  electricity  usage for heating
during the winter and air  conditioning  during the  summer.  Electricity  usage
peaks during the summer. Gas sales are also seasonal, with winter being the peak
time period due to heating during the cold months.

Other Activities of the ESBU

Cinergy

The ESBU,  through various  non-regulated  subsidiaries  and joint ventures,  is
responsible  for the  development and marketing of products and services to meet
retail customers' needs.  These products and services include:  retail marketing
of natural gas and  electricity;  energy-related  asset  management  services to
commercial and industrial  customers;  energy management and consulting services
to commercial customers that operate retail facilities; bundled billing services
for residential and small business customers;  and telecommunications  services.
The  ESBU,  through  various  non-regulated  companies,   also  invests  in  the
development of thermal and chilled water energy facilities through joint venture
arrangements with Trigen Energy Corporation.

IBU

Cinergy

The IBU manages  Cinergy's direct and indirect  international  business holdings
through Global Resources and its subsidiaries in more than ten countries.

Cinergy, through a subsidiary of Global Resources, along with GPU, Inc. formed a
50%/50% joint  venture,  Avon Energy  Partners  Holdings  ("Avon  Energy"),  and
acquired Midlands  Electricity plc ("Midlands") in June 1996. Midlands primarily
distributes and supplies electricity to over 2.2 million industrial, commercial,
and residential  customers in the United Kingdom ("UK"). In addition,  Midlands,
together with its subsidiaries,  generates power, supplies natural gas to retail
customers,  and performs  electrical  contracting  services.  In November  1998,
Midlands  entered  into an  agreement,  which is  subject  to  governmental  and
regulatory  approvals,  to sell its power supply business to National Power PLC.
(See Note 10 of the "Notes to Financial Statements" in "Item 8.
Financial  Statements and Supplementary Data" for summarized  financial data for
Avon Energy.)

During  1998,  Cinergy  received  approval  from  the  Securities  and  Exchange
Commission  ("SEC")  to invest up to 100% of its  retained  earnings  in foreign
utility  companies  ("FUCOs") and "exempt  wholesale  generators"  ("EWGs").  At
December 31, 1998, Cinergy's consolidated retained earnings equaled $945 million
and its aggregate  investment  in EWGs and FUCOs totaled $619 million,  of which
approximately $108 million was invested during 1998.

Cinergy continues to pursue energy-related investment opportunities.  The timing
of such  investments  will depend on changing  market  conditions and regulatory
approvals.  Certain  risks such as foreign  exchange  risk are inherent in these
types of  investments.  Cinergy  implements  a  variety  of  agreements  such as
currency swap agreements or contracts  pegged to the United States ("US") dollar
to mitigate risks associated with international investment.  Nonetheless,  it is
not possible to mitigate all risks. (Reference is made to "Market Risk Sensitive
Instruments and Positions" in "Item 7.  Management's  Discussion and Analysis of
Financial Condition and Results of Operations.")

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 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.

CG&E,  ULH&P,  and PSI are each  subject  to  regulation  by the 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.  Transportation  of gas between  CG&E and
ULH&P by KO  Transmission is subject to regulation by the FERC under the Natural
Gas Act.

CG&E, ULH&P, and PSI are subject to regulation by their respective state utility
commissions as to retail rates, services,  accounts,  depreciation,  issuance of
securities, acquisitions, and sales of certain utility properties.

Refer to the  information  appearing  under the caption  "Rate  Orders and Other
Regulatory  Matters"  in  "Item  7.  Management's  Discussion  and  Analysis  of
Financial  Condition and Results of  Operations"  and Note 1(f) of the "Notes to
Financial  Statements" in "Item 8. Financial  Statements and Supplementary Data"
for  additional  discussions  on rate  orders  in effect  and  other  regulatory
matters.

Cinergy

Midlands is subject to regulation by the UK's Office of Electricity  Regulation.
Midlands'  rates are subject to  regulatory  review  every five years,  with the
results of the next review  scheduled to become  effective on April 1, 2000. The
supply business  franchise  license,  which Midlands intends to sell to National
Power plc,  currently  applies only to customers having an annual maximum demand
of less than 100 kilowatt-hours ("kwh"). Customers with a higher demand are able
to buy their  electricity  from any  electricity  supplier.  (See Note 10 of the
"Notes  to  Financial   Statements"  in  "Item  8.   Financial   Statements  and
Supplementary  Data" for a discussion  of the pending  sale of Midlands'  supply
business.)

On October 28, 1998,  Midlands opened up a section of its market to competition.
Domestic  and small  business  customers  within those areas were free from that
date to move to a new electricity supplier.  Midlands, similar to other regional
electric suppliers, is opening up its market to competition in phases. Midlands'
market is expected to be  completely  open by March 1999.  Opening the market to
competition  enabled  Midlands  to  compete  for  domestic  and  small  business
customers  outside of its service area as permitted,  and also enabled Midlands'
competitors to compete for Midlands' customers.

COMPETITIVE PRESSURES, CAPITAL RESOURCES, AND YEAR 2000

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

Refer to the  information  appearing  under the applicable  captions in "Item 7.
Management's  Discussion  and  Analysis of  Financial  Condition  and Results of
Operations" for discussions regarding Competitive Pressures,  Capital Resources,
and Year 2000.

EMPLOYEES

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

The number of  employees of Cinergy and its  subsidiaries  at December 31, 1998,
was 8,794, of whom 1,260 were employed by  international  subsidiaries.  Cinergy
and its utility  subsidiaries  have  collective  bargaining  agreements with the
International   Brotherhood   of  Electrical   Workers   ("IBEW"),   the  United
Steelworkers of America ("USWA"),  and the Independent  Utilities Union ("IUU").
The following is a table showing the number of employees for each  registrant by
classification:

         Classification        Cinergy     CG&E        PSI       ULH&P

         IBEW                   2,808      1,099 (a)  1,344 (d)    69 (a)
         USWA                     403        287 (b)    n/a        92 (b)
         IUU                    1,022        514 (c)    n/a        61 (c)
         Non-Bargaining         3,301        394        663        24
         International          1,260 (e)    n/a        n/a       n/a
                                8,794      2,294      2,007       246

(a)     Contract will expire April 1, 2001.
(b)     Contract will expire May 15, 2002.
(c)     Contract will expire April 1, 2001.
(d)     Contract  will expire April 30,  1999.  (See Note 12(e) of the "Notes to
        Financial Statements" in "Item 8. Financial Statements and Supplementary
        Data" for further information.)
(e)     Of this number, 847 belonged to bargaining units.



<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" for a  discussion  of
jointly-owned plant.

Cinergy, CG&E, and PSI

ECBU

At December 31, 1998,  Cinergy's 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>

<S>                                <C>                      <C>       <C>       <C>
                                                                      Principal     Net
                                                             Percent    Fuel    Capability
             Plant Name                  Location           Ownership  Source       MW

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>



The 1998 peak loads  (exclusive of off-system  transactions)  occurred in August
for  CG&E at  4,725 MW and in July for PSI at  5,708  MW.  For the  period  1999
through 2008, peak load and kwh sales for CG&E and PSI are each forecast to have
annual growth of 2% and 1%,  respectively.  These forecasts reflect load growth,
alternative fuel choices,  population  growth,  and housing starts,  and exclude
non-firm power transactions and any potential  off-system,  long-term firm power
sales.  During 1998,  substantially  all of CG&E's and PSI's kwh  generation was
from coal-fired units.

EDBU

Outlined in the following table are the electric  transmission  and distribution
systems (excluding  jointly-owned portions) for Cinergy, CG&E, PSI, and ULH&P as
of December 31, 1998:

                                    Electric      Electric        Substation
                                  Transmission  Distribution       Combined
                                    Systems       Systems          Capacity
                                       (circuit miles)        (kilovolt-amperes)

          Cinergy and subsidiaries   7 056         37 470         50 002 861
          CG&E and subsidiaries      1 788         17 551         21 518 202
          PSI                        5 268         19 919         28 484 659
          ULH&P                        105          2 529          1 094 548

A portion of CG&E's total  transmission  system is jointly  owned,  primarily in
conjunction with its jointly-owned  electric generating units. Further,  certain
portions of PSI's  transmission  systems are  jointly  owned.  In addition to an
intercompany tie between CG&E's and PSI's electric systems,  Cinergy's  electric
system is interconnected with 10 other utilities.

At year-end,  CG&E's natural gas distribution system consisted of 5,836 miles of
mains  and  service  lines  located  in  southwestern  Ohio.  CG&E also owns two
propane/air peakshaving plants. Associated with these plants are two underground
caverns  with a total  capacity  of fifteen  million  gallons.  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.

At year-end, ULH&P's natural gas distribution system consisted of 1,331 miles of
mains  and  service  lines  located  in  northern  Kentucky.  ULH&P  also owns a
propane/air  peakshaving  plant.  Further,  ULH&P  owns a seven  million  gallon
capacity  underground  storage  cavern for liquid  propane  and  related  liquid
propane  feeder lines located in northern  Kentucky,  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

IBU

As of  December  31,  1998,  Cinergy  had  interests  in  4,479  MW of  electric
generating plants. This includes Cinergy's international  subsidiaries,  as well
as jointly-owned  investments.  Additionally,  ownership of two district heating
plants provides 816 MW of thermal capacity,  of which 132 MW can be converted to
electricity.  Cinergy also owns  interests in 39,133 miles of  transmission  and
distribution   systems   through   jointly-owned   investments.   Through  these
investments, Cinergy serves 2.24 million transmission and distribution customers
and 16,500  retail  district  heating  customers  (served  through 275 wholesale
customers).


                            ITEM 3. LEGAL PROCEEDINGS

Cinergy, CG&E, and PSI

Manufactured Gas Plant Claims

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

Cinergy and CG&E

United Scrap Lead Site

The United States Environmental  Protection Agency ("EPA") alleged that CG&E was
a Potentially Responsible Party under the Comprehensive  Environmental Response,
Compensation  and Liability Act liable for cleanup of the United Scrap Lead Site
in Troy, Ohio. CG&E was one of approximately  200 companies so named. In January
1998, CG&E executed a de minimis settlement agreement. This agreement, which was
accepted by the Federal  District Court in October 1998,  fully resolves  CG&E's
liability for the site.

ULH&P

ULH&P has no material pending legal proceedings.


           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, 1999)

                         Age at
                        Dec. 31,
         Name             1998           Office & Date Elected or in Job

Cinergy, CG&E, and PSI

Jackson H. Randolph        68      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            51      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            51      Vice President and General Counsel of CG&E
                                     - 1998
                                   President, IBU of Cinergy - 1997
                                   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

William J. Grealis (1)     53      Vice President and Chief Strategic Officer
                                     of Cinergy, CG&E, and PSI - 1998
                                   President,  ESBU of  Cinergy  (2) - 1996 Vice
                                   President of Cinergy - 1995 President of CG&E
                                   (3) - 1995  President of  Investments  - 1995
                                   President,  Gas Business  Unit of CG&E - 1995
                                   Partner - Akin, Gump, Strauss, Hauer &
                                     Feld (4) - 1978

J. Joseph Hale, Jr.        49      Vice President of CG&E and PSI - 1998
                                   Vice President of Cinergy - 1996
                                   General Manager, Marketing Operations of
                                     CG&E - 1995
                                   President of Cinergy Foundation, Inc. (5) -
                                     1992

Donald B. Ingle, Jr.       49      Vice President of Cinergy, CG&E, and PSI
                                     (2) - 1997
                                   President,   ESBU  of  Cinergy   (2)  -  1997
                                   Contract  Consultant  -  Investments  -  1995
                                   President and Chief Executive Officer -
                                     CornerStone Industries, Inc. (4) - 1992



<PAGE>



EXECUTIVE OFFICERS OF THE REGISTRANTS (continued)

                         Age at
                        Dec. 31,
         Name             1998           Office & Date Elected or in Job

Madeleine W. Ludlow        44      President, ECBU of Cinergy and Vice
                                     President of Cinergy, CG&E, and PSI (6) -
                                     1998
                                   Vice President and Chief Financial Officer
                                     of Cinergy, CG&E, and PSI - 1997
                                   Vice President - Enterprise Diversified
                                     Holdings Incorporated ("EDHI"), a
                                     subsidiary of Public Service Enterprise
                                     Group Incorporated (4) - 1996
                                   Vice President and Treasurer - EDHI (4)
                                     - 1992

William L. Sheafer         55      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            46      Vice President and Comptroller of Cinergy,
                                     CG&E, and PSI - 1998
                                   Comptroller of Cinergy, CG&E, and PSI (7) -
                                     1997
                                   Assistant Comptroller of CG&E - 1995
                                   Assistant Comptroller of Cinergy and PSI -
                                     1994
                                   Assistant Controller of CG&E - 1991

Larry E. Thomas            53      Vice President of Cinergy, CG&E, and PSI -
                                     1997
                                   President, EDBU 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

Charles J. Winger          53      Vice President and Chief Financial Officer
                                     of Cinergy, CG&E, and PSI (6) - 1998
                                   Vice President of Cinergy - 1997
                                   Vice President and Comptroller of Cinergy,
                                     CG&E,  and  PSI (7) - 1997  Comptroller  of
                                   CG&E - 1995  Comptroller  of  Cinergy  - 1994
                                   Comptroller of Resources - 1988


<PAGE>



EXECUTIVE OFFICERS OF THE REGISTRANTS (continued)

                         Age at
                        Dec. 31,
         Name             1998           Office & Date Elected or in Job

Cinergy and PSI

John M. Mutz               63      Vice President of Cinergy - 1995
                                   President of PSI - 1994
                                   President of Resources - 1993

Cinergy

John Bryant                52      Vice President of Cinergy - 1998
                                   Managing Director of Cinergy Global Power
                                     Services Limited, Cinergy's international
                                     project development subsidiary (9) - 1997
                                   Executive Generation Director - Midlands -
                                     1996
                                   Generation Director - Midlands - 1992

Michael J. Cyrus (10)      43      Chief Operating Officer, ECBU of Cinergy -
                                     1998
                                   Vice President of Cinergy - 1998
                                   Senior Vice President - Electric
                                     Clearinghouse, Inc. ("ECI") (4) - 1997
                                   President - NGC Canada (4) - 1995
                                   Executive Vice President - Novagas
                                     Clearinghouse Ltd. (4) - 1995
                                   Vice President, Energy Trading & Risk
                                     Management - Natural Gas Clearinghouse
                                     ("NGC") (4) - 1994
                                   Director, Option Trading - NGC (4) - 1993

M. Stephen Harkness        50      Vice President of Cinergy - 1996
                                   Executive Vice President and Chief
                                     Operating Officer of Trigen-Cinergy
                                     Solutions LLC (11) - 1996
                                   General Manager, Corporate Development
                                     and Financial Services of Cinergy - 1994

Jerry W. Liggett           57      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

CG&E

James L. Turner            39      President of CG&E (12) - 1999
                                   Vice President of Cinergy Services - 1997
                                   Senior Counsel of Cinergy - 1995
                                   Principal - Lewis & Kappes, P.C. (4)(13) -
                                     1993

<PAGE>



EXECUTIVE OFFICERS OF THE REGISTRANTS (continued)

                         Age at
                        Dec. 31,
         Name             1998           Office & Date Elected or in Job


Jerome A. Vennemann        48      Secretary of CG&E (8) - 1998
                                   Associate General Counsel of Cinergy, CG&E,
                                     and PSI - 1996
                                   Assistant Secretary of CG&E - 1995
                                   Assistant Secretary of Cinergy and PSI -
                                     1994
                                   Senior Counsel of Cinergy, CG&E, and PSI -
                                     1994

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)     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.

(2)     Mr.  Grealis  relinquished  the position of President of the ESBU during
        May 1997,  at which time he was  succeeded by Mr.  Ingle,  who served as
        acting  President of the ESBU through  September 1997. At that time, Mr.
        Ingle was named  President  of the ESBU and Vice  President  of Cinergy,
        CG&E, and PSI, all effective October 1, 1997.

(3)     Mr. Grealis  relinquished  the position of President of  CG&E  effective
        March 24, 1998.

(4)     Non-affiliate of Cinergy.

(5)     An  affiliated  public   benefit  corporation  organized  and  operating
        exclusively For charitable purposes.

(6)     Effective April 1, 1998, Ms. Ludlow relinquished the additional title of
        Chief Financial  Officer and Mr. Winger was appointed Vice President and
        Chief Financial Officer.

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

(8)     Mr.  Vennemann  was named  Secretary of CG&E  effective  April 22, 1998,
        relinquishing  the position of Assistant  Secretary,  and  retaining the
        position of Associate General Counsel.

(9)     Name changed to  Cinergy   Global  Power   Services   Limited  from  MPI
        International Limited, effective May 1, 1998.


<PAGE>



EXECUTIVE OFFICERS OF THE REGISTRANTS (continued)

(10)    Prior to becoming Vice President effective April 22, 1998, Mr. Cyrus was
        Senior Vice  President of Trading and  Operations  with ECI, NGC's power
        subsidiary in Houston,  Texas, since 1997. Mr. Cyrus joined NGC in 1993,
        holding various executive positions involving energy trading, marketing,
        and risk  management.  Prior to serving as Senior Vice President of ECI,
        Mr. Cyrus was  President of NGC Canada and Executive  Vice  President of
        Novagas Clearinghouse Ltd., where he had oversight  responsibilities for
        NGC's Canadian commercial operations.

(11)    Joint venture company formed by Cinergy and Trigen Energy Corporation.

(12)    In addition to serving as  President  of CG&E and as Vice  President  of
        Cinergy Services,  Mr. Turner has had full  responsibility for Cinergy's
        Government and Regulatory Affairs department since April 1998.

(13)    Prior to joining  Cinergy's  Legal  Department in 1995, Mr. Turner was a
        principal  in the  Indianapolis  law  firm  of  Lewis  &  Kappes,  P.C.,
        representing  industrial customers in utility regulatory and legislative
        matters.





<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.  As of February
1, 1999,  Cinergy's most recent dividend  record date,  there were 69,033 common
shareholders of record.  The following table shows the high and low sales prices
per share, as applicable, and the dividends on common stock declared by Cinergy,
CG&E, PSI, and ULH&P for the past two years:

<TABLE>
<CAPTION>



                                   Cinergy                CG&E(a)   PSI(a)    ULH&P(a)
<S>     <C>            <C>         <C>       <C>          <C>     <C>        <C>
                                             Dividends             Dividends
                           Market Price      Declared             Declared(b)
                         High        Low     Per Share      In Thousands     Per Share

  1998  1st Quarter    $38 11/16   $33          $.45      $42,600   $28,400       -
        2nd Quarter     37  5/16    31  5/8      .45       42,600    40,399(c)    -
        3rd Quarter     38  7/8     30 13/16     .45       46,400    25,000       -
        4th Quarter     39  7/8     33  3/4      .45       46,400    25,000    $14.50

  1997  1st Quarter    $35  3/4    $32  5/8     $.45      $42,600   $28,400       -
        2nd Quarter     35  5/8     32           .45       42,600    28,400       -
        3rd Quarter     35  1/4     32  5/16     .45       42,600    28,400       -
        4th Quarter     39  1/8     32           .45       42,600    28,400    $17.00

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

(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.

(c)  During the second quarter of 1998,  PSI paid a non-cash  dividend on common
     stock of approximately $11,999,000.
</FN>
</TABLE>

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


                         ITEM 6. SELECTED FINANCIAL DATA
Cinergy
                                     1998     1997     1996     1995     1994
                                      (in millions, except per share amounts)

Operating revenues (1)              $5 876   $4 387   $3 276   $3 023   $2 888
Net income before extraordinary
  item (1)                             261      363      335      347      191
Net income (2)                         261      253      335      347      191
Common stock
  Earnings per share ("EPS") (3)
    Net income before extraordinary
      item                            1.65     2.30     2.00     2.22     1.30
    Net income                        1.65     1.61     2.00     2.22     1.30
  EPS-assuming dilution (3)
    Net income before extraordinary
      item                            1.65     2.28     1.99     2.20     1.29
    Net income                        1.65     1.59     1.99     2.20     1.29


<PAGE>



  Dividends declared per share        1.80     1.80     1.74     1.72     1.50

Total assets (4)                    10 298    8 858    8 725    8 103    8 037
Cumulative preferred stock of
  subsidiaries subject to mandatory
  redemption (5)                      -        -        -         160      210
Long-term debt (6)                   2 604    2 151    2 326    2 347    2 615
Long-term debt due within
  one year (6)                         136       85      140      202       60

   CG&E
                                     1998     1997     1996     1995     1994
                                                    (in millions)

Operating revenues (1)              $2 856   $2 452   $1 976   $1 848   $1 788
Net income (1)                         216      239      227      236      158

Total assets (4)                     5 459    4 914    4 844    5 081    5 069
Cumulative preferred stock subject
  to mandatory redemption (5)         -        -        -         160      210
Long-term debt (6)                   1 220    1 324    1 381    1 518    1 738
Long-term debt due within
  one year (6)                         130     -         130      152     -

   PSI
                                     1998     1997     1996     1995     1994
                                                    (in millions)

Operating revenues (1)              $2 403   $1 960   $1 332   $1 248   $1 114
Net income (1)                          52      132      126      146       82

Total assets (4)                     3 890    3 406    3 295    3 076    2 945
Long-term debt (6)                   1 026      826      945      828      878
Long-term debt due within
  one year (6)                           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, 15, 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).


                 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  management's  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.  Forward-looking  statements involve risks and uncertainties
which may cause actual  results to differ  materially  from the  forward-looking
statements.  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:

o    Factors   affecting   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.

o    Legislative   and  regulatory  initiatives   regarding   deregulation   and
     restructuring of the industry.

o    The extent and timing of the entry of additional competition in electric or
     gas markets and the effects of continued industry consolidation through the
     pursuit of mergers, acquisitions, and strategic alliances.

o    Challenges   related  to  Year  2000   readiness,   including   success  in
     implementing the Cinergy Year 2000 Readiness Program,  the effectiveness of
     the Cinergy Year 2000  Readiness  Program,  and the Year 2000  readiness of
     outside entities.

o    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.

o    Financial or regulatory  accounting  principles or policies  imposed by the
     Financial Accounting Standards Board ("FASB"),  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.

o    Political,  legal,  and economic  conditions and developments in the United
     States ("US") and the foreign  countries in which Cinergy Corp.  ("Cinergy"
     or  "Company")  or  its  subsidiaries  or  affiliates  operate,   including
     inflation rates and monetary fluctuations.

o    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.

o    The performance of projects undertaken by the non-traditional  business and
     the success of efforts to invest in and develop new opportunities.

o    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.

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

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

o    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."

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

Cinergy 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 The  Cincinnati Gas & Electric  Company  ("CG&E") and PSI
Resources,  Inc.  Cinergy is the parent  holding  company  of PSI  Energy,  Inc.
("PSI"),  CG&E,  Cinergy  Investments,  Inc.  ("Investments"),   Cinergy  Global
Resources,  Inc. ("Global Resources"),  and Cinergy Services, Inc. ("Services").
PSI is a public utility primarily engaged in providing electric service in north
central,  central,  and southern  Indiana.  CG&E is a public  utility  primarily
engaged in  providing  electric and gas service in the  southwestern  portion of
Ohio and through its  subsidiaries  in adjacent  areas in Kentucky  and Indiana.
CG&E's principal subsidiary,  The Union Light, Heat and Power Company ("ULH&P"),
is an operating utility primarily engaged in providing  electric and gas service
in northern  Kentucky.  Investments  holds  virtually all of Cinergy's  domestic
non-utility  businesses and interests.  Global Resources,  formed in 1998, holds
Cinergy's  international  businesses  and  certain  other  interests.   Services
provides Cinergy  companies with a variety of  administrative,  management,  and
support services.

Cinergy conducts its operations through various subsidiaries and affiliates. The
Company is functionally organized into four business units through which many of
its activities are conducted:  Energy Commodities Business Unit ("ECBU"), Energy
Delivery Business Unit ("EDBU"), Energy Services Business Unit ("ESBU"), and the
International  Business Unit  ("IBU").  The  traditional,  vertically-integrated
utility  functions  have been  realigned  into the ECBU,  EDBU, and ESBU. As the
industry continues its evolution, Cinergy will continually analyze its operating
structure  and  make  adjustments  as  appropriate.   In  early  1999,   certain
organizational changes were begun to further align the business units to reflect
Cinergy's  strategic  vision.  Reference  is made to  Note 15 of the  "Notes  to
Financial  Statements" in "Item 8. Financial  Statements and Supplementary Data"
for a discussion  on financial  information  by business unit as of December 31,
1998.

<PAGE>

FINANCIAL CONDITION

COMPETITIVE PRESSURES

ELECTRIC UTILITY INDUSTRY

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

Introduction

The  electric  utility  industry is  continuing  to  transition  from a monopoly
cost-of-service  regulated  environment  to an industry in which  companies will
ultimately compete to be the retail customers' energy provider.  This transition
will continue to impact the operations, structure, and profitability of Cinergy.

Energy  companies are positioning  themselves for full  competition  through the
pursuit of mergers and acquisitions, strategic alliances, and the development of
energy products and services.  Cinergy's  success in this transition is in large
part  dependent  on  legislative   and  regulatory   outcomes  with  respect  to
electricity  deregulation  in its three franchise  states:  Ohio,  Indiana,  and
Kentucky, as well as other regions in the US where Cinergy chooses to compete in
the retail and wholesale markets.

Restructuring Process

Wholesale  Markets The wholesale  electric markets have been open to competition
since 1996 when the FERC issued  Orders 888 and 889.  These rules  provided  for
mandatory filing of open access/comparability  transmission tariffs,  functional
unbundling of all services,  utilities' use of these filed tariffs for their own
bulk power  transactions,  establishment  of an  electronic  bulletin  board for
transmission  availability  and  pricing  information,  and  establishment  of a
contract-based  approach to recover stranded investments as a result of customer
choice at the wholesale level.

Competitors  within the  wholesale  market  include  traditional  utilities  and
non-utility   competitors   such  as  exempt  wholesale   generators   ("EWGs"),
independent power producers, and power marketers.  Cinergy, through its ECBU, is
involved in wholesale power marketing and trading.

During late June 1998,  Midwestern  wholesale electric power markets experienced
unprecedented  price volatility due to several factors,  including  unseasonably
hot weather,  unplanned generating unit outages,  transmission constraints,  and
defaults  by  certain  power   marketers  on  their  supply   obligations.   The
simultaneous  occurrence of these events resulted in temporary but extreme price
spikes in the  Midwestern  electricity  markets.  During this period,  Cinergy's
subsidiaries  met both their  statutory  obligation  to serve  retail  franchise
customers and contractual obligations with wholesale customers. Since the events
of June  1998,  the  Midwestern  markets  have  continued  to  experience  price
volatility  and  illiquidity.  For  further  discussion,  see the  "Market  Risk
Sensitive Instruments and Positions" section herein.

During 1998, the New York Mercantile  Exchange ("NYMEX") began trading contracts
with delivery points located in the Midwest and Southern regions of the country.
Cinergy's  transmission  system is the delivery point for the Midwest region and
one of only four NYMEX delivery points in the US.

<PAGE>

Retail Markets Regulation and the transition to competition at the retail (i.e.,
end-user) level currently  remains under the jurisdiction of individual  states.
(See State  Developments  for a  discussion  on the  current  status of customer
choice  in  each  of   Cinergy's   franchise   states.)  In  most  states  where
restructuring  legislation  has been enacted,  all customers have been given the
right to choose an electricity supplier.  The incumbent utility has retained the
right  and  obligation  to  provide  the   distribution   and   transmission  of
electricity,  which continues to remain a regulated service.  Significant issues
facing state legislators,  regulators,  and incumbent franchise utilities in the
restructuring to a competitive retail market include:

o    The  responsibility for unrecovered costs of the utilities in excess of the
     amounts which would be recovered  under  competitive  market prices and the
     mechanism to recover these costs.

o    The period allowed for transition to full competition.

o    The extent to which incumbent  utilities continue to have the obligation to
     serve during the transition  period,  or in the alternative,  the extent to
     which competitive  bidding for existing franchise  customers is required or
     allowed.

o    Default  supplier  responsibility  following the transition  period and the
     compensation for the associated risk.

o    The extent to which  utilities  are  granted  the  flexibility  to position
     themselves  for  competition  during the transition  period,  including the
     right to sell assets and retain the proceeds from such sales.

o    Resolution  of  potential   market  power  issues  either   through  forced
     divestiture of generation and/or  participation in a regional  transmission
     organization.

o    The need for a power  exchange or similar  mechanism  to establish a market
     clearing price.

o    Codes of conduct  regarding the separation of the monopoly and non-monopoly
     functions of a utility and the treatment of affiliate transactions.

o    Restructuring of state tax laws applicable to utilities necessitated by the
     disproportionate allocation of state tax liability to public utilities.

The anticipated  restructuring  of retail electric  markets will create risks as
well as opportunities for utilities,  e.g., the risks and opportunities  arising
from the  termination of the regulated Fuel  Adjustment  Clause,  which provides
protection against escalation in fuel and purchased power costs. Additionally, a
number of  implementation  issues,  including  enhancements  or  replacements to
existing  customer  information and billing systems,  will be required.  Cinergy
will  continue  to focus on  reducing  costs  and  maintaining  its  status as a
low-cost  provider of  electricity  as well as  identifying  and  addressing the
likely   implementation   issues   associated  with  retail   customer   choice.
Additionally,  Cinergy will continue to execute its strategy of  developing  and
offering a portfolio of energy products and services for the retail market.

Cinergy continues to be an advocate of competition in retail electricity markets
and  continues  to  pursue  customer-choice  legislation  at both the  state and
federal  levels.  Cinergy  believes that the transition to competition  can best
meet the  interests of all  stakeholders  where the rules are  prescribed to the
fullest extent possible in legislation that embodies the following:

<PAGE>

o    Price  freezes that provide an  opportunity  for the utility to recover its
     transition  costs and  provide  immediate  flexibility  for the  utility to
     restructure its portfolio of supply assets in preparation for  competition,
     keeping any proceeds from the sale or other disposition of assets to offset
     transition costs.

o    A transition period with choice  immediately  available to all. During this
     period  customers can adapt to the rights and  responsibilities  associated
     with choosing an alternative electricity supplier.

o    Mitigation  of  market  power  issues  through  participation  in a  large,
     regional transmission organization.

o    Adequate recovery of regulatory assets.

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

State Developments

At  present,  a number  of states  have  enacted  legislation  that will lead to
complete retail electric  competition over 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 in return for  recovery of
utility  stranded  costs,  including the ability to securitize  revenue  streams
associated with such stranded costs.

Every  state that has  passed  legislation  has  included  a  mechanism  for the
recovery  of some  stranded  investment.  However,  states  have  varied  on the
methodology to be applied in determining the level of stranded investment,  with
divestiture of generating assets being one such method.

As  discussed  below,  the  three  states  in which  Cinergy  operates  electric
utilities are in various  stages of addressing  customer  choice.  None of these
states has yet passed legislation, but policymakers and stakeholders continue to
work to resolve the issues.

Cinergy and PSI

Indiana  Customer-choice  legislation  was  introduced  in the  Indiana  General
Assembly in 1998 by a coalition of customer organizations and two investor-owned
utilities  ("IOUs"),  including  Cinergy.  After hearing and  consideration by a
Senate committee, the bill was defeated in the full Senate.

Legislation  proposed by a group of large industrial customers was introduced in
January  1999.  At present,  Cinergy  continues to work with IOUs in Indiana and
other  stakeholders to develop  customer-choice  legislation that can be enacted
into law in Indiana. The outcome of this effort is uncertain.

Cinergy and CG&E

Ohio Electric  restructuring  legislation was introduced in the Ohio legislature
during 1998. This legislation,  "companion" electric restructuring bills (SB 237
and HB 732),  proposed to afford choice to all retail electric customers in Ohio
beginning  January 1, 2000.  Neither bill was passed during the 1998 legislative
session.

During the third quarter of 1998, Ohio's IOUs,  including CG&E, released a draft
bill that sets forth the utilities' proposed approach to comprehensive  electric
restructuring in Ohio.  Under the IOUs' proposal,  choice to all retail electric
customers would be introduced by January 1, 2001. Rates would be frozen during a
transition  period,  a fixed charge for certain  transition costs would continue

<PAGE>

after the  freeze  period  for a set time,  and  customers  would be  provided a
market-based  "shopping  credit" to stimulate the  development  of a competitive
market.  The proposal also included a restructuring of the tax laws with respect
to electric utilities.  In January 1999, a "place holder" bill was introduced in
both the House and Senate. These bills set forth a legislative intent to develop
comprehensive  electric  restructuring  legislation  in Ohio  during  1999.  Key
policymakers in the state continue to meet with the IOUs and other  stakeholders
to see whether compromise legislation can be developed.  It is uncertain whether
this effort will produce legislation in Ohio in 1999.

Cinergy, CG&E, and ULH&P

Kentucky House Joint Resolution 95, which required the formation of an executive
task force  comprised  of members  from the  Governor's  office and the Kentucky
General  Assembly to further  study  electric  restructuring,  was passed by the
Kentucky  General  Assembly and signed by the Governor in April 1998. Task force
members  will  study  electric   restructuring   in  anticipation  of  the  next
legislative session, which occurs in January 2000.

Cinergy

United Kingdom

Transition to full  competition in the United  Kingdom's ("UK") electric utility
industry  began with the  industry's  privatization  in 1991. As a result of the
transition  plan,  larger  users of  electricity  have been free to choose their
supplier since as early as 1991. In September 1998, a phase-in of choice for all
remaining  customers  commenced and is to be completed by March 1999.  The power
suppliers  sell  power  into a "pool"  from which  Regional  Electric  Companies
("RECs")  purchase power for their customers through the supply segment of their
business. Midlands Electricity plc ("Midlands") is one of twelve RECs in the UK.
In November  1998,  Midlands  entered into an agreement to sell its power supply
business to one of the UK's  primary  power  generation  companies.  The sale is
contingent upon UK government and regulatory  approvals.  Midlands' power supply
business purchases,  markets,  and supplies electricity to 2.2 million customers
in the UK.

After  the  sale,  Midlands  will  continue  to own  and  operate  its  electric
distribution business,  which will remain regulated by the Office of Electricity
Regulation. Midlands' electric distribution business accounted for approximately
90% of its net income before interest and income taxes for the fiscal year ended
March  1998.  All  the  RECs,  including  Midlands,  are  in  the  process  of a
distribution price review. This process occurs every five years and is scheduled
to take effect  April 1, 2000.  The public must be notified  six months prior to
any price  changes;  therefore,  prices must be set and  announced by October 1,
1999. (See Note 10 of the "Notes to Financial  Statements" in "Item 8. Financial
Statements  and  Supplementary  Data" for an additional  discussion of Cinergy's
investment in Midlands.)



<PAGE>



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

Other Matters 

Midwest  ISO  During  1998,  the  FERC  approved  the  formation  of  a  Midwest
Independent  System Operator  ("Midwest  ISO"). The Midwest ISO is the result of
Cinergy's  collaboration  with other  Midwestern  utility  companies  to form an
Independent System Operator ("ISO") that will assume functional control of their
combined  transmission  systems and facilitate a reliable,  efficient market for
electric power. The ISO will provide non-discriminatory open transmission access
consistent  with FERC Order No. 888. The ISO will also be responsible for system
reliability and  administration of a regional  transmission  tariff,  which will
eliminate  "pancaking" of transmission rates in the region. The Midwest ISO will
be governed by a recently-elected, disinterested Board of Directors.

In addition to the ISO concept,  other utilities have proposed to transfer their
transmission assets to a "for profit" independent regional  transmission company
("Transco"). Although Cinergy is not opposed to the formation of Transcos in the
long run, it believes  that an ISO is a more  efficient  and  effective  interim
measure  to   immediately   address  market  power  issues  and  improve  system
reliability.

Currently,  there are 10 utility members  participating  in the Midwest ISO. The
Midwest ISO consists of 45,000 miles of  transmission  lines and covers portions
of 11 states, and includes over $6.5 billion of transmission investment, forming
one of the largest  ISOs in the  country.  The  Midwest  ISO plans on  beginning
operations in the year 2000.

Repeal of the PUHCA PUHCA limits  registered  public utility  holding  companies
such as Cinergy from competing for growth  opportunities  both  domestically and
internationally.  Under PUHCA,  registered  public utility holding companies are
limited in the amount of foreign  investments  and in  domestic  investments  in
generation they can make. It also restricts  business  combinations  through its
requirement that the electric systems of combining entities be "integrated."

Past efforts to repeal PUHCA have not been successful.  In February 1999, a bill
to repeal  significant parts of PUHCA - S. 313, was introduced in the US Senate.
Recently, the bill was voted out of the Senate Banking Committee without markup,
and now goes to the full Senate. While it is uncertain whether this bill will be
enacted into law, Cinergy  continues to support the repeal of this act either as
part  of  comprehensive   reform  of  the  electric   industry  or  as  separate
legislation.

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.  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, 1998,  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 and results of operations of
the Company.

<PAGE>

GAS UTILITY INDUSTRY

Cinergy and CG&E

Customer  Choice  Choice of gas supplier or pilot  customer-choice  programs are
operating   in  several   states.   CG&E   currently   participates   in  a  gas
customer-choice  program  in Ohio.  This  program,  which made  customer  choice
available to all  residential and small  commercial  customers in November 1997,
was extended during 1998. Gas customers in approximately two-thirds of the state
of Ohio  are now  eligible  to  participate  in this  voluntary  program.  Large
industrial,  commercial,  and educational  institution customers already had the
ability to select  their own gas  supplier.  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 gas  transportation  services for  substantially  all
customers within its franchise  territory  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

Acquisition of ProEnergy

In June  1998,  Cinergy,  through  Cinergy  Capital &  Trading,  Inc.  ("CC&T"),
acquired  Producers Energy Marketing,  LLC ("ProEnergy") from Apache Corporation
("Apache") and Oryx Energy Company ("Oryx").  ProEnergy has exclusive  marketing
rights to North American gas production  owned or controlled by Apache and Oryx,
which  represents  approximately  1.1  billion  cubic feet per day of  dedicated
natural  gas supply.  These  supplies,  combined  with the active  marketing  of
third-party  gas,  are  geographically   diverse  and  are  spread  through  the
Southwest,  Rocky  Mountains,  Gulf Coast,  Gulf of Mexico,  and  Michigan.  The
acquisition  was funded  with cash and the  issuance  of  771,258  new shares of
Cinergy common stock.



<PAGE>



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

SECURITIES RATINGS

The  ratings as of  February  28,  1999,  provided  by the major  credit  rating
agencies--Duff & Phelps Credit Rating Co. ("D&P"), Fitch IBCA ("Fitch"), Moody's
Investors   Service   ("Moody's"),   and  Standard  &  Poor's  Ratings  Services
("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+        BBB+        Baa1        BBB+
  Junior Unsecured Debt         BBB         BBB+        Baa2        BBB+
  Preferred Stock               BBB         BBB+        baa1        BBB
  Commercial Paper              D-1-        F-1         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-1         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.

RATE ORDERS AND OTHER REGULATORY MATTERS

Cinergy and PSI

Indiana

Indiana Utility Regulatory  Commission ("IURC") Orders - PSI's Retail Rate Order
and Demand-Side  Management  ("DSM") Order 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).  The order reflects a return on common
equity of 11.0% and an  overall  rate of  return  on net  original  rate base of
8.21%.  In  settlement of a challenge by consumer  groups to the September  1996
Order, the IURC approved a settlement  agreement which reduced the original rate
increase by $2.1 million in August 1997.

In a separate  order  issued by the IURC in December  1996  ("December  1996 DSM
Order"), PSI was granted permission to recover $35 million per year for the four
years ending December 31, 2000, through a non-bypassable  charge in PSI's retail
rates for previously incurred DSM costs and associated carrying costs.  Further,
PSI is  authorized  to spend up to $8 million  annually on ongoing DSM  programs
through the year 1999 and to collect such amounts currently in retail rates.

<PAGE>

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 expires  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 a previous coal supply  agreement
between PSI and Exxon Coal and Minerals  Company.  The buyout charge,  excluding
the portion applicable to joint owners, is being recovered through the wholesale
and retail fuel adjustment clauses,  with carrying costs on unrecovered amounts,
through December 2002. (See Note 1(f) of the "Notes to Financial  Statements" in
"Item 8. Financial Statements and Supplementary Data.")

Coal Gasification  Contract Buyout Costs In November 1995, PSI and Destec Energy
Inc. ("Destec") entered into a 25-year  contractual  agreement for the provision
of coal  gasification  services at PSI's Wabash River  Generating  Station.  The
agreement  requires  PSI to pay  Destec a base  monthly  fee  including  certain
monthly  operating  expenses.  PSI received  authorization in the September 1996
Order  for the  inclusion  of these  costs in retail  rates.  In  addition,  PSI
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.  Over the next five  years,  the base  monthly  fees and
expenses for the coal gasification  service agreement are expected to total $212
million.

In September 1998, PSI reached agreement with Dynegy Inc. (Dynegy Inc. purchased
Destec in June 1997) to purchase the remainder of its 25-year  contract for coal
gasification  services for approximately  $266 million.  The proposed  purchase,
which is contingent  upon  regulatory  approval  satisfactory  to PSI,  could be
completed  in  1999.  PSI  is  investigating  its  financing  alternatives.  The
transaction,  if approved as proposed, is not expected to have a material impact
on PSI's earnings.

Currently,  natural gas prices have fallen to a level which causes the synthetic
gas  supply  taken  under the  current  gasification  services  agreement  to be
substantially above market. If the buyout of the gasification services agreement
is  approved,  the  combustion  turbine  will be fired with natural gas, or with
synthetic gas if it can be produced at a cost  competitive  with natural gas. In
nominal dollars,  it is estimated that the total savings,  primarily as a result
of the  purchase,  would  be  approximately  $270  million  over the life of the
contract.

Cinergy and CG&E

Ohio

Public  Utilities  Commission of Ohio ("PUCO")  Order - CG&E's Gas Rate Order 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%.  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.

<PAGE>

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.

Cinergy, CG&E, and ULH&P

SEC Order Authorizing the Retention of Gas Operations

In its 1994 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 November  1998,  the SEC
issued  an  order   unconditionally   approving  the  retention  of  CG&E's  gas
businesses.

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 operated by the ECBU). 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.

All required  modifications to Cinergy's generating units to implement the Phase
I 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 to the extent a viable emission  allowance market exists.  This
cost-effective  strategy  will  allow for  meeting  the  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.  To meet  NOx  reductions  required  by  Phase  II,
additional  burner  modifications  are  planned  on  certain  affected  units in
addition to using a system-wide NOx emission averaging strategy.

Capital expenditures are forecast to be less than $10 million to comply with the
Phase II NOx reductions,  substantially all of which are expected to be incurred
during 1999.  These  expenditures  are  included in the amounts  provided in the
"Capital Requirements" section herein.

<PAGE>

Ozone Transport Rulemaking In June 1997, the 37-state collaborative known as the
Ozone Transport Assessment Group made a wide range of recommendations to the EPA
to address the impact of ozone transport on serious  nonattainment  areas in the
Northeast, Midwest, and South. In late 1997, in response to this recommendation,
the EPA published its proposed call for revisions to State  Implementation Plans
("SIPs") for statewide  reductions in NOx  emissions.  In October 1998,  the EPA
finalized its Ozone Transport Rule ("NOx SIP Call").  It applies to 22 states in
the  eastern  half of the US,  including  the three  states in which the Cinergy
electric utilities operate, and also proposes a model NOx trading program.  This
rule recommends  that states reduce NOx emissions from primarily  industrial and
utility sources to a certain limit by May 2003. The EPA gave the affected states
until  September 30, 1999, to incorporate  utility NOx reductions with a trading
program into their SIPs.  If the states fail to revise  their SIPs  accordingly,
the EPA has proposed to implement a federal plan to accomplish NOx reductions by
May 2003.

Ohio, Indiana, a number of other states, and various industry groups,  including
some of which Cinergy is a member, filed legal challenges to the NOx SIP Call in
late 1998. Ohio and Indiana have also provided preliminary indications that they
will seek fewer NOx  reductions  from the utility  sector in their  implementing
regulations than the EPA has budgeted in its rulemaking.  The state implementing
regulations  will need the EPA's  approval.  The  current  estimate  of  capital
expenditures required for compliance with the EPA limits in the new NOx SIP Call
is between $500 million and $700 million (in 1998 dollars) between now and 2003.
This estimate is significantly dependent on several factors, including the final
determination regarding both the timing and stringency of the final required NOx
reductions,  the output of  Cinergy's  generating  units,  the  availability  of
adequate supplies of resources to construct the necessary control equipment, and
the extent to which a NOx allowance trading market develops, if any.

Ambient  Air  Standards  and  Regional  Haze  During  1997,  the EPA revised the
National Ambient Air Quality Standards for ozone and fine particulate matter and
proposed  rules for regional haze. The EPA is scheduled to finalize new regional
haze rules by the summer of 1999 and  Congress,  as part of the funding bill for
the Surface Transportation Act, combined the schedules for fine particulates and
regional  haze  implementation.  These  new  rules  increase  the  pressure  for
additional NOx and SO2 emissions  reductions.  Depending on the ultimate outcome
of the NOx SIP Call,  additional  NOx  reductions may be required from states by
2007 to address the new eight-hour ozone standard.

The EPA  estimates it will take up to five years to collect  sufficient  ambient
air  monitoring  data to  determine  nonattainment  areas.  The states will then
determine the sources of these  particulates  and determine a regional  emission
reduction  plan. 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. At
this  time,  the exact  amount  and  timing  of  required  reductions  cannot be
predicted.

Global Climate Change In December 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. On November 12, 1998, the
US signed the Kyoto  Protocol.  However,  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.  The Kyoto Protocol,  in its present form, is unlikely to be ratified by
the US Senate since it does not contain  provisions  requiring  participation of
developing countries.

<PAGE>

Significant uncertainty exists concerning both 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.  The ECBU believes
that voluntary  programs,  such as the US Department of Energy  ("DOE")  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.   In  November  1998,  the  EPA  finalized  its  Mercury  Information
Collection  Request  ("ICR").  Pursuant to the ICR,  all  generating  units must
provide detailed  information  about coal use and mercury content.  The EPA will
also select about 100  generating  units for one-time  stack  sampling.  At that
time, the EPA also announced that it would make its regulatory  determination on
the need for  additional  regulation  by the  fourth  quarter  of 2000.  It will
utilize the new information from the ICR, a new study by the National Academy of
Sciences, and other additional  information.  If more air toxics regulations are
issued, the compliance cost could be significant.  The outcome or effects of the
EPA's determination cannot currently be predicted.

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
("CERCLA")  with respect to certain  manufactured  gas plant ("MGP") sites,  and
therefore is responsible for the costs of  investigating  and remediating  these
sites.

In November 1998,  NIPSCO,  IGC, and PSI entered into an agreement which settled
the  allocation  of CERCLA  liability  for past and future costs among the three
companies,  at seven MGP  sites in  Indiana.  Similar  agreements  were  reached
between IGC and PSI which allocate  CERCLA  liability at 14 MGP sites with which
NIPSCO had no  involvement.  These  agreements  conclude  all CERCLA and similar
claims  between  the three  companies  relative  to MGP sites.  Pursuant  to the
agreements, the parties are continuing to investigate and remediate the sites as
appropriate.  In the case of some sites, the parties have applied to the Indiana
Department  of  Environmental  Management  for  inclusion  of such  sites in the
Indiana Voluntary Remediation Program.

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.

<PAGE>

Refer to Notes 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

The regulated businesses of Cinergy (CG&E, ULH&P, and PSI) forecast construction
expenditures  for  1999  and  over  the  next  five  years  (1999 - 2003)  to be
approximately  $194 million and $889 million for CG&E (including $29 million and
$120 million for ULH&P) and $192 million and $774 million for PSI, respectively.
The timing and amount of  investments by Cinergy's  non-regulated  businesses is
dependent upon the development and favorable evaluation of opportunities.

The above forecast excludes the estimated  expenditures necessary to comply with
the EPA's proposed stricter NOx emission control  standards  associated with the
22-state NOx SIP Call.  Cinergy  estimates that the capital costs for additional
NOx controls at its facilities could range between $500 million and $700 million
(in 1998 dollars) over the next five years. The above forecast also excludes any
capital expenditures that may be required for the construction of new generating
facilities.

In order to meet the  power  supply  demands  of its  customers,  the ECBU  must
constantly  assess the  adequacy of its supply  portfolio  and  determine  which
supply alternatives to pursue to most effectively meet demands, hedge risks, and
satisfy regulatory  requirements.  Supply  alternatives  include  investments in
existing facilities, investments in new facilities, and/or acquisitions of power
supply from the market. In addition, Cinergy's present demand requirements could
be impacted  if  customer-choice  legislation  is passed in any of the states in
which Cinergy has a regulated franchise. (All forecasted amounts,  excluding NOx
compliance  amounts,  are in nominal  dollars 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

Cinergy's mission is to reach the top five in our industry within three years on
five key dimensions - market capitalization,  number of customers,  electric and
gas commodity trading,  international  presence,  and productivity.  Cinergy has
entered into various  growth  initiatives  in its pursuit of these goals.  These
initiatives include,  among others, energy marketing and trading,  retail energy
products and services,  and additional  international  investment.  In addition,
Cinergy is working toward  maximizing  the value of its existing  operations and
assets and  continues to explore the potential  for mergers,  acquisitions,  and
strategic alliances.

Certain legal and regulatory  requirements,  including  PUHCA,  limit  Cinergy's
ability to invest in growth initiatives. PUHCA restricts the amount which can be
invested  outside the  regulated  utility,  including  foreign  utility  company
("FUCO")  investments  and  investments in domestic power plants that qualify as
"qualifying facilities" ("QFs") under the Public Utility Regulatory Policies Act
of 1978 or are certified as EWGs by the FERC. Under these restrictions,  Cinergy

<PAGE>

may  invest  or commit to  invest  (i) an amount  equal to 100% of  consolidated
retained  earnings  (defined under  applicable SEC regulations as the average of
Cinergy's  consolidated  retained  earnings  for the four most recent  quarterly
periods) in EWGs and FUCOs  (equal to $949 million at December  31,  1998),  and
(ii) an amount  equal to 15% of  consolidated  capitalization  ($942  million at
December 31, 1998) in QFs and other "energy-related"  nonutility investments (as
defined in the applicable SEC regulation).

At December  31,  1998,  under  these SEC  restrictions,  Cinergy had  available
capacity for  additional  EWG/FUCO  investments  of $332  million and  available
capacity for additional QFs and "energy-related"  nonutility investments of $524
million.

OTHER COMMITMENTS

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

Securities  Redemptions  Mandatory  redemptions  of  long-term  debt  total $410
million ($251 million for CG&E and its  subsidiaries,  including $40 million for
ULH&P, and $159 million for PSI) during the period 1999 through 2003.

The  maintenance  and  replacement  fund  provisions  contained  in PSI's  first
mortgage bond indenture require cash payments,  bond retirements,  or pledges of
unfunded  property  additions  each year based on an amount related to PSI's net
revenues. Cinergy will continue to evaluate opportunities for the refinancing of
outstanding securities beyond mandatory redemption requirements.

Cinergy

Guarantees  At December 31, 1998,  Cinergy had issued $286 million in guarantees
primarily  related  to  the  energy  marketing  and  trading  activities  of its
subsidiaries and affiliates. In addition, Cinergy had guaranteed $258 million of
the debt securities of its subsidiaries and affiliates.

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

Year 2000 The Year 2000 issue generally exists because many computer systems and
applications,  including  those  embedded in equipment and  facilities,  use two
digit rather than four digit date fields to designate an  applicable  year. As a
result,  the systems and applications may not properly recognize dates including
and  beyond  the year 2000 or  accurately  process  data in which such dates are
included,   potentially   causing  data   miscalculations  and  inaccuracies  or
operational   malfunctions  and  failures,   which  could  materially  affect  a
business's financial condition, results of operations, and cash flows.

Cinergy has established a centrally-managed,  company-wide initiative,  known as
the Cinergy Year 2000 Readiness Program, to identify, evaluate, and address Year
2000 issues. The Cinergy Year 2000 Readiness Program,  which began in the fourth
quarter of 1996,  is generally  focused on three  elements  that are integral to
this  initiative:   (1)  business  continuity;  (2)  risk  management;  and  (3)
regulatory compliance.  Business continuity includes providing reliable electric
and gas supply and service in a safe and  cost-effective  manner.  This  element
encompasses mission-critical generation,  transmission, and distribution systems
and related  infrastructure,  as well as operational  and financial  information
technology ("IT") systems and applications,  end-user computing  resources,  and
building systems (such as security,  elevator, and heating and cooling systems).
Risk  management  includes  a  review  of the Year  2000  readiness  efforts  of
Cinergy's  critical  suppliers,  key  customers  and  other  principal  business
partners,  and, as  appropriate,  the  development  of joint  business  support,
contingency  plans, and the inclusion of Year 2000 concerns as a regular part of


<PAGE>

the due diligence  process in any new business  venture.  Regulatory  compliance
includes communications with regulatory agencies,  other utilities,  and various
industry groups. While this initiative is broad in scope, it has been structured
to identify and prioritize efforts for mission-critical electric and gas systems
and services and key business partners.

Under the Cinergy Year 2000 Readiness Program,  Cinergy has established a target
date of June 30, 1999, for the remediation  and testing of its  mission-critical
generation,  transmission,  and  distribution  systems  (gas and  electric).  An
innovative  remediation and testing effort which Cinergy has initiated  involves
operating several electric-generating units with post Year 2000 dates. Cinergy's
experience  has been that those  units have  continued  to operate  without  any
material  adverse result  relating to a Year 2000 issue.  Cinergy's  progress to
date ranges from  approximately  90% regarding IT systems to  approximately  75%
regarding assessment of critical suppliers.

Cinergy has also reviewed its existing contingency and business continuity plans
and  modified  them in light of the Year 2000  issue.  Contingency  planning  to
maintain  and  restore  service  in the event of  natural  and  other  disasters
(including  software and  hardware-related  problems) has been part of Cinergy's
standard  operation  for many years,  and  Cinergy is working to  leverage  this
experience  in the  review  of  existing  plans  to  address  Year  2000-related
challenges. These reviews have assessed the potential for business disruption in
various scenarios, including the most reasonably likely worst-case scenario, and
to provide for key operational back-up, recovery, and restoration alternatives.

Cinergy  cannot  guarantee  that third  parties on whom it depends for essential
goods and services (those where the interruption of the supply of such goods and
services could lead to issues involving the safety of employees,  customers,  or
the public, the continued reliable delivery of gas and/or  electricity,  and the
ability to comply  with  applicable  laws or  regulations)  will  convert  their
mission-critical  systems and processes in a timely manner.  Failure or delay by
any of these third parties could  significantly  disrupt business.  However,  to
address this issue,  Cinergy has established a supplier compliance program,  and
is working with its critical suppliers in an effort to minimize such risks.

In addition,  Cinergy is  coordinating  its findings and other issues with other
utilities and various industry groups via the Electric Power Research  Institute
Year  2000  Embedded  Systems  Project  and the Year 2000  Readiness  Assessment
Program of the North American Electric  Reliability Council ("NERC"),  acting at
the request of the DOE. The DOE has asked NERC to report on the integrity of the
transmission  system  for  North  America  and  to  coordinate  and  assess  the
preparation  of the electric  systems in North  America for the Year 2000.  NERC
submitted its initial  quarterly status report and coordination  plan to the DOE
in September 1998, and a second  quarterly  status report for the fourth quarter
of 1998 was submitted on January 11, 1999.

Cinergy  currently  estimates  that the total cost of  assessment,  remediation,
testing,  and  upgrading  its  systems  as a result of the Year  2000  effort is
approximately  $13  million.  Approximately  $11 million in  expenses  have been
incurred  through  December 31, 1998, for external labor,  hardware and software
upgrades,  and for Cinergy employees who are dedicated  full-time to the Cinergy
Year 2000  Readiness  Program.  The timing of these expenses may vary and is not
necessarily  indicative  of  readiness  efforts  or  progress  to date.  Cinergy
anticipates  that a portion of its Year 2000  expenses  will not be  incremental
costs,  but rather,  will represent the  redeployment  of existing IT resources.
Since  its  formation,  Cinergy  has  incurred,  and  will  continue  to  incur,
significant  capital  improvement  costs related to planned  system  upgrades or
replacements  required in the normal  course of  business.  These costs have not
been accelerated as a result of the Year 2000 issue.

<PAGE>

The above information is based on Cinergy's  current best estimates,  which were
derived using numerous assumptions of future events,  including the availability
and  future  costs of certain  technological  and other  resources,  third-party
modification  actions,  and other factors.  Given the complexity of these issues
and possible  unidentified  risks, actual results may vary materially from those
anticipated  and  discussed  above.  Specific  factors  that  might  cause  such
differences  include,  among  others,  the  ability  to locate and  correct  all
affected   computer  code,  the  timing  and  success  of  remedial  efforts  of
third-party suppliers, and similar uncertainties.

The  above  information  is a Year 2000  Readiness  Disclosure  pursuant  to the
Federal Year 2000 Information and Readiness Disclosure Act.

CAPITAL RESOURCES

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

The regulated  businesses of Cinergy forecast that their need for external funds
during the 1999 through 2003 period will  primarily  be for the  refinancing  of
existing securities.  It is currently expected that funds required to pursue the
various  non-regulated  growth  initiatives  underway will be obtained primarily
through  short-term  borrowing and the issuance of long-term  debt and/or equity
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

Currently,  a substantial  portion 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  operations  could be subject to a higher
degree of volatility than under the present regulatory structure.

COMMON STOCK

Cinergy

During 1998, 1997, and 1996, Cinergy issued approximately  194,000;  66,000; and
15,000 new shares, respectively, of common stock pursuant to various stock-based
employee plans. In addition,  Cinergy  purchased  approximately  861,000 and 1.7
million  shares on the open market to satisfy the  majority of its 1998 and 1997
obligations,  respectively,  under  these  plans.  Cinergy  currently  plans  to
continue  using market  purchases of common stock to satisfy the majority of its
obligations under these plans;  however,  given its future capital requirements,

<PAGE>

it will continue to  re-evaluate  this  decision.  In the event  Cinergy  begins
issuing  shares of common stock to satisfy these  obligations,  it has authority
under PUHCA to issue and sell through  December 31, 2000, up to approximately 22
million additional shares of Cinergy common stock.

SHORT-TERM DEBT

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

Cinergy has authority under PUHCA to issue and sell,  through December 31, 2002,
short-term notes,  long-term  unsecured  debentures,  and commercial paper in an
aggregate  principal  amount not to exceed $2 billion.  The entire amount may be
outstanding  as  short-term  debt;  however,   long-term  unsecured   debentures
outstanding  may not exceed $400 million at any time.  In  connection  with this
authority, Cinergy has established committed and uncommitted lines of credit, of
which $305 million remained unused and available at December 31, 1998.

Also at  year-end,  Global  Resources  had  $100  million  available  under  its
revolving credit facility.

As of December 31, 1998, Cinergy's utility subsidiaries had regulatory authority
to borrow up to $853 million ($453 for CG&E and its subsidiaries,  including $50
million  for ULH&P,  and $400  million  for PSI).  Pursuant  to this  authority,
committed and uncommitted lines of credit have been established for CG&E and PSI
of which,  $310  million and $249  million,  respectively,  remained  unused and
available at December 31, 1998.

For a detailed discussion of the registrants' short-term indebtedness,  refer to
Note 5 of the "Notes to Financial  Statements" in "Item 8. Financial  Statements
and Supplementary Data."

LONG-TERM DEBT

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

Under the authority mentioned above, Cinergy had long-term debt authorization of
$400 million,  of which $200 million was issued and  outstanding at December 31,
1998. CG&E has filed an application  with the PUCO requesting  authorization  to
issue up to $200 million of additional  long-term debt. As of December 31, 1998,
PSI and ULH&P had state  regulatory  authority  for  additional  long-term  debt
issuance of $350 million and $10 million,  respectively.  Regulatory approval to
issue additional amounts of securities will be requested as needed.

SALE OF ACCOUNTS RECEIVABLE

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

For a detailed discussion of the registrants' sale of accounts receivable, refer
to  Note  6 of the  "Notes  to  Financial  Statements"  in  "Item  8.  Financial
Statements and Supplementary Data."



<PAGE>



MARKET RISK SENSITIVE INSTRUMENTS AND POSITIONS

Energy Commodities Sensitivity

Cinergy, CG&E, and PSI

The  transactions  associated with the energy  marketing and trading  activities
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.  These
operations  subject  Cinergy to the risks and  volatilities  associated with the
energy commodities  (primarily electricity and natural gas) which it markets and
trades. The wholesale energy marketing and trading business continues to be very
competitive.  As the ECBU  continues to develop and expand its energy  marketing
and trading business,  its exposure to movements in the price of electricity and
other energy commodities will become greater. As a result,  Cinergy is likely to
be subject to future earnings volatility.

The energy marketing and trading  activities of the ECBU principally  consist of
CG&E's and PSI's power marketing and trading  operation which markets and trades
over-the-counter contracts for the purchase and sale of electricity primarily in
the  Midwest  region  of the  US,  where  owned  generation  is  located.  These
activities  are  conducted  by  Services  on behalf  of CG&E and PSI.  The power
marketing  and  trading   operation   consists  of  both  physical  and  trading
activities.  Transactions  are  designated  as physical when there is intent and
ability to physically deliver the power from company-owned generation. All other
transactions  are  considered  trading  transactions.  Substantially  all of the
contracts in both the  physical and trading  portfolios  commit  Cinergy,  CG&E,
and/or PSI to purchase or sell  electricity at fixed prices in the future (i.e.,
fixed-price forward purchase and sales contracts,  full requirements contracts).
The  ECBU  also   markets   and  trades   over-the-counter   option   contracts.
Substantially all of the contracts in the physical  portfolio require settlement
by physical  delivery of  electricity.  Contracts  within the trading  portfolio
generally  require  settlement  by  physical  delivery  or  are  netted  out  in
accordance with industry trading  standards.  The use of these types of physical
commodity  instruments  is  designed  to allow  the  ECBU to  manage  and  hedge
contractual  commitments,  reduce  exposure  relative to the  volatility of cash
market prices, and take advantage of selected arbitrage opportunities.

The ECBU 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,  a net open  position  is  created or allowed to
continue when it is believed 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.  To the extent net open
positions exist,  there is the risk that  fluctuating  market prices of electric
power may potentially impact Cinergy's, CG&E's, and/or PSI's financial condition
or  results  of  operations  adversely  if prices  do not move in the  manner or
direction expected.

The  ECBU  measures  the  risk  inherent  in  the  trading  portfolio  utilizing
value-at-risk  analysis and other  methodologies,  which  utilize  forward price
curves in electric  power  markets to quantify  estimates of the  magnitude  and
probability  of potential  future  losses  related to open  contract  positions.
Predominantly  all of the contracts in the physical  portfolio  require physical
delivery of  electricity  and  generally  do not allow for net cash  settlement.
Therefore,  these contracts are not included in the value-at-risk  analysis. The
value-at-risk  expresses  the  potential  loss  in  fair  value  of the  trading
portfolio  over a  particular  period of time,  with a specified  likelihood  of

<PAGE>

occurrence,  due to an adverse market movement. The value-at-risk is reported as
a percentage of operating income, based on a 95% confidence interval,  utilizing
one-day  holding  periods.  On a one day  basis as of  December  31,  1998,  the
value-at-risk  for the power  trading  activities  was less than 1% of Cinergy's
1998 Consolidated  Operating  Income.  The average  value-at-risk,  on a one-day
basis at the end of each quarter in 1998,  for the power  trading  portfolio was
less  than  2% of  Cinergy's  1998  Consolidated  Operating  Income.  The  daily
value-at-risk  for the power trading portfolio as of December 31, 1997, was also
less than 2% of Cinergy's 1998 Consolidated  Operating Income. 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

The ECBU,  through  Cinergy's  acquisitions  of ProEnergy and  Greenwich  Energy
Partners, in 1998 and 1997, respectively,  actively markets physical natural gas
and actively trades derivative  commodity  instruments,  customarily  settled in
cash,  including futures,  forwards,  swaps, and options. The ESBU, through CRI,
utilizes  derivative  commodity   instruments,   customarily  settled  in  cash,
primarily  to  hedge   purchases  and  sales  of  natural  gas.  The  aggregated
value-at-risk  amounts  associated  with these  trading and hedging  activities,
utilizing 95% confidence  intervals and one-day holding periods,  were less than
$1 million as of December 31, 1998 and 1997.  The market risk exposures of these
trading  activities  is  not  considered   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  the  ESBU's  trade  accounts
receivable  from  electric and gas retail  customers is limited due to the large
number of customers and diversified  customer base of  residential,  commercial,
and industrial customers.  Contracts within the physical portfolio of the ECBU's
power marketing and trading  operations are primarily with traditional  electric
cooperatives and municipalities and other IOUs.

Contracts  within the  trading  portfolio  of the power  marketing  and  trading
operations are primarily with power marketers and other IOUs. As of December 31,
1998,  approximately 73% of the activity within the trading portfolio represents
commitments  with 10  counterparties.  The majority of these  contracts  are for
terms of one year or less. As a result of the extreme volatility  experienced in
the Midwest  power  markets  during 1998,  several new entrants  into the market
began   experiencing   financial   difficulties  and  failed  to  perform  their
contractual  obligations.  As a result, the bad debt provisions of approximately
$13 million with respect to settled  transactions were recorded during the year.
Counterparty  credit  exposure  within the power trading  portfolio is routinely
factored  into the  mark-to-market  valuation.  At  December  31,  1998,  credit
exposure  within the power trading  portfolio is not believed to be significant.

<PAGE>

Prior to 1998, credit exposure due to  nonperformance by counterparties  was not
significant.  As the  competitive  electric  power market  continues to develop,
counterparties  will  increasingly  include new market  entrants,  such as other
power marketers,  brokers,  and commodity  traders.  This increased level of new
market   entrants,   as  well  as  competitive   pressures  on  existing  market
participants,  could increase the ECBU's exposure to credit risk with respect to
its  power   marketing  and  trading   operation.   As  of  December  31,  1998,
approximately  37% of the activity  within the ECBU's physical gas marketing and
trading portfolio  represents  commitments with 10  counterparties.  Credit risk
losses  related to the  ECBU's  gas and other  commodity  physical  and  trading
operations have not been significant.  Based on the types of counterparties  and
customers with which  transactions are executed,  credit exposure within the gas
and other commodity trading  portfolios at December 31, 1998, is not believed to
be significant.

Cinergy, CG&E, and PSI

Cinergy has  established a risk management  function and has implemented  active
risk  management  policies and  procedures to manage and minimize  corporate and
business unit 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  guarantees 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 energy marketing and trading transactions subject to parameters  established
by Cinergy's Risk Policy Committee. Market and credit risks are monitored by the
risk management and credit function, which operates separately from the business
units which  originate or actively  manage the market and credit risk exposures,
to  ensure  compliance  with  Cinergy's  stated  risk  management  policies  and
procedures.   These  policies  and  procedures  are  periodically  reviewed  and
monitored  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.  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/pound  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 "Accumulated other comprehensive
loss",  which is reported as a separate  component of common stock equity in the
Consolidated Financial Statements.

<PAGE>

In connection with this swap, Cinergy must pay semi-annual interest on its pound
sterling obligation and will receive semi-annual interest on the dollar notional
amount.  At December 31, 1998,  the estimated  fair value of this swap was $(59)
million. This was partially offset by a $46 million currency translation gain to
date on Cinergy's investment in Midlands.

Cinergy also has exposure to fluctuations in the US dollar/Czech koruna exchange
rate  through  its  investments  in the Czech  Republic.  Cinergy has hedged the
exchange  rate  exposure   related  to  certain  of  its  Czech  koruna  ("CZK")
denominated   investments  through  foreign  exchange  forward  contracts.   The
contracts  require  Cinergy to  exchange  1,447  million  Czech  korunas for $40
million.  When the Czech koruna  strengthens  relative to the dollar, the dollar
value of  Cinergy's  investment  increases;  however,  the value of the  foreign
exchange forward contracts decreases, offsetting the increase in the investment.
The  reverse is true when the Czech  koruna  declines  relative  to the  dollar.
Translation  losses related to the contracts are recorded in "Accumulated  other
comprehensive  loss",  which is reported as a separate component of common stock
equity in the  Consolidated  Financial  Statements.  At December 31,  1998,  the
estimated  aggregate fair value of these foreign exchange forward  contracts was
$(7) million.

Cinergy has investments in various other countries where the net investments are
not hedged.  The Company does have exposure to  fluctuations  in exchange  rates
between the US dollar and the  currencies  of these  countries.  At December 31,
1998,  Cinergy does not believe it has a material  exposure to the currency risk
attributable to these investments.

The following table  summarizes the details of the swap and the foreign exchange
forward  contracts.  (For  presentation  purposes,  the pound  sterling  payment
obligation has been converted to US dollars using the dollar/pound sterling spot
exchange rate at December 31, 1998, of 1.66000.  The interest rates are based on
the six-month LIBOR implied forward rates at December 31, 1998.)

                                      Expected Maturity Date
                                                            There-
                         1999   2000  2001   2002    2003   after   Total
Currency Swap                         ($US Equivalent in millions)

Receive principal ($US)  $ -    $ -   $ -    $500    $ -    $ -     $500
Average interest
  receive rate (variable)  - %    - %   - %   5.3%     - %    - %    5.3%

Pay principal (pound
  sterling UK)           $ -    $ -   $ -    $548    $ -    $ -     $548
Average interest
  pay rate (partially
  variable, partially
  fixed)                   - %    - %   - %   6.0%     - %    - %    6.0%

Foreign Exchange Forward Contracts     ($US Equivalent in millions)

Receive $US/Pay CZK      $ 40   $ -   $ -    $ -     $ -    $ -     $ 40
Average contractual
  exchange rate(CZK/$US) 36.2     -     -      -       -      -     36.2



<PAGE>



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, 1998,  this included (i)
short-term bank loans and commercial paper totaling $637 million ($5 million for
CG&E and $90 million for PSI),  (ii) $267 million of pollution  control  related
debt ($184  million  for CG&E and $83 million  for PSI) which is  classified  as
"Notes payable and other short-term obligations" on Cinergy's, CG&E's, and PSI's
respective  Consolidated  Balance  Sheets,  and  (iii)  a $253  million  sale of
accounts  receivable ($166 million sold by CG&E and its subsidiaries,  including
$16 million  sold by ULH&P,  and $87 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, 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 "Notes payable and other short-term  obligations" on
Cinergy's, CG&E's, and PSI's respective Consolidated 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 the
amounts  sold).  At December  31, 1998 and 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.



<PAGE>



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, 1998:
<TABLE>
<CAPTION>

                                              Expected Maturity Date
<S>                          <C>    <C>    <C>     <C>    <C>     <C>     <C>      <C>   
                                                                  There-            Fair
                             1999   2000   2001    2002   2003    after    Total    Value
                                                   (in millions)
Liabilities

Cinergy and Subsidiaries
Long-term Debt (a)
  Fixed rate                 $137   $ 32   $ 90(d) $124   $177(e) $2 097  $2 657   $2 830
  Average interest rate (b)   6.0%   5.7%   5.2%    7.3%   6.2%      7.0%    6.8%

  Other (c)                  $ -    $ -    $ -     $ -    $ -     $  100  $  100   $  104
  Average interest rate (b)    - %    - %    - %     - %    - %      6.5%    6.5%

Capital Lease
  Variable rate              $ -    $ -    $ 22    $ -    $ -     $  -    $   22   $   22
  Average interest rate (b)    - %    - %   5.3%     - %    - %      -  %    5.3%

CG&E and Subsidiaries
Long-term Debt (a)
  Fixed rate                 $130   $ -    $  1    $100   $120(e) $  902  $1 253   $1 311
  Average interest rate (b)   5.9%    - %   9.8%    7.3%   6.3%      6.9%    6.8%

  Other (c)                  $ -    $ -    $ -     $ -    $ -     $  100  $  100   $  104
  Average interest rate (b)    - %    - %    - %     - %    - %      6.5%    6.5%

Capital Lease
  Variable rate              $ -    $ -    $ 22    $ -    $ -     $  -    $   22   $   22
  Average interest rate (b)    - %    - %   5.3%     - %    - %      -  %    5.3%

PSI
Long-term Debt (a)
  Fixed rate                 $  7   $ 32   $ 89(d) $ 24   $ 57    $  836  $1 045   $1 134
  Average interest rate (b)   7.0%   5.7%   5.2%    7.6%   5.9%      7.3%    7.0%

ULH&P
Long-term Debt (a)
  Fixed rate                 $ 20   $ -    $ -     $ -    $ 20    $   35  $   75   $   78
  Average interest rate (b)   6.5%    - %    - %     - %   6.1%      7.0%    6.6%

<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 1998. 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.

(d)  6.00%  Debentures  due December 14, 2016,  reflected as maturing in 2001 as
     the interest rate resets on December 14, 2001.

(e)  6.35%  Debentures  due June 15, 2038,  reflected as maturing in 2003 as the
     interest rate resets on June 15, 2003.
</FN>
</TABLE>



<PAGE>



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 one interest  rate swap  agreement,  Cinergy has  effectively  fixed the
interest  rate on the  pound  sterling  denominated  obligation  created  by the
currency  swap  discussed   above.   This  contract   requires  Cinergy  to  pay
semi-annually  a fixed rate and receive a floating rate through  February  2002.
The notional amount of the swap is 280 million pounds  sterling.  The fair value
of the swap was  approximately  $(19) million at December 31, 1998.  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, 1998, the fair value of this
swap  decreased  from $(3)  million at  December  31,  1997  primarily  due to a
projected  decline in the average variable  interest rate received on the dollar
denominated leg of the swap over its remaining term.

At December  31,  1998,  CG&E had an interest  rate swap  agreement  outstanding
related to its sale of accounts  receivable.  The contract has a notional amount
of $100  million  and  requires  CG&E to pay a fixed rate and receive a floating
rate.  PSI had three  interest rate swap  agreements  outstanding  with notional
amounts of $100  million  each.  One  contract,  with two years  remaining  of a
four-year  term,  requires PSI to pay a floating  rate and receive a fixed rate.
The other two contracts,  with six-month terms,  require PSI to pay a fixed rate
and receive a floating rate. The floating rate is based on applicable  LIBOR. At
December 31, 1998 and 1997,  the fair values of these  interest  rate swaps were
not significant.  The following table presents  notional  principal  amounts and
weighted average  interest rates by contractual  maturity dates for the interest
rate swaps of Cinergy, CG&E, and PSI. The variable rates are the average implied
forward  rates  during  the  contracts  based on a December  31,  1998 one month
commercial  paper index yield curve for CG&E and the six month LIBOR yield curve
at  December  31, 1998 for Cinergy and PSI.  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, 1998.


<PAGE>




                                       Expected Maturity Date
                                                        There-          Fair
                        1999  2000  2001  2002   2003   after   Total   Value
Interest Rate                       ($US Equivalent in millions)
Derivatives
Interest Rate Swaps
Receive fixed/pay
    variable ($US)      $ -   $100  $ -   $ -    $ -    $ -     $100    $  2
  Average pay rate       5.2%  5.1%   - %   - %    - %    - %    5.1%
  Average receive rate   6.1%  6.1%   - %   - %    - %    - %    6.1%

  Receive variable/pay
    fixed ($US)         $200  $ -   $ -   $ -    $ -    $ -     $200    $ (1)
  Average pay rate       5.5%   - %   - %   - %    - %    - %    5.5%
  Average receive rate   5.1%   - %   - %   - %    - %    - %    5.1%

  Receive variable/pay
    fixed (pound
    sterling UK)        $ -   $ -   $ -   $465(a)$ -    $ -     $465(a) $(19)
  Average pay rate        - %   - %   - %  7.1%    - %    - %    7.1%
  Average receive rate    - %   - %   - %  6.0%    - %    - %    6.0%

(a)  Notional  converted to US dollars  using the Sterling spot exchange rate at
     December 31, 1998, of 1.66000.

ACCOUNTING CHANGES

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

During the second  quarter  of 1998,  the FASB  issued  Statement  of  Financial
Accounting Standards No. 133, Accounting for Derivative  Instruments and Hedging
Activities  ("Statement  133").  Statement  133  requires  companies  to  record
derivative  instruments,  as defined in Statement 133, as assets or liabilities,
measured at fair value. The statement  requires that changes in the derivative's
fair value be recognized  currently in earnings unless specific hedge accounting
criteria are met. Special accounting for qualifying hedges allows a derivative's
gains and losses to offset  related  results  on the  hedged  item in the income
statement,  and requires that a company must formally document,  designate,  and
assess the  effectiveness  of transactions  that receive hedge  accounting.  The
standard is  effective  for fiscal  years  beginning  after June 15,  1999,  and
Cinergy expects to adopt the provisions of Statement 133 in the first quarter of
2000. The Company has not yet quantified the impact of adopting Statement 133 on
its consolidated  financial  statements.  However,  Statement 133 could increase
volatility in earnings and other comprehensive income.

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.



<PAGE>



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 . . . . . . . . . .     49
  Cinergy
     Consolidated Statements of Income for the three years
       ended December 31, 1998. . . . . . . . . . . . . . . . . .     51
     Consolidated Balance Sheets at December 31,
       1998 and 1997. . . . . . . . . . . . . . . . . . . . . . .     52
     Consolidated Statements of Changes in Common Stock
       Equity for the three years ended December 31, 1998 . . . .     54
     Consolidated Statements of Cash Flows for the
       three years ended December 31, 1998. . . . . . . . . . . .     55
     Results of Operations. . . . . . . . . . . . . . . . . . . .     56
  CG&E
     Consolidated Statements of Income for the three years
       ended December 31, 1998. . . . . . . . . . . . . . . . . .     62
     Consolidated Balance Sheets at December 31,
       1998 and 1997. . . . . . . . . . . . . . . . . . . . . . .     63
     Consolidated Statements of Changes in Common Stock
       Equity for the three years ended December 31, 1998 . . . .     65
     Consolidated Statements of Cash Flows for the
       three years ended December 31, 1998. . . . . . . . . . . .     66
     Results of Operations. . . . . . . . . . . . . . . . . . . .     67
  PSI
     Consolidated Statements of Income for the three years
       ended December 31, 1998. . . . . . . . . . . . . . . . . .     72
     Consolidated Balance Sheets at December 31,
       1998 and 1997. . . . . . . . . . . . . . . . . . . . . . .     73
     Consolidated Statements of Changes in Common Stock
       Equity for the three years ended December 31, 1998 . . . .     75
     Consolidated Statements of Cash Flows for the
       three years ended December 31, 1998. . . . . . . . . . . .     76
     Results of Operations. . . . . . . . . . . . . . . . . . . .     77
  ULH&P
     Statements of Income for the three years ended
       December 31, 1998. . . . . . . . . . . . . . . . . . . . .     81
     Balance Sheets at December 31, 1998 and 1997 . . . . . . . .     82
     Statements of Changes in Common Stock Equity
       for the three years ended December 31, 1998. . . . . . . .     84
     Statements of Cash Flows for the three years ended
       December 31, 1998. . . . . . . . . . . . . . . . . . . . .     85
     Results of Operations. . . . . . . . . . . . . . . . . . . .     86

  Notes to Financial Statements . . . . . . . . . . . . . . . . .     88

Financial Statement Schedules

     Schedule II - Valuation and Qualifying Accounts
       Cinergy. . . . . . . . . . . . . . . . . . . . . . . . . .    155
       CG&E . . . . . . . . . . . . . . . . . . . . . . . . . . .    156
       PSI. . . . . . . . . . . . . . . . . . . . . . . . . . . .    157
       ULH&P. . . . . . . . . . . . . . . . . . . . . . . . . . .    158

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, 1998 and 1997, and for each
of the three years in the period ended December 31, 1998, as listed in the index
on page 48. 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, 1998 and 1997,  and the results of their  operations
and their cash flows for each of the three  years in the period  ended  December
31, 1998, in conformity with generally accepted accounting principles.

As explained in Note 1 to the  consolidated  financial  statements,  the Company
changed its method of  accounting  for its energy  trading  and risk  management
activities effective December 31, 1998.

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 48 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 28, 1999


<PAGE>




Cinergy Corp.
  and Subsidiaries



<PAGE>


<TABLE>
<CAPTION>

                                  CINERGY CORP.

                        CONSOLIDATED STATEMENTS OF INCOME
<S>                                     <C>            <C>            <C>   
                                           1998           1997           1996
                                        (in thousands, except per share amounts)

Operating Revenues
  Electric                              $4 747 235     $3 861 698     $2 768 706
  Gas                                    1 060 664        491 145        474 035
  Other                                     68 395         34 258         33 446    
                                         5 876 294      4 387 101      3 276 187

Operating Expenses
  Fuel and purchased and exchanged
    power                                2 846 323      1 912 793        872 088
  Gas purchased                            857 010        266 158        249 116
  Other operation and maintenance        1 006 382        869 867        838 218
  Depreciation and amortization            325 515        306 922        294 852
  Taxes other than income taxes            274 635        265 693        258 375
                                         5 309 865      3 621 433      2 512 649

Operating Income                           566 429        765 668        763 538

Equity in Earnings of Unconsolidated
  Subsidiaries                              51 484         60 392         25 430

Other Income and (Expenses) - Net           10 346         (1 534)       (16 652)

Interest                                   243 587        236 319        215 603

Income Before Taxes                        384 672        588 207        556 713

Income Taxes (Note 11)                     117 187        213 000        198 736

Preferred Dividend Requirements
  of Subsidiaries                            6 517         12 569         23 180

Net Income Before Extraordinary Item    $  260 968     $  362 638     $  334 797
Extraordinary Item - Equity Share of
  Windfall Profits Tax (Less Applicable
  Income Taxes of $0) (Note 17)               -          (109 400)           -  
Net Income                              $  260 968     $  253 238     $  334 797

Average Common Shares Outstanding          158 238        157 685        157 678

Earnings Per Common Share (Note 16)
  Net income before extraordinary item       $1.65          $2.30          $2.00
  Net income                                 $1.65          $1.61          $2.00

Earnings Per Common Share - Assuming
  Dilution (Note 16)
    Net income before extraordinary item     $1.65          $2.28          $1.99
    Net income                               $1.65          $1.59          $1.99

Dividends Declared Per Common Share          $1.80          $1.80          $1.74

<FN>
The  accompanying  notes as they relate to Cinergy Corp. are an integral part of
these consolidated financial statements.
</FN>
</TABLE>


<PAGE>


<TABLE>
<CAPTION>

                                  CINERGY CORP.

                           CONSOLIDATED BALANCE SHEETS

ASSETS

<S>                                                 <C>             <C>    
                                                            December 31
                                                        1998           1997
                                                       (dollars in thousands)

Current Assets
  Cash and temporary cash investments               $   100 154     $   53 310
  Restricted deposits                                     3 587          2 319
  Notes receivable                                           64            110
  Accounts receivable less accumulated provision
    for doubtful accounts of $25,622 at December
    31, 1998, and $10,382 at December 31, 1997
    (Note 6)                                            580 305        413 516
  Materials, supplies, and fuel - at average cost       202 747        163 156
  Prepayments and other                                  74 849         38 171
  Energy risk management assets (Note 1(c))             969 000           -___
                                                      1 930 706        670 582
Utility Plant - Original Cost
  In service
    Electric                                          9 222 261      8 981 182
    Gas                                                 786 188        746 903
    Common                                              186 364        186 078
                                                     10 194 813      9 914 163
  Accumulated depreciation                            4 040 247      3 800 322
                                                      6 154 566      6 113 841
  Construction work in progress                         189 883        183 262
      Total utility plant                             6 344 449      6 297 103

Other Assets
  Regulatory assets (Note 1(f))                         970 767      1 076 851
  Investments in unconsolidated
    subsidiaries (Note 10)                              574 401        537 720
  Other                                                 478 472        275 897
                                                      2 023 640      1 890 468

                                                    $10 298 795     $8 858 153

<FN>
The  accompanying  notes as they relate to Cinergy Corp. are an integral part of
these consolidated financial statements.
</FN>
</TABLE>


<PAGE>


<TABLE>
<CAPTION>

                                  CINERGY CORP.

LIABILITIES AND SHAREHOLDERS' EQUITY

<S>                                                 <C>            <C>   
                                                             December 31
                                                         1998          1997
                                                       (dollars in thousands)

Current Liabilities
  Accounts payable                                  $   668 860    $  488 716
  Accrued taxes                                         228 347       187 033
  Accrued interest                                       51 679        46 622
  Notes payable and other short-term
    obligations (Note 5)                                903 700     1 114 028
  Long-term debt due within one year (Note 4)           136 000        85 000
  Energy risk management liabilities (Note 1(c))      1 117 146          -
  Other                                                  93 376        79 193
                                                      3 199 108     2 000 592

Non-Current Liabilities
  Long-term debt (Note 4)                             2 604 467     2 150 902
  Deferred income taxes (Note 11)                     1 091 075     1 248 543
  Unamortized investment tax credits                    156 757       166 262
  Accrued pension and other postretirement
    benefit costs (Note 9)                              315 147       297 142
  Other                                                 298 370       277 523
                                                      4 465 816     4 140 372

      Total liabilities                               7 664 924     6 140 964

Cumulative Preferred Stock of Subsidiaries (Note 3)
  Not subject to mandatory redemption                    92 640       177 989

Common Stock Equity (Note 2)
  Common stock - $.01 par value;
    authorized shares - 600,000,000;
    outstanding shares - 158,664,532 in 1998
    and 157,744,658 in 1997                               1 587         1 577
  Paid-in capital                                     1 595 237     1 573 064
  Retained earnings                                     945 214       967 420
  Accumulated other comprehensive loss                     (807)       (2 861)
      Total common stock equity                       2 541 231     2 539 200

Commitments and Contingencies (Note 12)
                                                    $10 298 795    $8 858 153
</TABLE>



<PAGE>

<TABLE>
<CAPTION>



                                                             CINERGY CORP.
                                       CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCK EQUITY

                                                        (dollars in thousands)
<S>                                            <C>       <C>           <C>          <C>               <C>              <C>
                                                                                      Accumulated
                                                                                         Other           Total            Total
                                               Common     Paid-in       Retained     Comprehensive    Comprehensive    Common Stock
                                               Stock      Capital       Earnings         Loss            Income           Equity    

Balance at December 31, 1995                   $1 577    $1 597 050    $  951 290      $(1 074)                         $2 548 843
Comprehensive income
  Net income                                                              334 797                       $334 797           334 797
  Other comprehensive income, net of tax
      effect of $179
  Foreign currency translation adjustment                                                                   (131)             (131)
    Minimum pension liability adjustment                                                                    (179)             (179)
    Other comprehensive loss total                                                        (310)             (310)
Comprehensive income total                                                                              $334 487
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 51 for
  per share amounts)                                                     (274 358)                                        (274 358)
Costs of reacquisition of preferred stock
  of subsidiary                                                           (18 391)                                         (18 391)
Other                                                          (338)          188                                             (150)

Balance at December 31, 1996                   $1 577    $1 590 735    $  993 526      $(1 384)                         $2 584 454
Comprehensive income
  Net income                                                              253 238                       $253 238           253 238
  Other comprehensive income, net of tax
      effect of $1,595
    Foreign currency translation adjustment                                                                 (394)             (394)
    Minimum pension liability adjustment                                                                  (1 083)           (1 083)
    Other comprehensive loss total                                                      (1 477)           (1 477)
Comprehensive income total                                                                              $251 761
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 51 for
  per share amounts)                                                     (283 866)                                        (283 866)
Other                                                          (267)        4 522                                            4 255
 
Balance at December 31, 1997                   $1 577    $1 573 064    $  967 420      $(2 861)                         $2 539 200
Comprehensive income
  Net income                                                              260 968                       $260 968           260 968
  Other comprehensive income, net of tax
      effect of $(1,813)
    Foreign currency translation adjustment                                                                2 160             2 160
    Minimum pension liability adjustment                                                                    (106)             (106)
    Other comprehensive income total                                                     2 054             2 054
Comprehensive income total                                                                              $263 022
Issuance of 919,874 shares of common stock - net   10        30 225                                                         30 235
Treasury shares purchased                          (3)      (15 426)                                                       (15 429)
Treasury shares reissued                            3         7 325                                                          7 328
Dividends on common stock (see page 51 for
  per share amounts)                                                     (284 703)                                        (284 703)
Other                                                            49         1 529                                            1 578
Balance at December 31, 1998                   $1 587    $1 595 237    $  945 214      $  (807)                         $2 541 231

<FN>
The accompanying notes as they relate to Cinergy Corp. are an integral part of these consolidated financial statements.
</FN>
</TABLE>


<PAGE>


<TABLE>
<CAPTION>

                                                             CINERGY CORP.

                                                 CONSOLIDATED STATEMENTS OF CASH FLOWS
<S>                                                   <C>           <C>         <C>      
                                                         1998          1997        1996
                                                                  (in thousands)

Operating Activities
  Net income                                          $ 260 968     $ 253 238   $ 334 797
  Items providing or (using) cash currently:
    Depreciation and amortization                       325 515       306 922     294 852
    Wabash Valley Power Association, Inc.
      settlement                                         80 000          -        (80 000)
    Deferred income taxes and investment tax
      credits - net                                    (107 835)       67 638      47 912
    Unrealized loss from energy risk management
      activities                                        135 000        15 000        -
    Equity in earnings of unconsolidated
      subsidiaries                                      (45 374)      (35 239)    (25 430)
    Extraordinary item - equity share of windfall
      profits tax                                          -          109 400        -
    Allowance for equity funds used during
      construction                                       (1 668)          (98)     (1 225)
    Regulatory assets - net                              46 856        33 605     (17 135)
    Changes in current assets and current liabilities
        Restricted deposits                              (1 268)         (598)       (358)
        Accounts and notes receivable                   (45 811)     (217 157)    132 749
        Materials, supplies, and fuel                   (33 484)       21 817      44 005
        Accounts payable                                 44 535       183 296      37 281
        Accrued taxes and interest                       46 371       (21 414)     (1 289)
        Other current assets and liabilities             (9 495)      (36 582)     52 749
    Other items - net                                    29 698        53 750      (8 161)

        Net cash provided by operating activities       724 008       733 578     810 747

Financing Activities
  Change in short-term debt                            (245 413)      191 811     572 417
  Issuance of long-term debt                            785 554       100 062     150 217
  Redemption of long-term debt                         (384 520)     (336 312)   (237 183)
  Funds on deposit from issuance of long-term debt         -             -            973
  Retirement of preferred stock of subsidiaries         (85 299)      (16 269)   (212 487)
  Issuance of common stock                                3 724         2 066         311
  Dividends on common stock                            (283 884)     (283 866)   (274 358)

        Net cash used in financing activities          (209 838)     (342 508)       (110)

Investing Activities
  Construction expenditures (less allowance for
    equity funds used during construction)             (368 609)     (328 055)   (323 013)
  Acquisition of businesses (net of cash acquired)      (63 412)         -           -
  Investments in unconsolidated subsidiaries            (35 305)      (29 032)   (503 349)

        Net cash used in investing activities          (467 326)     (357 087)   (826 362)

Net increase (decrease) in cash and temporary
  cash investments                                       46 844        33 983     (15 725)
Cash and temporary cash investments at beginning
  of period                                              53 310        19 327      35 052 
Cash and temporary cash investments at end of
  period                                              $ 100 154     $  53 310   $  19 327

Supplemental Disclosure of Cash Flow Information Cash paid during the year for:
    Interest (net of amount capitalized)              $ 229 501     $ 235 948   $ 207 393
    Income taxes                                        179 677       140 655     141 917

<FN>
The accompanying notes as they relate to Cinergy Corp. are an integral part of these consolidated financial statements.
</FN>
</TABLE>


<PAGE>


RESULTS OF OPERATIONS - CINERGY

Operating Revenues 

Electric Operating Revenues

The  components  of electric  operating  revenues and the related  kilowatt-hour
("kwh") sales are shown below:

                                  Revenue                   Kwh Sales
                          1998     1997     1996     1998     1997     1996  
                                       ($ and kwh in millions)

Retail                   $2,553   $2,455   $2,438   46,983   45,327   45,121
Sales for resale          2,140    1,368      297   77,558   57,454   12,399
Other                        54       39       34     -        -        -
Total                    $4,747   $3,862   $2,769  124,541  102,781   57,520

Electric operating revenues increased $885 million (23%) for 1998, when compared
to 1997.  This  increase was  primarily  due to  increased  volumes and a higher
average price per kwh received on non-firm  power sales for resale  transactions
related  to the  energy  marketing  and  trading  operations.  There was also an
increase in the average  price per kwh paid for the  corresponding  purchases of
purchased and exchanged power described below. Also contributing to the increase
were higher retail kwh sales due to the warmer weather during 1998 when compared
to  1997  and  growth  in the  average  number  of  residential  and  commercial
customers.

Higher  non-firm power sales for resale due to increased  activity in the energy
marketing and trading operations  significantly  contributed to the $1.1 billion
(39%) increase in electric  operating  revenues in 1997,  when compared to 1996.
Also contributing to the increase was a full year's effects of PSI's retail rate
increases  approved in the September 1996 Order,  as amended in August 1997, the
December  1996 DSM  Order,  and the  return  of  approximately  $13  million  to
customers in 1996 in  accordance  with an order  issued in February  1995 by the
IURC ("February 1995 Order").  This order required all retail  operating  income
above a certain rate of return to be refunded to customers. Partially offsetting
these increases was the reduction in fuel revenue due to a lower average cost of
fuel used in electric production.

Gas Operating Revenues

The  components of gas operating  revenues and the related  thousand  cubic feet
("mcf") sales are shown below:

                                Revenue                Mcf Sales 
                          1998    1997   1996     1998   1997   1996  
                                   ($ and mcf in millions)

Sales for resale         $  659   $  -   $  -      338      -      -
Retail                      357    454    440       55     69     75
Transportation               41     32     28       58     54     49
Other                         4      5      6        -      -      -
Total                    $1,061   $491   $474      451    123    124

Gas operating revenues increased $570 million in 1998, as compared to 1997. This
increase was primarily due to the gas operating revenues of ProEnergy, which was
acquired  in June 1998.  Partially  offsetting  this  increase  was a decline in
retail sales due to lower mcf volumes  reflecting,  in part,  the milder weather
during the first  quarter of 1998,  and a  reduction  in the  average  number of


<PAGE>

full-service  residential,  commercial and industrial customers.  Transportation
revenues increased as full-service  customers  continued the move away from full
service to purchasing gas directly from suppliers, using transportation services
provided by CG&E.

The gas rate increase of 2.5%  (approximately $9 million  annually)  approved by
the PUCO in the  December  1996 Order and a higher  average  cost per mcf of gas
purchased contributed to the $17 million (4%) increase in gas operating revenues
in 1997, as compared to 1996. These increases were partially offset by a decline
in retail sales due to lower mcf volumes reflecting milder weather during 1997.

Other Revenues

Other revenues increased $34 million in 1998, as compared to 1997. This increase
was  primarily  the  result  of  increased  sales  and  new  initiatives  by the
non-regulated businesses operated by the various business units.

Operating Expenses

Fuel and Purchased and Exchanged Power

The components of fuel and purchased and exchanged power are shown below:

                                                    1998       1997      1996 
                                                          (in millions)

Fuel                                               $  723     $  693     $713
Purchased and exchanged power                       2,123      1,220      159
Total                                              $2,846     $1,913     $872

Electric fuel costs  increased $30 million (4%) in 1998,  when compared to 1997,
and declined $20 million (3%) in 1997, when compared to 1996.

An analysis of these fuel costs is shown below:

                                                     1998      1997
                                                      (in millions)

Previous year's fuel expense                         $693      $713
Increase (Decrease) due to change in:
  Price of fuel                                       (23)        7
  Deferred fuel cost                                   22       (55)
  Kwh generation                                       28        28
  Other                                                 3        -_

Current year's fuel expense                          $723      $693

Purchased and  exchanged  power  expense  increased  $903 million (74%) and $1.1
billion  in 1998 and  1997,  respectively.  These  increases  primarily  reflect
increased  purchases  of  non-firm  power  for  resale  to others as a result of
increased  activity  in the  energy  marketing  and  trading  operations  and an
increase  in the  average  price paid per kwh.  Also  recorded in 1998 were $135
million  of  unrealized  losses  related  to the  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 energy marketing
and trading operations.)


<PAGE>



Gas Purchased

Gas  purchased  increased  $591  million in 1998,  as compared to 1997.  This is
primarily due to the gas purchased expenses of ProEnergy,  which was acquired in
June 1998.  Slightly  offsetting  this increase was a decrease in the volumes of
gas purchased by CG&E, due to lower demand,  and a lower average cost per mcf of
gas purchased by CG&E.

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.

Other Operation and Maintenance

The components of other operation and maintenance expenses are shown below:

                                        1998   1997   1996
                                          (in millions)

Other operation                        $  814  $693   $644
Maintenance                               192   177    194
Total                                  $1,006  $870   $838

Other  operation  expenses  increased $121 million (17%) in 1998, as compared to
1997.  This  increase is  primarily  due to the  one-time  charge of $80 million
recorded during the second quarter of 1998,  reflecting the  implementation of a
1989  settlement  of a dispute with the Wabash  Valley Power  Association,  Inc.
("WVPA").  (See  Note 18 of the  "Notes  to  Financial  Statements"  in "Item 8.
Financial Statements and Supplementary Data.") This increase was also the result
of increased growth and new initiatives by the non-regulated businesses operated
by the various business units.  Maintenance  expenses increased $15 million (8%)
in 1998,  as  compared  to 1997.  This  increase is due to an increase in boiler
plant  maintenance,  an increase in general plant  expenses,  and an increase in
distribution  line  maintenance  costs  resulting  from storm damage  during the
second quarter of 1998.

Other  operation  expenses  increased  $49 million (8%) in 1997,  as compared to
1996. This increase is primarily due to higher other operation expenses relating
to the PSI 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.  The effect of discontinuing  deferral of
certain  DSM-related  costs also  added to the  increase.  Maintenance  expenses
decreased  $17  million  (9%) in 1997,  as compared  to 1996.  This  decrease is
primarily  attributable to reduced outage related charges and other  maintenance
costs associated with the electric  production  facilities.  Reduced maintenance
costs associated with the electric  transmission and distribution  facilities in
the PSI territory also contributed to the decrease for 1997.

Depreciation and Amortization

Depreciation and amortization increased $19 million (6%) in 1998, as compared to
1997.  This  increase is  primarily  attributable  to  amortization  of phase-in
deferrals  reflecting  the PUCO ordered  phase-in plan for the William H. Zimmer
Generating  Station  ("Zimmer").  (See  Note  1(f) of the  "Notes  to  Financial
Statements" in "Item 8. Financial Statements and Supplementary Data.")



<PAGE>



Equity in Earnings of Unconsolidated Subsidiaries

The decrease in equity in earnings of unconsolidated  subsidiaries of $9 million
(15%) for 1998,  as  compared  to 1997,  is  partially  due to a decline  in the
earnings of Midlands,  as a result of milder  weather  conditions  and a penalty
imposed on each electric distribution company caused by the delay in opening the
electricity supply business to competition.

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 Income and (Expenses) - Net

The $12  million  change in other  income  and  (expenses)  - net for  1998,  as
compared to 1997, is primarily  due to a gain on the sale of Cinergy's  interest
in a  foreign  subsidiary.  This  gain  is  partially  offset  by  a  litigation
settlement.

The $15  million  change in other  income  and  (expenses)  - net for  1997,  as
compared  to 1996,  is due,  in part,  to charges in 1996 of  approximately  $14
million  associated with the disallowance of information system costs related to
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.

Interest

The $21 million (10%) increase in interest expense in 1997, as compared to 1996,
is due to higher  short-term  borrowings  used to fund the  redemption  of first
mortgage  bonds by CG&E and Cinergy's  investments in  non-regulated  companies,
including Avon Energy.

Income Taxes

Income taxes  decreased $96 million (45%) in 1998, as compared to 1997, due to a
decrease in taxable income over the prior year and the increased  utilization of
foreign tax credits.

Preferred Dividend Requirements of Subsidiaries

The decrease in preferred  dividend  requirements  of subsidiaries of $6 million
(48%)  for  1998,  as  compared  to 1997,  is  primarily  attributable  to PSI's
redemption of all outstanding  shares of its 7.44% Series  Cumulative  Preferred
Stock on March 1, 1998.

Preferred dividend  requirements of subsidiaries  decreased $11 million (46%) in
1997,  when  compared to 1996.  This decrease is 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.")



<PAGE>



Extraordinary Item

Extraordinary  item - equity  share  of  windfall  profits  tax  represents  the
one-time charge for the windfall profits tax levied against Midlands as recorded
in  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
<S>                                     <C>            <C>            <C>    
                                           1998           1997           1996
                                                     (in thousands)

Operating Revenues
  Electric                              $2 452 692     $1 956 256     $1 502 008
  Gas                                      403 431        495 620        474 041
                                         2 856 123      2 451 876      1 976 049

Operating Expenses
  Fuel and purchased and exchanged
    power                                1 407 136        896 025        417 451
  Gas purchased                            199 683        266 123        249 116
  Other operation and maintenance          392 841        398 336        426 374
  Depreciation and amortization            191 109        180 191        177 839
  Taxes other than income taxes            217 691        211 303        207 904
                                         2 408 460      1 951 978      1 478 684

Operating Income                           447 663        499 898        497 365

Other Income and (Expenses) - Net           (1 291)        (6 156)       (11 699)

Interest                                   102 238        115 828        122 550

Income Before Taxes                        344 134        377 914        363 116

Income Taxes (Note 11)                     128 322        138 761        135 936

Net Income                                 215 812        239 153        227 180

Preferred Dividend Requirement                 858            868         10 643

Costs of Reacquisition of
  Preferred Stock (Note 3(b))                 -              -            18 391

Net Income Applicable to
  Common Stock                          $  214 954     $  238 285     $  198 146

<FN>
The  accompanying  notes as they relate to The Cincinnati Gas & Electric Company
are an integral part of these consolidated financial statements.
</FN>
</TABLE>


<PAGE>


<TABLE>
<CAPTION>

                      THE CINCINNATI GAS & ELECTRIC COMPANY

                           CONSOLIDATED BALANCE SHEETS

ASSETS
<S>                                                  <C>            <C>  
                                                            December 31
                                                        1998           1997
                                                      (dollars in thousands)

Current Assets
  Cash and temporary cash investments                $   26 989     $    2 349
  Restricted deposits                                     1 173          1 173
  Notes receivable from affiliated companies             84 358         27 193
  Accounts receivable less accumulated provision
    for doubtful accounts of $17,607 at December
    31, 1998, and $9,199 at December 31, 1997
    (Note 6)                                            205 060        193 549
  Accounts receivable from affiliated companies          22 635         35 507
  Materials, supplies, and fuel - at average cost       115 294        107 967
  Prepayments and other                                  40 158         31 827
  Energy risk management assets (Note 1(c))             484 500           -
                                                        980 167        399 565

Utility Plant - Original Cost
  In service
    Electric                                          4 806 958      4 700 631
    Gas                                                 786 188        746 903
    Common                                              186 364        186 078
                                                      5 779 510      5 633 612
  Accumulated depreciation                            2 147 298      2 008 005
                                                      3 632 212      3 625 607
  Construction work in progress                         119 993        118 133
      Total utility plant                             3 752 205      3 743 740

Other Assets
  Regulatory assets (Note 1(f))                         627 035        667 765
  Other                                                 100 061        103 368
                                                        727 096        771 133

                                                     $5 459 468     $4 914 438

<FN>
The  accompanying  notes as they relate to The Cincinnati Gas & Electric Company
are an integral part of these consolidated financial statements.
</FN>
</TABLE>


<PAGE>


<TABLE>
<CAPTION>

                      THE CINCINNATI GAS & ELECTRIC COMPANY

LIABILITIES AND SHAREHOLDER'S EQUITY
<S>                                                  <C>           <C> 
                                                            December 31
                                                        1998          1997 
                                                      (dollars in thousands)

Current Liabilities
  Accounts payable                                   $  282 743    $  249 538
  Accounts payable to affiliated companies               13 166        10 821
  Accrued taxes                                         151 455       149 129
  Accrued interest                                       20 571        25 430
  Notes payable and other short-term
    obligations (Note 5)                                189 283       289 000
  Notes payable to affiliated companies                  17 020        12 253
  Long-term debt due within one year (Note 4)           130 000          -
  Energy risk management liabilities (Note 1(c))        558 573          -
  Other                                                  26 422        29 950
                                                      1 389 233       766 121
Non-Current Liabilities
  Long-term debt (Note 4)                             1 219 778     1 324 432
  Deferred income taxes (Note 11)                       771 145       794 396
  Unamortized investment tax credits                    110 801       116 966
  Accrued pension and other postretirement
    benefit costs (Note 9)                              146 361       180 566
  Other                                                 134 990       100 576
                                                      2 383 075     2 516 936

      Total liabilities                               3 772 308     3 283 057

Cumulative Preferred Stock (Note 3)
  Not subject to mandatory redemption                    20 717        20 793

Common Stock Equity (Note 2)
  Common stock - $8.50 par value;
    authorized shares - 120,000,000; outstanding
    shares - 89,663,086 in 1998 and 1997                762 136       762 136
  Paid-in capital                                       553 926       534 649
  Retained earnings                                     351 505       314 553
  Accumulated other comprehensive loss                   (1 124)         (750)
      Total common stock equity                       1 666 443     1 610 588

Commitments and Contingencies (Note 12)
                                                     $5 459 468    $4 914 438
</TABLE>


<PAGE>


<TABLE>
<CAPTION>

                                                 THE CINCINNATI GAS & ELECTRIC COMPANY
                                       CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCK EQUITY
                                                        (dollars in thousands)

<S>                               <C>            <C>             <C>            <C>                <C>                <C>  
                                                                                 Accumulated
                                                                                    Other              Total              Total
                                   Common         Paid-in        Retained       Comprehensive      Comprehensive      Common Stock
                                   Stock          Capital        Earnings           Loss              Income             Equity

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

Balance at December 31, 1996      $762 136       $536 276        $247 403                                              $1 545 815
Comprehensive income
  Net income                                                      239 153                            $239 153             239 153
  Other comprehensive income,
      net of tax effect of $404
    Minimum pension liability
      adjustment                                                                                         (750)               (750)
    Other comprehensive loss
      total                                                                       $  (750)               (750)
Comprehensive income total                                                                           $238 403
Dividends on preferred stock                                         (871)                                                   (871)
Dividends on common stock                                        (170 400)                                               (170 400)
Other                                              (1 627)           (732)                                                 (2 359)

Balance at December 31, 1997      $762 136       $534 649        $314 553         $  (750)                             $1 610 588
Comprehensive income
  Net income                                                      215 812                            $215 812             215 812
  Other comprehensive income,
      net of tax effect of $201
    Minimum pension liability
      adjustment                                                                                         (374)               (374)
    Other comprehensive loss
      total                                                                       $  (374)               (374)
Comprehensive income total                                                                           $215 438
Dividends on preferred stock                                         (859)                                                   (859)
Dividends on common stock                                        (178 000)                                               (178 000)
Contribution from parent company
  for reallocation of taxes                        19 253                                                                  19 253
Other                                                  24              (1)                                                     23

Balance at December 31, 1998      $762 136       $553 926        $351 505         $(1 124)                             $1 666 443

<FN>
The accompanying  notes as they relate to The Cincinnati Gas & Electric Company are an integral part of these consolidated financial
statements.
</FN>
</TABLE>


<PAGE>



<TABLE>
<CAPTION>


                      THE CINCINNATI GAS & ELECTRIC COMPANY

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
<S>                                                   <C>          <C>          <C>      
                                                         1998         1997         1996
                                                                 (in thousands)

Operating Activities
  Net income                                          $ 215 812    $ 239 153    $ 227 180
  Items providing or (using) cash currently:
    Depreciation and amortization                       191 109      180 191      177 839
    Deferred income taxes and investment tax
      credits - net                                     (27 045)      16 443       18 929
    Unrealized loss from energy risk management
      activities                                         73 000        2 000         -
    Allowance for equity funds used during
      construction                                       (1 647)         (98)      (1 225)
    Regulatory assets - net                               4 606        6 472        3 513
    Changes in current assets and current
      liabilities
        Accounts and notes receivable                   (55 788)    (105 829)     156 182
        Materials, supplies, and fuel                    (7 327)       6 872        2 437
        Accounts payable                                 35 550       81 569       19 587
        Accrued taxes and interest                       (2 533)        (272)      10 165
        Other current assets and liabilities             (5 359)      (1 637)     (10 106)
    Other items - net                                    40 782        4 257       56 664

        Net cash provided by operating activities       461 160      429 121      661 165

Financing Activities
  Change in short-term debt                             (94 950)      86 662       30 591
  Issuance of long-term debt                            243 186      100 062         -
  Redemption of long-term debt                         (220 409)    (290 612)    (162 583)
  Retirement of preferred stock                             (52)        (234)        -
  Dividends on preferred stock                             (859)        (871)     (10 643)
  Dividends on common stock                            (178 000)    (170 400)    (377 969)

        Net cash used in financing activities          (251 084)    (275 393)    (520 604)

Investing Activities
  Construction expenditures (less allowance for
    equity funds used during construction)             (185 436)    (156 499)    (142 053)

        Net cash used in investing activities          (185 436)    (156 499)    (142 053)

Net increase (decrease) in cash and temporary
  cash investments                                       24 640       (2 771)      (1 492)

Cash and temporary cash investments at beginning
  of period                                               2 349        5 120        6 612

Cash and temporary cash investments at end of
  period                                              $  26 989    $   2 349    $   5 120

Supplemental Disclosure of Cash Flow Information Cash paid during the year for:
    Interest (net of amount capitalized)              $ 101 897    $ 115 801    $ 117 848
    Income taxes                                        125 704      106 154      109 034



<FN>
The  accompanying  notes as they relate to The Cincinnati Gas & Electric Company
are an integral part of these consolidated financial statements.
</FN>
</TABLE>


<PAGE>


RESULTS OF OPERATIONS - CG&E

Operating Revenues

Electric Operating Revenues

The  components  of electric  operating  revenues  and the related kwh sales are
shown below:

                                  Revenue                   Kwh Sales 
                          1998     1997     1996     1998     1997     1996  
                                       ($ and kwh in millions)

Retail                   $1,392   $1,315   $1,366   22,657   21,992   22,075
Sales for resale          1,046      623      123   37,861   26,640    6,096
Other                        15       18       13     -        -        -
Total                    $2,453   $1,956   $1,502   60,518   48,632   28,171

Electric  operating  revenues  increased  by $497  million  (25%)  in 1998  when
compared to 1997.  This increase was  primarily  due to increased  volumes and a
higher  average  price per kwh  received  on  non-firm  power  sales for  resale
transactions  related to the energy marketing and trading operations.  There was
also an  increase  in the  average  price  per kwh  paid  for the  corresponding
purchases of purchased and exchanged power described below. Also contributing to
the increase were higher retail kwh sales due to the warmer  weather during 1998
when  compared  to 1997 and  growth in the  average  number of  residential  and
commercial customers.

Higher  non-firm  power  sales for resale due to  increased  activity  in energy
marketing and trading operations  significantly  contributed to the $454 million
(30%) increase in electric  operating  revenues in 1997,  when compared to 1996.
Partially  offsetting  this  increase was the reduction in fuel revenue due to a
lower average cost of fuel used in electric production.

Non-system kwh sales (and related  revenues and expenses)  resulting from energy
marketing  and trading  operations  are allocated  50%/50%  between CG&E and PSI
pursuant to the operating agreement filed with the companies' regulators.

Gas Operating Revenues

The  components  of gas  operating  revenues and the related mcf sales are shown
below:

                                   Revenue               Mcf Sales 
                              1998   1997   1996    1998   1997   1996  
                                       ($ and mcf in millions)

Retail                        $357   $454   $440      56     69     75
Transportation                  41     33     28      58     54     49
Other                            5      9      6       -      -      -
Total                         $403   $496   $474     114    123    124

Gas operating revenues decreased $93 million (19%) in 1998, as compared to 1997,
reflecting  a decline in retail mcf sales due to the milder  weather  during the
first  quarter  of 1998 and a decrease  in the  average  number of  full-service
residential,  commercial,  and industrial  customers.  Partially  offsetting the
decline was an increase in transportation  revenues,  as full-service  customers
continued  the move away from full  service  to  purchasing  gas  directly  from
suppliers, using transportation services provided by CG&E.

<PAGE>

The gas rate increase of 2.5% ($9 million annually)  approved by the PUCO in the
December  1996  Order  and a  higher  average  cost  per  mcf of  gas  purchased
contributed to the $22 million (5%) increase in gas operating  revenues in 1997,
as compared  to 1996.  These  increases  were  partially  offset by a decline in
retail sales reflecting milder weather during 1997.

Operating Expenses

Fuel and Purchased and Exchanged Power

The components of fuel and purchased and exchanged power are shown below:

                                                    1998       1997      1996 
                                                          (in millions)

Fuel                                               $  339      $300      $349
Purchased and exchanged power                       1,068       596        68
Total                                              $1,407      $896      $417

Electric fuel costs  increased $39 million (13%) in 1998, when compared to 1997,
and decreased $49 million (14%) in 1997, when compared to 1996.

An analysis of these fuel costs is shown below:

                                                    1998       1997
                                                     (in millions)

Previous year's fuel expense                        $300       $349
Increase (Decrease) due to change in:
  Price of fuel                                       (4)         8
  Deferred fuel cost                                  33        (50)
  Kwh generation                                      10         (7)

Current year's fuel expense                         $339       $300

Purchased and  exchanged  power  expense  increased  $472 million (79%) and $528
million  in 1998 and  1997,  respectively.  These  increases  primarily  reflect
increased  purchases  of  non-firm  power  for  resale  to others as a result of
increased activity in energy marketing and trading operations and an increase in
the  average  price  paid per kwh.  Also  recorded  in 1998 were $73  million of
unrealized losses related to the energy 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 energy marketing and trading
operations.)

Gas Purchased

Gas  purchased  decreased  $66  million  (25%) in  1998,  as  compared  to 1997,
reflecting a decrease in the volumes of gas purchased,  due to lower demand, and
a lower average cost per mcf of 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.



<PAGE>



Other Operation and Maintenance

The components of other operation and maintenance expenses are shown below:

                                        1998    1997   1996
                                           (in millions)

Other operation                         $300    $308   $330
Maintenance                               93      90     96
Total                                   $393    $398   $426

Other  operation  expenses  decreased  $22 million (7%) in 1997,  as compared to
1996. This decrease was primarily due to the effect of charges in 1996 for early
retirement  and  severance  programs  and the  December  1996  Order.  Partially
offsetting  this  decrease  was  the  effect  of  curtailing  certain  deferrals
associated  with DSM  programs  for new  participants  after  December 31, 1996.
Maintenance  expenses  declined  $6 million  (6%) in 1997,  as compared to 1996,
primarily due 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.

Depreciation and Amortization

In 1998,  depreciation and amortization  increased $11 million (6%), as compared
to 1997.  This  increase  was  primarily  due to the  amortization  of  phase-in
deferrals  reflecting the PUCO ordered phase-in plan for Zimmer.  (See Note 1(f)
of the "Notes to Financial  Statements"  in "Item 8.  Financial  Statements  and
Supplementary Data.")

Other Income and (Expenses) - Net

The change in other  income and  (expenses)  - net of $5  million  for 1998,  as
compared to 1997,  is largely due to an  increase in interest  income  resulting
from an increase  in the balance of  short-term  loans to  affiliated  companies
through  Cinergy's  money pool  arrangement  and an adjustment  recorded in 1997
related to the sale of certain assets.

The $6 million change in other income and (expenses) - net for 1997, as compared
to 1996,  is due  primarily  to charges  in 1996 of  approximately  $14  million
associated  with the  disallowance  of  information  system costs related to 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.

Interest

The decrease in interest  expense of $14 million  (12%) in 1998,  as compared to
1997, is due to decreases in both interest on long-term  debt and other interest
expense.  The decrease in interest expense on long-term debt is primarily due to
a net  redemption  of  approximately  $86 million of  long-term  debt during the
period of March 1997 through  December  1998.  The decrease in other interest is
due to a reduction in average short-term borrowings.

The  decrease in  interest  expense of $7 million  (5%) in 1997,  as compared to
1996, is primarily due to a decrease in long-term debt which is partially offset
by an increase in other interest.  The decrease in interest on long-term debt is
primarily due to the  redemptions  and  maturities of long-term debt in 1996 and
1997.  The increase in other  interest is primarily  due to interest  expense on
increased short-term borrowings used to fund CG&E's redemption of first mortgage
bonds.

<PAGE>

Preferred Dividend Requirement

Preferred  dividend  requirement  decreased  $10  million  (92%) in  1997,  when
compared to 1996. This decrease is 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.")


<PAGE>



PSI Energy, Inc.
and Subsidiary


<PAGE>


<TABLE>
<CAPTION>

                                PSI ENERGY, INC.

                        CONSOLIDATED STATEMENTS OF INCOME

<S>                                     <C>            <C>            <C>   
                                           1998           1997           1996
                                                     (in thousands)

Operating Revenues
  Electric                              $2 403 038     $1 960 395     $1 331 962

Operating Expenses
  Fuel and purchased and exchanged
    power                                1 547 511      1 059 173        519 901
  Other operation and maintenance          509 138        431 355        366 181
  Depreciation and amortization            130 604        126 731        117 013
  Taxes other than income taxes             54 541         53 721         49 911
                                         2 241 794      1 670 980      1 053 006

Operating Income                           161 244        289 415        278 956

Other Income and (Expenses) - Net            3 300          4 624          3 101

Interest                                    89 359         84 454         79 188

Income Before Taxes                         75 185        209 585        202 869

Income Taxes (Note 11)                      23 147         77 380         77 191

Net Income                              $   52 038     $  132 205     $  125 678

Preferred Dividend Requirement               5 659         11 701         12 537

Net Income Applicable to
  Common Stock                          $   46 379     $  120 504     $  113 141

<FN>
The accompanying  notes as they relate to PSI Energy,  Inc. are an integral part
of these consolidated financial statements.
</FN>
</TABLE>


<PAGE>

<TABLE>
<CAPTION>


                                PSI ENERGY, INC.

                           CONSOLIDATED BALANCE SHEETS

ASSETS
<S>                                                  <C>            <C>   
                                                            December 31
                                                        1998           1997
                                                      (dollars in thousands)

Current Assets
  Cash and temporary cash investments                $   18 788     $   18 169
  Restricted deposits                                     2 414          1 146
  Notes receivable                                           73            110
  Notes receivable from affiliated companies             17 024         21 998
  Accounts receivable less accumulated provision
    for doubtful accounts of $7,893 at December
    31, 1998, and $1,183 at December 31, 1997
    (Note 6)                                            225 449        197 898
  Accounts receivable from affiliated companies             384          6 384
  Materials, supplies, and fuel - at average cost        80 445         55 189
  Prepayments and other                                  31 461          4 438
  Energy risk management assets (Note 1(c))             484 500           -
                                                        860 538        305 332

Electric Utility Plant - Original Cost
  In service                                          4 415 303      4 280 551
  Accumulated depreciation                            1 892 949      1 792 317
                                                      2 522 354      2 488 234
  Construction work in progress                          69 891         65 129
      Total electric utility plant                    2 592 245      2 553 363

Other Assets
  Regulatory assets (Note 1(f))                         343 731        409 086
  Other                                                  93 012        138 650
                                                        436 743        547 736

                                                     $3 889 526     $3 406 431

<FN>
The accompanying  notes as they relate to PSI Energy,  Inc. are an integral part
of these consolidated financial statements.
</FN>
</TABLE>


<PAGE>

<TABLE>
<CAPTION>


                                PSI ENERGY, INC.

LIABILITIES AND SHAREHOLDER'S EQUITY
<S>                                                  <C>            <C>    
                                                            December 31
                                                        1998           1997
                                                       (dollars in thousands)

Current Liabilities
  Accounts payable                                   $  217 959     $  212 833
  Accounts payable to affiliated companies               30 145         41 326
  Accrued taxes                                          58 901         69 304
  Accrued interest                                       28 335         21 369
  Notes payable and other short-term
    obligations (Note 5)                                173 162        190 600
  Notes payable to affiliated companies                 102 946         16 435
  Long-term debt due within one year (Note 4)             6 000         85 000
  Energy risk management liabilities (Note 1(c))        558 573           -
  Other                                                   2 227          2 560
                                                      1 178 248        639 427

Non-Current Liabilities
  Long-term debt (Note 4)                             1 025 659        826 470
  Deferred income taxes (Note 11)                       364 049        403 535
  Unamortized investment tax credits                     45 956         49 296
  Accrued pension and other postretirement
    benefit costs (Note 9)                              112 387        116 576
  Other                                                 115 656        176 271
                                                      1 663 707      1 572 148

      Total liabilities                               2 841 955      2 211 575

Cumulative Preferred Stock (Note 3)
  Not subject to mandatory redemption                    71 923        157 196

Common Stock Equity (Note 2)
  Common stock - without par value; $.01 stated
    value; authorized shares - 60,000,000;
    outstanding shares - 53,913,701 in 1998
    and 1997                                                539            539
  Paid-in capital                                       410 739        400 893
  Retained earnings                                     564 865        637 814
  Accumulated other comprehensive loss                     (495)        (1 586)
      Total common stock equity                         975 648      1 037 660

Commitments and Contingencies (Note 12)
                                                     $3 889 526     $3 406 431
</TABLE>


<PAGE>


<TABLE>
<CAPTION>

                                                           PSI ENERGY, INC.
                                       CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCK EQUITY
                                                        (dollars in thousands)

                                                                               Accumulated
                                                                                  Other               Total               Total
                                   Common        Paid-in       Retained       Comprehensive       Comprehensive       Common Stock
                                   Stock         Capital       Earnings           Loss               Income              Equity

<S>                                 <C>         <C>            <C>              <C>               <C>                 <C>    
Balance at December 31, 1995        $539        $403 253       $626 349         $(1 074)                               $1 029 067
Comprehensive income
  Net income                                                    125 678                             $125 678              125 678
  Other comprehensive income,
      net of tax effect of $109
    Minimum pension liability
      adjustment                                                                                        (179)                (179)
    Other comprehensive loss
      total                                                                        (179)                (179)
Comprehensive income total                                                                          $125 499
Dividends on preferred stock                                    (12 629)                                                  (12 629)
Dividends on common stock                                      (112 076)                                                 (112 076)
Other                                               (306)            20                                                      (286)

Balance at December 31, 1996        $539        $402 947       $627 342         $(1 253)                               $1 029 575
Comprehensive income
  Net income                                                    132 205                             $132 205              132 205
  Other comprehensive income,
      net of tax effect of $203
    Minimum pension liability
      adjustment                                                                                        (333)                (333)
    Other comprehensive loss
      total                                                                        (333)                (333)
Comprehensive income total                                                                          $131 872
Dividends on preferred stock                                    (11 795)                                                  (11 795)
Dividends on common stock                                      (113 600)                                                 (113 600)
Other                                             (2 054)         3 662                                                     1 608

Balance at December 31, 1997        $539        $400 893       $637 814         $(1 586)                               $1 037 660
Comprehensive income
  Net income                                                     52 038                             $ 52 038               52 038
  Other comprehensive income,
      net of tax effect of $(666)
    Minimum pension liability
      adjustment                                                                                       1 091                1 091
    Other comprehensive income
      total                                                                       1 091                1 091
Comprehensive income total                                                                          $ 53 129
Dividends on preferred stock                                     (6 187)                                                   (6 187)
Dividends on common stock                                      (106 800)                                                 (106 800)
Non-cash dividend on common stock                               (11 999)                                                  (11 999)
Contribution from parent company
  for reallocation of taxes                        9 823                                                                    9 823
Other                                                 23             (1)                                                       22

Balance at December 31, 1998        $539        $410 739       $564 865         $  (495)                               $  975 648

<FN>
The accompanying  notes as they relate to PSI Energy,  Inc. are an integral part of these consolidated financial statements.
</FN>
</TABLE>

<PAGE>


<TABLE>
<CAPTION>

                                                           PSI ENERGY, INC.

                                                 CONSOLIDATED STATEMENTS OF CASH FLOWS
<S>                                                   <C>        <C>         <C> 
                                                        1998        1997       1996
                                                               (in thousands)

Operating Activities
  Net income                                          $ 52 038   $132 205    $125 678
  Items providing or (using) cash currently:
    Depreciation and amortization                      130 604    126 731     117 013
    WVPA settlement                                     80 000       -        (80 000)
    Deferred income taxes and investment tax
      credits - net                                    (57 130)    35 661      29 925
    Unrealized loss from energy risk management
      activities                                        62 000     13 000        -
    Allowance for equity funds used during
      construction                                         (21)      -           -
    Regulatory assets - net                             42 250     27 134     (20 648)
    Changes in current assets and current
      liabilities
        Restricted deposits                             (1 268)      (596)       (336)
        Accounts and notes receivable                  (16 850)  (149 290)      2 722
        Materials, supplies, and fuel                  (25 256)    14 944      41 343
        Accounts payable                                (7 086)   126 979      10 363
        Accrued taxes and interest                      (3 437)    (6 578)      6 704
        Other current assets and liabilities           (20 856)   (15 801)       (843)
    Other items - net                                   21 900     17 431       4 656

        Net cash provided by operating activities      256 888    321 820     236 577

Financing Activities
  Change in short-term debt                             69 073     22 120     (13 616)
  Issuance of long-term debt                           200 228       -        150 217
  Redemption of long-term debt                        (164 111)   (45 700)    (74 600)
  Funds on deposit from issuance of long-term debt        -          -            973
  Retirement of preferred stock                        (85 247)   (16 035)    (15 116)
  Dividends on preferred stock                          (6 187)   (11 795)    (12 629)
  Dividends on common stock                           (106 800)  (113 600)   (112 076)

        Net cash used in financing activities          (93 044)  (165 010)    (76 847)

Investing Activities
  Construction expenditures (less allowance for
    equity funds used during construction)            (163 225)  (141 552)   (172 341)

        Net cash used in investing activities         (163 225)  (141 552)   (172 341)

Net increase (decrease) in cash and temporary
  cash investments                                         619     15 258     (12 611)

Cash and temporary cash investments at beginning
  of period                                             18 169      2 911      15 522

Cash and temporary cash investments at end of
  period                                              $ 18 788   $ 18 169    $  2 911

Supplemental Disclosure of Cash Flow Information Cash paid during the year for:
    Interest (net of amount capitalized)              $ 78 752   $ 82 959    $ 76 655
    Income taxes                                        63 957     58 671      37 048


<FN>
The accompanying  notes as they relate to PSI Energy,  Inc. are an integral part
of these consolidated financial statements.
</FN>
</TABLE>


<PAGE>


RESULTS OF OPERATIONS - PSI

Operating Revenues

The  components  of electric  operating  revenues  and the related kwh sales are
shown below:

                                  Revenue                   Kwh Sales 
                          1998     1997     1996     1998     1997     1996
                                       ($ and kwh in millions)

Retail                   $1,161   $1,140   $1,071   24,326   23,335   23,046
Sales for resale          1,206      787      239   43,966   33,317   10,451
Other                        36       33       22     -        -        -
Total                    $2,403   $1,960   $1,332   68,292   56,652   33,497

Operating  revenues  increased by $443 million  (23%) in 1998,  when compared to
1997. This increase was primarily due to increased  volumes and a higher average
price per kwh received on non-firm power sales for resale  transactions  related
to energy  marketing and trading  operations.  There was also an increase in the
average  price per kwh paid for the  corresponding  purchases of  purchased  and
exchanged power described below.  Also  contributing to the increase were higher
retail kwh sales due to the warmer weather during 1998 when compared to 1997 and
growth in the average number of residential and commercial customers.

Higher  non-firm  power  sales for resale due to  increased  activity  in energy
marketing and trading operations  significantly  contributed to the $628 million
(47%) increase in electric  operating  revenues in 1997,  when compared to 1996.
Also contributing to the increase was a full year's effects of PSI's retail rate
increases  approved in the September 1996 Order,  as amended in August 1997, the
December  1996 DSM  Order,  and the  return  of  approximately  $13  million  to
customers  in 1996 in  accordance  with the  February  1995  Order.  This  order
required  all  retail  operating  income  above a  certain  rate of return to be
refunded to customers.

Non-system kwh sales (and related  revenues and expenses)  resulting from energy
marketing  and trading  operations  are allocated  50%/50%  between CG&E and PSI
pursuant to the operating agreement filed with the companies' regulators.

Operating Expenses

Fuel and Purchased and Exchanged Power

The components of fuel and purchased and exchanged power are shown below:

                                                    1998       1997      1996 
                                                          (in millions)

Fuel                                               $  382     $  393     $364
Purchased and exchanged power                       1,166        666      156
Total                                              $1,548     $1,059     $520

Electric fuel costs decreased $11 million (3%) in 1998 and increased $29 million
(8%) in 1997.


<PAGE>


An analysis of these fuel costs is shown below:

                                                     1998      1997
                                                      (in millions)

Previous year's fuel expense                         $393      $364
Increase (Decrease) due to change in:
  Price of fuel                                       (19)       (2)
  Deferred fuel cost                                  (11)       (5)
  Kwh generation                                       19        36

Current year's fuel expense                          $382      $393

Purchased and  exchanged  power  expense  increased  $500 million (75%) and $510
million  in 1998 and  1997,  respectively.  These  increases  primarily  reflect
increased  purchases  of  non-firm  power  for  resale  to others as a result of
increased activity in energy marketing and trading operations and an increase in
the  average  price  paid per kwh.  Also  recorded  in 1998 were $62  million of
unrealized losses related to the energy 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 energy marketing and trading
operations.)

Other Operation and Maintenance

The components of other operation and maintenance expenses are shown below:

                                        1998    1997   1996
                                           (in millions)

Other operation                         $409    $345   $269
Maintenance                              100      86     97
Total                                   $509    $431   $366

Other  operation  expenses  increased  $64 million (19%) in 1998, as compared to
1997.  This  increase is  primarily  due to the  one-time  charge of $80 million
recorded during the second quarter of 1998,  reflecting the  implementation of a
1989  settlement  of a dispute with WVPA (see Note 18 of the "Notes to Financial
Statements"  in  "Item  8.  Financial   Statements  and  Supplementary   Data").
Maintenance  expenses  increased $14 million (16%) in 1998, as compared to 1997,
primarily  due to an increase  in boiler  plant  maintenance  and an increase in
distribution  line  maintenance  costs  resulting  from storm damage  during the
second quarter of 1998.

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.  The effect of discontinuing  deferral of
certain  DSM-related  costs also added to the  increase.  These  increases  were
partially  offset by the  effect of  charges  in 1996 for early  retirement  and
severance programs.  Maintenance expenses declined $11 million (11%) in 1997, as
compared to 1996,  primarily  due to reduced  outage  related  charges and other
maintenance costs associated with electric production facilities.  This decrease
was also the  result of  reduced  maintenance  costs  associated  with  electric
transmission and distribution facilities.



<PAGE>



Depreciation and Amortization

Depreciation and amortization increased $10 million (8%) in 1997, as compared to
1996.  This  increase  was  primarily  due to  amortization  of  post-in-service
deferred  operating  expenses.  This  reflects 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.

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.

Interest

The  increase in interest  expense of $5 million  (6%) for 1998,  as compared to
1997, is due to an increase of $9 million in interest on long-term  debt,  which
is partially offset by a decrease of $3 million in other interest  expense.  The
increase in interest on long-term  debt is due  primarily to the net issuance of
approximately  $163 million of long-term  debt during the period from March 1998
to December 1998.  The decrease in other interest  expense is primarily due to a
reduction in average short-term borrowings and lower short-term interest rates.

In 1997,  interest  expense  increased  $5 million  (7%) when  compared  to 1996
primarily  due to an increase in  long-term  debt.  The  increase in interest on
long-term  debt is  primarily  due to the net  issuance  of  approximately  $100
million of long-term debt during 1996 and 1997.

Preferred Dividend Requirement

The decrease in preferred dividend  requirement of $6 million (52%) for 1998, as
compared  to  1997,  is  primarily  attributable  to  PSI's  redemption  of  all
outstanding  shares of its 7.44% Series  Cumulative  Preferred Stock on March 1,
1998.



<PAGE>



The Union Light, Heat and Power Company


<PAGE>


<TABLE>
<CAPTION>

                     THE UNION LIGHT, HEAT AND POWER COMPANY

                              STATEMENTS OF INCOME
<S>                                      <C>            <C>            <C> 
                                           1998           1997           1996
                                                     (in thousands)

Operating Revenues
  Electric                               $191 359       $192 774       $190 900
  Gas                                      65 454         78 848         76 868
                                          256 813        271 622        267 768
Operating Expenses
  Electricity purchased from parent
    company for resale                    142 567        145 906        143 839
  Gas purchased                            32 804         44 354         41 185
  Other operation and maintenance          37 131         36 917         35 931
  Depreciation                             13 148         12 369         11 909
  Taxes other than income taxes             3 993          4 055          4 036
                                          229 643        243 601        236 900

Operating Income                           27 170         28 021         30 868

Other Income and (Expenses) - Net          (1 242)        (1 850)        (1 425)

Interest                                    4 604          4 768          4 661

Income Before Taxes                        21 324         21 403         24 782

Income Taxes (Note 11)                      7 774          8 486         10 186

Net Income                               $ 13 550       $ 12 917       $ 14 596


<FN>
The accompanying notes as they relate to The Union Light, Heat and Power Company
are an integral part of these financial statements.
</FN>
</TABLE>


<PAGE>

<TABLE>
<CAPTION>

                     THE UNION LIGHT, HEAT AND POWER COMPANY

                                 BALANCE SHEETS

ASSETS
<S>                                                    <C>           <C>     
                                                            December 31
                                                         1998          1997
                                                       (dollars in thousands)


Current Assets
  Cash and temporary cash investments                  $  3 244      $    546
  Accounts receivable less accumulated provision
    for doubtful accounts of $1,248 at December
    31, 1998, and $996 at December 31, 1997
    (Note 6)                                             14 125         7 308
  Accounts receivable from affiliated companies             666           446
  Materials, supplies, and fuel - at average cost         8 269         6 094
  Prepayments and other                                     308           385
                                                         26 612        14 779

Utility Plant - Original Cost
  In service
    Electric                                            232 222       204 111
    Gas                                                 164 040       155 167
    Common                                               18 908        19 073
                                                        415 170       378 351
  Accumulated depreciation                              143 386       133 213
                                                        271 784       245 138
  Construction work in progress                          11 444        14 346
      Total utility plant                               283 228       259 484

Other Assets
  Regulatory assets (Note 1(f))                          10 978        11 065
  Other                                                   3 767         6 262
                                                         14 745        17 327

                                                       $324 585      $291 590

<FN>
The accompanying notes as they relate to The Union Light, Heat and Power Company
are an integral part of these financial statements.
</FN>
</TABLE>


<PAGE>

<TABLE>
<CAPTION>


                     THE UNION LIGHT, HEAT AND POWER COMPANY

LIABILITIES AND SHAREHOLDER'S EQUITY
<S>                                                    <C>           <C>  
                                                            December 31
                                                         1998          1997
                                                       (dollars in thousands)

Current Liabilities
  Accounts payable                                     $  5 903      $ 11 097
  Accounts payable to affiliated companies               14 986        19 712
  Accrued taxes                                           3 216         6 332
  Accrued interest                                        1 959         1 286
  Notes payable to affiliated companies                  31 817        23 487
  Long-term debt due within one year (Note 4)            20 000          -
  Other                                                   4 247         4 364
                                                         82 128        66 278

Non-Current Liabilities
  Long-term debt (Note 4)                                54 553        44 671
  Deferred income taxes (Note 11)                        26 134        26 211
  Unamortized investment tax credits                      4 238         4 516
  Accrued pension and other postretirement
    benefit costs (Note 9)                               11 678        14 044
  Amounts due to customers - income taxes                 8 959         6 566
  Other                                                   8 077         6 391
                                                        113 639       102 399

      Total liabilities                                 195 767       168 677

Common Stock Equity (Note 2)
  Common stock - $15.00 par value;
    authorized shares - 1,000,000; outstanding
    shares - 585,333 in 1998 and 1997                     8 780         8 780
  Paid-in capital                                        19 525        18 683
  Retained earnings                                     100 513        95 450
      Total common stock equity                         128 818       122 913

Commitments and Contingencies (Note 12)
                                                       $324 585      $291 590

</TABLE>



<PAGE>

<TABLE>
<CAPTION>


                     THE UNION LIGHT, HEAT AND POWER COMPANY
                  STATEMENTS OF CHANGES IN COMMON STOCK EQUITY
                             (dollars in thousands)



<S>                                <C>            <C>            <C>             <C>
                                                                                    Total
                                   Common         Paid-in        Retained        Common Stock
                                   Stock          Capital        Earnings           Equity    

Balance at 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 at 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 at December 31, 1997       $8 780         $18 683        $ 95 450          $122 913
Net income                                                         13 550            13 550
Dividends on common stock                                          (8 487)           (8 487)
Contribution from parent for
  reallocation of taxes                               843                               843
Other                                                  (1)           -                   (1)

Balance at December 31, 1998       $8 780         $19 525        $100 513          $128 818

<FN>
The accompanying notes as they relate to The Union Light, Heat and Power Company
are an integral part of these financial statements.
</FN>
</TABLE>


<PAGE>

<TABLE>
<CAPTION>


                     THE UNION LIGHT, HEAT AND POWER COMPANY

                            STATEMENTS OF CASH FLOWS
<S>                                                     <C>        <C>         <C> 
                                                         1998        1997       1996
                                                                (in thousands)

Operating Activities
  Net income                                            $13 550    $12 917     $14 596
  Items providing or (using) cash currently:
    Depreciation                                         13 148     12 369      11 909
    Deferred income taxes and investment
      tax credits - net                                    (261)    (6 124)      9 857
    Allowance for equity funds used during
      construction                                         (142)       (97)          8
    Regulatory assets                                         3        100      (1 500)
    Changes in current assets and current
      liabilities
        Accounts and notes receivable                    (4 820)     4 507      20 758
        Materials, supplies, and fuel                    (2 175)       973      (1 339)
        Accounts payable                                 (9 920)     2 020      (4 690)
        Accrued taxes and interest                       (2 443)     7 920      (1 494)
        Other current assets and liabilities                (40)      (899)        615
    Other items - net                                     3 268      6 242      (7 169)

        Net cash provided by operating activities        10 168     39 928      41 551

Financing Activities
  Change in short-term debt                               8 330     (7 162)      7 606
  Issuance of long-term debt                             40 066       -           -
  Redemption of long-term debt                          (10 118)      -        (26 083)
  Dividends on common stock                              (8 487)    (9 951)     (4 975)

        Net cash provided by (used in)
          financing activities                           29 791    (17 113)    (23 452)

Investing Activities
  Construction expenditures (less allowance for
    equity funds used during construction)              (37 261)   (23 466)    (18 652)

        Net cash used in investing activities           (37 261)   (23 466)    (18 652)

Net increase (decrease) in cash and temporary
  cash investments                                        2 698       (651)       (553)

Cash and temporary cash investments at beginning
  of period                                                 546      1 197       1 750

Cash and temporary cash investments at end of
  period                                                $ 3 244    $   546     $ 1 197

Supplemental Disclosure of Cash Flow Information Cash paid during the year for:
    Interest (net of amount capitalized)                $ 3 635    $ 4 490     $ 4 667
    Income taxes                                         11 305      2 859       1 240


<FN>
The accompanying notes as they relate to The Union Light, Heat and Power Company
are an integral part of these financial statements.
</FN>
</TABLE>

<PAGE>

                                                                 
RESULTS OF OPERATIONS - ULH&P

Operating Revenues

Electric Operating Revenues

Electric  operating revenues decreased $1 million (1%) in 1998, when compared to
1997. This decrease primarily reflects revisions of ULH&P's estimate of unbilled
revenue recorded during 1998, which resulted in a decrease in electric operating
revenues of $2 million.

Electric  operating  revenues increased $2 million (1%) in 1997. The increase in
1997 was  partially  due to the  effect  of an order  issued by the KPSC 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.

Gas Operating Revenues

The  components  of gas  operating  revenues and the related mcf sales are shown
below:

                                  Revenue                   Mcf Sales
                           1998     1997     1996     1998     1997     1996
                                       ($ and mcf in thousands)

Retail                   $60,503  $74,437  $72,768    9,479   11,208   11,995
Transportation             3,999    3,373    2,657    3,636    3,729    3,074
Other                        952    1,038    1,443      147      185      184
Total                    $65,454  $78,848  $76,868   13,262   15,122   15,253

Gas operating revenues decreased $13 million (17%) in 1998, as compared to 1997,
primarily  due to a decrease  in mcf  volumes  sold.  Also  contributing  to the
decline was a decrease in the average price per mcf of gas purchased.

The $2 million (3%) increase in gas  operating  revenues in 1997, as compared to
1996, was due to a higher average cost per mcf of gas purchased.

Operating Expenses

Electricity Purchased from Parent Company for Resale

Electricity purchased decreased $3 million (2%) for 1998, when compared to 1997.
This decrease reflects lower volumes purchased from CG&E.

Gas Purchased

Gas purchased  decreased  $12 million  (26%) in 1998, as compared to 1997.  This
decrease  reflects a decline in the average  cost per mcf of gas  purchased  and
lower volumes of 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.

Depreciation

In 1998,  depreciation  expense increased $.8 million (6%), as compared to 1997,
due to additions to depreciable plant.



<PAGE>



Other Income and (Expenses) - Net

Other income and  (expenses)  - net changed $.6 million in 1998,  as compared to
1997, due, in part, to decreased expenses  associated with the sales of accounts
receivable.

Other income and  (expenses)  - net changed $.4 million in 1997,  as compared to
1996, due primarily to increased expenses  associated with the sales of accounts
receivable in 1996.




<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
The  Cincinnati  Gas  &  Electric  Company  ("CG&E")  and  PSI  Resources,  Inc.
("Resources").  Cinergy's  utility  subsidiaries  are CG&E and PSI Energy,  Inc.
("PSI").  CG&E, an Ohio combination electric and gas public utility company, 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 public 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 is derived from the sale of  electricity  and the
sale and transportation of natural gas.

Cinergy's    non-utility    subsidiaries   are   Cinergy    Investments,    Inc.
("Investments"),   Cinergy  Services,  Inc.  ("Services"),  and  Cinergy  Global
Resources, Inc. ("Global Resources").  Investments, a Delaware corporation, is a
non-utility  subholding  company that holds virtually all of Cinergy's  domestic
non-utility businesses and interests.  Services, a Delaware corporation,  is the
service  company for the  Cinergy  system,  providing  member  companies  with a
variety of administrative, management, and support services. Global Resources, a
Delaware corporation,  was formed in May 1998, and holds Cinergy's international
businesses and certain other interests.

Cinergy conducts its operations through various subsidiaries and affiliates. The
Company is functionally organized into four business units through which many of
its activities are conducted:  Energy Commodities Business Unit ("ECBU"), Energy
Delivery Business Unit ("EDBU"), Energy Services Business Unit ("ESBU"), and the
International  Business Unit  ("IBU").  The  traditional,  vertically-integrated
utility  functions have been realigned  into the ECBU,  EDBU, and ESBU.  Each of
these  business  units is  described  in detail  along  with  certain  financial
information  by  business  unit as of  December  31,  1998,  in Note 15.  As the
industry continues its evolution, Cinergy will continually analyze its operating
structure  and  make  adjustments  as  appropriate.   In  early  1999,   certain
organizational changes were begun to further align the business units to reflect
Cinergy's strategic vision.

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.  These  estimates and  assumptions  affect the reported  amounts of
assets and liabilities and the disclosures of contingent  assets and liabilities

<PAGE>

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.

The  Statements  of Income in this  report  have been  reclassified  in order to
present  the  operations  of  all  consolidated,  non-regulated  entities  as  a
component of operating income. Prior to this reclassification, the operations of
such  entities were  reflected in "Other Income and Expenses - Net."  Similarly,
"Income Taxes" now includes the income taxes  associated with the  non-regulated
entities. These changes had no effect on net income.  Additionally,  the Balance
Sheets have been reformatted. Prior years' data has been reclassified to conform
to the current year's presentation.

Cinergy, CG&E, and PSI

(c)  Energy  Marketing  and  Trading  Cinergy's  energy  marketing  and  trading
operations,   conducted   primarily   through  its  ECBU,   markets  and  trades
electricity, natural gas, and other energy-related products. The power marketing
and trading operation has both physical and trading  activities.  Generation not
required to meet  native  load  requirements  is  available  to be sold to third
parties,   either  under  long-term   contracts,   such  as  full   requirements
transactions or firm forward sales  contracts,  or in short-term and spot market
transactions. When transactions are entered into, each transaction is designated
as either a physical or trading  transaction.  In order for a transaction  to be
designated as physical,  there must be intent and ability to physically  deliver
the power from company-owned generation. Physical transactions are accounted for
on  a  settlement   basis.  All  other   transactions  are  considered   trading
transactions  and  are  accounted  for  using  the   mark-to-market   method  of
accounting.  Under  the  mark-to-market  method  of  accounting,  these  trading
transactions are reflected at fair value as "Energy risk management  assets" and
"Energy  risk  management  liabilities".  Changes in fair  value,  resulting  in
unrealized gains and losses,  are reflected in "Fuel and purchased and exchanged
power".  Revenues  and  costs for all  transactions  are  recorded  gross in the
Consolidated  Statements  of Income  as  contracts  are  settled.  Revenues  are
recognized  in  "Operating  Revenues - Electric" and costs are recorded in "Fuel
and purchased and exchanged power".

Although physical transactions are entered with the intent and ability to settle
the contract  with  company-owned  generation,  it is likely,  that from time to
time, due to numerous factors such as generating  station  outages,  native load
requirements,  and weather,  power used to settle the physical transactions will
be required to be purchased on the open market.  Depending on the factors giving
rise to these open  market  purchases,  the cost of such  purchases  could be in
excess of the associated revenues. Losses such as this will be recognized as the
power is  delivered.  In addition,  physical  contracts are subject to permanent
impairment  tests.  At December  31,  1998,  management  has  concluded  that no
physical contracts are impaired.

At December 31, 1998, the trading portfolio consisted of "Energy risk management
assets" of $969 million  ($484.5 million each for CG&E and PSI) and "Energy risk
management liabilities" of $1,117 million (approximately $558.5 million each for
CG&E and PSI).  Prior to December 31, 1998, the transactions now included in the
trading  portfolio were accounted for and valued at the aggregate  lower of cost
or market.  Under this method,  only the net value of the entire  portfolio  was
recorded as a liability in the  Consolidated  Balance Sheets.  The net liability
was not significant at December 31, 1997.

Contracts in the trading  portfolio are valued at  end-of-period  market prices,
utilizing factors such as closing exchange prices,  broker and  over-the-counter
quotations, and model pricing. Model pricing considers time value and volatility
factors underlying any options and contractual  commitments.  Management expects

<PAGE>

that some of these  obligations,  even though  considered as trading  contracts,
will ultimately be settled from time to time by using company-owned  generation.
The cost of this  generation  is typically  below the market prices at which the
trading portfolio has been valued.

Because of the volatility  currently  experienced in the power markets,  and the
factors discussed above pertaining to both the physical and trading  activities,
volatility  in future  earnings  (losses)  from  period to period in the ECBU is
likely.

As a result of the acquisitions of Producers Energy Marketing, LLC ("ProEnergy")
in 1998 and Greenwich Energy Partners in 1997, the ECBU also physically  markets
natural gas and trades  natural gas and other  energy-related  products.  All of
these operations are accounted for on the  mark-to-market  method of accounting.
Revenues  and  costs  from  physical   marketing  are  recorded   gross  in  the
Consolidated Statements of Income as contracts are settled due to the exchanging
of title to the natural gas throughout the earnings  process.  Realized revenues
for 1998 were approximately  $650 million.  There were no such revenues prior to
1998.  All  non-physical  transactions  are  recorded  net in  the  Consolidated
Statements of Income.  Energy risk  management  assets and liabilities and gross
margins from trading  activities  were not  significant at December 31, 1998 and
1997 or for each of the three years ended December 31, 1998.

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 and its  subsidiaries  utilize foreign  exchange  forward  contracts and
currency swaps to hedge certain of their net investments in foreign  operations.
Accordingly,  any  translation  gains or losses related to the foreign  exchange
forward  contracts or the principal  exchange on the currency swaps are recorded
in "Accumulated  other  comprehensive  loss",  which is a separate  component of
Common Stock Equity.  Aggregate  translation losses related to these instruments
are reflected in Current Liabilities 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" as realized over the life of the agreement.

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

(e)  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.


<PAGE>



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

(f) Regulation 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.  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, 1998,  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. The regulatory assets of CG&E and its
utility subsidiaries and PSI as of December 31 are as follows:

                                              1998                 1997
                                      CG&E(1) PSI Cinergy  CG&E(1) PSI Cinergy
                                                    (in millions)

Amounts due from customers -
  income taxes (2)                     $331  $ 26  $357     $350  $ 24  $  374
Post-in-service carrying costs and
  deferred operating expenses           128    43   171      135    44     179
Coal contract buyout costs               -     99    99       -    122     122
Deferred demand-side management ("DSM")
  costs                                  40    43    83       39    71     110
Phase-in deferred return and
  depreciation (3)                       75    -     75       90    -       90
Deferred merger costs                    16    69    85       16    74      90
Unamortized costs of reacquiring
  debt                                   34    29    63       36    30      66
Coal gasification services expenses      -     19    19       -     22      22
Other                                     3    16    19        2    22      24

  Total                                $627  $344  $971     $668  $409  $1 077

(1)  Includes  $11  million  related  to ULH&P  (for DSM,  unamortized  costs of
reacquiring  debt and other  regulatory  assets) at both December 31, 1998,  and
1997. 
(2) Income tax provisions reflected in customer rates are regulated by the
various regulatory  commissions  overseeing the regulated business operations of
CG&E and its utility  subsidiaries and PSI. In accordance with the provisions of
Statement  71,  Cinergy,  CG&E,  and PSI have  recorded a net  regulatory  asset
representing  the probable  recovery from  customers of additional  income taxes
established  under  Statement  109.  ULH&P has recorded a  regulatory  liability
representing  the probable  repayment  to customers of income taxes  established

<PAGE>

under  Statement  109 to the extent  deferred  income  taxes  recovered in rates
exceed  amounts  payable in future  periods.  
(3) Pursuant to an order from the Public  Utilities  Commission of Ohio, CG&E is
recovering this asset over a seven-year period which began in May 1995.

CG&E has previously  received regulatory orders authorizing the recovery of $553
million  (including  $4  million  for ULH&P) of its total  regulatory  assets at
December 31, 1998. PSI has previously received regulatory orders authorizing the
recovery of $334  million of its total  regulatory  assets at December 31, 1998.
The  recovery of these assets is being  reflected in rates  charged to customers
over periods  ranging from 1 to 29 years,  1 to 33 years,  and 4 to 22 years for
CG&E, PSI, and ULH&P,  respectively.  Both CG&E  (including  ULH&P) and PSI will
request recovery of additional amounts in future proceedings. These proceedings,
if any, may be related to the transition to customer  choice in each  applicable
jurisdiction.

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

(g) 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

(h) AFUDC In  accordance  with the  uniform  systems of accounts  prescribed  by
regulatory  authorities,  Cinergy's  utility  subsidiaries  capitalize  AFUDC, a
non-cash  income item,  which is defined 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." The borrowed funds component
of AFUDC, which is recorded on a pre-tax basis, is as follows:

                                            1998       1997       1996
                                                   (in millions)

        Cinergy and its subsidiaries        $7.5       $5.4       $6.2
        CG&E and its subsidiaries            5.5        4.6        3.9
        ULH&P                                 .6         .2         .1
        PSI                                  2.0         .8        2.3

AFUDC accrual rates are compounded semi-annually and were as follows:

                                            1998       1997       1996

        Cinergy average                     6.6%       6.3%       7.1%
        CG&E and its utility
          subsidiaries average              7.1        6.4        8.7
        ULH&P average                       6.1        6.9        8.8
        PSI average                         5.6        5.9        5.4



<PAGE>



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

(i) 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:

                                                  1998    1997    1996

         CG&E and its utility subsidiaries
           Electric                               2.9%    2.9%    2.9%
           Gas                                    2.9     2.9     2.8
           Common                                 2.6     3.0     3.0
         ULH&P
           Electric                               3.4     3.3     3.3
           Gas                                    3.1     3.1     3.1
           Common                                 5.0     5.0     5.1
         PSI                                      3.0     3.0     3.0

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

(j) Operating  Revenues and Fuel Costs  Cinergy's  utility  subsidiaries  record
revenues for electric and gas service provided during the month, including sales
unbilled at the end of each month.  The costs of  electricity  and gas purchased
and fuel used in electric  production are expensed as recovered through revenues
and any portion of these costs  recoverable  or refundable in future  periods is
deferred  in  either  "Accounts   receivable"  or  "Accounts   payable"  in  the
accompanying Balance Sheets.  Indiana law subjects the recovery of fuel costs to
a determination that such recovery will not result in earning a return in excess
of that allowed by the Indiana  Utility  Regulatory  Commission  ("IURC") in its
last general rate order.

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

(k) 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 and
Note 18 for information concerning a non-cash financing transaction.

Cinergy

(l) Translation of Foreign  Currency All assets and liabilities  reported in the
balance sheets of foreign  subsidiaries whose functional  currency is other than
the United  States  ("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 recorded in  "Accumulated  other  comprehensive  loss",  which is a separate
component of common stock equity.



<PAGE>



Cinergy, CG&E, and PSI

(m) Accounting Changes Effective with the first quarter of 1998, Cinergy and its
subsidiaries  adopted  the  provisions  of  Statement  of  Financial  Accounting
Standards No. 130, Reporting  Comprehensive Income ("Statement 130").  Statement
130 establishes standards for reporting and displaying  comprehensive income and
its  components  in  a  full  set  of  general-purpose   financial   statements.
Comprehensive  income per Statement 130 is defined as "the change in equity of a
business  enterprise  during a period  from  transactions  and other  events and
circumstances from nonowner sources."

In December 1998, the Company  implemented the provisions of the Emerging Issues
Task Force Issue No. 98-10, "Accounting for Contracts Involved in Energy Trading
and Risk  Management  Activities."  For a detailed  discussion  of the Company's
energy trading and risk management activities, refer to Note 1(c).

2.  Common Stock

Cinergy

(a)  Changes in Common Stock Outstanding

The following  table  reflects the shares of Cinergy  common stock  reserved for
issuance at December 31, 1998, and shares issued in 1998, 1997, and 1996 for the
Company's stock-based plans.

                                  Shares
                                Reserved at            Shares Issued
                               Dec. 31, 1998     1998       1997      1996

1996 Long-term Incentive
  Compensation Plan ("LTIP")     6 956 386         -       43 614      -

Stock Option Plan                4 366 186      192 591    22 219    15 007

Performance Shares Plan ("PSP")    771 301         -         -          492

Employee Stock Purchase
  and Savings Plan               1 931 378        1 006      -         -

401(k) Savings Plans             6 469 373         -         -         -

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

Directors' Deferred
  Compensation Plan                200 000         -         -         -

Cinergy retired 44,981; 304; and 6,511 shares of common stock in 1998, 1997, and
1996,  respectively,  primarily  representing shares tendered as payment for the
exercise of previously granted stock options.

In June 1998,  Cinergy  issued  771,258  shares of new  common  stock to acquire
ProEnergy.

CG&E, PSI, and ULH&P

Cinergy owns all of the common stock of CG&E and PSI, and all of ULH&P's  common
stock is held by CG&E.

Cinergy, CG&E, and PSI

(b) Dividend  Restrictions 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 1998, 1997,
and 1996, compensation cost related to Cinergy's stock-based compensation plans,
before income taxes,  recognized in the Consolidated Statements of Income was $1
million, $6 million, and $2 million, respectively.

Net income and earnings per share  ("EPS") for 1998,  1997,  and 1996,  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:

                                           1998        1997         1996
                                      (in millions, except per share amounts)

Net income - as reported                   $261        $253         $335
           - pro forma                     $258        $251         $334

EPS - as reported                          $1.65       $1.61        $2.00
    - pro forma                            $1.63       $1.59        $1.99

Diluted EPS - as reported                  $1.65       $1.59        $1.99
            - pro forma                    $1.62       $1.58        $1.99

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
EPS 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 with the  exception  of  participants  that  retire.  Their shares
become vested upon retirement.  Participants'  shares that are not vested become
forfeited when the participant leaves Cinergy.  Restricted shares are granted at

<PAGE>

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 1998 and 1997, 41,129 and 425,938 performance-based restricted
shares at a weighted  average  price of $34.69 and  $29.95,  respectively,  were
granted to certain key employees.  As of December 31, 1998, Cinergy held a total
of 442,941  performance-based  restricted shares. 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 1998 and 1997 is summarized as follows:
<TABLE>
<CAPTION>
<S>                                       <C>        <C>             <C>         <C>
                                                  1998                       1997
                                                     Weighted                    Weighted
                                                      Average                     Average
                                                     Exercise                    Exercise
                                           Number      Price          Number       Price 

Outstanding, beginning of year            369 600     $33.60            -           -

  Granted                                 471 400      38.19         369 600      $33.60
  Forfeited                               (68 000)     36.06            -           -

Outstanding, end of year                  773 000     $36.19         369 600      $33.60

Exercisable, end of year                   11 600     $36.05            -           -

Weighted average fair value of
  options granted during the year              $4.68                        $3.54
</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:
                                            1998           1997

Risk-free interest rate                     5.6%           6.2%
Expected dividend yield                     4.8%           5.4%
Expected lives                              5.6 yrs.       5.4 yrs.
Expected common stock variance              1.8%           1.7%

The price range for the options outstanding under the LTIP at December 31, 1998,
was $33.50 - $38.59 and the weighted average contractual life was 8.7 years.

     (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.  The activity under this plan has predominantly consisted
of the issuance of stock  options.  Options are granted at the fair market value
of the shares on the date of grant.  Options generally 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.

<PAGE>

<TABLE>
<CAPTION>
Stock Option Plan activity for 1998, 1997, and 1996 is summarized as follows:
<S>                              <C>         <C>       <C>         <C>        <C>        <C>   
                                         1998                  1997                   1996       
                                             Weighted              Weighted              Weighted
                                             Average               Average               Average
                                             Exercise              Exercise              Exercise
                                  Number      Price     Number      Price      Number     Price

Outstanding, beginning of year   2 954 475    $23.79   3 334 637    $23.57    3 653 085   $22.47

  Granted                          480 000     36.88        -          -        220 000    29.75
  Exercised                       (430 961)    21.62    (380 162)    21.71     (513 448)   18.16
  Forfeited                       (100 000)    26.92        -          -        (25 000)     -

Outstanding, end of year         2 903 514    $26.17   2 954 475    $23.79    3 334 637   $23.57

Exercisable, end of year         1 535 514    $23.61   1 389 975    $22.58    1 131 637   $21.34

Weighted average fair value of
  options granted during the year         $4.53                $ -                    $3.07
</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 1998 and 1996 (no
options were granted during 1997), were as follows:

                                            1998           1996

Risk-free interest rate                     5.6%           6.3%
Expected dividend yield                     4.8%           5.8%
Expected lives                              6.5 yrs.       6.5 yrs.
Expected common stock variance              2.0%           1.8%

Price ranges,  along with certain  other  information,  for options  outstanding
under the Stock Option Plan at December 31, 1998, are as follows:

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

$13.15 - $17.35       99 638       $15.35      1.1 yrs.      99 638   $15.35
$22.88 - $25.19    2 034 213       $23.61      6.0 yrs.   1 286 213   $23.73
$28.44 - $36.88      769 663       $29.15      7.1 yrs.     149 663   $34.00

  (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

<PAGE>

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 5%. 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.  The current offering period began
January 1, 1997,  and ended February 28, 1999. The purchase price for all shares
under this offering is $31.83.  The previous  offering period ended December 31,
1996,  with a  purchase  price of $21.73.  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 1998,  1997, and 1996 is
summarized as follows:

<TABLE>
<CAPTION>


<S>                          <C>       <C>          <C>       <C>          <C>        <C>   
                                    1998                  1997                   1996
                                       Weighted               Weighted                Weighted
                                       Average                Average                 Average
                                       Exercise               Exercise                Exercise
                             Number     Price       Number     Price         Number     Price

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

  Granted                       -       31.83       338 947     31.83          -          -
  Exercised                   (3,342)   31.83           (95)    31.83      (414 284)    21.73
  Forfeited                  (25 651)   31.83       (12 485)    31.83       (76 503)    21.73

Outstanding, end of year     297 374   $31.83       326 367    $31.83           -      $  -

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



<PAGE>



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                     5.9%
Expected dividend yield                     5.4%
Expected lives                              2.0 yrs.
Expected common stock variance              1.6%

3.  Preferred Stock of Subsidiaries

Cinergy, CG&E, and PSI

(a)  Schedule of Cumulative Preferred Stock
<TABLE>
<CAPTION>
<S>   <C>                                                                  <C>          <C>  
                                                                                December 31
                                                                             1998         1997
CG&E                                                                       (dollars in thousands)
  Not subject to mandatory redemption
    Par value $100 per share - authorized 6,000,000 shares - outstanding
      4%     Series   169,834 shares in 1998 and 1997                      $ 16 983     $ 16 983
      4 3/4% Series    37,335 shares in 1998 and 38,096 shares in 1997        3 734        3 810
          Total                                                              20 717       20 793

PSI
  Not subject to mandatory redemption
    Par value $25 per share - authorized 5,000,000 shares - outstanding
      4.32%  Series   169,161 shares in 1998 and 1997                         4 229        4 229
      4.16%  Series   148,763 shares in 1998 and 1997                         3 719        3 719
      7.44%  Series 3,408,712 shares in 1997                                   -          85 218
    Par value $100 per share - authorized 5,000,000 shares - outstanding
      3 1/2% Series    39,748 shares in 1998 and 40,302 shares in 1997        3 975        4 030
      6 7/8% Series   600,000 shares in 1998 and 1997                        60 000       60 000
           Total                                                             71 923      157 196

Total - Cinergy
  Total not subject to mandatory redemption                                $ 92 640     $177 989
</TABLE>

Cinergy, CG&E, and PSI

(b)  Changes in Cumulative Preferred Stock Outstanding
<TABLE>
<CAPTION>
<S>   <C>      <C>   <C>           <C>          <C>        <C>             <C>        <C> 
                           1998                    1997                   1996
             Par   Shares        Par       Shares       Par       Shares        Par
     Series Value  Retired      Value      Retired     Value      Retired      Value 
                           (in thousands)         (in thousands)          (in thousands)

Not Subject to Mandatory Redemption
CG&E  4    %   $100       -        $  -               1    $      1        100 165    $10 016
      4 3/4     100        761          76        3 525         352         88 379      8 838

PSI   7.15      100       -           -         158 640      15 864           -          -
      3 1/2     100        554          55          265          26            276         29
      7.44       25  3 408 712      85 218         -           -           591 288     14 782
      4.32       25       -           -               1        -              -          -

Subject to Mandatory Redemption
CG&E  7 7/8%   $100       -        $  -            -       $   -           800 000    $80 000
      7 3/8     100       -           -            -           -           800 000     80 000

</TABLE>


<PAGE>



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,  made a  capital  contribution  to CG&E of all the
shares,  and CG&E subsequently  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 EPS applicable to common stock for Cinergy.

4.  Long-term Debt

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

(a)  Schedule  of  Long-term  Debt  (excluding   amounts  reflected  in  current
liabilities)

<TABLE>
<CAPTION>
<S>    <C>                                                             <C>            <C>    
                                                                              December 31
                                                                          1998           1997
                                                                         (dollars in thousands)
Cinergy
    Other Long-term Debt
       6.53% Debentures due December 16, 2008                          $  200 000     $     -

    Unamortized Discount                                                      (87)          -
          Total - Cinergy                                                 199 913           -

Global Resources
    Other Long-term Debt
       6.20% Debentures due November 3, 2008                              150 000           -    
       Other                                                                9 443           -    
          Total Other Long-term Debt                                      159 443           -

    Unamortized Premium and Discount - Net                                   (326)          -   
          Total - Global Resources                                        159 117           -

</TABLE>


<PAGE>


<TABLE>
<CAPTION>

                                                                              December 31
                                                                          1998           1997
                                                                         (dollars in thousands)

CG&E and Subsidiaries
  CG&E
    First Mortgage Bonds
<S>    <C>                                                              <C>            <C>
       5.80% Series due February 15, 1999                                    -           110 000
       7 3/8% Series due May 1, 1999                                         -            50 000
       7 3/8% Series due November 1, 2001                                    -            60 000
       7 1/4% Series due September 1, 2002                                100 000        100 000
       6.45% Series due February 15, 2004                                 110 000        110 000
       8 1/2% Series due September 1, 2022                                   -           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                                      604 700        924 700

    Pollution Control Notes
       6.50% due November 15, 2022                                         12 721         12 721

    Other Long-term Debt
       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 London
         Interbank  Offered Rate ("LIBOR") - based floating rate
         at any interest rate payment date between October 1, 1999
         and October 1, 2002)                                             100 000        100 000
       6.40% Debentures due April 1, 2008                                 100 000           -
       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
       6.35% Debentures due June 15, 2038                                 100 000           -
          Total Other Long-term Debt                                      550 000        350 000

    Unamortized Premium and Discount - Net                                 (3 396)        (8 860)
          Total - CG&E                                                  1 164 025      1 278 561

  ULH&P
    First Mortgage Bonds
       6 1/2% Series due August 1, 1999                                      -            20 000
       8% Series due October 1, 2003                                         -            10 000
          Total First Mortgage Bonds                                         -            30 000

    Other Long-term Debt
       6.11% Debentures due December 8, 2003                               20 000           -
       6.50% Debentures due April 30, 2008                                 20 000           -
       7.65% Debentures due July 15, 2025                                  15 000         15 000
          Total Other Long-term Debt                                       55 000         15 000

    Unamortized Premium and Discount - Net                                   (447)          (329)
          Total - ULH&P                                                    54 553         44 671

  Lawrenceburg Gas Company
    First Mortgage Bonds
       9 3/4% Series due October 1, 2001                                    1 200          1 200
          Total - CG&E and Subsidiaries                                 1 219 778      1 324 432

</TABLE>


<PAGE>

<TABLE>
<CAPTION>


                                                                              December 31
                                                                          1998           1997 
                                                                         (dollars in thousands)

PSI
    First Mortgage Bonds
<S>                                                                    <C>            <C>     
       Series S,       7%, due January 1, 2002                               -            26 429
       Series Y,   7 5/8%, due January 1, 2007                               -            24 140
       Series QQ,  8 1/4%, due June 15, 2013 (Pollution Control)             -            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                                      154 195        227 764

    Secured Medium-term Notes
       Series A, 7.15% to 8.88%, due January 6, 1999 to
         June 1, 2022                                                     284 000        290 000
       Series B, 5.22% to 8.26%, due September 19, 2000
         to August 22, 2022                                               195 000        195 000
         (Series A and B, 7.83% weighted average interest rate
         and 14 year weighted average remaining life)
          Total Secured Medium-term Notes                                 479 000        485 000

    Other Long-term Debt
       Series 1994A Promissory Note, non-interest bearing,
        due January 3, 2001                                                19 825         19 825
       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
       6.00% Debentures due December 14, 2016
         (Redeemable in whole or in part at the option of the
         holders on December 14, 2001)                                     50 000           -
       6.50% Synthetic Putable Yield Securities due August 1, 2026         50 000           -
       7.25% Junior Maturing Principal Securities due March 15, 2028      100 000           -
       6.00% Rural Utilities Service ("RUS") Obligation payable in
         annual installments                                               85 620           -
          Total Other Long-term Debt                                      405 445        119 825

     Unamortized Premium and Discount - Net                               (12 981)        (6 119)
          Total - PSI                                                   1 025 659        826 470

          Total - Cinergy and Subsidiaries                             $2 604 467     $2 150 902

Total - Cinergy Corp. Consolidated 
  First Mortgage Bonds                                                 $  760 095     $1 183 664
  Secured Medium-term Notes                                               479 000        485 000
  Pollution Control Notes                                                  12 721         12 721
  Other Long-term Debt                                                  1 369 888        484 825
  Unamortized Premium and Discount - Net                                  (17 237)       (15 308)
          Total Long-term Debt                                         $2 604 467     $2 150 902

</TABLE>

<PAGE>



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

(b)      Mandatory Redemption and Other Requirements

Long-term debt  maturities for the next five years  (excluding  callable  and/or
putable debt) are as follows:

                 Cinergy and     CG&E and
                 Subsidiaries  Subsidiaries       PSI         ULH&P
                                    (in millions)

1999                 $137          $130          $  7          $20
2000                   32             -            32            -
2001                   40             1            39            -
2002                  124           100            24            -
2003                   77            20            57           20
                     $410          $251          $159          $40

Maintenance  and replacement  fund provisions  contained in PSI's first mortgage
bond indenture require cash payments,  bond retirements,  or pledges of unfunded
property additions each year based on an amount related to PSI's net revenues.

5.  Notes Payable and Other Short-term Obligations

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

Notes  payable and other  short-term  obligations  (excluding  notes  payable to
affiliated companies) and weighted average interest rates were as follows:
<TABLE>
<CAPTION>

Cinergy
<S>                    <C>         <C>         <C>       <C>         <C>         <C>  
                             December 31, 1998                December 31, 1997
                                               Weighted                          Weighted
                       Established              Average  Established              Average
                          Lines    Outstanding   Rate       Lines    Outstanding   Rate
                            (in millions)                    (in millions)
Cinergy
  Committed lines
    Acquisition line      $  160      $160       5.61%    $  350       $  350      6.25%
    Revolving line           600       245       5.68        400           89      6.27
  Commercial paper            -         50       5.78         -           161      6.19
  Uncommitted lines           45        50*      5.84         -            -
Utility subsidiaries
  Committed lines            300        -         -          270           30      6.09
  Uncommitted lines          410        95       5.90        360          206      6.19
  Pollution control notes    267       267       3.83        244          244      4.08
Non-utility subsidiary       138        37      13.11        115           34      7.20

Total                     $1 920      $904       5.20%     $1 739      $1 114      5.78%

<FN>
* Excess  over  Established  Line  represents  amount  sold by  dealers to other
investors.
</FN>
</TABLE>

CG&E
<TABLE>
<CAPTION>
<S>                    <C>         <C>         <C>       <C>         <C>         <C>  
                             December 31, 1998                December 31, 1997
                                               Weighted                          Weighted
                       Established              Average  Established              Average
                          Lines    Outstanding   Rate       Lines    Outstanding   Rate
                            (in millions)                    (in millions)

Committed lines           $100         $ -        -        $ 85         $ 15       6.13%
Uncommitted lines          215            5      5.28%      190           90       6.19
Pollution control notes    184          184      3.78       184          184       4.08

Total                     $499         $189      3.83%     $459         $289       4.85%

</TABLE>

<PAGE>

<TABLE>
<CAPTION>


PSI
<S>                    <C>         <C>         <C>       <C>         <C>         <C>  
                            December 31, 1998                 December 31, 1997
                                               Weighted                          Weighted
                       Established              Average  Established              Average
                          Lines    Outstanding   Rate       Lines    Outstanding   Rate
                            (in millions)                    (in millions)

Committed lines           $200       $ -          -         $185        $ 15       6.06%
Uncommitted lines          195         90        5.93%       170         116       6.19
Pollution control notes     83         83        3.94         60          60       4.08

Total                     $478       $173        4.98%      $415        $191       5.52%
</TABLE>

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

Cinergy and its utility  subsidiaries have arranged  committed lines ("unsecured
lines of credit"), as well as uncommitted lines (short-term borrowings on an "as
offered" basis) with various banks. The established committed lines include $106
million  designated as backup for certain of the  uncommitted  lines at December
31, 1998. Further,  the committed lines are maintained by commitment fees, which
were immaterial during the 1996 through 1998 period.

Cinergy, CG&E, and PSI

Cinergy's  committed lines are comprised of an acquisition  line and a revolving
line. The established  revolving line also provides credit support for Cinergy's
commercial paper program,  which is limited to a maximum  outstanding  principal
amount of $400 million.  The proceeds from the commercial  paper sales were used
for  general  corporate  purposes.  Proceeds  from the sale of  Cinergy's  6.53%
debentures  were used to reduce the  acquisition  line to the year-end  level of
$160 million.

CG&E and PSI also  have the  capacity  to issue  commercial  paper  that must be
supported by committed  lines of the  respective  company.  Neither CG&E nor PSI
issued commercial paper in 1998 or 1997.

Amounts  outstanding  under  the  committed  lines  for  Cinergy,   the  utility
subsidiaries,  and the non-utility  subsidiary 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.

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

Global Resources  established a $100 million revolving credit agreement in 1998,
which is due to expire in March 1999.

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 and its utility subsidiaries 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

<PAGE>

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, 1998 and  December  31,  1997,  see "Notes  payable to  affiliated
companies" on the  Consolidated  Balance Sheets for CG&E and PSI and the Balance
Sheets for ULH&P.

6.  Sale of Accounts Receivable

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

In 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.  As of December 31, 1998, $253 million
($166 million by CG&E and its subsidiaries,  including $16 million by ULH&P, and
$87 million by PSI), net of reserves,  has been sold. 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, 1998 and 1997.

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 computer,  communications,
and  transportation  equipment  and  office  space.  Total  rental  payments  on
operating leases for each of the past three years were are follows:

                                        1998       1997       1996
                                               (in millions)
     Cinergy and subsidiaries            $42        $36        $31
     CG&E and subsidiaries                21         18         18
     PSI                                  21         18         13
     ULH&P                                 3          1          2

Future minimum lease payments  required under  operating  leases with remaining,
non-cancelable lease terms in excess of one year as of December 31, 1998, are as
follows:

                    Cinergy and           CG&E and
                    Subsidiaries        Subsidiaries        PSI        ULH&P* 
                                (in millions, ULH&P in thousands)

     1999               $ 38                $11             $10        $135
     2000                 31                  9               8          84
     2001                 22                  8               7          25
     2002                 14                  7               5          25
     2003                 10                  5               4          20
     After 2003           36                 21              11         114
                        $151                $61             $45        $403

*    Excludes amounts  applicable to CG&E's  non-cancelable  leases allocated to
     ULH&P.



<PAGE>



Cinergy and CG&E

(b)      Capital Lease

In 1996, CG&E entered into a sale-leaseback  agreement for certain  equipment at
Woodsdale Generating Station. 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  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,  included in
Non-Current Liabilities, 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.  Cinergy has also
hedged certain of its net  investments in the Czech Republic  utilizing  foreign
exchange forward contracts.  Translation gains and losses related to the forward
foreign exchange  contracts and the principal exchange on the currency swap have
primarily been recorded in  "Accumulated  other  comprehensive  loss",  which is
reported as a separate  component  of common  stock  equity in the  Consolidated
Financial  Statements of Cinergy.  At December 31, 1998,  aggregate  translation
losses of  approximately  $49 million,  related to the foreign  exchange forward
contracts and the principal  exchange of the currency swap,  have been reflected
in  Current  Liabilities  in the  Consolidated  Balance  Sheets of  Cinergy.  At
December 31, 1998,  the fair value of these  contracts was  approximately  $(66)
million.

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.  Cinergy has  effectively  fixed the interest  rate
applicable to the pound  sterling  denominated  leg of its currency swap for its
remaining term through an interest rate swap agreement.  This contract  requires
Cinergy to pay a fixed rate and receive a floating  rate.  This  contract  has a
total  notional  principal  amount of 280 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.  The fair value of this  interest rate swap
agreement at December 31, 1998, was approximately $(19) million.

<PAGE>

At December  31,  1998,  CG&E had an interest  rate swap  agreement  outstanding
related to its sale of accounts  receivable.  The contract has a notional amount
of $100  million  and  requires  CG&E to pay a fixed rate and receive a floating
rate.  PSI had three  interest rate swap  agreements  outstanding  with notional
amounts of $100  million  each.  One  contract,  with two years  remaining  of a
four-year  term,  requires PSI to pay a floating  rate and receive a fixed rate.
The other two contracts,  with six-month terms,  require PSI to pay a fixed rate
and receive a floating rate. The floating rate is based on applicable  LIBOR. At
December 31, 1998, the fair values of these interest rate swap  agreements  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):

                                             December 31          December 31
                                                1998                 1997     
                                          Carrying   Fair      Carrying   Fair
                                           Amount    Value      Amount    Value
Financial Instruments                       (in millions; ULH&P in thousands)

Cinergy and Subsidiaries
First mortgage bonds and
    other long-term debt (includes
    amounts reflected as long-term
    debt due within one year)             $ 2 740   $ 2 934     $ 2 236  $ 2 337

CG&E and Subsidiaries
First mortgage bonds and
    other long-term debt (includes
    amounts reflected as long-term
    debt due within one year)             $ 1 350   $ 1 415     $ 1 324  $ 1 355

PSI
First mortgage bonds and
    other long-term debt (includes
    amounts reflected as long-term
    debt due within one year)             $ 1 032   $ 1 134     $   912  $   982

ULH&P
First mortgage bonds and
    other long-term debt                  $74 553   $78 145     $44 671  $45 591

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 New York Stock Exchange,  on the present value of future cash flows.  The
discount rates used  approximate  the  incremental  borrowing  costs for similar
instruments.



<PAGE>



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  the  ESBU's  trade  accounts
receivable  from  electric and gas retail  customers is limited due to the large
number of customers and diversified  customer base of  residential,  commercial,
and industrial  customers.  Contracts within the physical power portfolio of the
ECBU's power  marketing and trading  operations are primarily  with  traditional
electric cooperatives and municipalities and other investor-owned utilities.

Contracts  within the  trading  portfolio  of the power  marketing  and  trading
operations  are  primarily  with  power   marketers  and  other   investor-owned
utilities. As of December 31, 1998, approximately 73% of the activity within the
trading portfolio represents commitments with 10 counterparties. The majority of
these  contracts  are for terms of one year or less.  As a result of the extreme
volatility  experienced  in the Midwest power markets  during 1998,  several new
entrants into the market began experiencing financial difficulties and failed to
perform their contractual  obligations.  As a result, the bad debt provisions of
approximately  $13 million with respect to settled  transactions  were  recorded
during the year. Counterparty credit exposure within the power trading portfolio
is routinely factored into the mark-to-market  valuation.  At December 31, 1998,
credit  exposure  within  the power  trading  portfolio  is not  believed  to be
significant.   Prior  to  1998,   credit  exposure  due  to   nonperformance  by
counterparties  was not  significant.  As the competitive  electric power market
continues  to  develop,  counterparties  will  increasingly  include  new market
entrants,  such as other power marketers,  brokers, and commodity traders.  This
increased  level of new market  entrants,  as well as  competitive  pressures on
existing market participants,  could increase the ECBU's exposure to credit risk
with respect to its power  marketing and trading  operation.  As of December 31,
1998, approximately 37% of the activity within the ECBU's physical gas marketing
and trading portfolio represents commitments with 10 counterparties. Credit risk
losses  related to the  ECBU's  gas and other  commodity  physical  and  trading
operations have not been significant.  Based on the types of counterparties  and
customers with which  transactions are executed,  credit exposure within the gas
and other commodity trading portfolios is not believed to be significant.

Potential  exposure to credit risk also exists from  Cinergy's  use of financial
derivatives  such as currency swaps,  foreign exchange  forward  contracts,  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 and Other Postretirement Benefits

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

Cinergy's  defined  benefit pension plans cover  substantially  all US employees
meeting  certain  minimum  age  and  service  requirements.  Plan  benefits  are
determined  under a final  average pay formula  with  consideration  of years of

<PAGE>

participation,  age at retirement,  and the applicable  average Social  Security
wage base or benefit amount.

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.  The
reconfiguration  of the pension plans did not have a  significant  impact on the
Company's financial condition or results of operations.

Cinergy's pension plan funding policy for US employees is to contribute annually
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.  The  pension  plans'  assets  consist of
investments in equity and fixed income securities.

Cinergy provides  certain health care and life insurance  benefits to retired US
employees and their eligible dependents,  if the retiree has met minimum age and
service requirements.  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
US 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. CG&E does not pre-fund its obligations for these postretirement
benefits. PSI is pre-funding its obligations as authorized by the IURC.

Cinergy's  benefit  plans' cost for 1998,  1997, and 1996 included the following
components:
<TABLE>
<CAPTION>
<S>                             <C>     <C>       <C>        <C> <C>           <C>  
                                                                     Other
                                        Pension                  Postretirement
                                        Benefits                    Benefits
                                 1998     1997     1996       1998     1997     1996
                                                    (in millions)

Service cost                    $21.8    $19.8    $21.2      $ 4.1    $ 3.1    $ 5.8
Interest cost                    71.6     67.8     61.6       16.1     16.3     18.7
Expected return on plans'
  assets                        (66.9)   (62.8)   (61.2)        -        -        -
Amortization of transition
  obligation/(asset)             (1.3)    (1.3)    (1.3)       5.0      5.0      8.4
Amortization of prior service
  cost                            4.4      4.4      4.5         -        -        -
Recognized actuarial loss          -       (.3)     (.3)        .4       .3       .3
Net periodic benefit cost       $29.6    $27.6    $24.5      $25.6    $24.7    $33.2
</TABLE>

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.


<PAGE>


<TABLE>
<CAPTION>
<S>                                <C>      <C>      <C>        <C>      <C>      <C>  

                                                                       Other
                                          Pension                  Postretirement
                                          Benefits                    Benefits
                                   1998     1997     1996       1998     1997     1996
Actuarial Assumptions:
Discount rate                      6.75%    7.5%     8.0%       6.75%    7.5%     8.0%
  Rate of future compensation
increase                           3.75%    4.5%     5.0%       n/a      n/a      n/a

Rate of return on plans' assets    9.00%    9.0%     9.0%       n/a      n/a      n/a
</TABLE>

For measurement purposes, a 7% annual rate of increase in the per capita cost of
covered  health care  benefits  was  assumed  for 1999.  The rate was assumed to
decrease gradually to 5% for 2004 and remain at that level thereafter.

The  following  table  provides a  reconciliation  of the  changes in the plans'
benefit  obligations  and fair value of assets over the  two-year  period  ended
December  31, 1998,  and a statement  of the funded  status as of December 31 of
both years.
<TABLE>
<CAPTION>
<S>                                        <C>      <C>           <C>       <C>    
                                                                       Other
                                               Pension             Postretirement
                                               Benefits               Benefits                               
                                            1998      1997         1998      1997
                                                        (in millions)

Change in benefit obligation

Benefit obligation at beginning of period  $960.3   $ 877.4       $221.9    $ 211.0

Service cost                                 21.8      19.8          4.1        3.1
Interest cost                                71.6      67.8         16.1       16.3
Amendments                                    1.0        -            -          -
Actuarial gain                               53.6      65.4         17.4        3.7
Benefits paid                               (56.2)    (70.1)       (13.0)     (12.2)

Benefit obligation at end of period       1 052.1     960.3        246.5      221.9

Change in plan assets

Fair value of plan assets at beginning
  of period                                 888.1     764.1           -          -
Actual return on plan assets                  9.9     186.6           -          -
Employer contribution                        23.5       7.5         13.0       12.2
Benefits paid                               (56.2)    (70.1)       (13.0)     (12.2)

Fair value of plan assets at end
  of period                                 865.3     888.1           -          -

Funded status                              (186.8)    (72.2)      (246.5)    (221.9)

Unrecognized prior service cost              43.3      46.6           -          -
Unrecognized net actuarial (gain)/loss      (24.1)   (134.6)        40.3       22.6
Unrecognized net plan assets                 (7.1)     (8.5)        65.8       70.9

Accrued benefit cost at December 31       $(174.7)  $(168.7)     $(140.4)   $(128.4)

</TABLE>


<PAGE>



Assumed  health care cost trend rates have a  significant  effect on the amounts
reported  for the health care plans.  A  one-percentage-point  change in assumed
health care cost trend rates would have the following effects:

                                           1-Percentage-     1-Percentage-
                                          Point Increase    Point Decrease
                                                    (in millions)
Effect on total of service and interest
  cost components                             $ 2.8             $(2.4)
Effect on postretirement benefit
  obligation                                   26.7             (23.7)

In  addition,  the  Company  sponsors  non-qualified  pension  plans  that cover
officers,  certain other key employees,  and non-employee  directors.  Cinergy's
non-qualified pension plans are not currently funded.  Cinergy may begin to fund
certain of these plans through a rabbi trust in 1999.

The pension benefit obligations and pension expense under these plans were:

                                     1998         1997   
                                       (in millions)
      Pension benefit obligations    $31.4        $24.6
      Pension expense                  4.5          4.1

Cinergy

10.  Investments in Unconsolidated Subsidiaries

Except for Cinergy's  50%  investment in Avon Energy  Partners  Holdings  ("Avon
Energy"),  which holds Midlands  Electricity  plc  ("Midlands"),  investments in
unconsolidated subsidiaries are not significant.

Summarized financial information for Avon Energy is as follows:

                                                            December 31
                                                         1998        1997
                                                           (in millions)
Assets
  Current assets                                        $  568      $  676
  Property, plant, and equipment                         1 974       1 890
  Other assets                                           2 111       2 148
    Total assets                                        $4 653      $4 714
Liabilities and Shareholders' Equity
  Other liabilities                                     $1 639      $2 175
  Long-term debt                                         1 896       1 533
  Total common shareholders' equity                      1 118       1 006
    Total liabilities and shareholders' equity          $4 653      $4 714

Cinergy's investments in unconsolidated
  subsidiaries:           Avon Energy                   $  556      $  505
                          Other companies                   18          33
    Total investments in unconsolidated
      subsidiaries                                      $  574      $  538



<PAGE>



                                                         December 31
                                                  1998      1997      1996
                                                        (in millions)

Operating revenues                               $2 406    $2 176    $1 132
Net income before extraordinary item             $  105    $  127    $   50
Extraordinary item - windfall profits
  tax (less applicable income taxes of $0)       $ -       $ (219)   $ -
Net income (loss)                                $  105    $  (92)   $   50

Cinergy's equity in earnings of Avon Energy
  before extraordinary item                      $   57    $   63    $   25
Cinergy's equity in extraordinary item             -         (109)     -

Cinergy's equity in earnings of: Avon Energy     $   57    $  (46)   $   25
                                 Other companies     (6)       (3)     -
Total equity in the earnings of unconsolidated
  subsidiaries                                   $   51    $  (49)   $   25

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

In November 1998, Midlands announced the sale of its electric supply business to
National  Power PLC ("National  Power").  National Power will acquire all of the
assets of  Midlands'  supply  business  and  assume its  liabilities,  including
obligations under all Midlands power purchase  agreements for approximately $300
million,  plus an adjustment for working capital at financial closing.  The sale
is subject to approval by Great  Britain's  Department of Trade and Industry and
Office of Electricity  Regulation and is expected in the second quarter of 1999.
Midlands will continue to own and operate its  distribution  business as well as
interests in various generation stations.



<PAGE>



11.  Income Taxes

Cinergy

The  significant  components of Cinergy's  net deferred  income tax liability at
December 31, 1998, and 1997, are as follows:

                                                       1998            1997 
                                                           (in millions)
Deferred Income Tax Liability
  Utility plant                                      $1 104.2        $1 076.8
  Unamortized costs of reacquiring debt                  21.2            24.4
  Deferred operating expenses and carrying
    costs                                                73.3            75.0
  Amounts due from customers - income taxes             121.7           129.4
  Deferred DSM costs                                     22.8            31.7
  Investments in unconsolidated subsidiaries               -             55.0
  Other                                                  51.0            47.9
    Total deferred income tax liability               1 394.2         1 440.2

Deferred Income Tax Asset
  Unamortized investment tax credits                     57.0            60.5
  Accrued pension and other benefit costs                89.0            63.3
  Net energy risk management liabilities                 54.5              -
  RUS obligations                                        29.5             3.8
  Investments in unconsolidated subsidiaries             13.1              -
  Other                                                  60.0            64.1
    Total deferred income tax asset                     303.1           191.7

Net Deferred Income Tax Liability                    $1 091.1        $1 248.5

CG&E

The  significant  components  of CG&E's net  deferred  income tax  liability  at
December 31, 1998, and 1997, are as follows:

                                                         1998           1997 
                                                            (in millions)
Deferred Income Tax Liability
  Utility plant                                         $694.4         $683.3
  Unamortized costs of reacquiring debt                   10.5           11.1
  Deferred operating expenses and
    carrying costs                                        55.2           62.0
  Amounts due from customers - income taxes              114.6          121.9
  Deferred DSM costs                                      13.2           11.7
  Other                                                   43.9           43.9
    Total deferred income tax liability                  931.8          933.9

Deferred Income Tax Asset
  Unamortized investment tax credits                      39.5           41.7
  Accrued pension and other benefit costs                 41.3           39.2
  Net energy risk management liabilities                  26.3             -
  Other                                                   53.6           58.6
    Total deferred income tax asset                      160.7          139.5

Net Deferred Income Tax Liability                       $771.1         $794.4



<PAGE>



PSI

The  significant  components  of PSI's net  deferred  income  tax  liability  at
December 31, 1998, and 1997, are as follows:

                                                         1998           1997
                                                            (in millions)
Deferred Income Tax Liability
  Electric utility plant                                $409.8         $393.5
  Unamortized costs of reacquiring debt                   10.7           13.3
  Amounts due from customers - income taxes                7.1            7.5
  Deferred operating expenses and accrued
    carrying costs                                        18.1           13.0
  Deferred DSM costs                                       9.6           20.0
  Other                                                    4.6            3.7  
    Total deferred income tax liability                  459.9          451.0

Deferred Income Tax Asset
  Unamortized investment tax credits                      17.5           18.8
  Accrued pension and other benefit costs                 20.7           24.1
  Net energy risk management liabilities                  28.2             -
  RUS obligations                                         29.5            3.8
  Other                                                     -              .8
    Total deferred income tax asset                       95.9           47.5

Net Deferred Income Tax Liability                       $364.0         $403.5

ULH&P

The  significant  components  of ULH&P's net  deferred  income tax  liability at
December 31, 1998, and 1997, are as follows:

                                                        1998          1997 
                                                          (in thousands)
Deferred Income Tax Liability
  Utility plant                                       $34 442       $34 001
  Unamortized costs of reacquiring debt                 1 390         1 463
  Deferred fuel costs                                   1 557           -
  Other                                                 2 626         2 546
    Total deferred income tax liability                40 015        38 010

Deferred Income Tax Asset
  Unamortized investment tax credits                    1 720         1 832
  Amounts due to customers - income taxes               3 616         2 650
  Deferred fuel costs                                    -              508
  Accrued pension and other benefit costs               2 658         2 397
  Other                                                 5 887         4 412
    Total deferred income tax asset                    13 881        11 799

Net Deferred Income Tax Liability                     $26 134       $26 211

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, 1998. 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.



<PAGE>



A summary of federal and state income taxes charged (credited) to income and the
allocation of such amounts is as follows:

Cinergy
                                                   1998       1997      1996
                                                        (in millions)

Current Income Taxes
  Federal                                         $209.0     $133.3    $143.4
  State                                             16.9       12.1       7.5
      Total current income taxes                   225.9      145.4     150.9

Deferred Income Taxes
  Federal
    Depreciation and other utility plant-
      related items                                 25.3       26.7      61.6
    DSM costs                                       (8.8)      (8.5)     (1.9)
    Pension and other benefit costs                 (3.3)        .9     (28.2)
    Litigation settlement                             -         1.8      26.2
    RUS obligations                                (22.5)      (3.5)       -
    Unrealized energy risk management losses       (49.4)      (1.5)       -
    Fuel costs                                      (1.0)       4.4       8.8
    Other items - net                              (32.0)      54.5     (15.4)
      Total deferred federal income taxes          (91.7)      74.8      51.1

  State                                             (7.4)       2.4       6.5
      Total deferred income taxes                  (99.1)      77.2      57.6

Investment Tax Credits - Net                        (9.6)      (9.6)     (9.8)

      Total Income Taxes                          $117.2     $213.0    $198.7

CG&E
                                                   1998       1997      1996
                                                         (in millions)

Current Income Taxes
  Federal                                         $151.7     $117.1    $115.5
  State                                              3.9        5.2       1.5 
      Total current income taxes                   155.6      122.3     117.0

Deferred Income Taxes
  Federal
    Depreciation and other utility plant-
      related items                                 14.7       13.6      36.6
    DSM costs                                         .8        7.5        .6
    Pension and other benefit costs                  5.0       (2.8)    (17.0)
    Unrealized energy risk management losses                 (25.2)       (.7)
    Fuel costs                                      (1.5)      (5.5)     10.8
    Other items - net                              (14.5)      11.6      (8.1)
      Total deferred federal income taxes          (20.7)      23.7      22.9

  State                                              (.4)      (1.0)      2.2
      Total deferred income taxes                  (21.1)      22.7      25.1

Investment Tax Credits - Net                        (6.2)      (6.2)     (6.2)

      Total Income Taxes                          $128.3     $138.8    $135.9


<PAGE>



PSI
                                                    1998      1997      1996 
                                                         (in millions)

Current Income Taxes
  Federal                                          $69.8     $35.0     $41.3
  State                                             10.5       6.8       6.0
      Total current income taxes                    80.3      41.8      47.3

Deferred Income Taxes
  Federal
    Depreciation and other electric utility
      plant-related items                           10.7      13.3      25.0
    DSM costs                                       (9.6)    (16.1)     (2.5)
    Pension and other benefit costs                 (1.9)      3.7     (11.2)
    Litigation settlement                             -        6.2      26.2
    RUS Obligations                                (22.5)     (3.5)       -
    Unrealized energy risk management losses       (24.2)      (.8)       -
    Fuel costs                                        .5       9.9      (2.0)
    Coal contract buyout                             3.1       5.5        -
    Coal gasification payments                      (1.0)      7.7        -
    Other items - net                               (3.1)      9.9      (6.3)
      Total deferred federal income taxes          (48.0)     35.8      29.2

  State                                             (5.8)      3.3       4.3
      Total deferred income taxes                  (53.8)     39.1      33.5

Investment Tax Credits - Net                        (3.4)     (3.5)     (3.6)

      Total Income Taxes                           $23.1     $77.4     $77.2



<PAGE>



ULH&P
                                                     1998      1997     1996
                                                          (in thousands)

Current Income Taxes
  Federal                                          $6 699   $11 607  $   416
  State                                             1 336     3 002      (87)
      Total current income taxes                    8 035    14 609      329

Deferred Income Taxes
  Federal
    Depreciation and other utility plant-
      related items                                   420       847    1 506
    Pension and other benefit costs                   319        -      (277)
    Fuel costs                                        820    (5 486)   6 111
    Unamortized costs of reacquiring debt             (58)     (122)     458
    Service company allocations                    (1 376)      (36)    -
    Other items - net                                (415)       48      291
      Total deferred federal income taxes            (290)   (4 749)   8 089

  State
    Depreciation and other utility plant-
      related items                                   196       287      425
    Fuel costs                                        211    (1 404)   1 570
    Other items - net                                 (99)       23       55
      Total deferred state income taxes               308    (1 094)   2 050

      Total deferred income taxes                      18    (5 843)  10 139

Investment Tax Credits - Net                         (279)     (280)    (282)

      Total Income Taxes                           $7 774   $ 8 486  $10 186

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
                                                 1998       1997       1996
                                                       (in millions)

Statutory federal income tax provision          $129.0     $196.4     $181.8
Increases (Reductions) in taxes resulting from:
  Amortization of investment tax credits          (9.6)      (9.6)      (9.8)
  Depreciation and other utility plant-
    related differences                           10.4       11.7       14.1
  Preferred dividend requirements of
    subsidiaries                                   2.3        4.4        8.5
  Foreign tax adjustments                        (20.0)     (13.2)     (11.1)
  Other - net                                     (4.4)       8.8        1.2
Federal income tax expense                      $107.7     $198.5     $184.7


<PAGE>




CG&E
                                                 1998       1997       1996
                                                        (in millions)

Statutory federal income tax provision          $119.2     $130.8     $125.8
Increases (Reductions) in taxes resulting from:
  Amortization of investment tax credits          (6.2)      (6.2)      (6.2)
  Depreciation and other utility plant-
    related differences                            9.0        9.8       11.7
  Other - net                                      2.8         .1         .9
Federal income tax expense                      $124.8     $134.5     $132.2

PSI
                                                 1998       1997       1996
                                                        (in millions)

Statutory federal income tax provision          $ 24.7     $ 69.8     $ 67.4
Increases (Reductions) in taxes resulting from:
  Amortization of investment tax credits          (3.4)      (3.5)      (3.6)
  Other - net                                     (2.9)       1.0        3.1
Federal income tax expense                      $ 18.4     $ 67.3     $ 66.9

ULH&P
                                                 1998       1997       1996 
                                                       (in thousands)

Statutory federal income tax provision          $6 937     $6 823     $7 987
Increases (Reductions) in taxes resulting from:
  Amortization of investment tax credits          (279)      (280)      (282)
  Depreciation and other utility plant-
    related differences                           (168)        96        358
  Other - net                                     (360)       (61)       160
Federal income tax expense                      $6 130     $6 578     $8 223

12.  Commitments and Contingencies

(a)      Construction

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

Construction  expenditures  for the 1999  through 2003 period are forecast to be
approximately  $889 million for CG&E (including $120 million for ULH&P) and $774
million for PSI. These  forecasted  amounts  exclude the estimated  expenditures
necessary to comply with the stricter  nitrogen oxide ("NOx")  emission  control
standards proposed by the United States Environmental Protection Agency ("EPA").

(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.



<PAGE>



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.
PSI acquired  four of the sites from Northern  Indiana  Public  Service  Company
("NIPSCO")  in 1931 and at the same time it sold  NIPSCO  the sites  located  in
Goshen and Warsaw,  Indiana.  In 1945, PSI sold 19 of these sites (including the
four it  acquired  from  NIPSCO) to Indiana  Gas and Water  Company,  Inc.  (now
Indiana Gas  Company,  Inc.  ("IGC")).  One of the 19 sites,  the one located in
Rochester, Indiana, was later sold by IGC to NIPSCO.

IGC  and  NIPSCO  both  made  claims  against  PSI,  contending  that  PSI  is a
Potentially  Responsible Party under the Comprehensive  Environmental  Response,
Compensation  and Liability Act ("CERCLA") with respect to the 21 MGP sites, and
therefore  legally  responsible for the costs of  investigating  and remediating
these sites.  Moreover, in August 1997, NIPSCO filed suit against PSI in federal
court,  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.

In November 1998,  NIPSCO,  IGC, and PSI entered into a Site  Participation  and
Cost Sharing Agreement by which they settled  allocation of CERCLA liability for
past and future costs, among the three companies, at seven MGP sites in Indiana.
Pursuant to this  agreement,  NIPSCO's  lawsuit  against PSI was dismissed.  The
parties  have  assigned  one of the parties  lead  responsibility  for  managing
further  investigation and remediation  activities at each of the sites. Similar
agreements were reached  between IGC and PSI which allocate CERCLA  liability at
14 MGP sites with which NIPSCO had no involvement. These agreements conclude all
CERCLA and similar  claims  between the three  companies  relative to MGP sites.
Pursuant to the agreements  and  applicable  laws, the parties are continuing to
investigate and remediate the sites as appropriate. Investigation and cleanup of
some  of the  sites  is  subject  to  oversight  by the  Indiana  Department  of
Environmental Management ("IDEM").

PSI has placed its  insurance  carriers  on notice of IGC's,  NIPSCO's,  and the
IDEM's claims  related to MGP sites.  In April 1998, PSI filed suit in Hendricks
County Circuit Court against its general liability  insurance  carriers seeking,
among other  matters,  a declaratory  judgment  that its insurance  carriers are
obligated to defend MGP claims  against PSI or pay PSI's costs of defense and to
indemnify  PSI for its  costs  of  investigating,  preventing,  mitigating,  and
remediating  damage to property and paying claims associated with MGP sites. PSI
cannot predict the outcome of this litigation.

Based  upon the work  performed  to date,  PSI has  accrued  costs for the sites
related to investigation,  remediation,  and groundwater  monitoring.  Estimated
costs of certain remedial  activities are accrued when such costs are reasonably
estimable.  PSI does not believe it can  provide an  estimate of the  reasonably
possible total  remediation costs for any site prior to completion of a remedial
investigation/feasibility  study and the development of some sense of the timing
for the  implementation of the potential  remedial  alternatives,  to the extent
such  remediation  may be  required.  Accordingly,  the total  costs that may be
incurred  in  connection  with  the  remediation  of all  sites,  to the  extent
remediation is necessary,  cannot be determined at this time. These future costs
at the 21 Indiana MGP sites, 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 the 21 MGP sites could be material to Cinergy's and
PSI's financial condition or results of operations.

<PAGE>

Cinergy, CG&E, and ULH&P

     (iii) CG&E and its Utility  Subsidiaries CG&E and its utility  subsidiaries
are aware of potential  sites where MGP activities 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 these MGP sites.

Cinergy, CG&E, and PSI

(c)      Ozone Transport Rulemaking

In October 1998, the EPA finalized its Ozone Transport Rule ("NOx SIP Call"). It
applies to 22 states in the eastern half of the US,  including  the three states
in which the Cinergy  electric  utilities  operate.  This rule  recommends  that
states reduce NOx emissions from primarily  industrial and utility  sources to a
certain limit by May 2003. Ohio,  Indiana, a number of other states, and various
industry  groups,  including  some of which  Cinergy  is a member,  filed  legal
challenges to the NOx SIP Call in late 1998. Ohio and Indiana have also provided
preliminary  indications  that  they will seek  fewer  NOx  reductions  from the
utility sector in their  implementing  regulations  than the EPA has budgeted in
its rulemaking. The state implementing regulations will need the EPA's approval.
Under the current  provisions of the NOx SIP Call,  the estimate for  compliance
with the EPA limits is currently  $500 million to $700 million (in 1998 dollars)
between  now and 2003.  This  estimate  is  significantly  dependent  on several
factors,  including  the  final  determination  regarding  both the  timing  and
stringency of the final required NOx reductions,  the output of CG&E's and PSI's
generating  units,  the  availability  of an  adequate  supply of  resources  to
construct  the  necessary  control  equipment,  and the  extent  to  which a NOx
allowance trading market develops, if any.

Cinergy

(d)  Uch Project

Midlands (of which the Company owns 50%) has a 40%  ownership  interest in a 586
megawatts  ("MW") power project in Pakistan  ("Uch  project" or "Uch") which was
originally  scheduled to begin commercial  operation in late 1998. In July 1998,
the Pakistani  government-owned  utility  issued a notice of intent to terminate
certain key project agreements  relative to the Uch project.  The notice asserts
that various forms of corruption  were involved in the original  granting of the
agreements  to the  Uch  investors  by a  predecessor  government.  The  Company
believes  that this  notice is similar to notices  received by a number of other
independent power projects in Pakistan.

The Uch  investors,  including  a  subsidiary  of  Midlands,  strongly  deny the
allegations  and have  pursued  all  available  legal  options to enforce  their
contractual rights under the project  agreements.  Physical  construction of the
project is complete;  however,  commercial  operations have been delayed pending
resolution of the dispute. In December 1998, the Pakistani government offered to
withdraw its notice.

Through its 50% ownership of Midlands,  the Company's current  investment in the
Uch project is  approximately  $32 million.  In addition,  project lenders could
require investors to make additional capital  contributions to the project under
certain  conditions.  The Company's share of these  additional  contributions is
approximately  $12 million.  At the present time, the Company cannot predict the
ultimate outcome of this matter.



<PAGE>



Cinergy and PSI

(e)  Expiration of Bargaining Agreement

Our  collective-bargaining  agreement  with  the  International  Brotherhood  of
Electrical Workers Local No. 1393, covering approximately 1,470 employees,  will
expire on May 1, 1999. Management has developed contingency plans for service to
continue  in the  event  of a work  stoppage.  In the  unlikely  event of a work
stoppage, incremental related costs would be incurred, but would not be expected
to have a material impact on operating income.

Cinergy, CG&E, and PSI

13.  Jointly-Owned Plant

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.  PSI is a joint owner of Gibson  Generating
Station  ("Gibson") Unit 5 with Wabash Valley Power  Association,  Inc. ("WVPA")
and 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. The Consolidated Statements of
Income reflect CG&E's and PSI's portions of all operating costs  associated with
the jointly-owned facilities.

<TABLE>
<CAPTION>
CG&E's and PSI's investments in jointly-owned plant are as follows:
<S>                                    <C>      <C>        <C>            <C>
                                                        1998
                                                Utility                   Construction
                                                Plant in   Accumulated       Work in
                                        Share   Service    Depreciation     Progress 
                                                  (dollars in millions)

CG&E
  Production
    Miami Fort Station (Units 7 and 8)  64.00%   $  216        $120            $4
    W.C. Beckjord Station (Unit 6)      37.50        41          26             1
    J.M. Stuart Station                 39.00       273         128             2
    Conesville Station (Unit 4)         40.00        73          39             2
    William H. Zimmer Station           46.50     1 218         275             5
    East Bend Station                   69.00       333         172             2
    Killen Station                      33.00       187          91             -
  Transmission                         Various       64          32             1

PSI
  Production:
    Gibson (Unit 5)                     50.05       206         102             3
  Transmission and local facilities     94.62         2           1             -
</TABLE>



<PAGE>



14.  Quarterly Financial Data (unaudited)

Cinergy
                                                        Basic      Diluted
                                                       Earnings    Earnings
               Operating    Operating       Net         (Loss)     (Loss)
Quarter Ended  Revenues (a)  Income  (a) Income(Loss)  Per Share  Per Share
                         (in millions, except per share amounts)
1998
March 31         $1 348       $226         $106         $ .67      $ .67
June 30           1 168          3(b,d)     (25)(b,d)    (.16)(b,d) (.16)(b,d)
September 30      1 976        204(e)       109 (e)       .69 (e)    .69 (e)
December 31       1 384        133(f)        71 (f)       .45 (f)    .45 (f)
  Total          $5 876       $566         $261         $1.65      $1.65

1997
March 31         $1 039       $215         $114         $ .72      $ .72
June 30             872        142           56           .35        .34
September 30      1 361        183          (27)(c)      (.16)(c)   (.17)(c)
December 31       1 115        226          110           .70        .70
  Total          $4 387       $766         $253         $1.61      $1.59

CG&E
                           Operating           Operating             Net
Quarter Ended              Revenues             Income  (a)        Income
                                             (in millions)
1998
March 31                    $  767               $141               $ 71
June 30                        590                 43(b)              13(b)
September 30                   884                147(e)              79(e)
December 31                    615                117(f)              53(f)
  Total                     $2 856               $448               $216

1997
March 31                    $  614               $143               $ 68
June 30                        487                 92                 38
September 30                   712                114                 52
December 31                    639                151                 81
  Total                     $2 452               $500               $239


PSI
                           Operating           Operating            Net
Quarter Ended              Revenues          Income (Loss)(a)  Income (Loss)
                                             (in millions)
1998
March 31                    $  592               $ 90               $ 43
June 30                        511                (29)(b,d)          (31)(b,d)
September 30                   807                 65 (e)             27 (e)
December 31                    493                 35 (f)             13 (f)
  Total                     $2 403               $161               $ 52

1997
March 31                    $  424               $ 74               $ 33
June 30                        391                 55                 24
September 30                   651                 77                 40
December 31                    494                 83                 35
  Total                     $1 960               $289               $132

<PAGE>

Cinergy, CG&E, PSI

(a) For a  discussion  of the  reclassification  of amounts  disclosed  in prior
reports, see Note 1 (b).

(b) In the second  quarter of 1998,  Cinergy  recorded  charges of $65  million,
pretax ($58 million for CG&E and $7 million for PSI) related to power  marketing
and trading operations which  constitutes,  after tax, $.26 per share, basic and
diluted.  For a discussion of the energy marketing and trading  operations,  see
Note 1(c).

(c) For a discussion of the windfall profits tax levied against Midlands,  which
was recorded in the third quarter of 1997 as an extraordinary item, see Note 17.
Net income,  basic EPS, and diluted EPS during the third quarter of 1997, before
the extraordinary item, were $83 million,  $.53, and $.52,  respectively.  Total
net income,  basic EPS, and diluted EPS for 1997, before the extraordinary item,
were $363 million, $2.30, and $2.28, respectively.

(d) In the  second  quarter of 1998,  Cinergy,  through  PSI,  recorded a charge
against  earnings of $80 million ($50 million  after tax or $.32 per share basic
and diluted) for a settlement related to the Marble Hill nuclear project.  For a
discussion of this settlement, see Note 18.

(e) In the third  quarter of 1998,  Cinergy  recorded  charges  of $20  million,
pretax  ($(5)  million  for  CG&E and $25  million  for  PSI)  related  to power
marketing and trading operations which  constitutes,  after tax, $.08 per share,
basic  and  diluted.  For a  discussion  of the  energy  marketing  and  trading
operations, see Note 1(c).

(f) In the fourth  quarter of 1998,  Cinergy  recorded  charges of $50  million,
pretax ($20 million for CG&E and $30 million for PSI) related to power marketing
and trading operations which  constitutes,  after tax, $.20 per share, basic and
diluted.  For a discussion of the energy marketing and trading  operations,  see
Note 1(c).

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

15.  Financial Information by Business Segment

During 1998, Cinergy and its subsidiaries adopted the provisions of Statement of
Financial  Accounting  Standards  No.  131,  Disclosures  about  Segments  of an
Enterprise and Related  Information  ("Statement  131").  Statement 131 requires
disclosure about reportable  operating  segments in annual and interim condensed
financial  statements.  These  operating  segments  are  based on  products  and
services,  geography,  legal  structure,  management  structure or any manner in
which management disaggregates a company.

Cinergy's  reportable  segments are strategic  business  units which were formed
during the second half of 1996 and began  operating as  separately  identifiable
business  units in 1997.  Each business unit has its own  management  structure,
headed by a business unit president who reports  directly to the chief executive
officer of Cinergy.  Each business unit and its  responsibilities as of December
31, 1998, is described in detail below.

The ECBU operates and maintains,  exclusive of certain  jointly-owned plant, all
of the Company's  domestic electric  generation  facilities.  In addition to the
production  of  electric  power,  all energy  risk  management,  marketing,  and
proprietary  arbitrage  trading,  with the  exception of electric and gas retail
sales,  is conducted  through the ECBU.  Revenues  from  external  customers are
derived from the ECBU's  marketing,  trading,  and risk  management  activities.
Intersegment revenues are derived from the sale of electric power to the ESBU.

<PAGE>

The EDBU plans,  constructs,  operates, and maintains the Company's transmission
and  distribution  systems.  Revenues from  customers  other than  end-users are
primarily  derived from the transmission of electric power through the Company's
transmission system. Intersegment revenues are derived from sale of electric and
gas transmission and distribution services to the ESBU.

The ESBU provides gas and electric  energy as well as gas supply risk management
services to end-users.  The ESBU also manages the  development and the sales and
marketing of new end-use energy-related products and services. All of the ESBU's
revenues  are derived  from the sales of such  services and products to external
customers.  All electric energy sold to end-users is purchased from the ECBU. In
addition to  energy-related  products  and  services,  the ESBU also sells other
end-use products and services, such as telephone services, through joint-venture
affiliates. Other products and services offered through joint-venture affiliates
include the  construction  and sale or lease of cogeneration  and  trigeneration
facilities  to  large  commercial/industrial  customers  and  energy  management
services to third parties.

The  IBU  directs  and  manages  all of  the  Company's  international  business
holdings,  which  include  wholly-owned  subsidiaries  and  equity  investments.
Revenues and equity earnings from unconsolidated companies are primarily derived
from energy-related businesses.

Transfer  pricing  for sales of electric  energy and sales of  electric  and gas
transmission  and  distribution  services  between the ECBU,  ESBU, and EDBU are
derived from the operating utilities' retail and wholesale rate structures.

<PAGE>

The following financial  information by business unit, product and service,  and
geographic  area for the years ending  December 31, 1998,  1997, and 1996, is as
follows:
<TABLE>
<CAPTION>

Business Units
<S>                              <C>      <C>       <C>       <C>     <C>       <C>      <C>           <C>   
                                                                        1998
                                                                                 All     Reconciling
                                            Cinergy Business Units              Other    Eliminations    
                                  ECBU     EDBU      ESBU      IBU     Total     (1)         (2)       Consolidated
(in millions)
Operating Revenues -
  External Customers             $2,726   $   34    $3,107    $  9    $ 5,876    $  -      $  -          $ 5,876
Intersegment Revenues             1,782      724      -         -       2,506       -       (2,506)         -
Depreciation and Amortization (3)   197      123         4       2        326       -         -              326
Equity in Earnings of
  Unconsolidated Subsidiaries        (1)    -           (4)     56         51       -         -               51
Interest Expense (net) (4)           95       88         3      51        237        7        -              244
Income Taxes                       -        -         -         -        -         117        -              117
Segment Profit (Loss)               151      225         4      16        396     (135)       -              261
Total Segment Assets              5,476    3,754       275     751     10,256       43        -           10,299
Investments in Unconsolidated
  Subsidiaries                     -        -            8     566        574       -         -              574
Total Expenditures for Long-
  Lived Assets                      109      227        17      -         353       17        -              370

<FN>
(1)  The all other category represents  miscellaneous corporate items, including
     income  taxes,  which are not  allocated to business  units for purposes of
     segment profit measurement.
(2)  The reconciling  eliminations category eliminates the intersegment revenues
     of the ECBU and the EDBU.
(3)  The components of Depreciation  and  Amortization  include  depreciation of
     fixed assets,  amortization of intangible assets,  amortization of phase-in
     deferrals, and amortization of post-in-service deferred operating expenses.
     (4) Interest income is deemed immaterial.
</FN>
</TABLE>



<PAGE>

<TABLE>
<CAPTION>


<S>                              <C>       <C>       <C>       <C>     <C>      <C>      <C>          <C>   
                                                                        1997
                                                                                 All     Reconciling
                                            Cinergy Business Units             Other    Eliminations    
                                  ECBU      EDBU      ESBU      IBU    Total     (1)         (2)      Consolidated
(in millions)
Operating Revenues -
  External Customers             $1,287    $   27    $3,071    $  2    $4,387    $ -        $  -         $4,387
Intersegment Revenues             1,688       727      -         -      2,415      -         (2,415)       -
Depreciation and Amortization
  (3)                               184       118         5      -        307      -           -            307
Equity in Earnings of
  Unconsolidated Subsidiaries      -         -           (3)     63        60      -           -             60
Interest Expense (net) (4)          108        86         4      38       236      -           -            236
Income Taxes                       -         -         -         -       -        213          -            213
Segment Profit (Loss) Before
  Extraordinary Item                330       224         4      22       580    (217)         -            363
Extraordinary Item (5)             -         -         -       (109)     (109)     -           -           (109)
Segment Profit (Loss)               330       224         4     (87)      471    (217)         -            254
Total Segment Assets              4,380     3,617       279     562     8,838      20          -          8,858
Investments in Unconsolidated
  Subsidiaries                     -         -            3     535       538      -           -            538
Total Expenditures for Long-
  Lived Assets                       79       224        12      -        315      13          -            328

<FN>
(1)  The all other category represents  miscellaneous corporate items, including
     income  taxes,  which are not  allocated to business  units for purposes of
     segment profit measurement.
(2)  The reconciling  eliminations category eliminates the intersegment revenues
     of the ECBU and the EDBU.
(3)  The components of Depreciation  and  Amortization  include  depreciation of
     fixed assets,  amortization of intangible assets,  amortization of phase-in
     deferrals, and amortization of post-in-service deferred operating expenses.
     (4) Interest  income is deemed  immaterial.  (5) Windfall  Profits Tax (see
     Note 17).
</FN>
</TABLE>




<PAGE>

<TABLE>
<CAPTION>



<S>                              <C>      <C>       <C>       <C>     <C>        <C>       <C>             <C>   
                                                                        1996
                                                                                   All     Reconciling
                                            Cinergy Business Units                Other    Eliminations   
                                  ECBU      EDBU      ESBU     IBU     Total       (1)         (2)         Consolidated
(in millions)
Operating Revenues -
  External Customers             $  210    $   23    $3,043    $ -     $3,276    $   -        $  -            $3,276
Intersegment Revenues             1,678       733      -         -      2,411        -         (2,411)          -
Depreciation and Amortization
  (3)                               175       115         5      -        295        -           -               295
Equity in Earnings of
  Unconsolidated Subsidiaries      -         -         -         25        25        -           -                25
Interest Expense (net) (4)          101        91         6      18       216        -           -               216
Income Taxes                       -         -         -         -       -          199          -               199
Segment Profit (Loss)               308       208        16       7       539      (204)         -               335
Total Segment Assets              4,399     3,424       283     605     8,711        14          -             8,725
Investments in Unconsolidated
  Subsidiaries                     -         -         -        593       593        -           -               593
Total Expenditures for
  Long-Lived Assets                 100       206        17     593       916         1          -               917

<FN>
(1)  The all other category represents  miscellaneous corporate items, including
     income  taxes,  which are not  allocated to business  units for purposes of
     segment profit measurement.
(2)  The reconciling  eliminations category eliminates the intersegment revenues
     of the ECBU and the EDBU.
(3)  The components of Depreciation  and  Amortization  include  depreciation of
     fixed assets,  amortization of intangible assets,  amortization of phase-in
     deferrals, and amortization of post-in-service deferred operating expenses.
(4) Interest income is deemed immaterial.
</FN>
</TABLE>



<PAGE>


<TABLE>
<CAPTION>

Products and Services
(in millions)
<S>        <C>              <C>           <C>              <C>          <C>       <C>        <C>    <C>   
                                                     Revenues
                     Traditional Utility                   Energy Marketing and Trading      Other
Year       Electric          Gas           Total           Electric      Gas       Total            Consolidated
1998        $2,696          $435          $3,131            $2,066      $665      $2,731      $14      $5,876
1997         2,579           519           3,098             1,283        -        1,283        6       4,387
1996         2,568           505           3,073               200        -          200        3       3,276
</TABLE>

Cinergy's  core  products and services  focus on providing  traditional  utility
services (the supply of electric energy and gas supply) and energy marketing and
trading services.

<TABLE>
<CAPTION>
Geographic Areas and Long-Lived Assets
(in millions)
<S>             <C>                  <C>          <C>                   <C>            <C>   
                                                   Revenues
                                                 International                           
Year            Domestic              UK          All Other(1)          Total          Consolidated
1998             $5,867              $ -              $9                 $9               $5,876
1997              4,385                -               2                  2                4,387
1996              3,276                -               -                  -                3,276
</TABLE>

<TABLE>
<CAPTION>
<S>             <C>                  <C>          <C>                   <C>            <C>   
                                               Long-Lived Assets
                                                 International
Year            Domestic              UK          All Other(1)          Total          Consolidated
1998             $7,302              $501            $209               $710              $8,012
1997              7,267               505              42                547               7,814
1996              7,302               593              10                603               7,905


<FN>
(1)      During 1998, the IBU acquired the assets of two district heating plants
         (approximately  816 MW combined) in the Czech Republic.  The assets and
         the  results  of  operations  of these  international  investments  are
         consolidated  into  the  company's  financial  statements,   while  the
         remaining international  long-lived assets of the IBU are accounted for
         as equity method  investments.  As a result,  revenues from the IBU are
         not significant.
</FN>
</TABLE>

Cinergy's core service  territory and asset base is located in the  southwestern
portion of Ohio,  including  adjacent areas in Kentucky,  and the north central,
central, and southern regions of Indiana. Cinergy's energy marketing and trading
function  provides  energy risk  management,  marketing,  and  trading  services
throughout the US. Abroad,  Cinergy owns a 50% interest in Midlands,  a regional
electric  company  located in the United  Kingdom  ("UK").  In  addition  to its
ownership  interest in Midlands,  Cinergy also has other equity  investments  in
Europe,  Africa,  and  Asia  and is  actively  developing  other  energy-related
projects.

<PAGE>


Cinergy

16.  Earnings Per Share

A  reconciliation  of earnings  per common share  ("basic  EPS") to earnings per
common share assuming dilution ("diluted EPS") is presented below:

                                          Income        Shares
                                        (Numerator)  (Denominator)      EPS
                                      (in millions, except per share amounts)
   1998 Earnings per common share:
   Net income                               $261           158         $1.65

Effect of dilutive securities:
   Common stock options                                      1

EPS--assuming dilution:
   Net income
    plus assumed conversions                $261           159         $1.65

1997
Earnings per common share:
   Net income before extraordinary item (a) $363           158         $2.30

Effect of dilutive securities:
   Common stock options                                      1

EPS--assuming dilution:
   Net income before extraordinary
    item plus assumed conversions(a)        $363           159         $2.28

1996
Net income                                  $335
Less:  costs of reacquisition of
       preferred stock of subsidiary          18

Earnings per common share:
   Net income applicable to common
    stock                                    317           158         $2.00

Effect of dilutive securities:
   Common stock options                                      1

EPS--assuming dilution:
   Net income applicable to common
    stock plus assumed conversions          $317           159         $1.99

(a)  The  after-tax  EPS  impact  of the  extraordinary  item - equity  share of
     windfall profits tax in 1997 was $.69 for both basic and diluted EPS.

Options to purchase  shares of common stock are excluded from the calculation of
EPS--assuming  dilution  when the exercise  prices of these  options are greater
than the average  market price of the common shares  during the year.  For 1998,
approximately   one  million   shares,   with  an  average   exercise  price  of
approximately  $38.00 per share,  were excluded from the  EPS-assuming  dilution
calculation.
For 1997 and 1996, shares excluded for this calculation were immaterial.

<PAGE>



Cinergy

17.  Extraordinary Item - Equity Share of Windfall Profits Tax

During the third quarter of 1997, a windfall profits tax was enacted into law in
Great  Britain.  This  tax was  levied  against  a  limited  number  of  British
companies,  including Midlands,  which had previously been owned and operated by
the government. The tax was intended to be a recovery of funds by the government
due to  the  undervaluing  of  companies,  such  as  Midlands,  when  they  were
privatized by the government via public stock offerings several years ago.

Cinergy's  share of the tax was  approximately  67 million pounds sterling ($109
million or $.69 per share, basic and diluted).  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  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 and PSI

18.       WVPA Settlement

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.  During
1998, PSI reached  agreement on all matters with the relevant  parties and, as a
result,  recorded a liability to the RUS. PSI will repay the  obligation  to the
RUS with  interest  over a 35-year  term.  The net proceeds from a 35-year power
sales agreement with WVPA will be used to fund the principal and interest on the
obligation to the RUS.  Assumption of the liability  (recorded as long-term debt
in the Consolidated  Balance Sheet) resulted in a charge against earnings of $80
million  ($50  million  after tax or $.32 per share  basic and  diluted)  in the
second quarter of 1998.


              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"), 1999 Proxy Statement with respect to identification of directors and
their current principal occupations.



<PAGE>



CG&E

The directors of The Cincinnati Gas & Electric  Company ("CG&E") at February 28,
1999, included:

Jackson H. Randolph Mr. Randolph,  age 68, is Chairman of CG&E. He has served as
a director of CG&E since 1983,  and his current term as director  expires  April
20, 1999.

James E. Rogers Mr. Rogers, age 51, 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 20, 1999.

James L. Turner Mr.  Turner,  age 39, is President  of CG&E.  He has served as a
director of CG&E since February 15, 1999, and his current term expires April 20,
1999.

PSI

Reference is made to PSI Energy,  Inc.'s ("PSI") 1999 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 14 through 18 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).


                         ITEM 11. EXECUTIVE COMPENSATION

Cinergy

Reference is made to Cinergy's  1999 Proxy  Statement  with respect to executive
compensation.

CG&E

Reference is made to Cinergy's  1999 Proxy  Statement  with respect to executive
compensation  information pertaining to the "Board Compensation Committee Report
on Executive Compensation" and "Deferred Compensation Agreements."

All  other  information  with  respect  to  executive  compensation,   including
"Compensation  of  Directors,"  "Summary   Compensation  Table,"   "Option/Stock
Appreciation Rights ("SAR") Grants Table," "Aggregated  Option/SAR Exercises and
Year End Option/SAR Values Table," "Pension  Benefits,"  "Employment  Agreements
and Severance  Arrangements,"  "Compensation  Committee  Interlocks  and Insider

<PAGE>

Participation," and "Performance Graph," is set forth below under the respective
heading.

Compensation of Directors

Directors who are not employees (the "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 Turner) 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 units,  dividends are credited to the individual  director's plan
account and thereby acquire  additional such units, at the same time and rate as
dividends are paid to holders of Cinergy  common stock.  The deferred  units are
distributed  to the  director as shares of Cinergy  common  stock at the time of
retirement from the appropriate board. Amounts deferred in cash earn interest at
the rate per annum,  adjusted  quarterly,  equivalent to the interest rate for a
one-year  certificate  of deposit as quoted in The Wall  Street  Journal for the
first business day of the calendar quarter,  and are paid to the director at the
time of retirement from the appropriate board.

Cinergy has  maintained an unfunded  Retirement  Plan for Directors  under which
non-employee directors of Cinergy, Cinergy Services, Inc. ("Services"), CG&E, or
PSI have accrued  retirement  benefits based upon their years of service.  Prior
service by non-employee directors of CG&E, PSI, or PSI Resources,  Inc. also was
credited under this plan. Under the terms of this plan,  non-employee  directors
with  five or more  years of  service  have  been  entitled  to  receive  annual
retirement compensation in an amount equal to the applicable board of directors'
annual  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 board  meeting
multiplied by five, with the  compensation  paid for as many years as the person
served as a director.

In  December  1998,  Cinergy's  board of  directors  amended  and  restated  the
Retirement Plan for Directors to eliminate  future benefit  accruals.  The board
also  adopted a new  Cinergy  Corp.  Directors'  Equity  Compensation  Plan,  an
equity-based compensation plan for non-employee directors, intended to supersede
the Retirement Plan for Directors on a going forward basis. Each of the plans is
subject to approval by Cinergy's shareholders at their annual meeting to be held
on April 21, 1999.

The amended and restated Retirement Plan for Directors is an unfunded plan under
which each  participant  who retires as a director,  or dies while  serving as a
director,  after January 1, 1999, has elected either to have his accrued benefit
converted to units representing shares of Cinergy common stock, or to receive an
annual cash  payment  equal to the fees in effect on  December  31,  1998.  Each
participant  who  retired  prior to January  1, 1999  (i.e.,  a former  director
already in "pay" status),  will receive an annual cash payment equal to the fees
in effect on the date preceding his or her retirement as a director.

The  Directors'  Equity  Compensation  Plan is an unfunded plan under which each
non-employee  director of Cinergy will receive,  beginning December 31, 1999, an

<PAGE>

annual award  equivalent  to 450 shares of Cinergy  common  stock.  Non-employee
directors of CG&E are not eligible to  participate  in this plan.  Although this
plan permits the payment of cash awards at the discretion of Cinergy's  board of
directors,  the board fully  anticipates  that all awards  under the  Directors'
Equity Compensation Plan will be paid in shares of Cinergy common stock.



<PAGE>



Summary Compensation Table

The following table sets forth the  compensation of the chief executive  officer
and the other  four most  highly  compensated  executive  officers  (these  five
executive  officers  are  sometimes  collectively  referred  to  as  the  "named
executive  officers")  for services to Cinergy and its  subsidiaries  during the
calendar years ended December 31, 1998, 1997, and 1996.
<TABLE>
<CAPTION>

                                                                    Long-Term Compensation
                                    Annual Compensation               Awards             Payouts
<S>                      <C>   <C>      <C>        <C>       <C>         <C>          <C>          <C>    
                                                                                          1996
                                                                                       Long-term
                                                    Other                              Incentive      All
                                                   Annual    Restricted   Securities  Compensation   Other
                                                   Compen-      Stock     Underlying  Plan ("LTIP") Compen-
       Name and                Salary   Bonus(1)   sation     Awards(2)  Options/SARs  Payouts(3)  sation(4)
  Principal Position     Year    ($)      ($)        ($)         ($)          (#)          ($)        ($)   

James E. Rogers          1998  810,000  619,200    47,041            0      535,400            0    138,329
  Vice Chairman          1997  700,008  337,504    17,039    1,951,169       55,400            0    126,956
  and Chief Executive    1996  625,000  607,518     3,697            0            0      849,750    108,108
    Officer

Jackson H. Randolph      1998  585,000  321,750    13,405            0            0            0     98,157
  Chairman of the Board  1997  585,000  321,750    14,575            0            0            0     88,181
                         1996  535,000  321,750    10,675            0            0      675,212    120,512

William J. Grealis       1998  396,900  180,590    25,643            0       20,700            0     34,313
  Vice President         1997  378,000  113,400    13,094      728,443       20,700            0     15,550
                         1996  343,200  205,920     8,828            0            0      246,048     35,611

Larry E. Thomas          1998  352,848  169,367     9,678            0       18,400            0     16,594
  Vice President         1997  336,048  100,814    11,502      647,575       18,400            0     15,809
                         1996  294,350  176,610     5,030            0            0      252,285     36,162

Cheryl M. Foley          1998  326,988  156,954    18,023            0       15,200            0     15,147
  Vice President and     1997  304,176   91,253     8,745      535,202       15,200            0     11,945
  General Counsel        1996  264,504  158,702     2,006            0            0      241,305     79,400

<FN>
(1)  Amounts  appearing in this column  reflect the Annual  Incentive Plan award
     earned during the year listed and paid in the following year.

(2)  Amounts  appearing in this column  reflect the dollar  values of restricted
     stock awards,  determined by multiplying the number of shares in each award
     by the  closing  market  price  of the  Company's  common  stock  as of the
     effective  date of grant.  The  aggregate  number of all  restricted  stock
     holdings and values at calendar year ended December 31, 1998, determined by
     multiplying the number of shares by the year end closing market price,  are
     as follows: Mr. Rogers - 58,462 shares  ($2,009,631);  Mr. Grealis - 21,826

<PAGE>

     shares ($750,269);  Mr. Thomas - 19,403 shares ($666,978);  and Ms. Foley -
     16,036  shares  ($551,238).  Dividends  are retained by the Company for the
     duration  of the  three-year  performance  cycle;  upon  settlement  of the
     restricted stock awards,  dividends will be paid in shares of the Company's
     common  stock based on the number of shares of  restricted  stock  actually
     earned  and the fair  market  value of the  Company's  common  stock on the
     settlement date.

(3)  Amounts  appearing in this column  reflect the values of the shares  earned
     under the  Company's  Performance  Shares  Plan  during the  1994-1997  and
     1996-1999  performance  cycles that were ended during 1996 in transition to
     the Value Creation Plan.

(4)  Amounts  appearing  in this column for 1998  include  for  Messrs.  Rogers,
     Randolph,  Grealis, and Thomas, and Ms. Foley,  respectively:  (i) employer
     matching contributions under 401(k) plan and related excess benefit plan of
     $24,300, $17,550, $11,907, $10,585, and $9,810; and (ii) insurance premiums
     paid with respect to  executive/group-term  life  insurance of $245,  $752,
     $22,406,  $6,009,  and  $5,337.  Also  includes  for  Mr.  Rogers  deferred
     compensation in the amount of $50,000, and for Messrs. Rogers and Randolph,
     respectively,   above-market  interest  on  amounts  deferred  pursuant  to
     deferred compensation agreements of $48,955 and $63,447, and benefits under
     split dollar life insurance agreements of $14,829 and $16,408.
</FN>
</TABLE>




<PAGE>



Option/SAR Grants Table

The  following  table sets forth  information  concerning  individual  grants of
options to  purchase  the  Company's  common  stock made to the named  executive
officers during 1998.
<TABLE>
<CAPTION>

                                                                                              Potential Realizable
                                                                                                Value at Assumed
                                                                                             Annual Rates of Stock
                                                                                             Price Appreciation for
                                   Individual Grants                                               Option Term
<S>                            <C>                 <C>             <C>          <C>          <C>           <C>      
                                                       % of
                           Number of Securities        Total
                                Underlying         Options/SARs    Exercise
                               Options/SARs         Granted to      or Base 
                                  Granted          Employees in      Price      Expiration        5%           10%
            Name                    (#)             Fiscal Year     ($/Sh)         Date          ($)           ($)

     James E. Rogers               55,400              5.82%       38.59375       1/1/2008    1,344,558     3,407,654
                                  480,000             50.45%       36.87500      3/24/2008   11,424,000    28,675,200
     William J. Grealis            20,700              2.18%       38.59375       1/1/2008      502,389     1,273,257
     Larry E. Thomas               18,400              1.93%       38.59375       1/1/2008      446,568     1,131,784
     Cheryl M. Foley               15,200              1.60%       38.59375       1/1/2008      368,904       934,952
</TABLE>

Aggregated Option/SAR Exercises and Year End Option/SAR Values Table

The  following  table  sets  forth  information  concerning:  (i) stock  options
exercised  by the named  executive  officers  during 1998,  including  the value
realized  (i.e.,  the spread  between the exercise price and market price on the
date of exercise); and (ii) the numbers of shares for which options were held as
of December 31, 1998,  including the value of "in-the-money"  options (i.e., the
positive spread between the exercise prices of outstanding stock options and the
closing market price of the Company's  common stock on December 31, 1998,  which
was $34.375 per share).



<PAGE>

<TABLE>
<CAPTION>

<S>                          <C>                 <C>             <C>                    <C>   
                                                                    Number of               Value of
                                                              Securities Underlying        Unexercised
                                                                   Unexercised            In-The-Money
                                                                  Options/SARs at        Options/SARs at
                                                                    Year End                Year End
                             Shares Acquired       Value               (#)                     ($)     
                               on Exercise       Realized         Exercisable/             Exercisable/
            Name                   (#)              ($)           Unexercisable           Unexercisable

     James E. Rogers                  0             n/a          195,629/640,800        2,249,734/623,475
     Jackson H. Randolph          8,742           102,992          91,258/50,000        1,049,467/575,000
     William J. Grealis           2,650            28,156          73,237/61,400          736,947/219,363
     Larry E. Thomas             31,588           478,800          62,516/56,800          718,934/246,100
     Cheryl M. Foley             20,000           223,126          20,000/50,400          230,000/243,300
</TABLE>

Pension Benefits

The  pension  benefits  payable  at  retirement  to each of the named  executive
officers are provided under the terms of the Cinergy Corp.  Non-union Employees'
Pension Plan, a  non-contributory,  defined  benefit  pension plan (the "Cinergy
Pension Plan"), plus certain supplemental plans or agreements.  Pension benefits
previously  earned under the terms of the former CG&E and PSI pension  plans are
fully preserved for participants under the terms of the Cinergy Pension Plan.

Under the terms of the Cinergy Pension Plan, the retirement  income payable to a
pensioner is 1.1% of final  average pay plus 0.5% of final average pay in excess
of covered compensation, times the number of years of plan participation through
35 years,  plus  1.4% of final  average  pay  times the  number of years of plan
participation  over 35 years.  Final average pay is the average  annual  salary,
based upon retirement  anniversary date, during the employee's three consecutive
years producing the highest such average within the last ten  anniversary  years
immediately preceding retirement,  plus any short-term incentive and/or deferred
compensation.  Covered  compensation is the average social security taxable wage
base over a period of up to 35  years.  The  Internal  Revenue  Service  ("IRS")
annually establishes a dollar limit, indexed to inflation,  of the amount of pay
permitted for  consideration  under the terms of such plans,  which for 1998 was
$160,000.

The Cinergy Excess Pension Plan is designed to restore pension benefits to those
individuals whose benefits under the Cinergy Pension Plan would otherwise exceed
the limits imposed by the IRS. Each of the named  executive  officers is covered
under the terms of the Cinergy Excess Pension Plan.


<PAGE>



The pension plan table set forth below illustrates the estimated annual benefits
payable as a straight-life  annuity under both Cinergy plans to participants who
retire at age 62.  Such  benefits  are not subject to any  deduction  for social
security or other offset amounts.

<TABLE>
<CAPTION>
<S>             <C>         <C>         <C>         <C>         <C>         <C>         <C>           <C>      
                                                   Years of Service
Compensation        5          10          15          20          25          30           35            40

$  500,000      $ 39,045    $ 78,085    $117,130    $156,170    $195,215    $234,255    $  273,300    $  312,340
   600,000        47,045      94,085     141,130     188,170     235,215     282,255       329,300       376,340
   700,000        55,045     110,085     165,130     220,170     275,215     330,255       385,300       440,340
   800,000        63,045     126,085     189,130     252,170     315,215     378,255       441,300       504,340
   900,000        71,045     142,085     213,130     284,170     355,215     426,255       497,300       568,340
 1,000,000        79,045     158,085     237,130     316,170     395,215     474,255       553,300       632,340
 1,100,000        87,045     174,085     261,130     348,170     435,215     522,255       609,300       696,340
 1,200,000        95,045     190,085     285,130     380,170     475,215     570,255       665,300       760,340
 1,300,000       103,045     206,085     309,130     412,170     515,215     618,255       721,300       824,340
 1,400,000       111,045     222,085     333,130     444,170     555,215     666,255       777,300       888,340
 1,500,000       119,045     238,085     357,130     476,170     595,215     714,255       833,300       952,340
 1,600,000       127,045     254,085     381,130     508,170     635,215     762,255       889,300     1,016,340
 1,700,000       135,045     270,085     405,130     540,170     675,215     810,255       945,300     1,080,340
 1,800,000       143,045     286,085     429,130     572,170     715,215     858,255     1,001,300     1,144,340
</TABLE>


The accrued  annual  retirement  benefit  payable to Mr.  Randolph is based upon
credited service of 40 years. The estimated  credited years of service at age 62
for each of the remaining named executive  officers are as follows:  Mr. Rogers,
20 years; Mr. Grealis, 12 years; Mr. Thomas, 37 years; and Ms. Foley, 19 years.

Effective January 1, 1999, the Cinergy Supplemental Retirement Plan was amended,
restated and renamed the Cinergy  Supplemental  Executive  Retirement  Plan (the
"SERP"). One part of the SERP, the "Mid-career  Benefit," is designed to provide
coverage to executives who will not qualify for full  retirement  benefits under
the Cinergy  Pension Plan.  For  retirement  on or after age 62, the  Mid-career
Benefit  is an amount  equal to that which a covered  employee  with 35 years of
participation would have received under the Cinergy Pension Plan and the Cinergy
Excess Pension Plan,  reduced by the actual benefit provided by those plans, and
further reduced by 50% of the employee's age 62 social security benefit. Messrs.
Rogers and Grealis,  and Ms. Foley are covered under the terms of the Mid-career
Benefit portion of the SERP.

<PAGE>



The second part of the SERP, the "Senior  Executive  Supplement," is designed to
provide  selected senior officers of Cinergy and its subsidiaries an opportunity
to earn a  retirement  benefit  that will  replace 60% of their final pay.  Each
participant accrues a retirement income replacement percentage at the rate of 4%
per year from the date of hire  (maximum  of 15  years).  The  Senior  Executive
Supplement  is an  amount  equal to a  maximum  of 60% of the  employee's  final
average pay (as defined in the Cinergy  Pension  Plan) or the final 12 months of
base pay and Annual Incentive Plan pay, reduced by the actual benefits  provided
under the  Cinergy  Pension  Plan,  the Cinergy  Excess  Pension  Plan,  and the
Mid-career Benefit,  and further reduced by 50% of the employee's  estimated age
62 social security benefit.  Messrs. Rogers,  Grealis, and Thomas, and Ms. Foley
are  covered  under  the  terms  of the  Senior  Executive  Supplement,  and the
estimated  retirement income  replacement  percentage for each is 60%, 48%, 60%,
and 60%, respectively.

Moreover,  Mr. Randolph has a Supplemental Executive Retirement Income Agreement
under which he or his beneficiary will receive an annual supplemental retirement
benefit of $511,654 in monthly installments of $42,638, for 180 months beginning
December 1, 2000.

The  Cinergy   Executive   Supplemental  Life  Insurance  Program  provides  key
management  personnel,  including the named executive officers,  with additional
life insurance  coverage  during  employment and with  post-retirement  deferred
compensation.  At the  later of age 50 or  retirement,  the  participant's  life
insurance coverage under the program is canceled.  At that time, the participant
receives  the total  amount of  coverage  in the form of  deferred  compensation
payable in ten equal annual installments of $15,000 per year.

Employment Agreements and Severance Arrangements

Mr. Rogers has an employment agreement which was effective October 24, 1994, and
was amended and restated in its entirety effective  September 22, 1998. Pursuant
to the terms of his agreement,  Mr. Rogers served as Vice  Chairman,  President,
and Chief  Operating  Officer of Cinergy until November 30, 1995, and since that
time, has served as Vice Chairman,  President,  and Chief Executive Officer. Mr.
Rogers' agreement currently is automatically  extended for an additional year on
each annual  anniversary  date, unless either Cinergy or Mr. Rogers gives timely
notice  otherwise.  During  the term of his  agreement,  Mr.  Rogers  receives a
minimum  annual  base  salary of  $810,000.  Under  the terms of his  employment
agreement,  Mr.  Rogers  was  credited  with 25  years of  participation  in the
Mid-career  Benefit portion of the SERP as of his 50th birthday.  He has been or
will be credited with an additional two years of  participation on each birthday
through his 55th,  provided that he is employed by Cinergy as of each  birthday.
Mr.  Rogers'  employment  agreement also provides that if he retires on or after
age 55 he will be entitled to receive annual  retirement income for his lifetime
equal to the greater of 60% of his final average pay, or 60% of his base pay and
Annual  Incentive  Plan pay for the final 12 months  immediately  preceding  his
retirement.

Mr.  Randolph has an employment  agreement  which commenced on October 24, 1994.
Pursuant to the terms of his  agreement,  Mr.  Randolph  served as Chairman  and
Chief  Executive  Officer of Cinergy  until  November 30, 1995, at which time he
relinquished the position of Chief Executive Officer.  He will continue to serve
as Chairman of the Board of Cinergy until November 30, 2000, the expiration date
of his agreement.  During the term of his  agreement,  Mr.  Randolph  receives a
minimum annual base salary of $465,000.

If the  employment of Messrs.  Rogers or Randolph (each  sometimes  individually
referred  to as the  "executive")  is  terminated  as a  result  of  death,  his
beneficiary  will  receive  a lump sum cash  amount  equal to the sum of (a) the
executive's  annual base salary through the  termination  date to the extent not

<PAGE>

previously  paid, (b) a pro rata portion of the benefit under  Cinergy's  Annual
Incentive  Plan  calculated  based  upon  the  termination  date,  and  (c)  any
compensation previously deferred but not yet paid to the executive (with accrued
interest or earnings  thereon) and any unpaid accrued  vacation pay. Mr. Rogers'
beneficiary  will also  receive an amount  equal to his vested  accrued  benefit
under the Value Creation Plan. In addition to these accrued amounts,  if Cinergy
terminates  the  executive's   employment   without  "cause"  or  the  executive
terminates  his  employment  for  "good  reason"  (as  each  is  defined  in the
employment  agreements),  Cinergy will pay to the  executive (a) a lump sum cash
amount  equal to the present  value of his annual base salary and benefit  under
Cinergy's  Annual  Incentive  Plan  payable  through  the  end  of the  term  of
employment, at the rate and applying the same goals and factors in effect at the
time of notice of such  termination,  (b) the value of all benefits to which the
executive  would have been entitled had he remained in employment  until the end
of the term of employment under Cinergy's Executive  Supplemental Life Insurance
Program (and also including the Value Creation Plan in the case of Mr.  Rogers),
(c) the value of all deferred  compensation  and all  executive  life  insurance
benefits  whether or not then  vested or  payable,  and (d)  medical and welfare
benefits  for  the  executive  and his  family  through  the end of the  term of
employment.  If the executive's employment is terminated by Cinergy for cause or
by the executive  without good reason,  the executive will receive unpaid annual
base salary  accrued  through  the  termination  date and any  accrued  deferred
compensation.

Mr. Grealis has an employment agreement which commenced on January 16, 1995, and
currently is  automatically  extended for an additional  year on each January 1,
unless either Cinergy or Mr. Grealis gives timely notice  otherwise.  During the
term of his  agreement,  Mr.  Grealis  receives a minimum  annual base salary of
$288,000.  Under his  employment  agreement,  Mr.  Grealis will  receive  annual
retirement income of no less than $283,000 payable as a straight-life annuity at
age 62.

Mr. Thomas has an employment agreement which currently is automatically extended
for an additional  year on each January 1, unless  either  Cinergy or Mr. Thomas
gives timely  notice  otherwise.  During the term of his  agreement,  Mr. Thomas
receives  a minimum  annual  base  salary  of  $240,000.  Under  his  employment
agreement,  if Mr.  Thomas  retires  on or after age 55 he will be  entitled  to
receive annual  retirement income equal to that which a covered employee with 35
years of  participation  would have received  under  Cinergy's  Pension Plan and
Excess Pension Plan.

Ms. Foley has an employment agreement which currently is automatically  extended
for an  additional  year on each January 1, unless  either  Cinergy or Ms. Foley
gives  timely  notice  otherwise.  During the term of her  agreement,  Ms. Foley
receives a minimum annual base salary of $230,000.

If the  employment of Messrs.  Grealis or Thomas,  or Ms. Foley (each  sometimes
individually  referred to as the  "officer") is terminated as a result of death,
for cause, or by the officer  without good reason,  the officer or the officer's
beneficiary  will be paid a lump sum  cash  amount  equal  to (a) the  officer's
unpaid annual base salary through the  termination  date, (b) a pro rata portion
of the officer's award under Cinergy's  Annual Incentive Plan, (c) the officer's
vested  accrued  benefits  under the Value  Creation  Plan,  and (d) any  unpaid
deferred  compensation  (including  accrued  interest  or  earnings)  and unpaid
accrued vacation pay. If, instead,  the officer's employment is terminated prior
to a change in control  (as  defined)  without  cause or by the officer for good
reason, the officer will be paid (a) a lump sum cash amount equal to the present
value of the officer's annual base salary and target annual incentive cash award
payable  through the end of the term of the agreement,  at the rate and applying
the same goals and factors in effect at the time of notice of such  termination,

<PAGE>

(b) the  present  value of all  benefits  to which the  officer  would have been
entitled had the officer remained in employment until the end of the term of the
agreement  under  the  Value  Creation  Plan  and  Executive  Supplemental  Life
Insurance Program, (c) the value of all deferred  compensation and all executive
life  insurance  benefits  whether or not vested or payable,  and (d)  continued
medical and welfare benefits through the end of the term of the agreement.

Each of the named executive officers  participates in Cinergy's Annual Incentive
Plan,  Stock Option  Plan,  LTIP,  Excess  Pension  Plan,  SERP,  and  Executive
Supplemental Life Insurance Program (with the exception of Mr. Randolph who does
not participate in the LTIP or SERP),  participates in all other  retirement and
welfare benefit plans applicable  generally to Company employees and executives,
and receives other fringe benefits.

If the employment of any named executive officer is terminated after a change in
control,  the officer will be paid a lump sum cash payment  equal to the greater
of (i) three times the sum of his annual base  salary  immediately  prior to the
date of his  termination of employment or, if higher,  the date of the change in
control,  plus all incentive  compensation or bonus plan amounts in effect prior
to the date of his termination of employment or, if higher,  prior to the change
in control,  and (ii) the present  value of all annual base salary,  bonuses and
incentive  compensation,  and  retirement  benefits that would  otherwise be due
under the  agreement,  plus deferred  compensation  and executive life insurance
benefits. In addition, the officer will be provided life,  disability,  accident
and health  insurance  benefits  for  thirty-six  months,  reduced to the extent
comparable  benefits are received,  without cost, by the officer. In addition to
the above,  Messrs.  Rogers and Randolph will receive their benefits under their
deferred  compensation  agreements  (discussed  below)  and  split  dollar  life
insurance agreements.

Compensation Committee Interlocks and Insider Participation

Mr.  Schiff,  Chairman  of the Board of  Cincinnati  Financial  Corporation,  an
insurance holding company,  serves on the Cinergy Compensation Committee and Mr.
Randolph,  Chairman  of the Board of Cinergy  and  certain of its  subsidiaries,
including  CG&E,  serves  on the  board of  directors  of  Cincinnati  Financial
Corporation.



<PAGE>



Performance Graph

The following  line graph compares the cumulative  total  shareholder  return of
CG&E common stock 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, 1994,  through October 24,
1994, the final trading date of CG&E common stock, and assumes a $100 investment
on January 1, 1994, and dividend reinvestment.








            Omitted is a line graph illustrating the following data.












                                             1/1/94     10/24/94

           CG&E Common Stock                $100.00     $ 88.00

           S&P Electric Utilities Index     $100.00     $ 83.00

           S&P 500 Stock Index              $100.00     $100.00

PSI

Reference is made to PSI's 1999 Information  Statement with respect to executive
compensation.

ULH&P

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

<PAGE>

                                                             
                ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
                              OWNERS AND MANAGEMENT

Cinergy

Reference is made to  Cinergy's  1999 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, 1998.

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  February  28,
1999. The beneficial  ownership of Cinergy's  common stock held by each director
and  named  executive  officer  as of  February  28,  1999,  is set forth in the
following table.

                                                 Amount and Nature
     Name of Beneficial Owner (1)           of Beneficial Ownership (2)    

          Cheryl M. Foley                           82,887 shares
          William J. Grealis                       111,926 shares
          Jackson H. Randolph                      214,875 shares
          James E. Rogers                          407,279 shares
          Larry E. Thomas                          133,677 shares
          James L. Turner                            2,632 shares

     All directors and executive                 1,152,994 shares
         officers as a group             (representing 0.73% of the class)

(1)  No individual listed beneficially owned more than 0.257% 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:  Ms. Foley -
     20,000;  Mr. Grealis - 73,237; Mr. Randolph - 91,258; Mr. Rogers - 195,629;
     Mr. Thomas - 62,516;  and all directors and executive officers as a group -
     528,707.

PSI

Reference is made to PSI's 1999  Information  Statement with respect to security
ownership of certain beneficial owners and management.

ULH&P

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





<PAGE>



            ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Cinergy, CG&E, and PSI

None.

ULH&P

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


    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",  page 48 of this  report,  for an index of the  financial
statements and financial statement schedules included in this report.

(b) Reports on Form 8-K.

The following report on Form 8-K was filed during the quarter ended December 31,
1998:

  Date of Report                             Items Filed

Cinergy

October 15, 1998        Item 5.  Other Events

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 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, a Delaware corporation.  (Exhibit
     to Cinergy's 1993 Form 10-K in File No. 1-11377.)

3-b  *By-laws of Cinergy as amended  October  15,  1998.  (Exhibit to  Cinergy's
     October 15, 1998, Form 8-K in File No. 1-11377.)


<PAGE>



 Exhibit
Designation                          Nature of Exhibit

CG&E

3-c  *Amended  Articles of  Incorporation  of 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, 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,
     effective  July 10, 1997.  (Exhibit to Cinergy's 1997 Form 10-K in File No.
     1-11377.)

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. (Exhibit to Cinergy's 1997 Form 10-K in File No. 1-11377.)

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  *Twenty-fifth  Supplemental  Indenture  between PSI and The First  National
     Bank of Chicago dated September 1, 1978. (Exhibit to File No. 2-62543.)

4-c  *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.)



<PAGE>



  Exhibit
Designation                           Nature of Exhibit

4-d  *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-e  *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-f  *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-g  *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-h  *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-i  *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-j  *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-k  *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-l  *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-m  *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-n  *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.)

4-o  *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-p  *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.)


<PAGE>



  Exhibit
Designation                           Nature of Exhibit

4-q  *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-r  *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-s  *Third  Supplemental  Indenture dated as of March 15, 1998, between PSI and
     The Fifth Third Bank, as Trustee.  (Exhibit to Cinergy's  1997 Form 10-K in
     File No. 1-11377.)

4-t  *Fourth Supplemental  Indenture dated as of August 5, 1998, between PSI and
     The Fifth Third Bank,  as Trustee.  (Exhibit to PSI's June 30,  1998,  Form
     10-Q in File No. 1-3543.)

4-u  #Fifth  Supplemental  Indenture dated as of December 15, 1998,  between PSI
     and The Fifth Third Bank,  as Trustee.  (Exhibit to PSI's 1998 Form 10-K in
     File No. 1-3543.)

4-v  #Unsecured  Promissory  Note dated  October 14,  1998,  between PSI and the
     Rural  Utilities  Service.  (Exhibit  to PSI's  1998  Form 10-K in File No.
     1-3543.)

4-w  *Loan Agreement  between PSI and the Indiana  Department  Finance Authority
     dated as of July 15, 1998.  (Exhibit to PSI's June 30,  1998,  Form 10-Q in
     File No. 1-3543.)

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  *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-z  *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.)

4-aa *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-bb *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-cc *Thirty-sixth  Supplemental Indenture between CG&E and The Bank of New York
     dated as of February 15, 1994.  (Exhibit to CG&E's  Registration  Statement
     No. 33-52335.)


<PAGE>



  Exhibit
Designation                           Nature of Exhibit

4-dd *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-ee *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-ff *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-gg *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-hh *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-ii *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-jj *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-kk *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-ll *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-mm *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-nn *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-oo *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-pp *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.)


<PAGE>



  Exhibit
Designation                           Nature of Exhibit

4-qq *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.)

4-rr *Fourth Supplemental  Indenture between CG&E and The Fifth Third Bank dated
     as of April 1, 1998.  (Exhibit to CG&E's March 31, 1998,  Form 10-Q in File
     No. 1-1232.)

4-ss *Fifth  Supplemental  Indenture between CG&E and The Fifth Third Bank dated
     as of June 9, 1998. (Exhibit to CG&E's June 30, 1998, 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 *Fifth Supplemental  Indenture between ULH&P and The Bank of New York dated
     as of  January 1,  1967.  (Exhibit  to CG&E's  Registration  Statement  No.
     2-60961.)

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.)

4-yy *Second Supplemental Indenture between ULH&P and The Fifth Third Bank dated
     as of April 30, 1998. (Exhibit to ULH&P's March 31, 1998, Form 10-Q in File
     No. 2-7793.)

4-zz #Third Supplemental  Indenture between ULH&P and The Fifth Third Bank dated
     as of  December  8, 1998.  (Exhibit  to ULH&P's  1998 Form 10-K in File No.
     2-7793.)

Cinergy

4-aaa*Base  Indenture  dated as of October  15,  1998,  between  Cinergy  Global
     Resources,  Inc. ("Global  Resources") and The Fifth Third Bank as Trustee.
     (Exhibit to Cinergy's September 30, 1998, Form 10-Q in File No. 1-11377.)

4-bbb*First Supplemental  Indenture dated as of October 15, 1998, between Global
     Resources  and The Fifth  Third  Bank as  Trustee.  (Exhibit  to  Cinergy's
     September 30, 1998, Form 10-Q in File No. 1-11377.)


<PAGE>



  Exhibit
Designation                           Nature of Exhibit

4-ccc#Indenture  dated as of December  16, 1998,  between  Cinergy and The Fifth
     Third Bank. (Exhibit to Cinergy's 1998 Form 10-K in File No. 1-11377.)

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 *+Second  Amended and Restated  Employment  Agreement  dated  September 22,
     1998,  between  Cinergy,  Services,  CG&E,  and PSI and  James  E.  Rogers.
     (Exhibit to Cinergy's September 30, 1998, Form 10-Q in File No. 1-11377.)

10-c *+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-d *+First  Amendment to Employment  Agreement  dated  January 1, 1997,  among
     Cinergy, CG&E, Services, Investments, PSI, and William J. Grealis. (Exhibit
     to Cinergy's 1997 Form 10-K in File No. 1-11377.)

10-e *+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-f *+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-g #+Second  Amendment to Employment  Agreement dated January 29, 1997,  among
     Cinergy,  Services,  CG&E, PSI, and Larry E. Thomas.  (Exhibit to Cinergy's
     1998 Form 10-K in File No. 1-11377.)

10-h *+Third Amendment to Employment Agreement dated May 1, 1998, among Cinergy,
     Services,  CG&E,  PSI, and Larry E. Thomas.  (Exhibit to Cinergy's June 30,
     1998, Form 10-Q in File No. 1-11377.)

10-i *+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-j *+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.)


<PAGE>



  Exhibit
Designation                           Nature of Exhibit

10-k #+Second  Amendment to Employment  Agreement dated January 29, 1997,  among
     Cinergy,  Services,  CG&E, PSI, and Cheryl M. Foley.  (Exhibit to Cinergy's
     1998 Form 10-K in File No. 1-11377.)

10-l *+Employment Agreement dated April 22, 1997, among Cinergy, Services, CG&E,
     PSI, and Madeleine W. Ludlow.  (Exhibit to Cinergy's 1997 Form 10-K in File
     No. 1-11377.)

10-m *+Employment  Agreement  dated October 1, 1997,  among  Cinergy,  Services,
     CG&E, PSI, and Donald B. Ingle, Jr. (Exhibit to Cinergy's 1997 Form 10-K in
     File No. 1-11377.)

Cinergy and PSI

10-n *+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.)

10-o *+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-p #+Second  Amendment to Employment  Agreement dated January 29, 1997,  among
     Cinergy,  PSI, and John M. Mutz.  (Exhibit to  Cinergy's  1998 Form 10-K in
     File No. 1-11377.)

10-q #+Third  Amendment  to  Employment  Agreement  dated  June 1,  1998,  among
     Cinergy,  PSI, and John M. Mutz.  (Exhibit to  Cinergy's  1998 Form 10-K in
     File No. 1-11377.)

10-r #+Fourth  Amendment to Employment  Agreement dated December 31, 1998, among
     Cinergy,  PSI, and John M. Mutz.  (Exhibit to  Cinergy's  1998 Form 10-K in
     File No. 1-11377.)

10-s *+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-t *+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-u *+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-v *+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.)


<PAGE>



  Exhibit
Designation                           Nature of Exhibit

10-w *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-x *+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-y *+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-z *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.)

10-aa*+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-bb*+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-cc*+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-dd*+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-ee*+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-ff*+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-gg*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-hh*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.)


<PAGE>



  Exhibit
Designation                           Nature of Exhibit

10-ii*+Amended and Restated  Supplemental  Executive Retirement Income Agreement
     between CG&E and certain  executive  officers.  (Exhibit to Cinergy's  1997
     Form 10-K in File No. 1-11377.) Cinergy

10-jj*+1997  Amendments  to Various  Compensation  and Benefit Plans of Cinergy,
     adopted January 30, 1997.  (Exhibit to Cinergy's 1997 Form 10-K in File No.
     1-11377.)

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.)

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.)


<PAGE>



  Exhibit
Designation                           Nature of Exhibit

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.)

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, 1998

<S>                                          <C>           <C>           <C>         <C>              <C>    <C>
                 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)
Accumulated Provisions Deducted from
 Applicable Assets

  Allowance for Doubtful Accounts

    1998                                      $10 382       $29 430       $4 022       $ 18 212       $ -       $25 622

    1997                                      $10 618       $12 582       $5 609       $ 18 427       $ -       $10 382

    1996                                      $94 409 (1)   $22 341       $9 503       $115 635       $ -       $10 618




<FN>
(1)  Includes  $84,049 for the Wabash Valley Power  Association,  Inc.  ("WVPA")
     Marble Hill receivable.  See Note 18 of the "Notes to Financial Statements"
     in "Item 8. Financial Statements and Supplementary Data."
</FN>
</TABLE>


<PAGE>


<TABLE>
<CAPTION>


                                                 THE CINCINNATI GAS & ELECTRIC COMPANY
                                            SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
                                              FOR THE THREE YEARS ENDED DECEMBER 31, 1998
<S>                                          <C>           <C>           <C>        <C>             <C>      <C>
                 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)
Accumulated Provisions Deducted from
 Applicable Assets

  Allowance for Doubtful Accounts

    1998                                       $9 199       $16 131      $ 4 021       $11 744       $ -       $17 607

    1997                                       $9 178       $ 6 484      $ 5 609       $12 072       $ -       $ 9 199

    1996                                       $9 615       $17 297      $ 6 669       $24 403       $ -       $ 9 178

</TABLE>


<PAGE>


<TABLE>
<CAPTION>

                                                           PSI ENERGY, INC.
                                            SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
                                              FOR THE THREE YEARS ENDED DECEMBER 31, 1998
<S>                                         <C>           <C>           <C>         <C>              <C>      <C>
                 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)
Accumulated Provisions Deducted from
 Applicable Assets

  Allowance for Doubtful Accounts

    1998                                     $ 1 183       $13 178        $  -         $ 6 468        $ -       $7 893

    1997                                     $ 1 269       $ 6 098        $  -         $ 6 184        $ -       $1 183

    1996                                     $84 517 (1)   $ 5 041        $2 834       $91 123        $ -       $1 269






<FN>
(1)  Includes  $84,049 for the WVPA Marble Hill  receivable.  See Note 18 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, 1998
<S>                                          <C>           <C>           <C>         <C>              <C>    <C>
                 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)
Accumulated Provisions Deducted from
 Applicable Assets

  Allowance for Doubtful Accounts

    1998                                       $  996        $1 861       $  583        $2 192         $ -       $1 248

    1997                                       $1 024        $1 579       $  691        $2 298         $ -       $  996

    1996                                       $1 035        $1 862       $1 577        $3 450         $ -       $1 024


</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:  February 28, 1999

                                    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
  Phillip R. Cox               Director
  Kenneth M. Duberstein        Director
  George C. Juilfs             Director
  Melvin Perelman              Director
  Thomas E. Petry              Director
  Mary L. Schapiro             Director
  John J. Schiff, Jr.          Director
  Philip R. Sharp              Director
  Van P. Smith                 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

Cinergy and ULH&P
  Cheryl M. Foley              Vice President, General Counsel, and Director
                               Secretary of Cinergy

CG&E and ULH&P
  James L. Turner              President and Director

PSI
  John M. Mutz                 President and Director

ULH&P
  Madeleine W. Ludlow          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        February 28, 1999
      James E. Rogers         Executive Officer, and Director
  Attorney-in-fact for all         President of Cinergy
   the foregoing persons       (Principal Executive Officer)


   /s/Charles J. Winger             Vice President and         February 28, 1999
     Charles J. Winger            Chief Financial Officer
                                     Director of ULH&P
                               (Principal Financial Officer)


    /s/John P. Steffen        Vice President and Comptroller   February 28, 1999
      John P. Steffen         (Principal Accounting Officer)