**UNITED STATES****SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

 

**FORM 10-K**

 
| **(Mark One)**                                                                                                                                                                                                                                                    |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **ý****ANNUAL REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                               |
|                                                                                                                                                                                                                                                              |
| **For  the fiscal year ended December 31, 2002**                                                                                                                                                                                                                  |
|                                                                                                                                                                                                                                                              |
| **or**                                                                                                                                                                                                                                                            |
|                                                                                                                                                                                                                                                              |
| **o****TRANSITION REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                |
|                                                                                                                                                                                                                                                              |
| **For  the transition period from                    to                    ** |

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

 

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**Each of the following classes orseries of securities registered pursuant to Section 12(b) of the Act isregistered on the New York Stock Exchange:**

 
| **Registrant**                                 |   | **Title of each class**        |   |
|------------------------------------------------|--------|--------------------------------|--------|
|                                           |   |                           |   |   |
| **Cinergy Corp.**                              |   | Common Stock                   |   |   |
|                                           |   | Income PRIDES                  |   |   |
|                                           |   |                           |   |   |
| **The Cincinnati Gas & Electric  Company** |   | Cumulative Preferred Stock     | 4      | % |
|                                           |   | Junior Subordinated Debentures | 8.28   | % |
|                                           |   |                           |   |   |
| **PSI Energy, Inc.**                           |   | Cumulative Preferred Stock     | 4.32   | % |
|                                           |   | Cumulative Preferred Stock     | 4.16   | % |
|                                           |   | Cumulative Preferred Stock     | 6-7/8  | % |
|                                           |   |                           |   |   |
| **The  Union Light, Heat and Power Company**   |   | None                           |   |   |

 

 

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Securities registered pursuant to Section 12(g) of the Act:  None

 

Indicate by check mark whether each registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the Securities ExchangeAct of 1934 during the preceding 12 months (or for such shorter period thatsuch registrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.

Yes ý   No o

 

Indicate by check mark if disclosure of delinquent filers pursuant toItem 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 statementsincorporated by reference in Part III of this Form 10-K or any amendment tothis Form 10-K.  ( )

 

Requirements pursuant to Item 405 of Regulation S-K are not applicablefor **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 Form10-K and is therefore filing this Form 10-K with the reduced disclosure formatspecified in General Instruction I (2) of Form 10-K.

 

Indicate by check mark whether each registrant is an accelerated filer(as defined in Rule 12b-2 of the Act).

Yes ý   No o

 

As of January 31, 2003, the aggregate market value of the common equityof **Cinergy Corp.** held bynonaffiliates (shareholders who are not directors or executive officers) was$5.3 billion.  All of the common stockof **The Cincinnati Gas & Electric Company**and **PSI Energy, Inc.** is owned by **Cinergy Corp.**, and all of the common stockof **The Union Light, Heat and Power Company**is owned by **The Cincinnati Gas & ElectricCompany**.  As of January 31,2003, each registrant had the following shares of common stock outstanding:

 
| **Registrant**                                 |   | **Description**                                |   | **Shares**  |   |
|------------------------------------------------|--------|------------------------------------------------|--------|-------------|--------|
|                                           |   |                                           |   |        |   |
| **Cinergy  Corp.**                             |   | Par value $.01 per share                       |   | 168,979,381 |   |
|                                           |   |                                           |   |        |   |
| **The  Cincinnati Gas & Electric Company** |   | Par value $8.50 per share                      |   | 89,663,086  |   |
|                                           |   |                                           |   |        |   |
| **PSI  Energy, Inc.**                          |   | Without par value, stated value $.01 per share |   | 53,913,701  |   |
|                                           |   |                                           |   |        |   |
| **The  Union Light, Heat and Power Company**   |   | Par value $15.00 per share                     |   | 585,333     |   |

 

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**DOCUMENTSINCORPORATED BY REFERENCE**

 

Portions of the Proxy Statement of **CinergyCorp.** and the Information Statement of **PSI Energy, Inc.** filed, or to be filed, with the Securitiesand Exchange Commission are incorporated by reference into Part III of thisreport.

 

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 anyindividual registrant is filed by such registrant on its own behalf.  Each registrant makes no representation asto information relating to registrants other than itself.

 

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**TABLE OFCONTENTS**

 
| **Item  Number** |                                                                                                 |
|------------------|------------------------------------------------------------------------------------------------------|
|             |                                                                                                 |
|             | **Cautionary  Statements Regarding Forward-Looking Information**                                     |
|             |                                                                                                 |
| **PART I**       |
| **1**            | **Business**                                                                                         |
|             | Website  Access to Reports                                                                           |
|             | Organization                                                                                         |
|             | Employees                                                                                            |
|             | Current Trends                                                                                       |
|             | Business Units                                                                                       |
|             | Other  Developments                                                                                  |
|             | Environmental  Matters                                                                               |
|             | Future Expectations/Trends                                                                           |
| **2**            | **Properties**                                                                                       |
|             | Energy Merchant                                                                                      |
|             | Regulated  Businesses                                                                                |
| **3**            | **Legal Proceedings**                                                                                |
|             | New Source Review (NSR)  and Notices of Violation (NOV)                                              |
|             | Manufactured Gas  Plant Sites (MGP)                                                                  |
|             | Gas Customer  Choice                                                                                 |
| **4**            | **Submission of Matters to a Vote  of Security Holders**                                             |
|             |                                                                                                 |
| **PART II**      |
| **5**            | **Market for Registrant’s Common  Equity and Related Stockholder Matters**                      |
| **6**            | **Selected Financial Data**                                                                          |
| **7**            | **Management’s Discussion and  Analysis of Financial Condition and Results of Operations**      |
|             | Introduction                                                                                         |
|             | Liquidity and Capital  Resources                                                                     |
|             | 2002 Results of  Operations - Historical                                                             |
|             | 2001 Results of  Operations - Historical                                                             |
|             | Results of Operations - Future                                                                       |
| **7A**           | **Quantitative and Qualitative  Disclosures About Market Risk**                                      |
|             | **Index to Financial Statements  and Financial Statement Schedules**                                 |
| **8**            | **Financial Statements  and Supplementary Data**                                                     |
| **9**            | **Changes in and Disagreements with Accountants  on Accounting and Financial Disclosure**            |
|             |                                                                                                 |
| **PART III**     |
| **10**           | **Directors  and Executive Officers of the Registrants**                                             |
|             | Board of Directors                                                                                   |
|             | Executive  Officers                                                                                  |
| **11**           | **Executive Compensation**                                                                           |
| **12**           | **Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters** |
| **13**           | **Certain  Relationships and Related Transactions**                                                  |
| **14**           | **Controls and  Procedures**                                                                         |

 

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| **PART IV** |
|-------------|
| **15**      | **Exhibits, Financial Statement Schedules, and  Reports on Form 8-K** |
|        | Financial Statements  and Schedules |
|        | Reports on  Form 8-K |
|        | Exhibits |
|        | **Signatures** |
|        | **Certifications** |

 

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**CAUTIONARYSTATEMENTS**

 

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

 

**CAUTIONARY STATEMENTS REGARDINGFORWARD-LOOKING INFORMATION**

 

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

 

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

 

•                  Factorsaffecting operations, such as:

 

(1)          unusual weatherconditions;

(2)          catastrophicweather-related damage;

(3)          unscheduled generationoutages;

(4)          unusual maintenance orrepairs;

(5)          unanticipated changes infossil fuel costs, gas supply costs, or

availability constraints;

(6)          environmental incidents,including costs of compliance with existing and future environmentalrequirements; and

(7)          electric transmission orgas pipeline system constraints.

 

•                  State,federal, and local legislative and regulatory initiatives.

 

•                  Thetiming and extent of the entry of additional competition in electric or gasmarkets and the effects of continued industry consolidation through the pursuitof mergers, acquisitions, and strategic alliances.

 

•                  Regulatoryfactors such as changes in the policies or procedures that set rates; changesin our ability to recover expenditures for environmental compliance, purchasedpower costs and investments made under traditional regulation through rates;and changes to the frequency and timing of rate increases.

 

•                  Financialor regulatory accounting principles or policies imposed by governing bodies.

 

•                  Political,legal, and economic conditions and developments in the United States (U.S.) andthe foreign countries in which we have a presence.  These would include inflation rates and monetary fluctuations.

 

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•                  Changingmarket conditions and other factors related to physical energy and financialtrading activities.  These would includeprice, basis, credit, liquidity, volatility, capacity, transmission, currencyexchange rates, interest rates, and warranty risks.

 

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

 

•                  Availabilityof, or cost of, capital.

 

•                  Employeeworkforce factors, including changes in key executives, collective bargainingagreements with union employees, and work stoppages.

 

•                  Legaland regulatory delays and other obstacles associated with mergers, acquisitions,and investments in joint ventures.

 

•                  Costsand effects of legal and administrative proceedings, settlements,investigations, and claims.  Examplescan be found in Note 11 of the “Notes to Financial Statements” in “Item 8.Financial Statements and Supplementary Data”.

 

•                  Changesin international, federal, state, or local legislative requirements, such aschanges in tax laws, tax rates, and environmental laws and regulations.

 

Unless we otherwise have a duty to do so, the Securities and ExchangeCommission’s (SEC) rules do not require forward-looking statements to berevised or updated (whether as a result of changes in actual results, changesin assumptions, or other factors affecting the statements).  Our forward-looking statements reflect ourbest beliefs as of the time they are made and may not be updated for subsequentdevelopments.

 

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**BUSINESS**

 

**PART I**

 

**ITEM 1.  BUSINESS**

 

**WEBSITEACCESS TO REPORTS**

 

We make our annual report on Form 10-K, quarterly reports on Form 10-Q,current reports on Form 8-K, and amendments to those reports, filed orfurnished pursuant to section 13(a) or 15(d) of the Securities Exchange Act of1934 available free of charge on or through our internet website, www.cinergy.com,as soon as reasonably practicable after we electronically file such materialwith, or furnish it to, the SEC.

 

**ORGANIZATION**

 

**Cinergy Corp.**, aDelaware corporation created in October 1994, owns all outstanding common stockof The Cincinnati Gas & Electric Company (**CG&E**)and PSI Energy, Inc. (**PSI**), bothof which are public utility subsidiaries. As a result of this ownership, we are considered a utility holdingcompany.  Because we are a holdingcompany with material utility subsidiaries operating in multiple states, we areregistered with and are subject to regulation by the SEC under the PublicUtility Holding Company Act of 1935, as amended.  Our other principal subsidiaries are:

 

•                  CinergyServices, Inc. (Services);

•                  CinergyInvestments, Inc. (Investments);

•                  CinergyGlobal Resources, Inc. (Global Resources); and

•                  CinergyWholesale Energy, Inc. (Wholesale Energy).

 

**CG&E**, an Ohiocorporation, is a combination electric and gas public utility company thatprovides service in the southwestern portion of Ohio and, through itssubsidiaries, in nearby areas of Kentucky and Indiana.  **CG&E’s**principal subsidiary, The Union Light, Heat and Power Company (**ULH&P**), is a Kentucky corporation thatprovides electric and gas service in northern Kentucky.  **CG&E’s**other subsidiaries are insignificant to its results of operations.

 

In 2001, **CG&E** began atransition to electric deregulation and customer choice.  Currently, the competitive retail electricmarket in Ohio is in the development stage. **CG&E** is recovering itsPublic Utilities Commission of Ohio (PUCO) approved costs and retail electricrates are frozen during this market development period.  See the “Retail Market Developments” sectionin “Item 7.  Management’s Discussion andAnalysis of Financial Condition and Results of Operations” for a discussion ofkey elements of Ohio deregulation.

 

**PSI**, an Indianacorporation, is a vertically integrated and regulated electric utility thatprovides service in north central, central, and southern Indiana.

 

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The following table presents further information related to theoperations of our domestic utility companies (our operating companies):

 
|                           |   | **Principal  Line(s) of Business**                                                                                                                                                                |   | **Major  Cities Served**                                                                              |   | **Approximate  Population  Served** |   |
|--------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------------------|--------|-------------------------------------|--------|
|                           |   |                                                                                                                                                                                              |   |                                                                                                  |   |                                |   |
| **CG&E** and  subsidiaries |   | •       Generation, transmission, distribution, and  sale of electricity

•       Sale and/or transportation of natural gas |   | Cincinnati, OH  Middletown, OH  Covington, KY  Florence, KY  Newport, KY  Lawrenceburg, IN            |   | 2,053,000                           |   |
|                           |   |                                                                                                                                                                                              |   |                                                                                                  |
|                           |   |                                                                                                                                                                                              |   |                                                                                                  |
|                           |   |                                                                                                                                                                                              |   |                                                                                                  |
|                           |   |                                                                                                                                                                                              |   |                                                                                                  |
|                           |   |                                                                                                                                                                                              |   |                                                                                                  |
|                           |   |                                                                                                                                                                                              |   |                                                                                                  |   |                                |   |
| **PSI**                        |   | •       Generation, transmission, distribution, and  sale of electricity                                                                                       |   | Bloomington, IN  Carmel, IN  Columbus, IN  Kokomo, IN  Lafayette, IN  New Albany, IN  Terre Haute, IN |   | 2,230,000                           |   |
|                           |   |                                                                                                                                                                                              |   |                                                                                                  |   |                                |   |
| **ULH&P**                  |   | •       Transmission, distribution, and sale of  electricity

•       Sale and transportation of natural gas                |   | Covington, KY  Florence, KY  Newport, KY                                                              |   | 342,000                             |   |
|                           |   |                                                                                                                                                                                              |   |                                                                                                  |
|                           |   |                                                                                                                                                                                              |   |                                                                                                  |
|                           |   |                                                                                                                                                                                              |   |                                                                                                  |

 

Services is a service company that provides our subsidiaries with avariety of centralized administrative, management, and support services.  Investments holds most of our domesticnon-regulated, energy-related businesses and investments, including gasmarketing and trading operations. Global Resources holds most of our international businesses andinvestments.

 

Wholesale Energy, through a wholly-owned subsidiary, Cinergy PowerGeneration Services, LLC (Generation Services), provides electricproduction-related construction, operation, and maintenance services to certainaffiliates and non-affiliated third parties.

 

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**EMPLOYEES**

 

We have collective bargaining agreements with the InternationalBrotherhood of Electrical Workers (IBEW), the United Steelworkers of America(USWA), the Utility Workers Union of America (UWUA), formerly the IndependentUtilities Union, and various international union organizations.

 

The following table indicates the number of employees by classificationat December 31, 2002:

 
|                         |   | **Regulated**   |   | **Non-Regulated** |   |          |   |
|------------------------------|--------|-----------------|--------|-------------------|--------|---------------|--------|
| **Classification**           |   | **CG&E(4)** |   | **PSI**           |   | **ULH&P** |   | **Total  Regulated** |   | **Domestic(5)(6)** |   | **International** |   | **Total Non-  Regulated** |   | **Cinergy  Total** |   |
|                         |   |            |   |              |   |          |   |   |   |   |   |   |   |   |   |   |   |
| IBEW(1)                      |   | 509             |   | 1,267             |   | 55            |   | 1,831 |   | 903 |   | — |   | 903 |   | 2,734 |   |
| USWA(2)                      |   | 277             |   | —            |   | 85            |   | 362 |   | 13 |   | — |   | 13 |   | 375 |   |
| UWUA(3)                      |   | 371             |   | —            |   | 53            |   | 424 |   | 373 |   | — |   | 373 |   | 797 |   |
| Various Union  Organizations |   | —          |   | —            |   | —        |   | — |   | 57 |   | 219 |   | 276 |   | 276 |   |
| Non-Bargaining               |   | 208             |   | 370               |   | 20            |   | 598 |   | 2,851 |   | 192 |   | 3,043 |   | 3,641 |   |
|                         |   | 1,365           |   | 1,637             |   | 213           |   | 3,215 |   | 4,197 |   | 411 |   | 4,608 |   | 7,823 |   |

 

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(1)          IBEW #1347 contract willexpire on April 1, 2006, IBEW #1393 contract will expire on May 1, 2005, andIBEW #352 contract will expire on February 5, 2005.

(2)          USWA #12049 and #5541-06contracts will expire on May 15, 2007.

(3)          Contract will expire onMarch 31, 2005.

(4)          **CG&E** and subsidiaries excluding **ULH&P**.

(5)          Includes 2,485 Services’employees, who provide services to both regulated and non-regulated operations.

(6)          Includes 1,353Generation Services’ employees who provide services to certain affiliates andnon-affiliated third parties.

 

**Collective Bargaining Agreements**

 

The collective bargaining agreements of the UWUA and the IBEW #1393expired on April 1, 2002 and April 30, 2002, respectively.  With regards to the contracts, the partieshave negotiated new three-year agreements that will run through March 31, 2005and May 1, 2005 for the UWUA and IBEW #1393, respectively.

 

**CURRENTTRENDS**

 

For many years our industry has been relatively stable and dominated byvertically integrated companies. However, in recent years a number of federal and state developments,aimed at promoting competition, initiated a de-integration of the traditionalvalue chain and triggered industry restructuring.

 

New business models emerged as market participants sought to exploitopportunities along the de-integrated value chain.  The marketplace became characterized by independent powerproducers, energy marketers and traders, energy merchants, transmission anddistribution providers and retail energy suppliers.  New market entrants and activity among the traditionalparticipants, such as mergers, acquisitions, asset sales and spin-offs of linesof business, reshaped the industry. Power generators attempted to differentiate themselves to attract a newcustomer base; large wholesalers expanded through acquisitions of regionalbusinesses; transmission 

 

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systems are being operated by Regional Transmission Operators; and thesale of retail energy is no longer the exclusive business of the traditionalintegrated utility.  Recent events haveled to the challenge of certain business models and are significantly alteringthe industry landscape.

 

In late 2000 and early 2001, California experienced unprecedented highprices, extreme price volatility, a lack of market liquidity and inadequategeneration supply, leading to customer blackouts.  Ultimately, California’s two largest utilities accumulatedsignificant unpaid obligations, which resulted in one of the utilitiesdeclaring bankruptcy during 2001.  Bythe end of 2001, several states, which had previously adopted deregulationplans had decided to delay or suspend their activities.  In December 2001, Enron Corp. (Enron), adominant energy trader and former seventh largest company of the Fortune 500 interms of revenue, filed for bankruptcy protection after disclosing substantialthird quarter losses and a restatement of prior period results, whichcontributed to a significant downgrade in its credit ratings.  The SEC, the Federal Energy Regulatory Commission(FERC), the U.S. Department of Justice and numerous Congressional committeesinitiated investigations of Enron’s collapse.

 

The events and circumstances with California, Enron and others, aresignificantly influencing the industry landscape.  In 2002, wholesale electric markets were characterized by lowerprices, decreased liquidity, and the near evaporation of mid- to long-termmarkets.  Developers cancelled turbineorders and abandoned existing power projects. Several trading operations announced plans to curtail or exit theirwholesale trading activities.  Creditrating agencies downgraded many industry participants.  In this period of unprecedented change anduncertainty, energy industry participants are likely to reconsider theirstrategies and business models.

 

The highly publicized accounting restatements of Enron in 2001 andothers in 2002 also led to a crisis of investor confidence regarding thereliability of financial statements, as reflected in the Dow Jones UtilityIndex, which receded to less than half its value during the highs of 2000-2001and hit a five-year low.  As a result,new legislation, regulations, and additional accounting guidance were developedand enacted, with more on the horizon.

 

**BUSINESSUNITS**

 

We conduct operations through our subsidiaries and manage through thefollowing three business units:

 

•                  EnergyMerchant Business Unit (Energy Merchant);

•                  RegulatedBusinesses Business Unit (Regulated Businesses); and

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

 

The following section describes the activities of our business units asof December 31, 2002.

See Note 16 of the “Notes to Financial Statements” in “Item 8.  Financial Statements and Supplementary Data”for financial information by business segment.

 

**Energy Merchant**

 

Energy Merchant manages wholesale generation and energy marketing andtrading of energy commodities.  EnergyMerchant operates and maintains our regulated and non-regulated electric

 

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generating plants, including some of our jointly-owned plants.  Energy Merchant is also responsible for ourinternational operations.  As ofDecember 31, 2002, the total winter electric capability (including our portionof the total capacity for the jointly-owned plants) of our domestic generatingplants was 13,112 megawatts (MW). Approximately 75 percent of this generation portfolio iscoal-fired.  See “Item 2.  Properties” for a further discussion of thegenerating facilities.

 

Energy Merchant also performs the following activities:

 

•                  energyrisk management;

•                  proprietaryarbitrage activities; and

•                  customizedenergy solutions.

 

See the “Market Risk Sensitive Instruments and Positions” section of“Item 7.  Management’s Discussion andAnalysis of Financial Condition and Results of Operations” for information onrisks associated with these activities.

 

Energy Merchant competes for wholesale contracts for the purchase andsale of electricity and natural gas. Energy Merchant’s main competitors include public utilities, power andnatural gas marketers and traders, and independent power producers.

 

***Fuel Supply***

 

Each year, through **CG&E**and **PSI**, we purchase approximately28 million tons of coal to generate electricity.  We purchase approximately 80 percent of our coal supply throughlong-term coal supply agreements and approximately 20 percent through the spotmarket or through short-term supply agreements.  We receive our coal supply primarily from mines located inIndiana, West Virginia, Ohio, Kentucky, Pennsylvania, and Illinois.  In early 2001, the market price for coalincreased due to the buildup of inventories at various generators and the lowproduction levels of coal mines.  In2002, coal prices decreased as normal production levels returned the market toa balanced state.  We expect this tocontinue and anticipate market prices for coal to be relatively level through2003.

 

**Cinergy** has a fleetof natural gas-fired peaking plants that have a capacity of 2,719 MW.  The fuel for these units is obtained throughthe natural gas open market.  Forfurther information on the risk of purchasing natural gas see the “Market RiskSensitive Instruments and Positions” section of “Item 7.  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations”.

 

Energy Merchant monitors alternative sources of coal and gas to assurea continuing availability of economical fuel supplies.  As such, it will maintain its practice ofpurchasing a portion of coal and gas requirements on the open market and willcontinue to investigate least-cost coal options to comply with new and existingenvironmental requirements.  **Cinergy**, **CG&E**,and **PSI** believe that they cancontinue to obtain enough coal and gas to meet future needs.  However, future environmental requirementsmay significantly impact the availability and price of these fuels.

 

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***Cogeneration***

 

Energy Merchant is an on-site energy solutionsprovider, including cogeneration and operation and maintenance services forlarge industrial customers.  Cogenerationis the simultaneous production of two or more forms of useable energy from asingle fuel source.

 

***Purchased Power***

 

At times, we purchase power to meet the energy needs of our wholesalecustomers and to meet the requirements of our retail native load customers(end-use customers within our operating companies’ franchise territory).  Factors that could cause **Cinergy** to purchase power for retail nativeload customers include generating plant outages, extreme weather conditions,growth, and other factors associated with supplying full requirementselectricity.  We believe we can obtainenough purchased power to meet future needs. However, during periods of excessive demand, the price and availabilityof these purchases may be significantly impacted.  See the “Significant Rate Developments” section of “Item 7.  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations” for additional information on **PSI’s** Purchased Power Tracker.

 

***Trading Operationsand Risk Management***

 

The energy marketing and trading activities of Energy Merchantprincipally consists of Cinergy Marketing & Trading, LP’s (Marketing &Trading) natural gas marketing and trading operations, Cinergy Global Trading Limited’s(Global Trading) European natural gas and power trading operations, and **CG&E’s** and **PSI’s** power marketing and trading operations.  In April 2002, **CG&E** and **PSI**executed a new joint operating agreement whereby new power marketing andtrading contracts since April 2002 are originated on behalf of **CG&E**. See the “Termination of Operating Agreement” section in “Item 7.  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations”.

 

Our domestic operations market and trade over-the-counter (an informalmarket where the buying/selling of commodities occurs) contracts for thepurchase and sale of electricity (primarily in the Midwest region of the U.S.),natural gas, and other energy-related products.  In addition, our domestic operations also market and tradenatural gas and other energy-related products on the New York MercantileExchange.  Global Trading’s operationstrade over-the-counter contracts for the purchase and sale of natural gas andelectricity (both primarily in the United Kingdom).  Global Trading also trades natural gas on the InternationalPetroleum Exchange.  See the “MarketRisk Sensitive Instruments and Positions” section of “Item 7.  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations” for information on risksassociated with these activities.

 

***International***

 

As of December 31, 2002, we had ownership interests in energy-relatedassets located in six different countries. These assets serve retail and wholesale customers by providing utilityservices including generation of electricity and heat as well as thedistribution of gas and electric commodities.

 

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***Revenue Data andCustomer Base***

 

Energy Merchant’s operating revenue is derived primarily by providingand trading electricity in the Midwest region of the U.S.  In addition, Energy Merchant provides andtrades natural gas primarily to wholesale customers across the U.S.  The majority of Energy Merchant’s customersare public utilities, power and natural gas marketers and traders, andindependent power producers.

 

**Regulated Businesses**

 

Regulated Businesses consists of **PSI’s**regulated, integrated utility operations, and **Cinergy’s**other regulated electric and gas transmission and distribution systems.  Regulated Businesses plans, constructs,operates, and maintains **Cinergy’s**transmission and distribution systems and delivers gas and electric energy toconsumers.  Regulated Businesses alsoearns revenues from wholesale customers primarily by transmitting electricpower through **Cinergy’s**transmission system.  RegulatedBusinesses operated approximately 46,500 circuit miles (the total length inmiles of separate circuits) of electric lines to provide regulated transmissionand distribution service to 1.5 million customers as of December 31, 2002.

 

Regulated Businesses operated approximately 8,500 miles of gas mains(gas distribution lines that serve as a common source of supply for more thanone service line) and service lines to provide domestic regulated transmissionand distribution services to approximately 500,000 customers as of December 31,2002.  See “Item 2.  Properties” for a further discussion of thetransmission and distribution systems owned by our operating companies.

 

***Electric Operations***

 

Regulated Businesses (through our operating companies) and othernon-affiliated utilities in a nine-state region are parties to the East CentralArea Reliability Council Agreement (ECAR Agreement).  The ECAR Agreement coordinates the planning and operation ofgeneration and transmission facilities, which provides for maximum reliabilityof regional bulk power supply.

 

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***Transmission SystemInterconnections***

 

The following map illustrates the interconnections between our electricsystems and other electric systems.

 

##### ******

 

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***Midwest IndependentTransmission System Operator, Inc. (Midwest ISO)***

 

As part of the effort to create a competitive wholesale powermarketplace, the FERC approved the formation of the Midwest ISO during1998.  In that same year, **Cinergy** agreed to join the Midwest ISO inpreparation for meeting anticipated changes in the FERC regulations and futurederegulation requirements.  The MidwestISO was established as a non-profit organization to maintain functional controlover the combined transmission systems of its members.  For further information on the Midwest ISO,see the “Midwest ISO” section of “Item 7. Management’s Discussion and Analysis of Financial Condition and Resultsof Operations”.

 

***Electricity Supply***

 

A new joint operating agreement, effective in April 2002, allows **Cinergy** to jointly dispatch the regulatedgenerating assets of **PSI** inconjunction with the deregulated generating assets of **CG&E. **Underthis agreement, transfers of power between **PSI**and **CG&E** are generally pricedat market rates.  See the “Terminationof Operating Agreement” section of “Item 7. Management’s Discussion and Analysis of Financial Condition and Resultsof Operations”.  With the implementationof electric deregulation in Ohio, effective January 1, 2001, RegulatedBusinesses continues, through a market development period, to acquire itselectricity requirements through Energy Merchant for those retail customers whodo not switch suppliers.

 

**ULH&P** purchasesenergy from **CG&E** pursuant to anew contract effective January 1, 2002, which was approved by the FERC and theKentucky Public Service Commission (KPSC). This five-year agreement is a negotiated fixed-rate contract with **CG&E** and replaces the previous cost ofservice based contract, which expired on December 31, 2001.

 

For further details on electricity supply of **CG&E**, **PSI**,and **ULH&P**, refer to the“Retail Market Developments” section of “Item 7.  Management’s Discussion and Analysis of Financial Condition andResults of Operations”.

 

***Gas Supply***

 

Regulated Businesses is responsible for the purchase and the subsequentdelivery of natural gas to native load customers.  Regulated Businesses’ natural gas procurement strategy is to buyfirm gas supplies (gas intended to be available at all times) and firminterstate pipeline capacity during the winter season (November through March)and buy spot supply and capacity during the non-heating season (April throughOctober).  This strategy allowsRegulated Businesses to assure reliable gas supply for its high priority(non-curtailable) customers during peak winter conditions and providesRegulated Businesses the flexibility to reduce its contract commitments if firmcustomers choose alternate gas suppliers under the Regulated Businesses’customer choice/gas transportation programs. In 2002, firm supply purchase commitment agreements providedapproximately 49 percent of the natural gas supply, with the remaining gaspurchased on the spot market.  Thesefirm supply agreements feature two levels of gas supply, specifically (1) baseload, which is a continuous supply to meet normal demand requirements, and (2)swing load, which is gas available on a daily basis to accommodate changes indemand due primarily to

 

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changing weather conditions. Regulated Businesses pays reservation charges for base and swing load.

 

Regulated Businesses manages gas procurement-hedging programs for **CG&E** and **ULH&P**.  Theseprograms include the use of fixed purchase prices as well as variable pricearrangements (collars), which have a minimum (floor) and maximum (cap)established on the price to be paid.  **ULH&P** has received approval from the KPSCfor its hedging program.  In accordancewith a PUCO ruling, **CG&E** mayapply for approval of its hedging program on an after-the-fact basis.  As of December 31, 2002, **CG&E** and **ULH&P**, combined, had hedged approximately 30 percent oftheir winter 2002/2003 base load requirements. See the “Gas Industry” section of “Item 7.  Management’s Discussion and Analysis of Financial Condition andResults of Operations” for further information.

 

Interstate pipelines either (1) transport gas purchased directly to thedistribution systems or (2) inject gas purchased into pipeline storagefacilities for future withdrawal and delivery. The majority of the gas supply comes from the Gulf of Mexico coastalareas of Texas and Louisiana.  Inaddition, a limited supply comes from the mid-continent (Arkansas-Oklahoma)basin.  Also, industrial transportationcustomers behind **Cinergy’s** citygate (point where the distribution system connects to an interstate gaspipeline) are obtaining methane gas recovered locally from an Ohio landfill.

 

Regulated Businesses expects the natural gas market will remaincompetitive in future years.  Whilenatural gas prices remained moderate for most of the year 2002, prices began toescalate in the fourth quarter of the year. We expect the prices to continue to rise throughout the 2002/2003 winterseason.  Price movement will be drivenby the effects of weather conditions, availability of supply, and changes indemand and storage inventories. Currently, neither **CG&E**nor **ULH&P** profit from changesin the cost of gas.  Natural gaspurchase costs are passed directly to the customer dollar-for-dollar under thegas cost recovery mechanism that is mandated under state law.

 

In November 2002, **CG&E’s**and **ULH&P’s**agreement withMirant Americas Energy Marketing, LP (Mirant) to manage their****interstate pipeline transportation andstorage capacity and gas supply contracts was assigned to Marketing &Trading, a non-regulated affiliate of **CG&E**and **ULH&P**, for the remainingterm of the contract.  Under the termsof this agreement, which expires in October 2003, Marketing & Trading isobligated to deliver gas to meet **CG&E’s**and**ULH&P’s** firm requirements.  **ULH&P**is in the process of seeking approval of this affiliate contract from theKPSC.  No other regulatory approvals arerequired.

 

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***Revenue Data andCustomer Base***

 

The percent of retail operating revenues derived from full serviceelectricity and gas sales and transportation for each of the three years endedDecember 31 were as follows:

 
|                           |   | **Retail  Operating Revenues** |       |
|--------------------------------|--------|--------------------------------|------------|
| **Registrant**                 |   | **2002**                       |       | **2001** |   | **2000** |   |
|                           |   | **Electric %**            |       | **Gas %** |   | **Electric %** |   | **Gas %** |   | **Electric %** |   | **Gas %** |   |
|                           |   |                           |       |   |   |   |   |   |   |   |   |   |   |
| **Cinergy**                    |   | **85**                         | ** ** | **15** |   | 81 |   | 19 |   | 84 |   | 16 |   |
| **CG&E**  and subsidiaries |   | **77**                         | ** ** | **23** |   | 71 |   | 29 |   | 75 |   | 25 |   |
| **PSI**                        |   | **100**                        | ** ** | **—** |   | 100 |   | — |   | 100 |   | — |   |
| **ULH&P**                  |   | **73**                         | ** ** | **27** |   | 68 |   | 32 |   | 71 |   | 29 |   |

 

Electric and gas sales are seasonal. Electricity usage in our service territory peaks during the summer andgas usage peaks during the winter.  Airconditioning increases electricity demand and heating increases electricity andgas demand.

 

The service territory of **CG&E**and its utility subsidiaries, including **ULH&P**,is heavily populated and is characterized by a stable residential customer baseand a diverse mix of industrial customers. The territory served by **PSI**is composed of residential, agricultural, and widely diversified industrialcustomers.  No single customer providesmore than 10 percent of total operating revenues (electric or gas) for any ofour operating companies.

 

Under the Ohio customer choice program, **CG&E’s** retail customers may choose their electricsupplier.  As of December 31, 2002, thenumber of customers switching to other electric suppliers by customer class wasas follows:

 

| **Revenue Class**        |   | **Number of  Accounts** |   | **Switching  Percentage(1)** |   |
|--------------------------|--------|-------------------------|--------|------------------------------|--------|
|                     |   |                    |   |                         |   |
| Residential              |   | 18,792                  |   | 3.8                          | %      |
| Commercial               |   | 2,178                   |   | 21.5                         | %      |
| Industrial               |   | 169                     |   | 24.6                         | %      |
| Other Public Authorities |   | 410                     |   | 21.5                         | %      |
| Total                    |   | 21,549                  |   |                         |   |

 

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(1)          The residential switching percentage is based onannual energy consumption and the non-residential switching percentages arebased on average monthly peak demand.

 

Customer switching reduces retail revenues by the generation componentof rates and shopping incentives.  **CG&E** still collects transmission anddistribution revenues from the delivery of electricity to switchedcustomers.  During the marketdevelopment period, the reduction in revenues due to customer switching isgenerally offset by wholesale power sales from the freed-up generation capacityand recoveries of lost revenues and shopping incentives through the RegulatoryTransition Charge (RTC).  The RTC is amechanism through which **CG&E**recovers its previous generation related regulatory assets and other transitioncosts.  For further discussion

 

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on Ohio deregulation see “Ohio” in “Item 7.  Management’s Discussion and Analysis of Financial Condition andResults of Operations”.

 

**Power Technology**

 

Power Technology primarily manages the development, marketing, andsales of our non-regulated retail energy and energy-related businesses.  This is accomplished through varioussubsidiaries and joint ventures.  PowerTechnology also manages Cinergy Ventures, LLC (Ventures), **Cinergy’s** venture capital subsidiary.  Ventures invests in emerging energytechnologies that can benefit future **Cinergy**business development activities.

 

**OTHERDEVELOPMENTS**

 

During 2002, **Cinergy** soldor initiated plans to dispose of generation and electric and gas distributionoperations in the Czech Republic, Estonia, and South Africa.  These investments have been classified asdiscontinued operations.  For furtherinformation see Note 15 of the “Notes to Financial Statements” in “Item 8.  Financial Statements and SupplementaryData”.

 

**ENVIRONMENTALMATTERS**

 

On December 21, 2000, **Cinergy**,**CG&E**, and **PSI** reached an agreement in principle withthe United States, three northeast states, and two environmental groups for anegotiated resolution of Clean Air Act (CAA) Amendments claims and otherrelated matters brought against coal-fired power plants owned and operated by **Cinergy’s**operating companies.  The estimated cost for capital expendituresassociated with this proposed settlement is expected to be approximately $700million.  These capital expenditures arein addition to ongoing efforts to maintain and enhance emissions controlequipment at our power plants, including our previously announced commitment toinstall Nitrogen Oxide (NOX) controls at various power plants.  In 2002, we spent $259 million for NOXand other environmental compliance projects. Forecasted expenditures for NOX and other environmentalcompliance projects (in nominal dollars) are approximately $200 million for2003 and $440 million for the 2003-2007 period.  See Note 11(f) of the “Notes to Financial Statements” in “Item8.  Financial Statements andSupplementary Data” for a discussion of the Environmental Protection Agency(EPA) agreement in principle and other related environmental issues.

 

**FUTURE EXPECTATIONS/TRENDS**

 

See the information appearing under the same caption in “Item 7.  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations” for the following discussions:

 

•                  WholesaleMarket Developments;

•                  RetailMarket Developments;

•                  MidwestISO;

•                  SignificantRate Developments; and

•                  GasIndustry.

 

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**PROPERTIES**

 

**ITEM 2.  PROPERTIES**

 

**ENERGYMERCHANT**

 

Our operating companies’ total winter electric capabilities, reflectedin MW, as of December 31, 2002, are shown in the table that follows.  Our electric generating plants, which aremanaged by our Energy Merchant business unit, are located in Ohio, Kentucky,and Indiana and are wholly-owned or jointly-owned facilities.

 
| **Registrant(1)** |   | **Stations** |   | **Coal  MW** |   | **Natural  Gas  MW** |   | **Oil  MW** |   | **Hydro  MW** |   | **Total  MW** |   |
|-------------------|--------|--------------|--------|--------------|--------|----------------------|--------|-------------|--------|---------------|--------|---------------|--------|
|              |   |         |   |         |   |                 |   |        |   |          |   |          |   |
| **CG&E**      |   | 9            |   | 4,186        |   | 736                  |   | 323         |   | —        |   | 5,245         |   |
| **PSI**           |   | 9            |   | 5,578        |   | 120                  |   | 261         |   | 45            |   | 6,004         |   |
|              |   |         |   |         |   |                 |   |        |   |          |   |          |   |
| **Total**         |   | 18           |   | 9,764        |   | 856                  |   | 584         |   | 45            |   | 11,249        |   |

 

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(1)  This table includes only our portion of thetotal capacity for the jointly-owned plants. Refer to Note 12 of the “Notes to Financial Statements” in “Item 8.  Financial Statements and Supplementary Data”for a discussion of the jointly-owned plants.

 

During 2002, electric generating plants, including those that we ownbut do not operate, performed reliably, as evidenced by our annual capacityfactor of 70 percent (excluding natural gas and fuel oil peaking stations), autilization factor of 84 percent and an****equivalentavailability factor of 84 percent.  Acapacity factor is a percentage that indicates how much of a power plant’scapacity is used over time.  Autilization factor is a percentage that indicates how much of a power plant’scapacity is used while being available. An equivalent availability factor is a percentage that indicates howmuch a unit is available to generate compared to its potential maximumgeneration.

 

In July 2002, we experienced record peak loads of 11,133 MW, 5,265 MW,****and 6,088 MW for**Cinergy**, **CG&E**,and **PSI**, respectively.  **Cinergy**and**CG&E** subsequently set newrecord peak loads of 11,305 MW and 5,311 MW, respectively, in August 2002.  At times, we purchase power to meet theenergy needs of our wholesale customers and to meet the requirements of our retailnative load customers.  Factors thatcould cause **Cinergy** to purchasepower for retail native load customers include outages, extreme weatherconditions, growth, economics, and other factors associated with supplying fullrequirements electricity.  We believe wecan obtain enough purchased power to meet future needs.

 

In December 2002, the Indiana Utility Regulatory Commission (IURC)approved **PSI’s**request to acquirethe Butler County, Ohio and the Henry County, Indiana peaking plants under theterms and conditions contained in a settlement agreement with **PSI**, the IURC Testimonial Staff and theIndiana Office of the Utility Consumer Counselor.  On February 4, 2003, the FERC issued an order approving thetransfer.  This action was the finalregulatory approval needed for the transfer, which occurred on February 5,2003.  See “Transfer of GeneratingAssets to **PSI**” in

 

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“Item 7.  Management’sDiscussion and Analysis of Financial Condition and Results of Operations” for additionalinformation.

 

**Ohio Deregulation**

 

In its transition plan, **CG&E** proposed to transfer itsgenerating stations and their related assets and obligations to an ExemptWholesale Generator (EWG) affiliate, subject to receipt of FERC, SEC, andapplicable third-party approvals and consents. To facilitate this transfer, the generation assets of **CG&E**, as of August 2000, were releasedfrom the first mortgage indenture lien allowing them to be moved unencumberedto the EWG affiliate.  Generation assetsadded after August 2000 remain subject to the lien of **CG&E’s** first mortgage bond indentureand would require release at some future date prior to being transferred.  A FERC order, that was effective April 2002,allowed **Cinergy** to jointlydispatch the regulated generating assets of **PSI**in conjunction with the deregulated generating assets of **CG&E**. Transfers of power between **PSI**and **CG&E** are generally pricedat market rates, see the “Termination of Operating Agreement” section of “Item7.  Management’s Discussion and Analysisof Financial Condition and Results of Operations”.  FERC has also authorized the transfer of **CG&E’s** generating assets to anon-regulated affiliate.  However, **Cinergy** has determined that it can realizethe benefits of the new joint dispatch agreement without transferring **CG&E’s** generation assets to an EWGaffiliate, and therefore **Cinergy**does not plan to transfer **CG&E’s**generation assets to a non-regulated affiliate in the foreseeable future.  For further discussion of Ohio deregulation,see the “Retail Market Developments” section of “Item 7.  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations”.

 

**Merchant Plants**

 

***Domestic***

 

At December 31, 2002, our domestic merchant plant capacity consisted offour gas-fired peaking plants with a total capacity of 1,863 MW.  A merchant plant only sells electricity onthe wholesale market without the benefit of long-term contracts that cover 100percent of the plant capacity.  Thefollowing is the breakdown of capacity for each generating facility:

 

| **Plant**        |   | **MW  Capacity** |   |
|------------------|--------|------------------|--------|
|             |   |             |   |
| Brownsville      |   | 480              |   |
| Caledonia        |   | 550              |   |
| Butler County(1) |   | 704              |   |
| Henry County(1)  |   | 129              |   |

 

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(1)          Transferred to **PSI** in February 2003.

 

***International***

 

As of December 31, 2002, we had ownership interests in six countries.  We had ownership interests in generationassets located in three countries.  Wealso have ownership interests in

 

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approximately 2,000 miles of gas and electric transmission anddistribution systems through jointly-owned investments in three countries.  We serve approximately 22,000 transmissionand distribution customers.

 

***Cogeneration***

 

As of December 31, 2002, **Cinergy**had ownership interests in and/or operated eighteen domestic cogeneration facilitiescapable of producing 559 MW of electricity. Cogeneration is the simultaneous production of two or more forms ofuseable energy from a single fuel source. During 2003-2004, **Cinergy**anticipates completion of an additional 761 MW of electric capacity.

 

***Other***

 

In the third quarter of 2002, Cinergy Capital & Trading, Inc.completed an acquisition of a coal-based synthetic fuel production facility,which converts coal feedstock into synthetic fuel for sale to a thirdparty.  The synthetic fuel replaces coalin the generation of electricity.  Thisfacility can be disassembled and transported to an alternate location at aminimal expense if needed.  See the“Results of Operations - Future” section of “Item 7.  Management’s Discussion and Analysis of Financial Condition andResults of Operations” for additional information regarding this new businessinitiative.

 

**REGULATEDBUSINESSES**

 

**Electric**

 

Metrics for our operating companies’ electric transmission anddistribution systems located in Ohio, Kentucky, and Indiana (excluding ourproportionate share of jointly-owned facilities) are as follows:

 
| **Registrant**                 |   | **Electric  Transmission  Systems** |   | **Electric  Distribution  Systems** |   | **Substation  Combined  Capacity** |   |
|--------------------------------|--------|-------------------------------------|--------|-------------------------------------|--------|------------------------------------|--------|
|                           |   | **(circuit  miles)**                |   | **(circuit miles)**                 |   | **(kilovolt-amperes)(1)**          |   |
|                           |   |                                |   |                                |   |                               |   |
| **CG&E**                   |   | 1,658                               |   | 15,714                              |   | 20,980,288                         |   |
| **ULH&P**                  |   | 106                                 |   | 2,750                               |   | 1,334,998                          |   |
| Other  subsidiaries            |   | 40                                  |   | —                              |   | —                             |   |
| **CG&E**  and subsidiaries |   | 1,804                               |   | 18,464                              |   | 22,315,286                         |   |
| **PSI**                        |   | 5,361                               |   | 20,907                              |   | 29,762,209                         |   |
|                           |   |                                |   |                                |   |                               |   |
| **Total**                      |   | 7,165                               |   | 39,371                              |   | 52,077,495                         |   |

 

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(1)  Kilovolt-amperes (1,000 volt-amperes) are abroad measure of our substation transformer capacity.

 

At the end of 2002, our operating companies’ electric systems wereinterconnected with fifteen other utilities.

 

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Our electric transmission and distribution systems are designed andconstructed to further the goal of providing reliable service to ourcustomers.  Every effort is made toensure that sufficient facilities are in service to meet this goal withoutinstalling facilities beyond what is required to operate reliably and withinthe design or designed parameters. Through our ongoing review of these systems, enhancements are developedand constructed to meet our planning, loading, and reliability guidelines.  This process allows us to prudently investin capacity additions only when and where they are required.

 

On February 1, 2002, the Midwest ISO assumed functional control ofRegulated Businesses’ transmission systems. Although the Midwest ISO continues to develop, modify, and change itsvarious operating practices, it does handle all transmission tariffadministration.

 

**Gas**

 

As of December 31, 2002, the natural gas transmission and distributionsystems of **CG&E** and itssubsidiaries had approximately 8,500 miles of mains and service lines locatedin southwestern Ohio, southeastern Indiana, and northern Kentucky.  **CG&E**and its subsidiaries also jointly own three underground caverns with a totalstorage capacity of approximately 23 million gallons of liquid propane (ofwhich 7 million gallons belonged to **ULH&P**).  As of December 31, 2002, **CG&E** had 20 million gallons of liquidpropane in storage (of which 7 million gallons belonged to **ULH&P**).  This liquid propane is used in the three propane/air peak shavingplants located in Ohio and Kentucky. Propane/air peak shaving plants store propane and, when needed, vaporizethe propane and mix with natural gas to supplement the natural gas supplyduring peak demand periods and emergencies. During 2002, **CG&E** and itssubsidiaries’ natural gas transmission and distribution systems operatedreliably.

 

In November 2002, **CG&E’s**and **ULH&P’s**agreement withMirant to manage their****interstatepipeline transportation and storage capacity and gas supply contracts wasassigned to Marketing & Trading, a non-regulated affiliate of **CG&E** and **ULH&P**, for the remaining term of the contract.  Under the terms of this agreement, whichexpires in October 2003, Marketing & Trading is obligated to deliver gas tomeet **CG&E’s**and**ULH&P’s** firm requirements.  **ULH&P**is in the process of seeking approval of this affiliate contract from theKPSC.  No other regulatory approvals arerequired.

 

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**LEGALPROCEEDINGS**

 

**ITEM 3.  LEGAL PROCEEDINGS**

 

**NEWSOURCE****REVIEW (NSR) ANDNOTICES OF VIOLATION (NOV)**

 

The CAA’s NSR provisions require that a company obtain apre-construction permit if it plans to build a new stationary source ofpollution or make a major modification to an existing facility, unless the changesare exempt.

 

On November 3, 1999, the United States sued a number of holdingcompanies and electric utilities, including **Cinergy,CG&E,** and **PSI**, invarious U.S. District Courts (District Court). The **Cinergy, CG&E,**and **PSI** suit alleged violations of the CAA attwo of our generating stations relating to NSR and New Source PerformanceStandards requirements.  The suit sought(1) injunctive relief to require installation of pollution control technologyon each of the generating units at **CG&E’s**W.C. Beckjord Generating Station and at **PSI’s**Cayuga Generating Station, and (2) civil penalties in amounts of up to $27,500per day for each violation.  Since thattime, two amendments to the complaint have been filed by the United States,alleging additional violations of the CAA, including allegations involvingdifferent generating units.  Inaddition, three northeast states and two environmental groups have intervenedin the case.

 

On December 21, 2000, **Cinergy,CG&E,** and **PSI**reached an agreement in principle with the parties in the litigation for anegotiated resolution of the CAA claims in the litigation.  See Note 11(f) of the “Notes to FinancialStatements” in “Item 8. Financial Statements and Supplementary Data” for a discussionof the tentative EPA Agreement.

 

On October 4, 2002, the Indiana District Court issued a Revised CaseManagement Plan in **Cinergy’s** casethat sets forth the dates by which various events in the litigation, such asdiscovery and the filing of dispositive motions, must be completed.  Consistent with the plan, on October 9,2002, the Indiana District Court set the case for trial by jury commencing onOctober 4, 2004.

 

At this time, it is not possible to predict whether a final agreementimplementing the agreement in principle can be reached.  The parties continue to negotiate.  If the settlement is not completed, weintend to defend against the allegations vigorously in court.  In such an event, it is not possible todetermine the likelihood that the plaintiffs would prevail upon their claims orwhether resolution of these matters would have a material effect on ourfinancial position or results of operations.

** **

**MANUFACTURED GAS PLANT SITES (MGP)**

 

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

 

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Coal tar residues, related hydrocarbons, and various metals associatedwith MGP sites have been found at former MGP sites in Indiana, including atleast 21 sites which **PSI** or itspredecessors previously owned.  **PSI**acquired four of the sites from NIPSCOin 1931.  At the same time, **PSI**sold NIPSCO the sites located in Goshenand Warsaw, Indiana.  In 1945, **PSI** sold 19 of these sites (including thefour sites it acquired from NIPSCO) to the predecessor of the Indiana GasCompany, Inc. (IGC).  IGC later sold thesite located in Rochester, Indiana to NIPSCO.

 

IGC and NIPSCO have both made claims against **PSI**, alleging that **PSI**is a Potentially Responsible Party with respect to the 21 MGP sites under theComprehensive Environmental Response, Compensation and Liability Act(CERCLA).  The claims further assertedthat **PSI** was legally responsiblefor the costs of investigating and remediating the sites.  In August 1997, NIPSCO filed suit against **PSI** in federal court, claiming recovery(pursuant to CERCLA) of NIPSCO’s past and future costs of investigating andremediating MGP-related contamination at the Goshen, Indiana MGP site.

 

In November 1998, NIPSCO, IGC, and **PSI**entered into a Site Participation and Cost Sharing Agreement (Agreement).  This Agreement allocated CERCLA liabilityfor past and future costs at seven MGP sites in Indiana among the three companies.  As a result of the Agreement, NIPSCO’slawsuit against **PSI** wasdismissed.  Similar agreements werereached between IGC and PSI that allocate CERCLA liability at 14 MGP sites withwhich NIPSCO was not involved.  Theseagreements concluded all CERCLA and similar claims between the three companiesrelated to MGP sites.  The partiescontinue to investigate and remediate the sites, as appropriate, under theagreements and applicable laws.  TheIndiana Department of Environmental Management (IDEM) oversees investigationand cleanup of some of the sites.

** **

**PSI** notified itsinsurance carriers of the claims related to MGP sites raised by IGC, NIPSCO,and IDEM.  In April 1998, **PSI** filed suit in Hendricks County CircuitCourt in the State of Indiana against its general liability insurancecarriers.  **PSI** sought a declaratory judgment to obligate its insurancecarriers to (1) defend MGP claims against **PSI**,or (2) pay **PSI’s** costs of defenseand compensate **PSI** for its costsof investigating, preventing, mitigating, and remediating damage to propertyand paying claims related to MGP sites. The lawsuit was moved to the Hendricks County Superior Court (SuperiorCourt) in July 1998.  The trial courtissued a variety of rulings with respect to the claims and defenses in the litigation.  **PSI**has appealed certain adverse rulings to the Indiana Court of Appeals.  At the present time, **PSI** cannot predict the outcome of thislitigation, including the outcome of the appeals to the Indiana Court ofAppeals.

 

**PSI**has accruedcosts for the sites related to investigation, remediation, and groundwatermonitoring.  However, **PSI** currently cannot determine the totalcosts that may be incurred in conection with remediation of all sites, to theextent that remediation is required. Until investigation and remediation activities have been completed onthese sites, and the extent of insurance coverage for these costs, if any, isdetermined, we are unable to reasonably estimate the total costs and impact onour financial position or results of operations.

 

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**GASCUSTOMER CHOICE**

 

In January 2000, Investments sold Cinergy Resources, Inc. (Resources),a former subsidiary, to Licking Rural Electrification, Inc., doing business asThe Energy Cooperative (Energy Cooperative). In February 2001, **Cinergy**, **CG&E**, and Resources were named asdefendants in three class action lawsuits brought by customers relating toEnergy Cooperative’s removal from the Ohio Gas Customer Choice program and thefailure to deliver gas to customers.

 

Subsequently, these class action suits were amended and consolidatedinto one suit.  **CG&E** has been dismissed as a defendantin the consolidated suit.  In March2001, **Cinergy**, **CG&E**, and Investments were named asdefendants in a lawsuit filed by both Energy Cooperative and Resources.  This lawsuit concerns any obligations orliabilities Investments may have to Energy Cooperative following its sale ofResources.  This lawsuit is pending inthe Licking County Common Pleas Court. Trial is anticipated to occur in late 2003 or early 2004.  In October 2001, **Cinergy**, **CG&E**,and Investments initiated litigation against the Energy Cooperative, requestingindemnification by the Energy Cooperative for the claims asserted by formercustomers in the class action litigation. This customer litigation is pending in the Hamilton County Common PleasCourt.  A trial date has not beenset.  We intend to vigorously defendthese lawsuits.  At the present time, wecannot predict the outcome of these suits.

 

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**SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS**

 

**ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS**

 

No matters were submitted to a vote ofsecurity holders of **Cinergy, CG&E,**or**PSI**during the fourthquarter of 2002.

 

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## **MARKETFOR REGISTRANT’S COMMON EQUITY**

## ** **

## **PART II**

 

## **ITEM 5.  MARKET FOR REGISTRANT’S COMMON EQUITY ANDRELATED STOCKHOLDER MATTERS**

 

**Cinergy Corp.’s**common stock is listed on the New York Stock Exchange.  The high and low stock prices for eachquarter for the past two years are indicated below:

 

|               |   | **High**  |       | **Low**    |   |
|--------------------|--------|-----------|------------|------------|--------|
| **2002**           |   |      |       |       |   |
| **First Quarter**  |   | **$**     | **35.75**  | ** ** | **$**  | **31.00** |   |
| **Second Quarter** |   | **37.19** | ** ** | **34.25**  |   |
| **Third Quarter**  |   | **36.21** | ** ** | **25.40**  |   |
| **Fourth Quarter** |   | **34.19** | ** ** | **28.25**  |   |
|               |   |      |       |       |   |
| 2001               |   |      |       |       |   |
| First Quarter      |   | $         | 35.15      |       | $      | 28.81 |   |
| Second Quarter     |   | 35.60     |       | 32.20      |   |
| Third Quarter      |   | 35.00     |       | 28.00      |   |
| Fourth Quarter     |   | 33.85     |       | 28.16      |   |

 

**Cinergy Corp.** holdsall outstanding **CG&E** and **PSI** common stock, and **CG&E** holds all **ULH&P** common stock.  Therefore, no public trading market existsfor the common stock of **CG&E**, **PSI**, and **ULH&P**.

 

As of January 31, 2003, **Cinergy Corp.**had 55,637 shareholders of record.

 

**Cinergy Corp.**declared dividends on its common stock of $.45 per share for each quarter of2002 and 2001.  The quarterly dividendspaid to **Cinergy Corp.** by **CG&E** and **PSI**, and to **CG&E**by **ULH&P** for the past twoyears were as follows:

 

| **Registrant** |   | **Quarter** |   | **2002**            |       | **2001** |   |
|----------------|--------|-------------|--------|---------------------|------------|----------|--------|
|           |   |        |   | **(in  thousands)** |       |
| **CG&E**   |   | First       |   | **$**               | **44,787** |     | $      | 71,535 |   |
|           |   | Second      |   | **46,866**          |       | 71,551   |   |
|           |   | Third       |   | **47,059**          |       | 71,588   |   |
|           |   | Fourth      |   | **47,197**          |       | 71,595   |   |
|           |   |        |   |                |       |     |   |
| **PSI**        |   | First       |   | **$**               | **26,944** |     | $      | — |   |
|           |   | Second      |   | **28,194**          |       | —   |   |
|           |   | Third       |   | **28,310**          |       | —   |   |
|           |   | Fourth      |   | **28,394**          |       | —   |   |
|           |   |        |   |                |       |     |   |
| **ULH&P**  |   | First       |   | **$**               | **—** |     | $      | — |   |
|           |   | Second      |   | **2,675**           |       | 4,829    |   |
|           |   | Third       |   | **—**          |       | —   |   |
|           |   | Fourth      |   | **6,995**           |       | 6,878    |   |

 

28

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On January 14, 2003, the board of directors of **Cinergy Corp.** declared dividends on itscommon stock of $.46 per share, payable February 15, 2003, to shareholders ofrecord at the close of business on January 24, 2003.

 

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

 

29

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**SELECTED FINANCIAL DATA**

 

**ITEM 6.  SELECTED FINANCIAL DATA**

 
|                                                                                              |   | **2002**                                     |       | **2001**   |   | **2000** |   | **1999** |   | **1998** |   |
|---------------------------------------------------------------------------------------------------|--------|----------------------------------------------|------------|------------|--------|----------|--------|----------|--------|----------|--------|
|                                                                                              |   | **(in  millions, except per share amounts)** |       |
|                                                                                              |   |                                         | ** ** |       |   |     |   |     |   |     |   |
| **Cinergy(1)**                                                                                    |   |                                         | ** ** |       |   |     |   |     |   |     |   |
| **Results  of Operations:**                                                                       |   |                                         | ** ** |       |   |     |   |     |   |     |   |
| Operating  revenues(2)                                                                            |   | **$**                                        | **11,960** | ** ** | $      | 12,997   |   | $        | 8,397  |     | $      | 5,953 |   | $ | 5,778 |   |
| Income before  discontinued operations and cumulative effect of a change in accounting  principle |   | **397**                                      | ** ** | 459        |   | 400      |   | 402      |   | 261      |   |
| Discontinued  operations, net of tax(3)                                                           |   | **(25**                                      | **)**      | (17        | )      | (1       | )      | 2        |   | —   |   |
| Cumulative  effect of a change in accounting principle, net of tax(4)                             |   | **(11**                                      | **)**      | —     |   | —   |   | —   |   | —   |   |
| Net income                                                                                        |   | **361**                                      | ** ** | 442        |   | 399      |   | 404      |   | 261      |   |
|                                                                                              |   |                                         | ** ** |       |   |     |   |     |   |     |   |
| **Per  Share Data:**                                                                              |   |                                         | ** ** |       |   |     |   |     |   |     |   |
| Earnings per  common share (EPS)                                                                  |   |                                         | ** ** |       |   |     |   |     |   |     |   |
| Income before  discontinued operations and cumulative effect of a change in accounting  principle |   | **2.37**                                     | ** ** | 2.88       |   | 2.52     |   | 2.53     |   | 1.65     |   |
| Discontinued  operations, net of tax(3)                                                           |   | **(0.15**                                    | **)**      | (0.10      | )      | (0.01    | )      | .01      |   | —   |   |
| Cumulative  effect of a change in accounting principle, net of tax(4)                             |   | **(0.06**                                    | **)**      | —     |   | —   |   | —   |   | —   |   |
| Net income                                                                                        |   | **2.16**                                     | ** ** | 2.78       |   | 2.51     |   | 2.54     |   | 1.65     |   |
| EPS - assuming  dilution                                                                          |   |                                         | ** ** |       |   |     |   |     |   |     |   |
| Income before  discontinued operations and cumulative effect of a change in accounting  principle |   | **2.34**                                     | ** ** | 2.85       |   | 2.51     |   | 2.52     |   | 1.65     |   |
| Discontinued  operations, net of tax(3)                                                           |   | **(0.15**                                    | **)**      | (0.10      | )      | (0.01    | )      | .01      |   | —   |   |
| Cumulative  effect of a change in accounting principle, net of tax(4)                             |   | **(0.06**                                    | **)**      | —     |   | —   |   | —   |   | —   |   |
| Net income                                                                                        |   | **2.13**                                     | ** ** | 2.75       |   | 2.50     |   | 2.53     |   | 1.65     |   |
| Dividends  declared per share                                                                     |   | **1.80**                                     | ** ** | 1.80       |   | 1.80     |   | 1.80     |   | 1.80     |   |
|                                                                                              |   |                                         | ** ** |       |   |     |   |     |   |     |   |
| **Balance  Sheet Data (at end of period):**                                                       |   |                                         | ** ** |       |   |     |   |     |   |     |   |
| Total assets                                                                                      |   | **13,307**                                   | ** ** | 12,300     |   | 12,330   |   | 9,617    |   | 9,687    |   |
| Long-term debt  (including amounts due in one year)                                               |   | **4,272**                                    | ** ** | 3,745      |   | 2,917    |   | 3,020    |   | 2,740    |   |
|                                                                                              |   |                                         | ** ** |       |   |     |   |     |   |     |   |
| **CG&E**                                                                                      |   |                                         | ** ** |       |   |     |   |     |   |     |   |
| **Results  of Operations:**                                                                       |   |                                         | ** ** |       |   |     |   |     |   |     |   |
| Operating  revenues(2)                                                                            |   | **$**                                        | **4,951**  | ** ** | $      | 4,752    |   | $        | 3,237  |     | $      | 2,578 |   | $ | 2,784 |   |
| Net income                                                                                        |   | **264**                                      | ** ** | 327        |   | 267      |   | 234      |   | 216      |   |
|                                                                                              |   |                                         | ** ** |       |   |     |   |     |   |     |   |
| **Balance  Sheet Data (at end of period):**                                                       |   |                                         | ** ** |       |   |     |   |     |   |     |   |
| Total assets                                                                                      |   | **5,542**                                    | ** ** | 5,360      |   | 5,987    |   | 4,917    |   | 5,154    |   |
| Long-term debt  (including amounts due in one year)                                               |   | **1,690**                                    | ** ** | 1,205      |   | 1,206    |   | 1,206    |   | 1,350    |   |
|                                                                                              |   |                                         | ** ** |       |   |     |   |     |   |     |   |
| **PSI**                                                                                           |   |                                         | ** ** |       |   |     |   |     |   |     |   |
| **Results  of Operations:**                                                                       |   |                                         | ** ** |       |   |     |   |     |   |     |   |
| Operating  revenues(2)                                                                            |   | **$**                                        | **2,359**  | ** ** | $      | 4,108    |   | $        | 2,691  |     | $      | 2,163 |   | $ | 2,342 |   |
| Net income                                                                                        |   | **214**                                      | ** ** | 162        |   | 135      |   | 117      |   | 52       |   |
|                                                                                              |   |                                         | ** ** |       |   |     |   |     |   |     |   |
| **Balance  Sheet Data (at end of period):**                                                       |   |                                         | ** ** |       |   |     |   |     |   |     |   |
| Total assets                                                                                      |   | **4,223**                                    | ** ** | 4,571      |   | 4,630    |   | 3,835    |   | 3,584    |   |
| Long-term debt  (including amounts due in one year)                                               |   | **1,372**                                    | ** ** | 1,348      |   | 1,113    |   | 1,243    |   | 1,032    |   |

 

----

(1)          Theresults of **Cinergy** also includeamounts related to non-registrants.

(2)          Emerging Issues TaskForce Issue 02-3, *Accounting for ContractsInvolved in Energy Trading and Risk Management Activities* willrequire that all gains and losses on energy trading derivatives be presented ona net basis beginning January 1, 2003. This will result in substantial reductions in reported *Operating Revenues, Fuel and purchased and exchangedpower* expense*,* and *Gas purchased* expense.  However, *OperatingIncome* and *Net Income*will not be affected by this change. For further information see Note 1(q)(i) of the “Notes to FinancialStatements” in “Item 8.  FinancialStatements and Supplementary Data”.

(3)          See Note 15 of the“Notes to Financial Statements” in “Item 8. Financial Statements andSupplementary Data” for further explanation.

(4)          In 2002, **Cinergy** recognized a cumulative effect of achange in accounting principle of $11 million (net of tax as a result of animpairment charge for goodwill related to certain of our international assets.See Note 14 of the “Notes to Financial Statements” in “Item 8. FinancialStatements and Supplementary Data”.

 

30

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

 

**ITEM 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

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

 

The following discussion should be read in conjunction with theaccompanying financial statements and related notes included elsewhere in thisreport.  The results discussed below arenot necessarily indicative of the results to be expected in any future periods.

 

**INTRODUCTION**

 

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

 

•                  factorsaffecting current and future operations;

•                  whatour expenditures for construction and other commitments were during 2002, andwhat we expect them to be in 2003-2007;

•                  potentialsources of cash for future capital expenditures;

•                  whyrevenues and expenses changed from period to period; and

•                  howthe above items affect our overall financial condition.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

**COMPARATIVE CASH FLOW ANALYSIS**

 

**Cinergy**

 

At December 31, 2002, **Cinergy’s**consolidated cash and cash equivalents totaled $221.1 million compared to$111.1 million at December 31, 2001. This increase was primarily attributable to increases in cash fromoperating activities and to the proceeds received from the monetization ofcertain non-core investments.  Theseincreases were partially offset by additional construction expenditures,including our operating companies’ environmental compliance programs, and by additionalinvestments.

 

The Cincinnati Gas & Electric Company (**CG&E**)

 

At December 31, 2002, **CG&E’s**consolidated cash and cash equivalents totaled $45.3 million compared to $9.1million at December 31, 2001.  Increasedcash from operating activities was largely offset by the payment of commonstock dividends, repayments of debt, and additional construction expenditures.

 

31

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PSI Energy, Inc. (**PSI**)

 

At December 31, 2002, **PSI’s**consolidated cash and cash equivalents totaled $2 million as compared to $1.6million at December 31, 2001.  Increasedcash from operating activities was offset by additional constructionexpenditures.

 

The Union Light, Heat and Power Company (**ULH&P**)

 

At December 31, 2002, **ULH&P’s**cash and cash equivalents totaled $3.9 million as compared to $4.1 million atDecember 31, 2001.  Increased cash fromoperating activities was offset by construction expenditures and the repaymentof short-term debt.

 

**Operating Activities**

 

For each of the years ended December 31, 2002, 2001, and 2000, our cashflows from operating activities were as follows:

 

**Net Cash Provided by (Used in)Operating Activities**

 

|                           |   | **2002**           |        | **2001** |   | **2000** |   |
|--------------------------------|--------|--------------------|-------------|----------|--------|----------|--------|
|                           |   | **(in thousands)** |        |
|                           |   |               |        |     |   |     |   |
| **Cinergy**(1)                 |   | **$**              | **996,199** |     | $      | 717,849  |   | $ | 632,045 |   |
| **CG&E**  and subsidiaries |   | **653,029**        |        | 343,118  |   | 470,170  |   |
| **PSI**                        |   | **499,047**        |        | 401,911  |   | 343,038  |   |
| **ULH&P**                  |   | **60,707**         |        | 47,766   |   | 49,559   |   |
|                                |        |                    |             |          |        |          |        |  |  |  |

 

----

(1)          Theresults of **Cinergy** also includeamounts related to non-registrants.

 

The tariff-based gross margins of our operating companies continue tobe the principal source of cash from operating activities.  The diversified retail customer mix ofresidential, commercial, and industrial classes and a commodity mix of gas andelectric services provide a reasonably predictable gross cash flow.

 

For the year ended December 31, 2002, **Cinergy’s**,**CG&E’s**, **PSI’s**, and **ULH&P’s** net cash provided by operating activitiesincreased, as compared to 2001, primarily due to increases in income afteradjusting for increases in non-cash items such as depreciation, favorableworking capital fluctuations, and deferred income taxes.   The increase in deferred income taxes, inpart, reflects a change in accounting methodology for tax purposes related tocapitalized costs, which increased current tax deductions.  Current tax obligations were also reduced byincreases in tax credits associated with the production and sale of syntheticfuel.

 

**Cinergy’s** net cashprovided by operating activities increased for 2001, as compared to 2000,primarily as a result of increased income and a net cash inflow from workingcapital fluctuations.  **CG&E’s** net cash provided by operatingactivities decreased primarily due to working capital fluctuations, offset inpart by increased income.  **PSI’s** cash from operating activitiesincreased primarily due to increased income.

 

32

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***FinancingActivities***

 

For each of the years ended December 31, 2002, 2001, and 2000, our cashflows from financing activities were as follows:

 

**Net Cash Provided by (Used in)Financing Activities**

 

|                           |   | **2002**           |      | **2001**   |   | **2000** |   |
|--------------------------------|--------|--------------------|-----------|------------|--------|----------|--------|
|                           |   | **(in thousands)** |      |
|                           |   |               |      |       |   |     |   |
| **Cinergy**(1)                 |   | **$**              | **3,225** | ** ** | $      | 867,263  |   | $ | 161,430 |   |
| **CG&E**  and subsidiaries |   | **(293,445**       | **)**     | 16,841     |   | (192,665 | )      |
| **PSI**                        |   | **(43,817**        | **)**     | 34,723     |   | (77,955  | )      |
| **ULH&P**                  |   | **(22,026**        | **)**     | (14,678    | )      | (18,006  | )      |
|                                |        |                    |           |            |        |          |        |  |  |  |

 

----

(1)          Theresults of **Cinergy** also includeamounts related to non-registrants.

 

For the year ended December 31, 2002, **Cinergy’s**net cash provided by financing activities decreased, as compared to2001.  This decrease was primarily dueto the net proceeds received in 2001 from the issuance of *Preferred trust securities* and from newdebt issuances, which were used to fund the purchase of new peaking generationfacilities and environmental compliance expenditures.  The payment of common stock dividends and the repayment of bothlong- and short-term debt reduced cash proceeds recognized in 2002 from theissuances of common stock and new long-term debt.

 

**CG&E’s**,**PSI’s**,****and**ULH&P’s** net cash used in financingactivities increased during 2002, as compared to 2001.  **CG&E’s**increase reflects a net reduction in debt financing, partially offset by adecrease in dividends paid on common stock. **PSI’s** increase primarilyreflects the payment of approximately $112 million in common stock dividends in2002, as compared to 2001, when no common dividends were paid.  **ULH&P’s**increase primarily reflects the repayment of short-term debt in 2002.

 

For the year ended December 31, 2001, **Cinergy’s**,**CG&E’s**, and **PSI’s** cash provided by financing activitiesincreased, as compared to 2000.  **Cinergy’s** increase was primarily due to thenet proceeds from the issuance of *Preferredtrust securities* and proceeds from debt issuances to fund thepurchase of new generating facilities and environmental complianceexpenditures.  **CG&E’s** increase was primarily a resultof increased short-term borrowings offset by an increase in dividends paid oncommon stock.  **PSI’s** increase was primarily the result ofno dividends paid on common stock in 2001 and the retirement of preferred stockin 2000.

 

33

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**Investing Activities**

 

For each of the years ended December 31, 2002, 2001, and 2000, our cashflows used in investing activities were as follows:

 

 

**NetCash Provided by (Used in) Investing Activities**

 

|                           |   | **2002**           |         | **2001** |   | **2000**   |   |
|--------------------------------|--------|--------------------|--------------|----------|--------|------------|--------|
|                           |   | **(in thousands)** |         |
|                           |   |               |         |     |   |       |   |
| **Cinergy**(1)                 |   | **$**              | **(889,408** | **)**    | $      | (1,567,099 | )      | $ | (782,340 | ) |
| **CG&E**  and subsidiaries |   | **(323,322**       | **)**        | (371,522 | )      | (266,422   | )      |
| **PSI**                        |   | **(454,810**       | **)**        | (436,358 | )      | (272,614   | )      |
| **ULH&P**                  |   | **(38,854**        | **)**        | (35,449  | )      | (28,734    | )      |
|                                |        |                    |              |          |        |            |        |  |  |  |

 

----

(1)          Theresults of **Cinergy** also includeamounts related to non-registrants.

 

For the year ended December 31, 2002, **Cinergy’s**net cash used in investing activities decreased, as compared to 2001.  This decrease was primarily the result of **Cinergy’s** 2001 acquisition of peaking generationfacilities, increased capital expenditures related to environmental complianceprograms, and other non-core investments. Proceeds from the sale of certain non-core investments in 2002, wereoffset by expenditures for our operating companies’ capital programs, includingongoing environmental compliance, additional investments in cogenerationprojects, and capital expenditures related to the purchase of a synthetic fuelproduction facility.

 

**CG&E’s**, **PSI’s**, and **ULH&P’s**net cash used in investing activities wascomparable to 2001, reflecting ongoing construction expenditures.

 

**Cinergy’s**, **CG&E’s**, **PSI’s**, and **ULH&P’s**net cash used in investing activities increased in 2001, as compared to 2000,as a result of an increase in capital expenditures related to environmentalcompliance projects.  **Cinergy’s** increase also reflects theacquisition of additional peaking generation facilities.

 

34

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**Capital Requirements**

 

Actual construction and other committed expenditures (includingcapitalized financing costs) for 2002 and forecasted construction and othercommitted expenditures for the year 2003 and for the five-year period 2003-2007(in nominal dollars) are presented in the table below:

 

**Capitaland Investment Expenditures**

 

|                           |   | **Actual  2002**   |     | **Forecasted** |          |
|--------------------------------|--------|--------------------|----------|----------------|---------------|
|                           |   |               | **2003** |           | **2003-2007** |   |
|                           |   | **(in  millions)** |     |
|                           |   |               |     |           |          |   |   |
| **Cinergy**(1)                 |   | **$**              | **988**  |           | $             | 759 |   | $ | 3,102 |   |
| **CG&E**  and subsidiaries |   | **324**            |     | 326            |          | 1,477 |   |
| **PSI**(2)                     |   | **467**            |     | 367            |          | 1,369 |   |
| **ULH&P**                  |   | **40**             |     | 43             |          | 242 |   |
|                                |        |                    |          |                |               |  |  |  |  |  |

 

----

(1)          Theresults of **Cinergy** also includeamounts related to non-registrants.

(2)          Excludesintercompany purchase of peaking plants from non-regulated affiliates.

 

This forecast includes an estimate of expenditures in accordance withthe companies’ plans regarding Nitrogen Oxide (NOX) emission controlstandards and other environmental compliance (excluding implementation of thetentative United States (U.S.) Environmental Protection Agency (EPA)Agreement), as discussed in Note 11(f) of “Notes to Financial Statements” in“Item 8.  Financial Statements andSupplementary Data”.  In 2002, we spent$259 million for NOX and other environmental complianceprojects.  Forecasted expenditures forNOX and other environmental compliance projects (in nominal dollars)are approximately $200 million for 2003 and $440 million for the 2003-2007period.  All forecasted amounts and theunderlying assumptions are subject to risks and uncertainties as disclosed in“Cautionary Statements Regarding Forward-Looking Information”.

 

***EnvironmentalCommitment and Contingency Issues***

 

*EPA Agreement*

 

On December 21, 2000, **Cinergy**,**CG&E**, and **PSI** reached an agreement in principle withthe United States, three northeast states, and two environmental groups for anegotiated resolution of Clean Air Act (CAA) Amendments claims and otherrelated matters brought against coal-fired power plants owned and operated by **Cinergy’s**operating companies.  The estimated cost for capital expendituresassociated with this settlement is expected to be approximately $700million.  These capital expenditures arein addition to ongoing efforts to maintain and enhance emissions controlequipment at our power plants.  See Note11(f) of the “Notes to Financial Statements” in “Item 8.  Financial Statements and Supplementary Data”for a discussion of the agreement in principle and related environmentalissues.

 

35

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*Manufactured Gas Plant (MGP) Sites*

 

In November 1998, **PSI**entered into a Site Participation and Cost Sharing Agreement with NorthernIndiana Public Service Company and Indiana Gas Company, Inc. related tocontamination at MGP sites, which **PSI**or its predecessors previously owned. Until investigation and remediation activities have been completed onthe sites, we are unable to reasonably estimate the total cost and impact onour financial position or results of operations.  In relation to the MGP claims, **PSI**also filed suit against its general liability insurance carriers.  Subsequently, **PSI** sought a declaratory judgment to obligate its insurancecarriers to (1) defend MGP claims against **PSI**,or (2) pay **PSI’s** costs of defenseand compensate **PSI** for its costsof investigating, preventing, mitigating, and remediating damage to propertyand paying claims related to MGP sites. At the present time, **PSI** cannotpredict the outcome of this litigation. See Note 11(g) of the “Notes to Financial Statements” in “Item 8.  Financial Statements and Supplementary Data”for further information on MGP Sites.

 

*Ambient Air Standards*

 

In 1997, the EPA revised the National Ambient Air Quality Standards(NAAQS) for ozone and fine particulate matter. State ozone non-attainment area designations are due to the EPA in April2003.  Fine particulate non-attainmentdesignations are expected in the 2004-2006 timeframe.  Fine particulate matter refers to very small solid or liquidparticles in the air.  Followingidentification of non-attainment areas, each individual state will identify thesources of emissions and develop emission reduction plans.  These plans may be state-specific orregional in scope.  Under the CAA,individual states have up to 12 years from the date of designation to secureemissions reductions from sources contributing to the problem.

 

**Cinergy** may facefurther reductions of NOX, sulfur dioxide (SO2), and particulateemissions due to the implementation of the fine particulate matter and 8-hourozone NAAQS as required by the EPA. However, we cannot predict the exact amount and timing of thesereductions at this time.  Nonetheless, **Cinergy** expects that compliance costs withthese new standards will be significant.

 

*Regional Haze*

 

The EPA published the final regional haze rule on July 1, 1999.  This rule established planning and emissionreduction timelines for states to use to improve visibility in national parksthroughout the U.S.  The ultimate effectof the new regional haze rule could be requirements for (1) newer and cleanertechnologies and additional controls on particulates emissions, and (2)reductions in SO2 and NOX emissions from utilitysources.  If more utility emissionsreductions are required, the compliance cost could be significant.  In August 1999, several industry groups(some of which we are a member) filed a challenge to the regional haze ruleswith the U.S. Circuit Court of Appeals for the District of Columbia (Court ofAppeals).  On May 24, 2002, the Court ofAppeals set aside a portion of the EPA’s rule, holding that the rule improperlyforced states to require emissions controls without adequate consideration ofan individual source’s impact on visibility impairment.  We currently cannot predict the timing oroutcome of the EPA’s response to the Court of Appeals’ ruling.

 

36

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In July 2001, the EPA proposed guidance to implement portions of the regionalhaze rule.  This guidance recommendsthat states require widespread installation of scrubbers to reduce SO2emissions.  We currently cannotdetermine whether or how the EPA will modify the scope of this guidance, orwhether the states in which we operate will adopt the EPA’s proposed guidance.

 

*Global Climate Change*

 

In December 1997, delegates to the United Nations’ climate summit inJapan adopted an agreement, the Kyoto Protocol (Protocol), to address globalwarming.  The Protocol establishes legallybinding greenhouse gas emission (man-made pollutants thought to be artificiallywarming the earth’s atmosphere) targets for developed nations.  On November 12, 1998, the U.S. signed theProtocol; however, it will not be effective in the U.S. until it is approved bya two-thirds vote of the U.S. Senate, which we currently believe is unlikely,as the current Administration is opposed to the Protocol and has not submittedit to the Senate for ratification.

 

A total of 108 nations, including the European Union, Japan, and Canadahave ratified the Protocol.  If theProtocol goes into effect, **Cinergy**does not anticipate that its operations will be impacted so long as the U.S.remains outside the Protocol agreement. In addition, there are still major uncertainties concerning the Protocolincluding how the Protocol will be implemented, the level and timing ofgreenhouse gas emissions reductions, the extent to which greenhouse gas tradingwould be allowed, and whether companies would be allowed to comply with emissionreduction requirements through agricultural, geologic, or oceanicsequestration, or through projects in the U.S. and abroad to reduce othergreenhouse gas emissions (such as methane). Because of these uncertainties, **Cinergy**cannot, at this time, identify specific impacts of the Protocol on itsoperations, even if the U.S. should change its course and ratify the Protocol.

 

In February 2002, the Bush Administration announced a voluntary globalclimate change initiative that calls for industries to undertake voluntaryactivities to reduce the intensity of greenhouse gas emissions.  The Bush Administration initiative alsocalled for increased funding of scientific research and for increased researchand development.  In response toPresident Bush’s call for industries to take voluntary actions, **Cinergy** signed a commitment with the EPA toparticipate in its Climate Leaders program. As a participant, **Cinergy**is committed to conducting an annual inventory of its corporate greenhouse gasemissions, to developing a greenhouse gas emission reduction goal, and toreporting annually on its corporate-wide greenhouse gas emissions and itsprogress toward achieving its greenhouse gas reduction goal.

 

Our plan for managing the potential risk and uncertainty of regulationsrelating to climate change includes the following:

 

•                  implementingcost-effective greenhouse gas emission reduction and offsetting activities;

•                  fundingresearch of more efficient and alternative electric generating technologies;

•                  fundingresearch to better understand the causes and consequences of climate change;

•                  encouraginga global discussion of the issues and how best to manage them; and

•                  advocatingcomprehensive legislation for fossil-fired power plants.

 

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*Air Toxics Regulation*

 

On December 14, 2000, the EPA made a determination that additionalregulation of mercury emissions from coal-fired power plants wasappropriate.  It is currently developinga Maximum Achievable Control Technology (MACT) standard for mercury.  Although the issue is highly uncertain,there is some possibility that the EPA may also seek to establish MACTstandards for other pollutants such as acid gases, metals, and organics.  The EPA is expected to issue draftregulations in December 2003, and final rules by December 2004, with reductionsrequired as soon as December 2007.  Wecurrently cannot predict the outcome or costs relating to the EPA’sdetermination and subsequent regulation.

 

At this time, **Cinergy**cannot predict the exact mercury target that the EPA will finalize nor thespecific compliance timing.  Inaddition, the form of the standard and the availability of flexibilitymechanisms is also not yet known. Nonetheless, **Cinergy** hasanalyzed various mercury MACT regulatory scenarios and has initially estimatedtotal capital compliance costs of between $500 million and $700 million formercury emissions control equipment. This range corresponds to an emissions reduction target between 50percent and 90 percent per power plant.

 

*Asbestos Claims Litigation*

 

**CG&E** and **PSI** have been named in lawsuits related toAsbestos at their electric generating stations.  In these lawsuits, plaintiffs claim to have been exposed toAsbestos containing products in the course of their work at the **CG&E** and **PSI** generating stations. The plaintiffs further claim that, as the property owner of thegenerating stations,**CG&E** and **PSI** should be held liable for theirinjuries and illnesses based on an alleged duty to warn and protect them fromany Asbestos exposure.  A majority ofthe lawsuits to date have been brought against **PSI**.  The impact on **CG&E’s** and **PSI’s** financial position or results of operations of thesecases to date has not been material. See Note 11(h) of the “Notes to Financial Statements” in “Item 8.  Financial Statements and Supplementary Data”for a discussion of Asbestos claims and related cases.

 

***Pensions***

 

**Cinergy** maintainsqualified defined benefit pension plans covering substantially all U.S.employees meeting certain minimum age and service requirements.  Plan assets consist of investments in equityand fixed income securities.  Fundingfor the qualified defined benefit pension plans is based upon actuariallydetermined contributions that take into account the amount deductible forincome tax purposes and the minimum contribution required under the EmployeeRetirement Income Security Act of 1974, as amended.  Due to the decline in market value of the investment portfolioover the last few years, assets held in trust to satisfy plan obligations havedecreased.  Additionally, recentdecreases in long-term interest rates have the effect of increasing themeasured liability for funding purposes. As a result of these events, future funding obligations could increasesubstantially.  Based on preliminaryestimates, we expect to fund approximately $33 million for the calendar year2003.  Contributions for the calendaryear 2002 were $4 million.

 

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***Other InvestingActivities***

 

Our ability to invest in growth initiatives is limited by certain legaland regulatory requirements, including the Public Utility Holding Company Actof 1935, as amended (PUHCA).  The PUHCAlimits the types of non-utility businesses in which **Cinergy** and other registered holding companies under PUHCA caninvest as well as the amount of capital that can be invested in permissiblenon-utility businesses.  Also, thetiming and amount of investments in the non-utility businesses is dependent onthe development and favorable evaluations of opportunities.  Under the PUHCA restrictions, we are allowedto invest or commit to invest in certain non-utility businesses, including:

 

1.               Exempt WholesaleGenerators (EWG) and Foreign Utility Companies (FUCO)

 

An EWG is an entity, certified by the Federal EnergyRegulatory Commission (FERC), devoted exclusively to owning and/or operating,and selling power from one or more electric generating facilities.  An EWG whose generating facilities are locatedin the U.S. is limited to making only wholesale sales of electricity.

 

A FUCO is a company all of whose utility assets andoperations are located outside the U.S. and which are used for the generation,transmission, or distribution of electric energy for sale at retail orwholesale, or the distribution of gas at retail.  A FUCO may not derive any income, directly or indirectly, fromthe generation, transmission or distribution of electric energy for sale or thedistribution of gas at retail within the U.S. An entity claiming status as a FUCO must provide notification thereof tothe Securities and Exchange Commission (SEC) under PUHCA.

 

In May 2001, the SEC issued an order under PUHCAauthorizing **Cinergy** to invest(including by way of guarantees) an aggregate amount in EWGs and FUCOs equal tothe sum of (1) our average consolidated retained earnings from time to timeplus (2) $2 billion.  As of December 31,2002, we had invested or committed to invest $1.2 billion in EWGs and FUCOs,leaving available investment capacity under the May 2001 order of $2.1 billion.

 

2.               QualifyingFacilities and Energy-Related Non-utility Entities

 

SEC regulations under the PUHCA permit **Cinergy** and other registered holding companies to investand/or guarantee an amount equal to 15 percent of consolidated capitalization(consolidated capitalization is the sum of *Notespayable and other short-term obligations*, *Long-term debt* (including amounts due within one year), *Preferred Trust Securities*, *Cumulative Preferred Stock of Subsidiaries*,and total *Common Stock Equity*) indomestic qualifying cogeneration and small power production plants (qualifyingfacilities) and certain other domestic energy-related non-utilityentities.  At December 31, 2002, we hadinvested and/or guaranteed approximately $0.7 billion of the $1.3 billionavailable.

 

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***Contractual CashObligations***

 

The following table presents **Cinergy’s**,**CG&E’s**,**PSI’s**, and **ULH&P’s**significant contractual cash obligations:

 
|                                                   |   | **Payments  Due**  |   |
|--------------------------------------------------------|--------|--------------------|--------|
| **Contractual  Cash Obligations**                      |   | **2003**           |   | **2004** |   | **2005** |   | **2006** |   | **2007** |   | **There-  after** |   | **Total** |   |
|                                                   |   | **(in  millions)** |   |
|                                                   |   |               |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Cinergy**(1)                                         |   |               |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Notes payable and other short-term obligations         |   | $                  | 521    |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | 147 | (2) | $ | 668 |   |
| Lease obligations                                      |   | 47                 |   | 37 |   | 30 |   | 26 |   | 23 |   | 74 |   | 237 |   |
| Long-term debt (including amounts due within one year) |   | 191                |   | 815 |   | 204 | (3)(4) | 335 |   | 374 |   | 2,351 |   | 4,270 |   |
| Preferred trust securities                             |   | 7                  |   | 8 |   | 2 |   | — |   | 316 |   | — |   | 333 |   |
| Fuel purchase contracts                                |   | 562                |   | 510 |   | 455 |   | 502 |   | 293 |   | 1,523 |   | 3,845 |   |
| Power purchase contracts(5)                            |   | 2,313              |   | 577 |   | 254 |   | 148 |   | 88 |   | 246 |   | 3,626 |   |
| **Total Cinergy**                                      |   | $                  | 3,641  |   | $ | 1,947 |   | $ | 945 |   | $ | 1,011 |   | $ | 1,094 |   | $ | 4,341 |   | $ | 12,979 |   |
|                                                   |   |               |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **CG&E** and subsidiaries                          |   |               |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Notes payable and other short-term obligations(6)      |   | $                  | — |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | 112 | (2) | $ | 112 |   |
| Lease obligations                                      |   | 11                 |   | 9 |   | 9 |   | 9 |   | 8 |   | 25 |   | 71 |   |
| Long-term debt (including amounts due within one year) |   | 120                |   | 110 |   | 150 | (4) | — |   | 100 |   | 1,212 |   | 1,692 |   |
| Fuel purchase contracts                                |   | 208                |   | 175 |   | 135 |   | 191 |   | — |   | — |   | 709 |   |
| Power purchase contracts(5)                            |   | 2,059              |   | 374 |   | 134 |   | 62 |   | 27 |   | 21 |   | 2,677 |   |
| **Total CG&E** and subsidiaries                    |   | $                  | 2,398  |   | $ | 668 |   | $ | 428 |   | $ | 262 |   | $ | 135 |   | $ | 1,370 |   | $ | 5,261 |   |
|                                                   |   |               |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **PSI**                                                |   |               |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Notes payable and other short-term obligations(6)      |   | $                  | 138    |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | 35 | (2) | $ | 173 |   |
| Lease obligations                                      |   | 11                 |   | 10 |   | 9 |   | 9 |   | 8 |   | 28 |   | 75 |   |
| Long-term debt (including amounts due within one year) |   | 56                 |   | 2 |   | 51 | (3) | 328 |   | 267 |   | 676 |   | 1,380 |   |
| Fuel purchase contracts                                |   | 354                |   | 335 |   | 320 |   | 311 |   | 293 |   | 1,523 |   | 3,136 |   |
| Power purchase contracts(5)                            |   | 215                |   | 163 |   | 79 |   | 47 |   | 20 |   | 21 |   | 545 |   |
| **Total PSI**                                          |   | $                  | 774    |   | $ | 510 |   | $ | 459 |   | $ | 695 |   | $ | 588 |   | $ | 2,283 |   | $ | 5,309 |   |
|                                                   |   |               |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **ULH&P**                                          |   |               |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Notes payable and other short-term obligations(6)      |   | $                  | 14     |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | 14 |   |
| Lease obligations                                      |   | —             |   | — |   | 1 |   | 1 |   | 1 |   | 3 |   | 6 |   |
| Long-term debt (including due within one year)         |   | 20                 |   | — |   | — |   | — |   | — |   | 55 |   | 75 |   |
| **Total ULH&P**                                    |   | $                  | 34     |   | $ | — |   | $ | 1 |   | $ | 1 |   | $ | 1 |   | $ | 58 |   | $ | 95 |   |

 

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(1)          Includes amounts fornon-registrants.

(2)          Includes Variable RatePollution Control Notes depicted according to scheduled maturities, which theholders have the right to have redeemed on any business day, with the remainderbeing redeemable annually.  See VariableRate Pollution Control Notes below.

(3)          Includes 6.50%Debentures due August 1, 2026, reflected as maturing in 2005, as the interestrate resets on August 1, 2005.

(4)          Includes 6.90%Debentures due June 1, 2025, reflected as maturing in 2005, as the debenturesare putable to **CG&E**at theoption****of the holders on June 1,2005.

(5)          Firm commitments aredisclosed on a gross basis and are not netted against firm sales with likecounterparties for purposes of this disclosure.

(6)          Includes net Money Poolborrowings.

 

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***Guarantees***

 

We are subject to an SEC order under the PUHCA, which limits theamounts **Cinergy Corp.** can haveoutstanding under guarantees at any one time to $2 billion.  As of December 31, 2002, we had $526 millionoutstanding under the guarantees issued, of which approximately 88 percentrepresents guarantees of obligations reflected on **Cinergy’s** Consolidated Balance Sheets.  The amount outstanding represents **Cinergy Corp.’s** guarantees of liabilitiesand commitments of its consolidated subsidiaries, unconsolidated subsidiaries,and joint ventures.  See Note 11(b) of the “Notes to FinancialStatements” in “Item 8. Financial Statements and Supplementary Data” for a discussionof guarantees in accordance with Financial Accounting Standards BoardInterpretation No. 45, *Guarantor’sAccounting and Disclosure Requirements for Guarantees, Including IndirectGuarantees of Indebtedness of Others* (FIN 45).  FIN 45 requires disclosure of maximumpotential liabilities for guarantees issued on behalf of unconsolidatedsubsidiaries and joint ventures and under indemnification clauses in variouscontracts.  The FIN 45 disclosure isdifferent from the PUHCA restrictions in that it requires a calculation ofmaximum potential liability, rather than actual amounts outstanding; itexcludes guarantees issued by consolidated subsidiaries; and it includespotential liabilities under indemnification clauses.

 

***CollateralRequirements***

 

**Cinergy**has certaincontracts in place, primarily with trading counterparties, that require theissuance of collateral in the event our debt ratings are downgraded belowinvestment grade.  Based upon ourDecember 31, 2002 trading portfolio, if such an event were to occur, **Cinergy** would be required to issue up toapproximately $69 million in collateral related to its gas and power tradingoperations.

 

**Capital Resources**

 

**Cinergy** meetscurrent and future capital requirements through:

 

•                  internallygenerated funds;

•                  cashand cash equivalents on hand ($221 million as of December 31, 2002);

•                  issuanceof debt and equity securities;

•                  bankfinancing under new and existing facilities; and

•                  monetizationof assets.

 

**Cinergy** believesthat it has adequate financial resources to meet its future needs.

 

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

 

We are required to secure authority to issue short-term debt from theSEC under the PUHCA and the state utility commission of Ohio.  The SEC under the PUHCA regulates theissuance of short-term debt by **Cinergy Corp.**,**PSI**, and **ULH&P**. The Public Utilities Commission of Ohio (PUCO) has regulatoryjurisdiction over the issuance of short-term debt by **CG&E**.

 

|                               |   | **Short-term  Regulatory Authority  December 31, 2002** |   |
|------------------------------------|--------|---------------------------------------------------------|--------|
|                               |   | **(millions)**                                          |   |
|                               |   |                                                    |   |   |   |
|                               |   | **Authority**                                           |   | **Outstanding** |   |
| **Cinergy  Corp.**                 |   | $                                                       | 5,000  | (1) | $ | 498 |   |
| **CG&E** and subsidiaries |   | 671                                                     |   | 9 |   |
| **PSI**                            |   | 600                                                     |   | 138 |   |
| **ULH&P**                      |   | 65                                                      |   | 14 |   |
|                                    |        |                                                         |        |  |  |  |  |

 

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(1)          **Cinergy Corp.,** under the PUHCA, was grantedapproval to increase total capitalization (which excludes retained earnings andaccumulated other comprehensive income (loss)) by $5 billion.  Outside this requirement, **Cinergy Corp.** is not subject to specificregulatory debt authorizations.

 

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

 

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**Cinergy Corp.’s**short-termborrowing consists primarily of unsecured revolving lines of credit and thesale of commercial paper.  **Cinergy Corp.’s** $1 billion creditfacilities and $800 million commercial paper program also support theshort-term borrowing needs of **CG&E**and **PSI**.  In addition, **Cinergy**,**CG&E**, and **PSI** maintain uncommitted lines ofcredit.  These facilities are not firmsources of capital but rather informal agreements to lend money, subject toavailability with pricing determined at the time of advance.  A summary of outstanding short-termborrowings for **Cinergy**, **CG&E**, **PSI**,and **ULH&P**, including variablerate pollution control bonds is as follows:

 
|                         |   | **Short-term  Borrowings  December 31, 2002** |   |
|------------------------------|--------|-----------------------------------------------|--------|
|                         |   | **Established  Lines**                        |   | **Outstanding** |   | **Unused** |   | **Standby  Liquidity(3)** |   | **Available  Revolving  Lines of  Credit** |   |
|                         |   | **(millions)**                                |   |
|                         |   |                                          |   |   |   |   |   |   |   |   |   |
| **Cinergy**                  |   |                                          |   |   |   |   |   |   |   |   |   |
| **Cinergy  Corp.**           |   |                                          |   |   |   |   |   |   |   |   |   |
| Revolving lines              |   | $                                             | 1,000  |   | $ | 25 |   | $ | 975 |   | $ | 481 |   | $ | 494 |   |
| Uncommitted  lines(1)        |   | 65                                            |   | — |   | 65 |   |   |   |   |   |
| Commercial  paper(2)         |   | 800                                           |   | 473 |   | 327 |   |   |   |   |   |
|                         |   |                                          |   |   |   |   |   |   |   |   |   |
| Operating  companies         |   |                                          |   |   |   |   |   |   |   |   |   |
| Uncommitted  lines(1)        |   | 75                                            |   | — |   | 75 |   |   |   |   |   |
| Pollution  control notes     |   |                                          |   | 147 |   |   |   |   |   |   |   |
|                         |   |                                          |   |   |   |   |   |   |   |   |   |
| Non-regulated  subsidiaries  |   |                                          |   |   |   |   |   |   |   |   |   |
| Revolving lines              |   | 7                                             |   | 1 |   | 6 |   |   |   | 6 |   |
| Short-term debt              |   | 22                                            |   | 22 |   | — |   |   |   |   |   |
|                         |   |                                          |   |   |   |   |   |   |   |   |   |
| **Cinergy  Total**           |   |                                          |   | $ | 668 |   |   |   |   |   | $ | 500 |   |
|                         |   |                                          |   |   |   |   |   |   |   |   |   |
| **CG&E**and subsidiaries |   |                                          |   |   |   |   |   |   |   |   |   |
| Uncommitted  lines(1)        |   | $                                             | 15     |   | $ | — |   | $ | 15 |   |   |   |   |   |
| Pollution  control notes     |   |                                          |   | 112 |   |   |   |   |   |   |   |
| Money pool                   |   |                                          |   | 9 |   |   |   |   |   |   |   |
|                         |   |                                          |   |   |   |   |   |   |   |   |   |
| **CG&E  Total**          |   |                                          |   | $ | 121 |   |   |   |   |   |   |   |
|                         |   |                                          |   |   |   |   |   |   |   |   |   |
| **PSI**                      |   |                                          |   |   |   |   |   |   |   |   |   |
| Uncommitted  lines(1)        |   | $                                             | 60     |   | $ | — |   | $ | 60 |   |   |   |   |   |
| Pollution  control notes     |   |                                          |   | 35 |   |   |   |   |   |   |   |
| Money pool                   |   |                                          |   | 138 |   |   |   |   |   |   |   |
|                         |   |                                          |   |   |   |   |   |   |   |   |   |
| **PSI  Total**               |   |                                          |   | $ | 173 |   |   |   |   |   |   |   |
|                         |   |                                          |   |   |   |   |   |   |   |   |   |
| **ULH&P**                |   |                                          |   |   |   |   |   |   |   |   |   |
| Money pool                   |   |                                          |   | $ | 14 |   |   |   |   |   |   |   |
|                         |   |                                          |   |   |   |   |   |   |   |   |   |
| **ULH&P  Total**         |   |                                          |   | $ | 14 |   |   |   |   |   |   |   |
|                              |        |                                               |        |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(1)          Outstanding amounts maybe greater than established lines as uncommitted lenders are, at times, willingto loan funds in excess of the established lines.

(2)          Thecommercial paper program is supported by **CinergyCorp.’s** revolving lines.

(3)          Standby liquidity isreserved against the revolvers to support the commercial paper program andoutstanding letters of credit (currently $473 million and $8 million,respectively).

 

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At December 31, 2002, **Cinergy Corp.**had $494 million remaining unused and available capacity relating to its $1billion revolving credit facilities. These revolving credit facilities include the following:

 
| **Credit  Facility**         |   | **Expiration** |   | **Established  Lines** |   | **Outstanding  and  Committed** |   | **Unused and  Available** |   |
|------------------------------|--------|----------------|--------|------------------------|--------|---------------------------------|--------|---------------------------|--------|
|                         |   |           |   |                   |   | **(in  millions)**              |   |                      |   |
|                         |   |           |   |                   |   |                            |   |                      |   |
| 364-day senior  revolving(1) |   | April 2003     |   |                   |   |                            |   |                      |   |
| Direct borrowing             |   |           |   | $                      |   |                            | $      | —                    |   | $ |   |   |
| Commercial paper  support    |   |           |   |                   |   | 473                             |   |                      |   |
|                         |   |           |   |                   |   |                            |   |                      |   |
| Total 364-day  facility      |   |           |   | 600                    |   | 473                             |   | 127                       |   |
|                         |   |           |   |                   |   |                            |   |                      |   |
| Three-year  senior revolving |   | May 2004       |   |                   |   |                            |   |                      |   |
| Direct borrowing             |   |           |   |                   |   | 25                              |   |                      |   |
| Commercial paper  support    |   |           |   |                   |   | —                          |   |                      |   |
| Letter of Credit  support    |   |           |   |                   |   | 8                               |   |                      |   |
|                         |   |           |   |                   |   |                            |   |                      |   |
| Total three-year  facility   |   |           |   | 400                    |   | 33                              |   | 367                       |   |
|                         |   |           |   |                   |   |                            |   |                      |   |
| Total credit  facilities     |   |           |   | $                      | 1,000  |                            | $      | 506                       |   | $ | 494 |   |

 

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(1)          **Cinergy Corp.** has historically followed thepractice of renewing its 364-day facility upon expiration.

 

In our credit facilities, **CinergyCorp.** has covenanted to maintain:

 

•                  aconsolidated net worth of $2 billion; and

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

 

A breach of these covenants could result in the termination of thecredit facilities and the acceleration of the related indebtedness.  In addition to breaches of covenants,certain other events that could result in the termination of available creditand acceleration of the related indebtedness include:

 

•                  bankruptcy;

•                  defaultsin the payment of other indebtedness; and

•                  judgmentsagainst the company that are not paid or insured.

 

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

 

*Variable Rate Pollution ControlNotes*

 

**CG&E** and **PSI** have issued certain variable ratepollution control notes (tax-exempt notes obtained to finance equipment or landdevelopment for pollution control purposes). Because the holders of these notes have the right to have their notesredeemed on a daily, monthly, or annual basis, they are reflected in *Notes payable and other short-term obligations*on the Balance Sheets

 

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for **Cinergy**, **CG&E**, and **PSI**.  In October 2002, **CG&E** and **PSI** redeemed $84 million and $47.6 million, respectively, ofvariable rate pollution control notes. At December 31, 2002, **CG&E**had $112 million and **PSI** had $35million outstanding in variable rate pollution control notes, classified as short-termdebt.  Any short-term pollution controlnote borrowings outstanding do not reduce the unused and available short-termdebt regulatory authority of **CG&E**,**PSI**, and **ULH&P**. See Notes 4 and 5 of the “Notes to Financial Statements” in “Item 8.Financial Statements and Supplementary Data” for additional informationregarding pollution control notes.

 

*Money Pool*

 

**Cinergy Corp.**,Cinergy Services, Inc. (Services), and our operating companies participate in amoney pool arrangement to better manage cash and working capitalrequirements.  Under this arrangement,those companies with surplus short-term funds provide short-term loans toaffiliates (other than **Cinergy Corp.**)participating under this arrangement. This surplus cash may be from internal or external sources.  The amounts outstanding under this moneypool arrangement are shown as a component of *Notesreceivable from affiliated companies* and/or *Notes payable to affiliated companies* onthe Balance Sheets of **CG&E**, **PSI**, and **ULH&P**.  Any money pool borrowings outstanding reducethe unused and available short-term debt regulatory authority of **CG&E**, **PSI**,and **ULH&P**.

 

***Operating Leases***

 

We have entered into operating lease agreements for various facilitiesand properties such as computer, communication and transportation equipment,and office space.  See Note 7(a) of the“Notes to Financial Statements” in “Item 8. Financial Statements and Supplementary Data” for additional information regardingoperating leases.

 

***Capital Leases***

 

Our operating companies are able to enter into capital leases subjectto the authorization limitations of the applicable state utilitycommissions.  New financing authority issubject to the approval of the respective commissions.  In May 2002, **ULH&P** received approval from the Kentucky Public ServiceCommission (KPSC) to enter into an additional $25 million of capital leaseobligations for the period ending December 31, 2004.  In June 2002, **PSI**received approval from the Indiana Utility Regulatory Commission (IURC) toenter into an additional $100 million of capital lease obligations for theperiod ending December 31, 2003.  InDecember 2002, **CG&E** receivedapproval from the PUCO to enter into an additional $74 million of capital leaseobligations for the period ending December 31, 2003.  See Note 7(b) of the “Notes to Financial Statements” in “Item8.  Financial Statements andSupplementary Data” for additional information regarding capital leases.

 

45

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***Long-term Debt***

 

A summary of our long-term debt authorizations at December 31, 2002, isas follows:

 

|                             |   | **Authorized** |   | **Used**          |   | **Available** |   |
|----------------------------------|--------|----------------|--------|-------------------|--------|---------------|--------|
|                             |   |           |   | **(in millions)** |   |          |   |
|                             |   |           |   |              |   |          |   |
| **Cinergy  Corp.**               |   |           |   |              |   |          |   |
| PUHCA total  capitalization(1)   |   | $              | 5,000  |              | $      | 1,750         |   | $ | 3,250 |   |
|                             |   |           |   |              |   |          |   |
| **CG&E**                     |   |           |   |              |   |          |   |
| State Public Utility  Commission |   | 500            |   | 500               |   | —        |   |
|                             |   |           |   |              |   |          |   |
| **PSI**                          |   |           |   |              |   |          |   |
| State Public  Utility Commission |   | 500            |   | 48                |   | 452           |   |
|                             |   |           |   |              |   |          |   |
| **ULH&P**                    |   |           |   |              |   |          |   |
| State Public  Utility Commission |   | 75             |   | —            |   | 75            |   |
|                                  |        |                |        |                   |        |               |        |  |  |  |

 

----

(1)          **Cinergy Corp.**, under PUHCA, was grantedapproval to increase total capitalization (which excludes retained earnings andaccumulated other comprehensive income (loss)) by $5 billion.  Outside this requirement, **Cinergy Corp.** is not subject to specificregulatory debt authorizations.

 

We are required to secure authority to issue long-term debt from theSEC under the PUHCA and the state utility commissions of Ohio, Kentucky, andIndiana.  The SEC under the PUHCAregulates the issuance of long-term debt by **CinergyCorp.**  The respective stateutility commissions regulate the issuance of long-term debt by our operatingcompanies.  In June 2000, the SEC issuedan order under the PUHCA authorizing **CinergyCorp.**, over a five-year period expiring in June 2005, to increaseits total capitalization based on a balance at December 31, 1999 (excludingretained earnings and accumulated other comprehensive income (loss)) by anadditional $5 billion, through the issuance of any combination of equity anddebt securities.  This increasedauthorization is subject to certain conditions, including, among others, thatcommon equity comprises at least 30 percent of **Cinergy Corp.’s** consolidated capital structure and that **Cinergy Corp.**, under certain circumstances,maintains an investment grade rating on its senior debt obligations.

 

In July 2002, **CG&E**filed a shelf registration statement with the SEC for the issuance of up to$700 million in any combination of unsecured debt securities, first mortgagebonds, or preferred stock.  This shelfregistration statement became effective in September 2002, and **CG&E** subsequently sold $500 million ofsenior unsecured debentures thereby reducing the standby capacity of its shelfregistration statement with the SEC to $200 million.  **PSI** maintains shelfregistration statements with the SEC with authority remaining to issue $400million in unsecured debentures, $205 million first in mortgage bonds, and $40million in preferred stock.  **ULH&P** may issue up to $30 million insecured or unsecured debt securities and up to $20 million in first mortgagebonds.

 

On January 15, 2003, **Cinergy Corp.**filed a shelf registration statement with the SEC with respect to the issuanceof common stock, preferred stock, and other securities including senior

 

46

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unsecured debt securities in an aggregate offering amount of $750million.  This registration statementbecame effective in January 2003, and on February 5, 2003, **Cinergy**sold $175 million of **Cinergy Corp.** common stock.

 

In February 2003, both **CG&E**and **PSI** filed shelf registrationstatements with the SEC for the issuance of unsecured debt securities, firstmortgage bonds, or preferred stock. These filings will increase the available amounts for these securitiesunder the SEC shelf registration statements by $300 million and $55 million for**CG&E** and **PSI**, respectively.

 

**CG&E**, **PSI**, and **ULH&P**are also subject to the various state public utility commissions for authorityto issue securities.  In December 2002, **CG&E** filed an application with the PUCOseeking authorization to issue secured and unsecured debt securities in anycombination up to an aggregate amount of $500 million for the period endingDecember 31, 2003.  In January 2003, thePUCO granted this request.

 

In October 2002, **PSI** fileda petition with the IURC for the purpose of securing authorization and approvalto issue promissory notes to **Cinergy Corp.**for the acquisition of the Butler County, Ohio and Henry County, Indianapeaking plants.  On January 22, 2003,the IURC granted this request, and on February 5, 2003, **PSI** issued the notes.

 

***Off-Balance SheetFinancing***

 

**Cinergy** usesspecial-purpose entities (SPE) from time to time to facilitate financing ofvarious projects.  SPEs are entitiesoften created for a single specified purpose, for example, to facilitatesecuritization, leasing, hedging, research and development, and reinsurance, orother transactions or arrangements.  Dueto our lack of control of these entities, a substantive investment by unrelatedparties, and various other criteria, **Cinergy**doesnot consolidate these SPEs.  TheFinancial Accounting Standards Board (FASB) issued Interpretation No. 46, *Consolidation of Variable Interest Entities*(Interpretation 46) in January 2003. This interpretation will significantly change the consolidationrequirements for SPEs and may impact certain of our SPEs.  Refer to “Accounting Changes” in “Results ofOperations - Future” for further information.

 

The following describes our major off-balance sheet financingsexcluding the investments **Cinergy**holds in various unconsolidated subsidiaries which are accounted for under theequity method (see Note 1(b) of the “Notes to Financial Statements” in “Item 8.Financial Statements and Supplementary Data”). **Cinergy Corp.** hasguaranteed approximately $8 million of the debt of these entities.

 

*(i)**                    Power Sales*

 

Cinergy Capital & Trading, Inc. (Capital & Trading) is a 10percent owner of two SPEs that were created to facilitate power sales toCentral Maine Power (Central Maine). The SPEs raised capital to purchase Central Maine’s existing powersupply contracts from two independent power producers.  The SPEs restructured the terms of theagreements, resulting in power sales contracts for approximately 45 MW, endingin 2009, and 35 MW, ending in 2016. Since the SPEs have no generation sources, power purchase agreementswere entered into with Capital & Trading with near equivalent terms.  The total debt outstanding at December 31,2002, within these two SPEs is approximately $233 million.  This debt is non-recourse to **Cinergy** and Capital & Trading in theevent of non-performance by Central Maine. A portion of the cash flows received by the SPEs from Central Maine isreserved to pay the interest and principal on the debt.

 

47

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Capital & Trading provides various services, including certaincredit support facilities.  The maximumexposure under the capped credit facilities is approximately $25 million.  There is a non-capped facility, but it canonly be called upon in the event the SPE breaches representations, violatescovenants, or other unlikely events.

 

Capital & Trading****accountsfor its 10 percent interest in both SPEs under the equity method of accounting.

 

*(ii)**                Leasing*

 

**Cinergy** had an arrangement with an SPE that had contracted to buy several combustionturbines from an unrelated party.  **Cinergy** entered this arrangement with theintention of leasing these turbines after construction.  In the second quarter of 2002, **Cinergy** exercised its option to purchasethe contractual rights to two of the turbines and subsequently sold thoserights to third parties.  **Cinergy** recognized a loss of approximately$7 million on this sale.  The rights tothe remaining turbines remained with the SPE.

 

In the fourth quarter of 2002, **Cinergy** decided not to pursue the leasingarrangement with the SPE.  We incurred acharge of approximately $14 million for the cancellation of the leasingarrangement.

 

*(iii)**            Sales of AccountsReceivable*

 

In February 2002, **CG&E**,**PSI**, and **ULH&P** replaced their existing agreementto sell certain of their accounts receivable and related collections.  **CinergyCorp.** formed Cinergy Receivables Company, LLC (Cinergy Receivables)to purchase, on a revolving basis, nearly all of the retail accounts receivableand related collections of **CG&E**,**PSI**, and **ULH&P**. **Cinergy Corp.** does notconsolidate Cinergy Receivables since it meets the requirements to be accountedfor as a qualifying SPE.  The sales ofreceivables are accounted for under Statement of Financial Accounting StandardsNo. 140, *Accounting for Transfers andServicing of Financial Assets and Extinguishments of Liabilities*(Statement 140).  For a more detaileddiscussion of our sales of accounts receivable, see Note 6 of the “Notes toFinancial Statements” in “Item 8. Financial Statements and Supplementary Data”.

 

48

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***Securities Ratings***

 

As of January 31, 2003, the major credit ratings agencies rated oursecurities as follows:

 

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

 

----

(1)          Fitch IBCA (Fitch)

(2)          Moody’s InvestorsService (Moody’s)

(3)          Standard & Poor’sRatings Services (S&P)

 

The lowest investment grade credit rating for Fitch isBBB-, Moody’s is Baa3, and S&P is BBB-.

 

In April 2002, Moody’s affirmed the credit ratings of **Cinergy Corp.** and its operatingsubsidiaries, **CG&E** and **PSI**. Moody’s also removed **Cinergy Corp.**from review for possible downgrade, and assigned stable outlooks to the debtand preferred stock of **Cinergy Corp.**and all of its operating subsidiaries.

 

In June 2002, S&P affirmed **CinergyCorp.’s** corporate credit rating, the rating of the company’scommercial paper program, and the secured debt ratings of **CG&E** and **PSI**, while lowering the credit ratings on otherissuances.  S&P removed all of the **Cinergy Corp.**,**CG&E**,****and **PSI** ratings from CreditWatch with negativeimplications and assigned a stable outlook.

 

Also in June 2002, Fitch affirmed the credit ratings of **Cinergy Corp.**  Fitch also changed the rating outlook on these securities fromnegative to stable and affirmed the ratings of **CG&E** and **PSI**.

 

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

 

49

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***Equity Securities***

 

Under the SEC’s June 2000 Order, **CinergyCorp.** is permitted to increase its total capitalization by $5billion (as previously discussed).  Theproceeds from any new issuances will be used for general corporate purposes.

 

In November 2001, **Cinergy Corp.**chose to reinstitute the practice of issuing new **Cinergy Corp.** common shares to meet its obligations under thevarious employee stock plans and the **CinergyCorp.** Direct Stock Purchase and Dividend Reinvestment Plan.  This replaces the previous practice ofpurchasing open market shares to fulfill plan obligations.  See Note 2(a) of the “Notes to FinancialStatements” in “Item 8.  FinancialStatements and Supplementary Data” for additional information on issued shares.

 

In December 2001, under an existing registration statement, **Cinergy Corp.** issued approximately $316million notional amount of combined securities (Income PRIDES), a component ofwhich is stock purchase contracts. These contracts obligate the holder to purchase common shares of **Cinergy Corp.** in, and/or before, February2005.  See Note 2(e) of the “Notes to FinancialStatements” in “Item 8.  FinancialStatements and Supplementary Data” for additional information regarding thestock purchase contracts.

 

In February 2002, **Cinergy Corp.**issued 6.5 million shares of common stock with net proceeds of approximately$200 million.

 

In July 2002, **Cinergy**implementeda policy that prohibits executive officers and directors from selling shares of**Cinergy Corp.** common stockacquired through the exercise of stock options (except to the extent necessaryto pay the exercise price and/or any accompanying tax obligation) until 90 daysafter they leave the company or board.

 

On January 15, 2003, **Cinergy Corp.**filed a registration statement with the SEC with respect to the issuance ofcommon stock, preferred stock, and other securities in an aggregate offeringamount of $750 million.  On February 5,2003, **Cinergy** sold 5.7 millionshares of common stock of **Cinergy Corp.**with net proceeds of approximately $175 million under this registrationstatement.

 

***Dividend Restrictions***

 

**Cinergy Corp.’s**ability to pay dividends to holders of its common stock is principallydependent on the ability of **CG&E**and **PSI** to pay **Cinergy Corp.** common dividends.  **CinergyCorp.**, **CG&E**, and **PSI** cannot pay dividends on their commonstock if their respective preferred stock dividends or preferred trustdividends are in arrears.  The amount ofcommon stock dividends that each company can pay is also limited by certaincapitalization and earnings requirements under **CG&E’s** and **PSI’s**credit instruments.  Currently, theserequirements do not impact the ability of either company to pay dividends onits common stock.

 

50

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***Other***

 

Where subject to rate regulations, our operating companies have theability to timely recover certain cash outlays through regulatory mechanismssuch as fuel adjustment clause, purchased power tracker (Tracker), gas costrecovery, and construction work in progress (CWIP) ratemaking.  For further discussion see “ElectricIndustry” and “Gas Industry”.

 

As opportunities arise, we will continue to monetize certain non-coreinvestments, which would include our international and renewable assetsoperated by Cinergy Global Resources, Inc. (Global Resources) and othertechnology investments.

 

51

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The Results of Operations discussions for **Cinergy**, **CG&E**,and **PSI** are combined within thissection.

 

**2002RESULTS OF OPERATIONS - HISTORICAL**

 

**Summary of Results**

 

Electric and gas gross margins and net income for **Cinergy**, **CG&E**,and **PSI** for the years endedDecember 31, 2002 and 2001 were as follows:

 
|                   |   | **Cinergy(1)**     |          | **CG&E and subsidiaries** |   | **PSI**     |   |
|------------------------|--------|--------------------|---------------|-------------------------------|--------|-------------|--------|
|                   |   | **2002**           |          | **2001**                      |   | **2002**    |   | **2001** |   | **2002** |   | **2001** |   |
|                   |   | **(in thousands)** |          |
|                   |   |               |          |                          |   |        |   |   |   |   |   |   |   |
| Electric gross  margin |   | **$**              | **2,400,458** |                          | $      | 2,250,044   |   | **$** | **1,228,005** |   | $ | 1,215,385 |   | **$** | **1,083,218** |   | $ | 942,530 |   |
| Gas gross margin       |   | **247,978**        |          | 231,017                       |   | **204,534** |   | 199,665 |   | **—** |   | — |   |
| Net income             |   | **360,576**        |          | 442,279                       |   | **263,696** |   | 326,654 |   | **214,249** |   | 162,333 |   |
|                        |        |                    |               |                               |        |             |        |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(1)          Theresults of **Cinergy**also includeamounts related to non-registrants.

 

Net income for the year ended December 31, 2002, was $361 million($2.13 per share on a diluted basis) as compared to $442 million ($2.75 pershare on a diluted basis) for the same period last year.  Income before taxes for the period was $558million compared to $718 million for the prior year.  Increased gross margins were offset by the recognition of costsassociated with employee severance programs, charges related to the write-offof certain investments, and higher operating costs.  Increased gross margins were also offset by a cumulative effectof a change in accounting principle related to the implementation of Statementof Financial Accounting Standards No. 142, *Goodwilland Other Intangible Assets* (Statement 142).

 

The explanations below follow the line items on the Statements ofIncome for **Cinergy**, **CG&E**, and **PSI**.  However, only theline items that varied significantly from prior periods are discussed.

 

**Electric Operating Revenues**

 
|           |   | **Cinergy(1)**     |      | **CG&E  and subsidiaries** |   | **PSI**      |   |
|----------------|--------|--------------------|-----------|--------------------------------|--------|--------------|--------|
|           |   | **2002**           |      | **2001**                       |   | **% Change** |   | **2002** |   | **2001** |   | **% Change** |   | **2002** |   | **2001** |   | **% Change** |   |
|           |   | **(in  millions)** |      |
|           |   |               |      |                           |   |         |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Retail         |   | **$**              | **2,771** |                           | $      | 2,691        |   | 3 |   | **$** | **1,412** |   | $ | 1,444 |   | (2 | ) | **$** | **1,360** |   | $ | 1,247 |   | 9 |   |
| Wholesale      |   | **3,970**          |      | 5,482                          |   | (28          | )      | **2,964** |   | 2,645 |   | 12 |   | **959** |   | 2,835 |   | (66 | ) |
| Transportation |   | **13**             |      | 3                              |   | —       |   | **13** |   | 3 |   | — |   | **—** |   | — |   | — |   |
| Other          |   | **158**            |      | 80                             |   | 98           |   | **125** |   | 64 |   | 95 |   | **40** |   | 26 |   | 54 |   |
| Total          |   | **$**              | **6,912** |                           | $      | 8,256        |   | (16 | ) | **$** | **4,514** |   | $ | 4,156 |   | 9 |   | **$** | **2,359** |   | $ | 4,108 |   | (43 | ) |

 

----

(1)          Theresults of **Cinergy** also includeamounts related to non-registrants.

 

*Electric operating revenues*decreased for **Cinergy** and **PSI**and increased for **CG&E** for the year ended December 31,2002, as compared to 2001.  Increases inretail sales, including transportation, were offset by an overall reduction inwholesale sales.

 

52

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**Cinergy’s** wholesalesales decrease primarily reflects a reduction in the average price per megawatthour (MWh) realized on non-firm wholesale transactions related to **CG&E’s** and **PSI’s** energy marketing and trading activities.  Non-firm power is power without a guaranteedcommitment for physical delivery. Additionally, **CG&E’s**increase and **PSI’s** decrease inwholesale revenues reflect the implementation of the new joint operating agreementeffective April 2002 (see “Termination of Operating Agreement” in “Results ofOperations - Future”).  In connectionwith implementation of the new operating agreement, new wholesale salestransactions entered into since April 2002 were originated on behalf of **CG&E**.

 

Retail revenues increased for **Cinergy**and **PSI** due toincreased MWh sales, attributable to weather and increased customer usage.  Also contributing to this increase werechanges in rate tariff adjustments associated with demand-side management,Tracker, CWIP, and fuel cost recovery programs.  The cost of fuel for **PSI’s**retail customers is passed on dollar-for-dollar under the state mandated fuelcost recovery mechanism.  **CG&E’s**retail revenues were relativelyflat for the year ended December 31, 2002, as compared to 2001.  Increased residential sales, primarilyattributable to weather, were offset by decreases in revenue from commercialand industrial customers.  This decreasereflects a sluggish economy and the migration of such customers to atransportation-only tariff, in connection with the Ohio electric customerchoice program.

 

Other *Electric operating revenues*for **Cinergy**, **CG&E**, and **PSI** increased for the year ended December 31, 2002, ascompared to 2001.  **Cinergy’s**and **CG&E’s** increase is due primarily to third party coalsales.** Cinergy’s**, **CG&E’s**,and **PSI’s** increase also reflectstransmission revenues associated with the Midwest Independent TransmissionSystem Operator, Inc. (Midwest ISO) which began operations in early 2002.

 

**Gas Operating Revenues**

 
|           |   | **Cinergy(1)**       |      | **CG&E  and subsidiaries** |     |
|----------------|--------|----------------------|-----------|--------------------------------|----------|
|           |   | **2002**             |      | **2001**                       |     | **% Change** |   | **2002** |   | **2001** |   | **% Change** |   |
|           |   | ***(in  millions)*** | * *  |
|           |   |                 | * *  |                           | * * |   | * * |   | * * |   | * * |   | * * |
| Retail         |   | **$**                | **386**   |                           | $        | 547 |   | (29 | ) | **$** | **386** |   | $ | 547 |   | (29 | ) |
| Wholesale      |   | **4,481**            |      | 4,068                          |     | 10 |   | **—** |   | — |   | — |   |
| Transportation |   | **47**               |      | 40                             |     | 18 |   | **47** |   | 40 |   | 18 |   |
| Other          |   | **3**                |      | 8                              |     | (63 | ) | **4** |   | 9 |   | (56 | ) |
| Total          |   | **$**                | **4,917** |                           | $        | 4,663 |   | 5 |   | **$** | **437** |   | $ | 596 |   | (27 | ) |

 

----

(1)                                  Theresults of **Cinergy** also includeamounts related to non-registrants.

 

*Gas operating revenues*for **Cinergy** increased for the yearended December 31, 2002, as compared to 2001. **Cinergy’s** increase wasprimarily the result of increased volumes sold by Cinergy Marketing &Trading, LP (Marketing & Trading), slightly offset by a lower pricereceived per thousand cubic feet (mcf). Wholesale natural gas commodity spot prices were 16 percent lower onaverage than the year ended December 31, 2001.

 

**CG&E’s** retailgas revenues decreased primarily due to a lower price received per mcfdelivered.  The lower price reflects asubstantial decrease in the wholesale gas commodity cost, which is passeddirectly to the retail customer dollar-for-dollar under the gas cost recoverymechanism

 

53

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that is mandated by state law. Partially offsetting this decrease in retail gas revenues was anincrease in **CG&E’s** base ratesapproved by the PUCO in May 2002 (See “**CG&E**Gas Rate Case” in “Results of Operations - Future”).

 

**Other Revenues**

 

*Other revenues* for**Cinergy**increased for the yearended December 31, 2002, as compared to 2001. This increase is primarily due to the sale of synthetic fuel, whichbegan in July 2002.

 

**Operating Expenses**

 
|                          |   | **Cinergy(1)**      |       | **CG&E  and subsidiaries** |     | **PSI**       |     |
|-------------------------------|--------|---------------------|------------|--------------------------------|----------|---------------|----------|
|                          |   | **2002**            |       | **2001**                       |     | **%  Change** |     | **2002** |   | **2001** |   | **%  Change** |   | **2002** |   | **2001** |   | **%  Change** |   |
|                          |   | ***(in millions)*** |       |
|                          |   |                | * *   |                           | * * |          | * * |   | * * |   | * * |   | * * |   | * * |   | * * |   | * * |
| Fuel                          |   | **$**               | **865**    |                           | $        | 779           |     | 11 |   | **$** | **410** |   | $ | 332 |   | 23 |   | **$** | **455** |   | $ | 453 |   | — |   |
| Purchased and exchanged power |   | **3,647**           |       | 5,227                          |     | (30           | )        | **2,876** |   | 2,609 |   | 10 |   | **821** |   | 2,713 |   | (70 | ) |
| Gas purchased                 |   | **4,669**           |       | 4,432                          |     | 5             |     | **233** |   | 397 |   | (41 | ) | **—** |   | — |   | — |   |
| Operation and maintenance     |   | **1,298**           |       | 1,013                          |     | 28            |     | **533** |   | 442 |   | 21 |   | **489** |   | 413 |   | 18 |   |
| Depreciation                  |   | **414**             |       | 374                            |     | 11            |     | **196** |   | 187 |   | 5 |   | **156** |   | 149 |   | 5 |   |
| Taxes other than income taxes |   | **263**             |       | 228                            |     | 15            |     | **198** |   | 174 |   | 14 |   | **57** |   | 50 |   | 14 |   |
| Total                         |   | **$**               | **11,156** |                           | $        | 12,053        |     | (7 | ) | **$** | **4,446** |   | $ | 4,141 |   | 7 |   | **$** | **1,978** |   | $ | 3,778 |   | (48 | ) |

 

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(1)          Theresults of **Cinergy** also includeamounts related to non-registrants.

 

***Fuel***

* *

*Fuel*represents the cost of coal, natural gas, and oil that is used to generateelectricity.   The following tabledetails the changes to fuel expense from the year ended December 31, 2001, tothe year ended December 31, 2002:

 

|                                     |   | **Cinergy(1)**      |       | **CG&E** |       | **PSI**    |       |
|------------------------------------------|--------|---------------------|------------|--------------|------------|------------|------------|
|                                     |   | ***(in millions)*** |       |
|                                     |   |                | * *   |         | * *   |       | * *   |
| 2001 fuel expense                        |   | $                   | 779        |         | $          | 332        |       | $ | 453 |   |
|                                     |   |                |       |         |       |       |       |
| *Increase (Decrease) due to changes in:* |   |                | ** ** |         | ** ** |       | ** ** |
| **Price of fuel**                        |   | **(8**              | **)**      | **(22**      | **)**      | **14**     | ** ** |
| **Deferred fuel cost**                   |   | **(5**              | **)**      | **—**   | ** ** | **(5**     | **)**      |
| **MWh generation**                       |   | **23**              | ** ** | **30**       | ** ** | **(7**     | **)**      |
| **Other(2)**                             |   | **76**              | ** ** | **70**       | ** ** | **—** | ** ** |
|                                     |   |                | ** ** |         | ** ** |       | ** ** |
| **2002 fuel expense**                    |   | **$**               | **865**    | ** **   | **$**      | **410**    | ** ** | **$** | **455** | ** ** |

 

----

(1)          Theresults of **Cinergy** also includeamounts related to non-registrants.

(2)          Includescosts of third party coal sales through our marketing and trading activities.

 

54

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***Purchased andExchanged Power***

 

*Purchased and exchanged power*expensedecreased**for **Cinergy** and **PSI** and increased for **CG&E**for the year ended December 31, 2002, as compared to 2001.  **Cinergy’s**decreaseprimarily reflects a reduction in the average price paid per MWh as wholesaleelectric on-peak commodity prices were approximately 23 percent lower onaverage as compared to 2001.  **CG&E’s**and**PSI’s***purchased andexchanged power* expense also reflects the implementation of the newjoint operating agreement beginning in April 2002.

 

***Gas Purchased***

* *

*Gas purchased*expense increased for **Cinergy** forthe year ended December 31, 2002, as compared to 2001.  **Cinergy’s**increase primarily reflects higher gas volumes purchased by Marketing &Trading.  Increased volumes purchasedwere partially offset by decreases in the average cost of mcf purchased.  Wholesale natural gas commodity spot priceswere 16 percent lower on average for the year ended December 31, 2002, ascompared to 2001.  **CG&E’s***gaspurchased* expense decreased primarily due to a decrease in theaverage cost purchased per mcf.  **CG&E’s** wholesale gas commodity cost ispassed directly to the retail customer dollar-for-dollar under the gas costrecovery mechanism that is mandated by state law.

 

***Operation andMaintenance***

* *

*Operation and maintenance*expense increased for **Cinergy**, **CG&E**, and **PSI** for the year ended December 31, 2002, as compared to2001.  **Cinergy’s**,**CG&E’s**, and **PSI’s** increase reflects the recognition ofcosts associated with employee severance programs, which began in the secondquarter of 2002.  Also contributing tothis increase were higher transmission costs, increased costs of employeecompensation and benefit programs, and expenditures related to processimprovement and performance measurement initiatives.  **Cinergy’s**and**PSI’s** increase also reflects increasedamortization of demand-side management expenditures.  Additionally, **Cinergy’s**increase includes costs associated with the production of synthetic fuel,beginning in July 2002 and increased operating costs for certain of ournon-regulated investments.

 

***Depreciation***

 

*Depreciation* expenseincreased for **Cinergy**, **CG&E**, and **PSI** for the year ended December 31, 2002, as compared to2001.  This increase was primarilyattributable to the addition of depreciable plant, including **Cinergy’s** acquisitions of non-regulatedpeaking generation in 2001 and a synthetic fuel project in 2002.

 

***Taxes Other ThanIncome Taxes***

* *

*Taxes other than income taxes*expense increased for **Cinergy**, **CG&E**, and **PSI** for the year ended December 31, 2002, as compared to2001.  This increase is primarilyattributable to increased property taxes. **Cinergy’s** and **CG&E’s** increase also reflects other taxchanges associated with deregulation in Ohio.

 

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**Equity in Earnings (Losses) ofUnconsolidated Subsidiaries**

* *

*Equity in earnings (losses)**of unconsolidated subsidiaries*increased for the year ended December 31, 2002, as compared to 2001, primarilydue to changes in the market valuation of certain investments and thedissolution and write-off of subsidiaries in 2001.

 

**Miscellaneous - Net**

 

*Miscellaneous - net*decreased for **Cinergy** for the yearended December 31, 2002, as compared to 2001, primarily reflecting thewrite-off of technology investments and costs accrued related to thetermination of a contract for the construction of combustion turbines.  Partially offsetting this decrease were netgains realized from the sale of equity investments in certain renewable energyprojects.

 

**Interest**

 

*Interest* expensedecreased for **Cinergy**, **CG&E**, and **PSI** for the year ended December 31, 2002, as compared to 2001,primarily as a result of lower interest rates.

 

**Preferred Dividend Requirement ofSubsidiary Trust**

* *

*Preferred dividend requirement ofsubsidiary trust* relates to quarterly payments to be made toholders of **Cinergy’s** preferredtrust securities, which were issued in December 2001.

 

**Income Taxes**

 

*Income taxes*expense decreased for **Cinergy** and **CG&E**for the year ended December 31,2002, as compared to 2001.  Thisdecrease was primarily due to the decrease in taxable income.  Also contributing to **Cinergy’s** decrease were tax creditsassociated with the production and sale of synthetic fuel beginning July2002.  **PSI’s**income tax expense increased for the year ended December 31, 2002, as comparedto 2001, mainly due to the increase in taxable income.

 

**Discontinued Operations**

 

In 2002,**Cinergy** soldand/or classified as held for sale, several non-core investments.  Pursuant to Statement of FinancialAccounting Standards No. 144, *Accounting forthe Impairment of Long-lived Assets* (Statement 144), these investmentshave been classified as discontinued operations in our financialstatements.  See Note 15 of the “Notesto Financial Statements” in “Item 8. Financial Statements and Supplementary Data” for further information.

 

**Cumulative Effect of a Change in AccountingPrinciple**

 

**Cinergy**recognizeda*Cumulative effect of a change inaccounting principle* of approximately $11 million (net of tax) as aresult of an impairment charge for goodwill related to the implementation ofStatement 142.  See Note 14 of the “Notesto Financial Statements” in “Item 8. Financial Statements and Supplementary Data” for further information.

 

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**ULH&P**

 

The Results of Operations discussion for **ULH&P** is presented only for the year ended December 31,2002, in accordance with General Instruction I(2)(a).

 

Electric and gas margins and net income for **ULH&P** for the year ended December 31, 2002 and 2001, wereas follows:

 

|                  |   | **ULH&P**         |       |
|-----------------------|--------|-----------------------|------------|
|                  |   | **2002**              |       | **2001** |   |
|                  |   | ***(in  thousands)*** | * *   |
|                  |   |                  |       |   | * * |
| Electric gross margin |   | $                     | **67,122** |   | $ | 79,398 |   |
| Gas gross margin      |   | **34,820**            |       | 36,740 |   |
| Net income            |   | **12,150**            |       | 35,924 |   |
|                       |        |                       |            |  |  |  |  |

 

**Electric Gross Margins**

 

*Electric operating revenues*decreased for the year ended December 31, 2002, as compared to 2001, primarilydue to the recognition of revenues in 2001 which were previously deferredsubject to refund in connection with a 2000 retail rate filing with theKPSC.  A settlement was reached in May2001, allowing **ULH&P** to retainthese revenues. Partially offsetting this decrease in revenues was an increasein sales attributable to warmer than normal weather.

 

*Electricity purchased from parentcompany for resale* increased for the year ended December 31,2002, as compared to 2001, due primarily to a new wholesale power contract with**CG&E** that became effective inJanuary 2002.  This five-year agreementis a negotiated fixed-rate contract that replaced the previous cost of servicebased contract that expired on December 31, 2001.

 

**Gas Gross Margins**

 

*Gas operating revenues*decreased for the year ended December 31, 2002, as compared to 2001.  This decrease is primarily due to lowerprice received per mcf.  The lower pricereflects a substantial decrease in the wholesale gas commodity cost.  Partially offsetting the decrease in gasrevenues was an increase in **ULH&P’s**base rates approved by the KPSC in January 2002 (see “**ULH&P** Gas Rate Case” in “Results ofOperations - Future”).

 

*Gas purchased*expenses decreased for the year ended December 31, 2002, as compared to 2001,due to lower prices paid per mcf.  Thewholesale gas commodity cost is passed directly to the retail customerdollar-for-dollar under the gas cost recovery mechanism that is mandated understate law.

 

**Operation and Maintenance**

 

*Operation and maintenance*expense increased for the year ended December 31, 2002, as compared to 2001,due primarily to higher transmission costs associated with the new wholesalepower contract with **CG&E** thatbecame effective in January 2002.

### ** **

### **57**

### ****

### ** **

**2001RESULTS OF OPERATIONS - HISTORICAL**

 

**Summary of Results**

 

Electric and gas gross margins and net income for **Cinergy**, **CG&E**,and **PSI** for the years endedDecember 31, 2001 and 2000 were as follows:

 
|                  |   | **Cinergy(1)**       |      | **CG&E  and subsidiaries** |     | **PSI**   |     |
|-----------------------|--------|----------------------|-----------|--------------------------------|----------|-----------|----------|
|                  |   | **2001**             |      | **2000**                       |     | **2001**  |     | **2000** |   | **2001** |   | **2000** |   |
|                  |   | ***(in thousands)*** |      |
|                  |   |                 | * *  |                           | * * |      | * * |   | * * |   | * * |   | * * |
| Electric gross margin |   | $                    | 2,250,044 |                           | $        | 2,220,084 |     | $ | 1,215,385 |   | $ | 1,183,816 |   | $ | 942,530 |   | $ | 959,541 |   |
| Gas gross margin      |   | 231,017              |      | 267,304                        |     | 199,665   |     | 224,633 |   | — |   | — |   |
| Net income            |   | 442,279              |      | 399,466                        |     | 326,654   |     | 266,820 |   | 162,333 |   | 135,398 |   |
|                       |        |                      |           |                                |          |           |          |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

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

 

Diluted earnings per share for the year ended December 31, 2001, was$2.75 as compared to $2.50 for the year ended December 31, 2000.  Included in 2000 results were previouslyreported one-time charges totaling $.11 per share related to a tentativeagreement reached with the EPA and a limited early retirement program (LERP)offered to employees during 2000.

 

The increase in 2001 earnings was primarily attributable to increasedelectric gross margins within Energy Merchant Business Unit’s (Energy Merchant)origination, marketing and trading segment, and reduced operatingexpenditures.  Partially offsetting thisincrease were lower electric gross margins within our regulated operations,mainly driven by mild weather and a slowed economy, and increased depreciationand interest expenses associated with new investments.  Gas gross margins decreased for the year endedDecember 31, 2001, as compared to 2000, primarily as a result of mild weather.

 

The explanations below follow the line items on the Statements ofIncome for **Cinergy**, **CG&E**, and **PSI**.  However, only theline items that varied significantly from prior periods are discussed.

 

**Electric Operating Revenues**

 
|           |   | **Cinergy(1)**      |     | **CG&E  and subsidiaries** |     | **PSI**       |     |
|----------------|--------|---------------------|----------|--------------------------------|----------|---------------|----------|
|           |   | **2001**            |     | **2000**                       |     | **%  Change** |     | **2001** |   | **2000** |   | **%  Change** |   | **2001** |   | **2000** |   | **%  Change** |   |
|           |   | ***(in millions)*** |     |
|           |   |                | * * |                           | * * |          | * * |   | * * |   | * * |   | * * |   | * * |   | * * |   | * * |
| Retail         |   | $                   | 2,691    |                           | $        | 2,692         |     | — |   | $ | 1,444 |   | $ | 1,482 |   | (3 | ) | $ | 1,247 |   | $ | 1,210 |   | 3 |   |
| Wholesale      |   | 5,482               |     | 2,615                          |     | —        |     | 2,645 |   | 1,233 |   | — |   | 2,835 |   | 1,450 |   | 96 |   |
| Transportation |   | 3                   |     | —                         |     | —        |     | 3 |   | — |   | — |   | — |   | — |   | — |   |
| Other          |   | 80                  |     | 52                             |     | 54            |     | 64 |   | 31 |   | — |   | 26 |   | 31 |   | (16 | ) |
| Total          |   | $                   | 8,256    |                           | $        | 5,359         |     | 54 |   | $ | 4,156 |   | $ | 2,746 |   | 51 |   | $ | 4,108 |   | $ | 2,691 |   | 53 |   |

 

----

(1)          Theresults of **Cinergy** also includeamounts related to non-registrants.

 

*Electric operating revenues*for **Cinergy**, **CG&E**, and **PSI** increased for the year ended December 31, 2001, ascompared to 2000, mainly due to an increase in volumes and average

 

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price per MWh realized on non-firm wholesale transactions related toenergy marketing and trading activities. Non-firm power is power without a guaranteed commitment for physicaldelivery.

 

**Gas Operating Revenues**

 

|           |   | **Cinergy(1)**    | ** ** | **CG&E and subsidiaries** | ** ** |
|----------------|--------|-------------------|------------|-------------------------------|------------|
|           |   | **2001**          |       | **2000**                      |       | **% Change** |   | **2001** |   | **2000** |   | **%Change** | ** ** |
|           |   | **(in millions)** | ** ** |
|           |   |              |       |                          |       |   |   |   |   |   |   |   |   |
| Retail         |   | $                 | 547        |                          | $          | 429 |   | 28 |   | $ | 547 |   | $ | 429 |   | 28 |   |
| Wholesale      |   | 4,068             |       | 2,454                         |       | 66 |   | — |   | — |   | — |   |
| Transportation |   | 40                |       | 56                            |       | (29 | ) | 40 |   | 56 |   | (29 | ) |
| Other          |   | 8                 |       | 3                             |       | — |   | 9 |   | 6 |   | 50 |   |
| Total          |   | $                 | 4,663      |                          | $          | 2,942 |   | 58 |   | $ | 596 |   | $ | 491 |   | 21 |   |

 

----

(1)     Theresults of **Cinergy** also includeamounts related to non-registrants.

 

*Gas operating revenues*for **Cinergy** increased for the yearended December 31, 2001, as compared to 2000. **Cinergy’s** increase wasprimarily the result of increased volumes sold by Marketing & Trading.

 

**CG&E’s** retailgas revenues increased primarily due to a higher price received per mcfsold.  This increase was partiallyoffset by a decrease in retail gas sales resulting from warmer weather duringthe fourth quarter of 2001.  The higherprice reflects a substantial increase in the wholesale gas commodity costduring the first six months, which is passed directly to the retail customerdollar-for-dollar under the gas cost recovery mechanism that is mandated bystate law.  Retail sales also increasedand transportation sales decreased due to transportation customers (customerswho purchase gas directly from other suppliers) returning to full gas service(customers who purchase gas and utilize the transportation services of **CG&E**).

 

**Operating Expenses**

 
|                           |   | **Cinergy(1)**    |   | **CG&E and subsidiaries** |   | **PSI**      |   |
|--------------------------------|--------|-------------------|--------|-------------------------------|--------|--------------|--------|
|                           |   | **2001**          |   | **2000**                      |   | **% Change** |   | **2001** |   | **2000** |   | **% Change** |   | **2001** |   | **2000** |   | **% Change** |   |
|                           |   | **(in millions)** |   |
|                           |   |              |   |                          |   |         |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Fuel                           |   | $                 | 779    |                          | $      | 760          |   | 3 |   | $ | 332 |   | $ | 344 |   | (3 | ) | $ | 453 |   | $ | 407 |   | 11 |   |
| Purchased and  exchanged power |   | 5,227             |   | 2,379                         |   | —       |   | 2,609 |   | 1,218 |   | — |   | 2,713 |   | 1,325 |   | — |   |
| Gas purchased                  |   | 4,432             |   | 2,675                         |   | 66           |   | 397 |   | 266 |   | 49 |   | — |   | — |   | — |   |
| Operation and  maintenance     |   | 1,013             |   | 1,112                         |   | (9           | )      | 442 |   | 492 |   | (10 | ) | 413 |   | 464 |   | (11 | ) |
| Depreciation                   |   | 374               |   | 342                           |   | 9            |   | 187 |   | 181 |   | 3 |   | 149 |   | 141 |   | 6 |   |
| Taxes other than  income taxes |   | 228               |   | 268                           |   | (15          | )      | 174 |   | 208 |   | (16 | ) | 50 |   | 57 |   | (12 | ) |
| Total                          |   | $                 | 12,053 |                          | $      | 7,536        |   | 60 |   | $ | 4,141 |   | $ | 2,709 |   | 53 |   | $ | 3,778 |   | $ | 2,394 |   | 58 |   |

 

----

(1)     Theresults of **Cinergy** also includeamounts related to non-registrants.

 

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**Fuel**

 

*Fuel* representsthe cost of coal, natural gas, and oil that is used to generateelectricity.  The following tabledetails the changes to fuel expense from the year ended December 31, 2000, tothe year ended December 31, 2001:

 

|                                      |   | **Cinergy(1)**    |   | **CG&E** |   | **PSI** |   |
|-------------------------------------------|--------|-------------------|--------|--------------|--------|---------|--------|
|                                      |   | **(in millions)** |   |
|                                      |   |              |   |         |   |    |   |
| 2000 fuel  expense                        |   | $                 | 760    |         | $      | 344     |   | $ | 407 |   |
|                                      |   |              |   |         |   |    |   |
| *Increase  (Decrease) due to changes in:* |   |              |   |         |   |    |   |
| Price of fuel                             |   | 47                |   | 22           |   | 25      |   |
| Deferred fuel  cost                       |   | 45                |   | 2            |   | 43      |   |
| MWh generation                            |   | (58               | )      | (36          | )      | (22     | )      |
| Other                                     |   | (15               | )      | —       |   | —  |   |
|                                      |   |              |   |         |   |    |   |
| 2001 fuel  expense                        |   | $                 | 779    |         | $      | 332     |   | $ | 453 |   |

 

----

(1)     Theresults of **Cinergy** also includeamounts related to non-registrants.

 

**Purchased and Exchanged Power**

** **

*Purchased and exchanged power*expense for **Cinergy**, **CG&E**, and **PSI** increased for the year ended December 31, 2001, ascompared to 2000, primarily due to an increase in purchases of non-firmwholesale power, reflecting higher sales volumes and higher prices paid perMWh.

 

**Gas Purchased**

 

*Gas purchased*expense for **Cinergy** increased forthe year ended December 31, 2001, as compared to 2000, primarily due to anincrease in gas commodity trading volumes. **CG&E’s***gas purchased* expense increased primarilydue to higher prices paid per mcf during the first six months of 2001.  **CG&E’s**wholesale gas commodity cost is passed directly to the retail customer dollar-for-dollarunder the gas cost recovery mechanism that is mandated by state law.

 

**Operation and Maintenance**

 

*Operation and maintenance*expense for **Cinergy**, **CG&E**, and **PSI** decreased for the year ended December 31, 2001, ascompared to 2000, due in part to one-time charges related to a tentativeagreement reached with the EPA in late 2000 and the LERP offered during 2000,as part of a corporate restructuring initiative.  **Cinergy’s** and **CG&E’s** decrease is also attributable toa sale of emission allowances, due to decreased electric generation, and **Cinergy’s** and **PSI’s** decrease reflects the reduction in amortization ofdemand-side management costs, resulting from the expiration of the agreement inMay 2000.

 

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**Depreciation**

 

*Depreciation*expensefor **Cinergy** increased for the yearended December 31, 2001, as compared to 2000. This increase was primarily attributable to the acquisition ofadditional depreciable plant, including investments in peaking generation.

 

**Taxes Other Than Income Taxes**

 

*Taxes other than income taxes*expense for **Cinergy**, **CG&E**, and **PSI** decreased for the year ended December 31, 2001, ascompared to 2000, primarily due to reduced property tax expense and other taxchanges associated with deregulation in Ohio.

 

**Miscellaneous – Net**

 

*Miscellaneous - net*increased for **Cinergy, CG&E**,****and **PSI**for the year ended December 31, 2001, as compared to 2000, due in part to gainsassociated with the demutualization of one of our medical insurancecarriers.  **Cinergy’s** and **PSI’s**increase also reflects income associated with capitalized financing costs of **PSI’s** pollution control projects.

 

**Interest**

 

*Interest* expensefor **Cinergy** increased for the yearended December 31, 2001, as compared to 2000, mainly due to debt issuancesprincipally associated with the acquisition of additional peakinggeneration.  Partially offsetting thisincrease was a decrease in short-term interest rates.

 

**Income Taxes**

 

*Income taxes*expense for **Cinergy**, **CG&E**, and **PSI** increased for the year ended December 31, 2001, ascompared to 2000, primarily due to an increase in taxable income.

 

**Discontinued Operations**

 

In 2002, **Cinergy** soldand/or classified as held for sale, several non-core investments resulting in areclassification of those investments as discontinued operations.  See Note 15 of the “Notes to FinancialStatements” in “Item 8.  FinancialStatements and Supplementary Data” for further information.

 

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

 

**FUTURE EXPECTATIONS/TRENDS**

 

In the “Future Expectations/Trends” section, we discuss electric andgas industry developments, market risk sensitive instruments and positions,inflation, and accounting matters.  Eachof these discussions will address the current status and potential futureimpact on our results of operations and financial condition.

 

**ELECTRIC INDUSTRY**

 

The utility industry has traditionally operated as a regulated monopolybut is transitioning to an environment of increased wholesale and retailcompetition.  Regulatory and legislativedecisions being made at the federal and state levels are aimed at promotingcustomer choice and are shaping this transition.  Customer choice provides the customer with the ability to selectan energy supplier (the company that generates or supplies the commodity) in anopen and competitive marketplace.  Inparticular, the FERC issued a Notice of Proposed Rulemaking (NOPR) proposingsignificant changes to enhance wholesale competition and create more customeroptions, among other initiatives.

 

The events and circumstances with California, Enron Corp. (Enron), andothers, are significantly influencing the transition to increased wholesale andretail competition.  In 2002, wholesaleelectric markets were characterized by lower prices, decreased liquidity, andthe near evaporation of mid- to long-term markets.  Developers cancelled turbine orders and abandoned existing powerprojects.  Several trading operationsannounced plans to curtail or exit their wholesale trading activities.  Credit rating agencies downgraded manyindustry participants.  In this periodof unprecedented change and uncertainty, energy industry participants arere-evaluating their strategies and business models.

 

**Wholesale Market Developments**

** **

***FERC NOPR on“Remedying Undue Discrimination through Open Access Transmission Service andStandard Electricity Market Design”***

 

In July 2002, the FERC issued a NOPR on “Remedying Undue Discriminationthrough Open Access Transmission Service and Standard Electricity MarketDesign” that proposed significant changes, intended by FERC, to enhancewholesale competition, enable efficient transmission system development,provide correct pricing signals for investment in transmission and generationfacilities, and create more customer options. Market monitoring and market power mitigation proposals are alsocritical parts of the proposals for standardized power market rules.  As part of this process, the FERC proposesto amend its regulations under the Federal Power Act, to modify the pro-formaopen access transmission tariff established under the FERC’s Order No.888.  FERC proposes to require allpublic utilities with open access transmission tariffs to file modifications totheir tariffs to implement its proposed standardized transmission services andstandardized wholesale electric market design. On November 15, 2002, **Cinergy**submitted initial NOPR comments to the FERC as part of this proceeding,generally supporting the FERC’s pro-competitive goals but suggesting modificationsand sensitivity to some regional differences. Pursuant to FERC’s procedural directives, **Cinergy** anticipates filing additional comments on this NOPRwith the FERC in the first quarter of 2003.

 

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The FERC issued a news release on January 13, 2003, stating itsintention to issue an additional document on this NOPR in April 2003.  The FERC also indicated that it would seekcomments on the new document from interested parties.  As a result, it is likely that the original timeline included inthe NOPR will be delayed.  **Cinergy**continues to evaluate this NOPR,but at this time, cannot determine the impact to either its financial positionor results of operations.

 

**FERC NOPR on New Standards of ConductRegulations**

 

In September 2001, the FERC issued a NOPR proposing to promulgate newstandards of conduct regulations that would apply, uniformly, to natural gaspipelines and transmitting public utilities. The FERC is proposing to adopt one set of standards of conduct to governthe relationships between regulated transmission providers and all their energyaffiliates, broadening the definition of an affiliate covered by the standardsof conduct from the more narrow definition in the existing regulations.  At this time, we are unable to predicteither the outcome of this proceeding or its effect on **Cinergy**.

 

***Supply-side Actions***

 

In December 2001, the IURC approved **PSI’s**plan for converting its Noblesville generating station from coal to naturalgas, which will increase the electric generating capacity at the plant fromapproximately 100 megawatts (MW) to 300 MW. The conversion is expected to be completed in June 2003.  In addition to increasing capacity, uponcompletion of the project, overall emissions to the environment will bereduced.  Also, in December 2001, **PSI** filed a petition with the IURC toacquire the Butler County, Ohio and Henry County, Indiana peaking plants fromsubsidiaries of Capital & Trading. In December 2002, the IURC approved **PSI’s**purchase of the two plants, and on February 4, 2003, the FERC issued an orderapproving the transfer.  See “Transferof Generating Assets to **PSI**” foradditional information.

 

***Demand-side Actions***

 

Pursuant to Ohio’s customer choice legislation enacted in 2001, fourpercent of **CG&E’s** residentialcustomers and 23 percent of **CG&E’s**non-residential retail customers, in terms of annual energy consumption, hadswitched electric suppliers as of December 31, 2002.  **CG&E** currentlyhas no plans to replace these customers by acquiring new retail customers,although **CG&E** reserves theflexibility to replace load in the wholesale market, to the extent itchooses.  For a further discussion onOhio deregulation, see “Retail Market Developments” in this section.

 

In July 2002, we experienced record peak loads of 11,133 MW, 5,265 MW,****and 6,088 MW for**Cinergy**, **CG&E**,and **PSI**, respectively.  **Cinergy**and **CG&E**subsequently set newrecord peak loads of 11,305 MW and 5,311 MW, respectively, in August 2002.  We met customer demands with our own supplyand planned purchases from other regional electric suppliers.

 

**Retail Market Developments**

 

Currently, regulatory and legislative initiatives shaping thetransition to a competitive retail market are the responsibilities of theindividual states.  Many states,including Ohio, have enacted electric utility deregulation legislation.  In general, these initiatives have sought toseparate the electric utility service into its basic components (generation,transmission, and distribution) and offer each component separately forsale.  This separation is referred to as

 

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unbundling of the integrated services. Under the customer choice initiatives in Ohio, we continue to transmitand distribute electricity; however, the customer can purchase electricity fromany available supplier, and we are compensated through a transportationcharge.  The following sections furtherdiscuss the current status of federal and state energy policies andderegulation legislation in the states of Ohio, Indiana, and Kentucky, each ofwhich includes a portion of our service territory.

 

***Federal Update***

 

*Energy Bill*

 

President Bush, in conjunction with the work of an inter-agency energytask force headed by Vice President Richard Cheney, developed a number ofrecommendations to address the energy security needs of America.  The U.S. House of Representatives passed itsversion of energy security legislation (H.R. 4) in 2001, and the U.S. Senate passedits version (S. 517) on April 25, 2002. After significant debate, the bill died in a conference committeebecause differences could not be resolved. While the Bush Administration has urged Congress to take up similarlegislation during 2003, it is unclear how quickly Congress will move to enacta bill.  Last year’s versions of theenergy bill included a provision to repeal the PUHCA, which **Cinergy** supported.  It is likely that early versions of theenergy bill will include PUHCA repeal, but it is too early to determine if anenergy bill with electricity provisions will pass Congress this year.

 

*Clear Skies Legislation*

 

At the end of the 107th Congress, President Bush requested theintroduction of legislation that would create a clear roadmap for environmentallaws, allowing the nation to meet air goals but providing certainty forelectric utilities with coal-fired power. That legislation is expected to be re-introduced in this session ofCongress, and President Bush, in his 2003 State of the Union address, expressedthat passage of his Clear Skies legislation was a top priority.  **Cinergy**has been a promoter of this legislation, as it will create a clear roadmap ofits environmental requirements while providing the time necessary to makerequired environmental improvements.

 

The importance of Clear Skies legislation is that it would replaceunpredictable environmental regulations with set targets and timetables,allowing the industry adequate time to access needed capital and buildenvironmental improvement projects. Clear Skies legislation would seek an overall 70 percent improvement inemissions from power plants over a phased-in reduction schedule beginning in2010 and stretching to 2018.  Theleaders of the U.S. Senate Environmental Committee have promised to considerthe legislation early in 2003; however, timing for consideration is lesscertain with the U.S. House of Representatives.  Therefore, the prospects for passage of the Clear Skieslegislation are unclear.

 

***Ohio***

 

In July 1999, Ohio Governor Robert Taft signed Amended Substitute SenateBill No. 3 (Electric Restructuring Bill), beginning the transition to electricderegulation and customer choice for the state of Ohio.  The Electric Restructuring Bill created acompetitive electric retail service market effective January 1, 2001.  The legislation provides for a marketdevelopment period that began January 1, 2001 and ends no later than December31, 2005.

 

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In May 2000, **CG&E**reached a stipulated agreement with the PUCO staff and various other interestedparties with respect to its proposal to implement electric customer choice inOhio effective January 1, 2001.  InAugust 2000, the PUCO approved **CG&E’s**stipulation agreement.  Subsequently,two parties filed applications for rehearing with the PUCO.  In October 2000, the PUCO denied theseapplications.  One of the partiesappealed to the Ohio Supreme Court in the fourth quarter of 2000, and **CG&E** subsequently intervened in thatcase.  In April 2002, the Ohio SupremeCourt affirmed the PUCO’s stipulated agreement with **CG&E** with respect to implementing electric customerchoice.  The Ohio Supreme Court rulingleaves **CG&E’s** transition planentirely intact.

 

Under **CG&E’s**transition plan, retail customers continue to receive transportation servicesfrom **CG&E** but may purchaseelectricity from another supplier. Retail customers that purchase electricity from another supplier receiveshopping credits from **CG&E**.  The shopping credits generally reflect thecosts of electric generation included in **CG&E’s**frozen rates.  However, shopping creditsfor the first 20 percent of electricity usage in each customer class to switchsuppliers, are higher than **CG&E’s**electric generation costs in order to stimulate the development of thecompetitive retail electric service market.

 

**CG&E**recoversits regulatory assets and other transition costs through a RegulatoryTransition Charge (RTC) paid by all retail customers.  As the RTC is collected from customers, **CG&E** amortizes the deferred balance ofregulatory assets and other transition costs. A portion of the RTC collected from customers is recognized currently asa return on the deferred balance of regulatory assets and other transitioncosts and as reimbursement for the difference in the shopping credits provided tocustomers and the wholesale revenues from switched generation.  The ability of **CG&E** to recover its regulatory assets and other transitioncosts is dependent on several factors, including, but not limited to, the levelof **CG&E’s** electric sales,prices in the wholesale power markets, and the amount of customer switching toother electric suppliers.

 

On January 10, 2003, **CG&E**filed an application with the PUCO for approval of a methodology to establishhow market-based rates for non-residential customers will be determined whenthe market development period ends.  Inthe filing, **CG&E** seeks toestablish a market-based standard service offer rate for non-residentialcustomers that do not switch suppliers, and a process for establishing thecompetitively-bid generation service option required by the ElectricRestructuring Bill.  As of December 31,2002, more than 20 percent of the load in each of **CG&E’s** non-residential customer classes has switched toother electric suppliers.  Under itstransition plan, **CG&E** may endthe market development period for those classes of customers once 20 percentswitching has been achieved; however, PUCO approval of the standard serviceoffer rate and competitive bidding process is required before the marketdevelopment period can be ended.  **CG&E** is not requesting to end themarket development period for non-residential customers at this time.  **CG&E**is unable to predict the outcome of this proceeding.

 

A FERC order, that was effective April 2002, allowed **Cinergy** to jointly dispatch the regulatedgenerating assets of **PSI** inconjunction with the deregulated generating assets of **CG&E**. The order also authorizes the transfer of the **CG&E** generating assets to a non-regulated affiliate.  However, **Cinergy**has determined that it can realize the benefits of the new joint dispatchagreement without transferring **CG&E’s**generation assets, and therefore **Cinergy**does not plan

 

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to transfer **CG&E’s**generating assets to a non-regulated affiliate in the foreseeable future.  For further discussion of the joint dispatchagreement, see “Termination of Operating Agreement”.

 

***Indiana***

 

In 2002, Indiana lawmakers anticipated the creation of an Energy PolicyCommission to assist in the creation of a comprehensive energy plan.  However, no such commission was formed and,as a result, there are no current plans for electric deregulation in Indiana.

 

***Kentucky***

 

Throughout 1999, a special Kentucky Electricity Restructuring TaskForce (Task Force), convened by the Kentucky legislature, studied the issues ofelectric deregulation.  In January 2000,the Task Force issued a final report to Kentucky Governor Paul Pattonrecommending that lawmakers wait until the 2002 General Assembly beforeconsidering any deregulation that would open the state’s electric industry tocompetition.  The state legislature didnot take any action in 2002 to move Kentucky towards electric deregulation.

 

***Other States***

 

At the end of 2000, approximately one half of the states and theDistrict of Columbia had adopted deregulation plans.  However, recent events are significantly influencing politicaland legislative activity.  At the end of2001, eight of the states decided to delay or suspend their deregulationactivities.  No additional states adoptedderegulation plans during 2002.

 

***Other***

 

Under generally accepted accounting principles (GAAP), **CG&E**, **PSI**,and **ULH&P** apply the provisionsof Statement of Financial Accounting Standards No. 71, *Accounting for the Effects of Certain Types ofRegulation*(Statement 71) to the applicable rate-regulated portionsof their businesses.  The provisions ofStatement 71 allow **CG&E**, **PSI**, and **ULH&P**to capitalize (record as a deferred asset) costs that would normally be chargedto expense.  These costs are classifiedas regulatory assets in the accompanying financial statements, and the majorityhave been approved by regulators for future recovery from customers through ourrates.  As of December 31, 2002, ouroperating companies have approximately $1 billion of net regulatory assets, ofwhich more than 90 percent has been approved for recovery.

 

Except with respect to the generation assets of **CG&E**, as of December 31, 2002, ouroperating companies continue to meet each of the criteria required for theapplication of Statement 71.  However,to the extent other states implement deregulation legislation, the applicationof Statement 71 will need to be reviewed. Based on our operating companies’ current regulatory orders and theregulatory environment in which they currently operate, management believes thefuture recovery of regulatory assets recognized in the accompanying BalanceSheets, as of December 31, 2002, is probable. See Note 1(c) of the “Notes to Financial Statements” in “Item 8.  Financial Statements and Supplementary Data”for a further discussion of our regulatory assets.

 

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**Midwest ISO**

 

***Historical***

 

As part of the effort to create a competitive wholesale powermarketplace, the FERC approved the formation of the Midwest ISO during1998.  In that same year, **Cinergy** agreed to join the Midwest ISO inpreparation for meeting anticipated changes in the FERC regulations and futurederegulation requirements.  The MidwestISO was established as a non-profit organization to maintain functional controlover the combined transmission systems of its members.

 

On December 15, 2001, the Midwest ISO initiated startup of itsoperations with the provision of a variety of support or stand alone servicesto its transmission owning members.  TheMidwest ISO achieved full startup, including implementation of tariffadministration, on February 1, 2002.  Although the Midwest ISO continues todevelop, modify, and enhance its various operating practices, it has assumedfunctional control of the transmission systems of its member companies,including the **Cinergy**utilities.  This transfer of control wasimplemented without significant impact on the operations of **Cinergy’s** transmission systems.

 

***FERC Orders***

 

In December 2001, the FERC approved the proposal of the Midwest ISO tobecome the first FERC-approved Regional Transmission Organization (RTO) anddenied a similar proposal from the Alliance Regional Transmission Organization(Alliance RTO) on the basis that the proposal lacked sufficient scope.  The FERC encouraged the former Alliance RTOcompanies to explore joining the Midwest ISO. Certain former Alliance RTO companies have joined or announced intent tojoin the Midwest ISO.  The remainingformer Alliance RTO companies have announced that they will join the PJMInterconnection, LLC (PJM).

 

In its July 17,2002 open meeting and subsequent orders, the FERC reaffirmed its expectationthat the Midwest ISO and PJM implement a common wholesale market between themby October 1, 2004.  FERC also imposedmore immediate deadlines upon the Midwest ISO, PJM, and various other partiesto establish certain protocols, including the elimination of pancakedtransmission rates between the Midwest ISO and PJM, necessary to establish a“virtual” single regional transmission organization among the Midwest ISO andPJM companies.  Pancaked transmissionrates are multiple transmission charges imposed for a single transactioncrossing between multiple transmission providers.  As part of the FERC orders, the FERC has opened an investigation,under Section 206 of the Federal Power Act (Section 206), into the justness andreasonableness of the “through and out” transmission rates of the Midwest ISOand PJM.  **Cinergy** is participating in the Section 206 hearing, alongwith the other transmission owners who are members, or potential members, ofthe Midwest ISO or PJM.  Pursuant to anorder issued in July 2002, the FERC indicated that it plans to issue a decisionby July 31, 2003.  As part of thisproceeding, **Cinergy** is advocatingthe removal of pancaked transmission rates between the Midwest ISO and PJM,including all of the former Alliance RTO companies, as well as lost revenuerecovery for transmission owners who are affected by the removal of thepancaked transmission rates.  At thistime, **Cinergy** cannot determine theimpact of either the FERC orders or the related Section 206 investigation uponeither our financial position or results of operations.

 

In related activity, the FERC issued an order in December 2001, inresponse to protests of the Midwest ISO’s proposed methodology related to thecalculation of its administrative adder fees

 

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for the services it provides.  **Cinergy** and a number of other parties filedprotests to the proposed methodology, suggesting, among other things, that themethodology was inconsistent with the transmission owners’ prior agreement withthe Midwest ISO and selectively allowed only independent transmission companiesto choose which unbundled administrative adder services they wished to purchasefrom the Midwest ISO.  A partialsettlement was reached in the FERC proceeding, resolving the issues addressedby **Cinergy’s** protest in a mannerfavorable to **Cinergy**.  Most active parties in the FERC proceedingfiled comments in support of the settlement. The only contested issue under the settlement involved an agreed upondeferred accounting and regulatory asset mechanism to be established as abackstop to guard against any under-recovery of assessed administrative fees inretail ratemaking proceedings.  Thesettlement agreement was neither approved nor denied approval by the FERC byDecember 31, 2002.  **Cinergy** anticipates that the settlementwill need to be renegotiated in early 2003 and resubmitted to the FERC forapproval.  **Cinergy** also anticipates that the Midwest ISO transmissionmembers will reach a similar settlement with the Midwest ISO, and that suchagreement will be approved by the FERC without material change.

 

In late 2001 and early 2002, the FERC issued its Opinion No. 453 and453-A ordering, among other things, that transmission service for bundledretail customers (i.e., customers who cannot select an alternative energyprovider) shall be provided under the Midwest ISO’s open access transmissiontariff, and that the Midwest ISO’s charges for its administrative servicesshall apply to bundled retail customers. **PSI** and other parties haveappealed these orders to the U.S. Court of Appeals for the District of ColumbiaCircuit, challenging the application of the Midwest ISO’s tariff, and theMidwest ISO’s charges for its administrative services to bundled retailcustomers.  **PSI** cannot predict either when the court will issue itsopinion in the appeal or the outcome of the appeal.

 

On November 22, 2002, the FERC issued an order conditionally approvingthe Midwest ISO’s recovery of costs associated with the establishment offinancial transmission rights, and the development of energy markets within theMidwest ISO’s operating area.  TheFERC’s order suspended the proposed rates and made them effective November 25,2002, subject to refund, and set for a hearing the issues identifiedbelow.  The FERC’s order expressed theexpectation that the Midwest ISO’s board of directors will guard against anyunreasonable costs being incurred by the Midwest ISO.  The Midwest ISO had proposed to assess a withdrawal/exit fee onany transmission owner member who withdraws from the Midwest ISO for itsproportionate share of any unrecovered deferred costs.  The Midwest ISO transmission owners,including **Cinergy**, filed a protestwith the FERC, challenging the cost allocation and the implementation of anexit fee within the Midwest ISO proposal. The FERC subsequently set these issues for a hearing.

 

In July 2002, the FERC issued a NOPR thatproposed significant changes to the electricity wholesale market.  At this time, we are unable to determine theimpact of the NOPR on the Midwest ISO and **Cinergy**.  See “FERC NOPR on ‘Remedying UndueDiscrimination through Open Access Transmission Service and StandardElectricity Market Design’” for further discussion.

 

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***State RegulatoryAgencies Filings***

 

This past summer, **PSI** andthe other investor-owned transmission companies in Indiana who are members ofthe Midwest ISO, requested approval from the IURC to defer, for subsequentrecovery from their respective Indiana retail electric customers, theapplicable costs incurred by the companies for administrative services providedby the Midwest ISO.

 

The actual costs for 2002 were approximately $6 million and $3 millionfor **PSI** and **CG&E**, respectively, and are deferred ontheir respective Balance Sheets as of December 31, 2002.  A settlement was reached between the IndianaOffice of the Utility Consumer Counselor, **PSI**,and the other parties to the IURC proceeding providing for the requested rateand deferred accounting treatment.  Thesettlement was approved by the IURC on December 11, 2002.  **PSI**anticipates that its recovery of these deferred amounts will commence with theIURC’s order in **PSI’s** upcomingretail electric rate case.  For themarket development period, **CG&E**is authorized to recover these costs in Ohio through its regulatory transitionplan.

 

**Significant Rate Developments**

 

***PSI Retail RateCase***

 

In December 2002, **PSI**filed a petition with the IURC seeking approval of a base retail electric rateincrease.  **PSI’s** proposed increase reflects an average increase ofapproximately 16 to 19 percent over **PSI’s**current retail electric rates.  Ifapproved by regulators, **PSI**estimates the rate request will become effective in early 2004.  **PSI**plans to file initial testimony in this case in March 2003.  An IURC decision is expected in the firstquarter of 2004.

 

***Transfer ofGenerating Assets to PSI***

 

In December 2001, **PSI**filed a petition with the IURC requesting approval, under Indiana’s Power PlantConstruction Act, to acquire the Butler County, Ohio and Henry County, Indianapeaking plants from their current owners, subsidiaries of Capital & Trading,to address its need for increased generating capacity.  In September 2002, **PSI** reached a settlement agreement withvarious parties, authorizing **PSI**to purchase the two peaking plants.  InDecember 2002, the IURC issued an order approving the settlement agreement andproviding state authorization to transfer the plants.

 

In September 2002, **PSI** andthe applicable Capital & Trading subsidiaries filed applications with theSEC under the PUHCA and the FERC, under the Federal Power Act, requestingauthorization for the transfer. However, in October 2002, the SEC notified **PSI** that the transaction is exempt from the SEC’s jurisdictionunder the PUHCA, and accordingly, **PSI**and the Capital & Trading subsidiaries withdrew the SEC application.  In October 2002, several parties intervenedand filed protests in the proceeding before the FERC, opposing thetransfer.  **Cinergy** timely filed an answer to these protests.

 

On February 4, 2003, the FERC issued an order, under Section 203 of theFederal Power Act, authorizing **PSI**’sproposed acquisition of the Henry County, Indiana and Butler County, Ohiogas-fired peaking power plants.  Thisaction was the final regulatory approval needed for the transfer, whichoccurred on February 5, 2003.

 

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On January 8, 2003, the IURC issued an order authorizing **PSI** to defer post-in-service depreciationand carrying costs associated with these peaking plants and **PSI**’s Noblesville generating station untilthe costs are reflected in **PSI**’sbase rates after a rate case.  Pursuantto Statement of Financial Accounting Standards No. 92, *Regulated Enterprises-Accounting for Phase-in Plans*(Statement 92), the equity component of allowance for funds used duringconstruction (AFUDC) will not be deferred for financial reporting.  Also, **PSI**is allowed to retain off-system sales profits associated with the three plantsbut will be required to credit such off-system sales profits (other than 50 MWsof Henry County capacity committed to wholesale) to customers from January 1,2004 until the effective date of **PSI’s**next retail base rate change.  See“Supply-side Actions” for additional detail.

 

***Purchased Power Tracker***

 

In May 1999, **PSI**filed apetition with the IURC seeking approval of a Tracker.  This request was designed to provide for the recovery of costsrelated to purchases of power necessary to meet native load requirements to theextent such costs are not recovered through the existing fuel adjustmentclause.

 

A hearing was held before the IURC in February 2001, to determinewhether it was appropriate for **PSI**tocontinue the Tracker for future periods. In April 2001, a favorable order was received extending the Tracker fortwo years, through the summer of 2002.  **PSI** is authorized to seek recovery of 90 percentof its purchased power expenses through the Tracker (net of the displacedenergy portion recovered through the fuel recovery process and net of themitigation credit portion), with the remaining 10 percent deferred forsubsequent recovery in **PSI’s**nextgeneral rate case.  In March 2002, **PSI** filed a petition with the IURC seekingapproval to extend the Tracker process beyond the summer of 2002.  A hearing was held on January 16, 2003.  We cannot predict the outcome of thisproceeding at this time.

 

In June 2002, **PSI** alsofiled a petition with the IURC seeking approval of the recovery through theTracker of its actual summer 2002 purchased power costs.  A hearing on this matter is scheduled forthe first quarter of 2003.

 

***2002 Purchased Power Costs***

 

In May 2002, the IURC approved a settlement agreement between **PSI**, the IURC staff, and the Indiana Officeof the Utility Consumer Counselor pertaining to **PSI’s** 2002 purchased power arrangements.  This agreement allowed **PSI** to purchase the output of the HenryCounty, Indiana and Butler County, Ohio peaking plants through December 31,2002.  The parties also agreed to notchallenge the recovery of costs for the purchase of power from these plants, aswell as the costs of additional summer 2002 purchases needed for reliabilitypurposes, through **PSI’s** Trackerand fuel recovery mechanism.  Before **PSI** can begin recovering its summer 2002purchased power costs through its Tracker, however, it must obtain an orderauthorizing such from the IURC in **PSI’s**summer 2002 Tracker case.  The hearingrelating to **PSI’s** summer 2002Tracker case is scheduled for the first quarter of 2003.  If approved, recovery of **PSI’s** summer 2002 purchased power costs viathe Tracker will likely begin in the second quarter of 2003 and extend over a12 month period.

 

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We have $27 million of 2002 purchased power costs deferred for recoveryat December 31, 2002.  Of the $27million, $24 million has been requested through the Tracker, and the recoveryof the remaining $3 million will be requested in **PSI’s** next retail rate case.

 

The transfer of the Henry County, Indiana and Butler County, Ohiopeaking plants to **PSI** willdecrease **PSI’s** need for purchasedpower by a like amount.  However, **PSI** will continue to have purchased powerrequirements and will continue to seek IURC approval to utilize its Tracker torecover the costs of such purchases.

 

***Termination of Operating Agreement***

 

Upon consummation of the merger between **CG&E** and PSI Resources, Inc. in 1994, an operatingagreement entered into between **CG&E**,**PSI**, and Services was filed withand approved by the FERC.  Thisagreement was established to provide for the coordinated planning and operationof the two regulated entities’ generation and transmission systems.

 

In October 2000, **CG&E**,**PSI**, and Services filed a noticeof termination of the operating agreement with the FERC.  The reason for the termination filing wasthat, with the introduction of deregulation in the State of Ohio, the companiesno longer share the common characteristics that formed the basis for theoperating agreement.  In December 2000,the FERC ruled that the companies have the contractual right to terminate theoperating agreement.  Additionally, theFERC established a termination effective date of May 22, 2001, and set a May 1,2001, hearing date on the issue of the reasonableness of termination.

 

Certain parties appealed the FERC’s December 2000 decision.  In March 2001, the IURC initiated aninvestigation proceeding into the termination of the operating agreement.  In May 2001, the parties to the FERCproceeding reached a settlement resolving termination issues and certaincompensation and damage issues.  Thesettlement agreement was approved by the FERC in June 2001 and delayed thetermination of the existing operating agreement until a new successor agreementhas been approved by the FERC.

 

In August 2001, the parties to both the IURC investigation proceedingand the previous FERC proceeding entered into two complementary settlementagreements.  Both agreements addressed,among other things, the terms and conditions of a proposed new joint generationoperating agreement and a proposed new joint transmission operating agreement.  The IURC settlement agreement was approvedby the IURC in September 2001.  Both theIURC and the FERC settlement agreements were conditioned upon FERC acceptanceof the proposed successor agreements.  **Cinergy** filed the successor agreements withthe FERC in October 2001 and in March 2002, the FERC approved the successoragreements.  The successor agreementsallow **Cinergy** to jointly dispatchthe regulated generating assets of **PSI**in conjunction with the deregulated generating assets of **CG&E.** Under these agreements, transfers of power between **PSI** and **CG&E**are generally priced at market rates. The successor agreements were implemented effective in April 2002.

 

***PSI Fuel Adjustment Charge***

 

**PSI** defers fuelcosts that are recoverable in future periods subject to IURC approval under afuel recovery mechanism.  In June 2001,the IURC issued an order in a **PSI**fuel recovery proceeding,

 

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disallowing approximately $14 million of deferred costs.  On June 26, 2001, **PSI** formally requested that the IURC reconsider its disallowancedecision.  In August 2001, the IURCindicated that it would reconsider its decision.  In August 2002, the IURC issued its final ruling allowing **PSI** to fully recover the $14 million.

 

In June 2001, **PSI** filed apetition with the IURC requesting authority to recover $16 million in underbilled deferred fuel costs incurred from March 2001 through May 2001.  The IURC approved recovery of these costssubject to refund pending the findings of an investigative sub-docket.  The sub-docket was opened to investigate thereasonableness of, and underlying reasons for, the under billed deferred fuelcosts.  A hearing was held in July 2002,and we anticipate a decision in the first quarter of 2003.

 

***CWIP Ratemaking Treatment for NOXEquipment***

 

During the third quarter of 2001, **PSI**filed an application with the IURC requesting CWIP ratemaking treatment forcosts related to NOX equipment currently being installed at certain **PSI** generation facilities.  CWIP ratemaking treatment allows for therecovery of carrying costs on the equipment during the constructionperiod.  **PSI** filed its case-in-chief testimony in January 2002.  In July 2002, the IURC approved theapplication allowing **PSI**tocommence CWIP ratemaking treatment for its NOX equipment investmentsmade through December 31, 2001. Initially this rate adjustment will result in approximately a onepercent increase in customer rates. Under the IURC’s CWIP rules, **PSI**mayupdate its CWIP tracker at six-month intervals.  The IURC’s July order also authorized **PSI** to defer, for subsequent recovery, post-in-servicedepreciation and to continue the accrual for AFUDC.  Pursuant to Statement 92, the equity component of AFUDC will notbe deferred for financial reporting.

 

In October 2002, **PSI** filedits first six-month CWIP tracker update with the IURC requesting approximately$11 million of additional revenue associated with investments made January 1,2002, through June 30, 2002, for NOX emission reductionequipment.  The IURC authorized therecovery of these incremental expenditures in an order issued on January 29,2003.  The cumulative annual revenue tobe recovered under this tracker is $28 million.

 

**GAS INDUSTRY**

 

**ULH&P Gas Rate Case**

 

In the second quarter of 2001, **ULH&P** filed a retail gas rate case with the KPSCseeking to increase base rates for natural gas distribution services andrequesting recovery through a tracking mechanism of the costs of an acceleratedgas main replacement program with an estimated capital cost of $112 millionover the next 10 years.  A hearing onthis matter was held in November 2001 and an order was issued in January2002.  In the order, the KPSC authorizeda base rate increase of $2.7 million, or 2.8 percent overall, to be effectiveon January 31, 2002.  In addition, theKPSC authorized **ULH&P** to implement the tracking mechanism to recover the costs of theaccelerated gas main replacement program for an initial period of three years,with the possibility of renewal for the full 10 years.  Per the terms of the order, the trackingmechanism will be set annually.  Thefirst filing was made in March 2002 and was approved by the KPSC in an orderissued in August 2002.  **ULH&P** filed an application for a certificate forpublic convenience and necessity with the KPSC in November 2002, to do castiron and bare steel main replacement

 

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work in 2003 at an estimated cost of $14.1million.  The Kentucky Attorney General(Attorney General) has appealed the KPSC’s approval of the tracking mechanismto the Franklin Circuit Court (Court) and has also appealed the KPSC’s August2002 order approving the new tracking mechanism rates.  The KPSC’s August 2002 order requires **ULH&P** to maintain records of the revenuescollected under the tracking mechanism to enable **ULH&P** to refund such revenues, in case theAttorney General’s appeal is upheld and the KPSC orders a refund.  Amounts collected to date under thistracking mechanism are not material.  **ULH&P** filed an application for rehearing with theKPSC in September 2002, in which **ULH&P** requested that the KPSC eliminate this requirement.  In October 2002, the KPSC issued an ordergranting **ULH&P’s**application for rehearing in part.  TheKPSC’s order clarified that **ULH&P** must maintain its records of the revenues collected under the trackingmechanism in case a refund is ordered at a later date; however, the KPSC’sorder stated that it will not address the issue of whether to order a refundunless the Court rules that the KPSC lacked the requisite authority to approvethe tracking mechanism.  As a result, **ULH&P** will not record these revenues as subject torefund unless the Court so rules.  Atthe present time, **ULH&P** cannot predict the outcome of this litigation.

 

**CG&E Gas Rate Case**

 

In the third quarter of 2001, **CG&E**filed a retail gas rate case with the PUCO seeking to increase base rates fornatural gas distribution service and requesting recovery through a trackingmechanism of the costs of an accelerated gas main replacement program with anestimated capital cost of $716 million over the next 10 years.  **CG&E**entered into a settlement agreement with most of the parties and a hearing onthis matter was held in April 2002.  Anorder was issued in May 2002, in which the PUCO approved the settlementagreement and authorized a base rate increase of approximately $15 million, or3.3 percent overall, to be effective on May 30, 2002.  In addition, the PUCO authorized **CG&E** to implement the tracking mechanism to recover thecosts of the accelerated gas main replacement program, subject to certain ratecaps that increase in amount annually through May 2007, through the effectivedate of new rates in **CG&E’s**next retail gas rate case.  The PUCO’sorder was not appealed.  In the fourthquarter of 2002, **CG&E**filed anapplication to increase its rates under the tracking mechanism by approximately$8 million or 2.4 percent.  The PUCO isinvestigating the application and **CG&E**expects that the increase will become effective in May 2003.

 

**Gas Prices**

 

While natural gasprices remained moderate for most of 2002, prices began to escalate during thefourth quarter.  We expect****prices to continue to rise throughout the2002/2003 winter season.  Price movementwill be driven by the effects of weather conditions, availability of supply,and changes in demand and storage inventories.** **Currently, neither **CG&E** nor **ULH&P** profit from changes in the cost of gas.  Natural gas purchase costs are passeddirectly to the customer dollar-for-dollar under the gas cost recoverymechanism that is mandated under state law.

 

In March 2002, **ULH&P** filed an application with theKPSC requesting approval of a gas procurement-hedging program designed tomitigate the effects of gas price volatility on customers.  In June 2002, the KPSC approved the pilotprogram for the 2002/2003 heating season, subject to certain restrictions.  The approved hedging program allows thepre-arranging of between 0-65 percent of winter heating season base load gasrequirements.  **ULH&P** made

 

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advancearrangements for approximately 23 percent of its winter 2002/2003 base loadrequirements under the program.

 

In July 2001, **CG&E**filed an application with the PUCO requesting approval of its gasprocurement-hedging program.  Thisrequest was subsequently denied. However, in denying **CG&E’s**request for pre-approval of a hedging program, the PUCO order providedclarification that prudently incurred hedging costs are a valid component of **CG&E’s** gas purchasing strategy.  As a result, **CG&E** has hedged approximately 30 percent of its winter2002/2003 base load requirements.**  CG&E** will seek PUCO approvalfor its hedging program on an after the fact basis.  At this time, we cannot predict the outcome of this request.

 

**CG&E**and**ULH&P**use primarily fixed priceforward contracts and contracts with a ceiling and floor on the price.  These contracts employ the normal purchasesand sales exemption, and do not involve Statement of Financial AccountingStandards No. 133, *Accounting for DerivativeInstruments and Hedging Activity* (Statement 133), hedges.

 

**MARKET RISK SENSITIVE INSTRUMENTS ANDPOSITIONS**

 

**Energy Commodities Sensitivity**

 

The transactions associated with Energy Merchant’s energy marketing andtrading activities give rise to various risks, including market risk.  Market risk represents the potential risk ofloss from adverse changes in market price of electricity or other energycommodities.  As Energy Merchantcontinues to develop its energy marketing and trading business (and due to itssubstantial investment in generation assets), its exposure to movements in theprice of electricity and other energy commodities may become greater.  As a result, we may be subject to increasedfuture earnings volatility.

 

The energy marketing and trading activities of Energy Merchantprincipally consist of Marketing & Trading’s natural gas marketing andtrading operations, Cinergy Global Trading Limited’s (Global Trading) Europeannatural gas and power trading operations, and **CG&E’s**and **PSI’s** power marketing andtrading operations.  In April 2002, **CG&E** and **PSI** executed a new joint operating agreement whereby new powermarketing and trading contracts of the participants since April 2002 areoriginated on behalf of **CG&E**.  See the “Termination of Operating Agreement”section for additional information.

 

Our domestic operations market and trade over-the-counter (an informalmarket where the buying/selling of commodities occurs) contracts for thepurchase and sale of electricity (primarily in the Midwest region of the U.S.),natural gas, and other energy-related products.  In addition, our domestic operations also market and tradenatural gas and other energy-related products on the New York MercantileExchange.  Global Trading’s operationstrade over-the-counter contracts for the purchase and sale of natural gas andelectricity (both primarily in the United Kingdom).  Global Trading also trades natural gas on the InternationalPetroleum Exchange.

 

Many of the contracts in both the accrual and trading portfolios commitus to purchase or sell electricity, natural gas, and other energy-relatedproducts at fixed prices in the future. The majority of the contracts in the natural gas and otherenergy-related product portfolios are

 

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financially settled contracts (i.e., there is no physical deliveryrelated with these items).  In addition,Energy Merchant also markets and trades over-the-counter option contracts.  The use of these types of commodityinstruments is designed to allow Energy Merchant to:

 

•    manage and economically hedge contractualcommitments;

•    reduce exposure relative to the volatilityof cash market prices;

•    take advantage of selected arbitrageopportunities; and

•    originate customized transactions withmunicipalities and end-use customers.

 

Energy Merchant structures and modifies its net position to capture thefollowing:

 

•    expected changes in future demand;

•    seasonal market pricing characteristics;

•    overall market sentiment; and

•    price relationships between different timeperiods and trading regions.

 

At times, a net open position is created or is allowed to continue whenEnergy Merchant believes future changes in prices and market conditions maypossibly result in profitable positions. Position imbalances can also occur due to the basic lack of liquidity inthe wholesale power market.  Theexistence of net open positions can potentially result in an adverse impact onour financial condition or results of operations.  This potential adverse impact could be realized if the marketprice of electric power does not react in the manner or directionexpected.  **Cinergy’s** Risk Management Control Policy contains limitsassociated with the overall size of net open positions for each tradingoperation and for **Cinergy** intotal.

 

*Value at Risk (VaR)*

 

Energy Merchant measures the market risk inherent in the tradingportfolio employing VaR analysis and other methodologies, which utilize forwardprice curves in electric power and natural gas markets to quantify estimates ofthe magnitude and probability of future value changes related to open contractpositions.  VaR is a statistical measureused to quantify the potential change in fair value of the trading portfolioover a particular period of time, with a specified likelihood of occurrence,due to market movement.  EnergyMerchant, through some of our non-regulated subsidiaries, markets physicalnatural gas and electricity and trades derivative commodity instruments whichare usually settled in cash including: forwards, futures, swaps, andoptions.  Any transaction, whethersettled physically or financially, that is included in our fair value power andgas accounting results is included in the VaR calculation.

 

Our VaR is reported based on a 95 percent confidence interval,utilizing a one-day holding period.  Thismeans that on a given day (one-day holding period) there is a 95 percent chance(confidence level) that our trading portfolio will not change more than thestated amount.  Our VaR model uses thevariance-covariance statistical modeling technique and historical volatilitiesand correlations over the past 21-trading day period.  During 2002, **Cinergy**revised the sample horizon used for calculating historical volatility andcorrelation for power prices from 200 trading days to 21 trading days.  This revision was made to be consistent withthe calculation methodology used for natural gas and to comply with the commonpractice in the industry of using a 21-trading day sample period forpower.  The 2001 VaR information includedin the chart below has not been restated to reflect this change.  The average VaR for 2001 was

 

75

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calculated using a simple quarterly average.  The 2002 average VaR was calculated using an average of tradingdays over the entire year.  The high andlow VaR for 2001 were based on quarterly VaR calculations.  The high and low VaR for 2002 were based onan entire year of trading day calculations. The market prices used to calculate VaR are obtained from exchanges andover-the-counter markets when available, established pricing models and otherfactors including market volatility, the time value of money, and locationdifferentials.  The VaR for **Cinergy’s** trading portfolio is presented inthe table below:

 

**VaRAssociated with Energy Trading Contracts**

 
|                                                                   |   | **2002**                   |       | **2001**                              |       |
|------------------------------------------------------------------------|--------|----------------------------|------------|---------------------------------------|------------|
|                                                                   |   | **(dollars  in millions)** |       |
|                                                                   |   | **Trading  VaR**           | ** ** | **Percentage  of  Operating  Income** | ** ** | **Trading  VaR** | ** ** | **Percentage  of  Operating  Income** | ** ** |
|                                                                   |   |                       | ** ** |                                  | ** ** |   | ** ** |   | ** ** |
| 95% confidence  level, one-day holding period, one-tailed  December 31 |   | **$1.6**                   | ** ** | **  0.2%**                  |       | $ 6.0 |   | 0.6% |   |
| Average for the  twelve months ended December 31                       |   | **   2.1**            | ** ** | **  0.3    **     | ** ** |   7.8 |   | 0.8   |   |
| High for the  twelve months ended December 31                          |   | **   3.7**            | ** ** | **  0.5    **     | ** ** | 11.9 |   | 1.3   |   |
| Low for the  twelve months ended December 31                           |   | **   0.5**            | ** ** | **  0.1    **     | ** ** |  4.9 |   | 0.5   |   |

 

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*Changes in Fair Value*

 

The changes in fair value of the energy risk management assets andliabilities for **Cinergy**, **CG&E**, and **PSI** for the years ended December 31, 2002 and 2001 arepresented in the table below:

 
|                                                                                      |   | **Change in Fair Value** | ** ** |
|-------------------------------------------------------------------------------------------|--------|--------------------------|------------|
|                                                                                      |   | **2002**                 | ** ** | **2001** | ** ** |
|                                                                                      |   | **Cinergy(1)**           |       | **CG&E** |   | **PSI** |   | **Cinergy(1)** |   | **CG&E** |   | **PSI** | ** ** |
|                                                                                      |   | **(in millions)**        | ** ** |
|                                                                                      |   |                     |       |   |   |   |   |   |   |   |   |   |   |
| Fair value of  contracts outstanding at the beginning of period:                          |   | **$**                    | **18**     | ** ** | **$** | **28** | ** ** | **$** | **(7** | **)** | $ | (78 | ) | $ | (40 | ) | $ | (40 | ) |
|                                                                                      |   |                     | ** ** |   | ** ** |   | ** ** |   |   |   |   |   |   |
| Inception value  of new contracts when entered(2)                                         |   | **6**                    | ** ** | **5** | ** ** | **1** | ** ** | 29 |   | 18 |   | 11 |   |
|                                                                                      |   |                     | ** ** |   | ** ** |   | ** ** |   |   |   |   |   |   |
| Changes in fair  value attributable to changes in valuation techniques and assumptions(3) |   | **14**                   | ** ** | **6** | ** ** | **9** | ** ** | 10 |   | — |   | — |   |
|                                                                                      |   |                     | ** ** |   | ** ** |   | ** ** |   |   |   |   |   |   |
| Other changes in  fair value(4)                                                           |   | **89**                   | ** ** | **26** | ** ** | **5** | ** ** | 53 |   | 17 |   | (11 | ) |
|                                                                                      |   |                     | ** ** |   | ** ** |   | ** ** |   |   |   |   |   |   |
| Option premiums  paid/(received)                                                          |   | **20**                   | ** ** | **1** | ** ** | **—** | ** ** | 15 |   | — |   | — |   |
|                                                                                      |   |                     | ** ** |   | ** ** |   | ** ** |   |   |   |   |   |   |
| Contract  reclassifications(5)                                                            |   | **14**                   | ** ** | **18** | ** ** | **5** | ** ** | — |   | — |   | — |   |
|                                                                                      |   |                     | ** ** |   | ** ** |   | ** ** |   |   |   |   |   |   |
| Contract acquisition(6)                                                                   |   | **(16**                  | **)**      | **—** | ** ** | **—** | ** ** | — |   | — |   | — |   |
|                                                                                      |   |                     | ** ** |   | ** ** |   | ** ** |   |   |   |   |   |   |
| Contracts  settled                                                                        |   | **(70**                  | **)**      | **(42** | **)** | **(13** | **)** | (11 | ) | 33 |   | 33 |   |
|                                                                                      |   |                     | ** ** |   | ** ** |   | ** ** |   |   |   |   |   |   |
| Fair value of  contracts outstanding at end of period                                     |   | **$**                    | **75**     | ** ** | **$** | **42** | ** ** | **$** | **—** | ** ** | $ | 18 |   | $ | 28 |   | $ | (7 | ) |

 

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

(2)             Represents fairvalue, recognized in income, attributable to long-term, structured contracts,primarily in power, which is recorded on the date a deal is signed.  These contracts are primarily with end-usecustomers or municipalities that seek to limit their risk to power pricevolatility.  While caps and floors oftenexist in such contracts, the amount of power supplied can vary from hour tohour to mirror the customers’ load volatility. See “Accounting Changes” for additional information regarding inceptiongains.

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

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

(5)             Includesreclassifications of the settlement value of contracts that have beenterminated as a result of counterparty non-performance to *Non-Current Liabilities-Other*.  These contracts no longer have price riskand are therefore not considered energy trading contracts.

(6)             Capital & Tradingacquired a portfolio of gas contracts and inventory in July 2002.  This amount represents the fair value of net*Energy risk management liabilities*assumed.  There was no inception gain orloss recognized at the date of acquisition.

 

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The following table presents the expected maturity of the *Energy risk management assets* and *Energy risk management liabilities* as ofDecember 31, 2002 for **Cinergy**, **CG&E**, and **PSI**:

 

|                                                |   | **Fair Value  of Contracts at December 31, 2002** |   |
|-----------------------------------------------------|--------|---------------------------------------------------|--------|
|                                                |   | **Maturing**                                      |   | **Total  Fair Value** |   |
| **Source of  Fair Value(1)**                        |   | **2003**                                          |   | **2004-2005** |   | **2006-2007** |   | **Thereafter** |   |   |
|                                                |   | **(in  millions)**                                |   |
| **Cinergy(2)**                                      |   |                                              |   |   |   |   |   |   |   |   |   |
| Prices actively  quoted                             |   | $                                                 | 33     |   | $ | (23 | ) | $ | — |   | $ | — |   | $ | 10 |   |
|                                                |   |                                              |   |   |   |   |   |   |   |   |   |
| Prices based on  models and other valuation methods |   | 23                                                |   | 26 |   | 7 |   | 9 |   | 65 |   |
|                                                |   |                                              |   |   |   |   |   |   |   |   |   |
| Total                                               |   | $                                                 | 56     |   | $ | 3 |   | $ | 7 |   | $ | 9 |   | $ | 75 |   |
|                                                |   |                                              |   |   |   |   |   |   |   |   |   |
| **CG&E**                                        |   |                                              |   |   |   |   |   |   |   |   |   |
| Prices actively  quoted                             |   | $                                                 | (3     | ) | $ | (13 | ) | $ | — |   | $ | — |   | $ | (16 | ) |
|                                                |   |                                              |   |   |   |   |   |   |   |   |   |
| Prices based on  models and other valuation methods |   | 12                                                |   | 23 |   | 6 |   | 17 |   | 58 |   |
|                                                |   |                                              |   |   |   |   |   |   |   |   |   |
| Total                                               |   | $                                                 | 9      |   | $ | 10 |   | $ | 6 |   | $ | 17 |   | $ | 42 |   |
|                                                |   |                                              |   |   |   |   |   |   |   |   |   |
| **PSI**                                             |   |                                              |   |   |   |   |   |   |   |   |   |
| Prices actively  quoted                             |   | $                                                 | (4     | ) | $ | (10 | ) | $ | — |   | $ | — |   | $ | (14 | ) |
|                                                |   |                                              |   |   |   |   |   |   |   |   |   |
| Prices based on  models and other valuation methods |   | 5                                                 |   | 6 |   | 3 |   | — |   | 14 |   |
|                                                |   |                                              |   |   |   |   |   |   |   |   |   |
| Total                                               |   | $                                                 | 1      |   | $ | (4 | ) | $ | 3 |   | $ | — |   | $ | — |   |
|                                                |

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| (1)             Active quotes are  considered to be available for two years for standard electricity  transactions and three years for standard gas transactions.  Non-standard transactions are classified  based on the extent, if any, of modeling used in determining fair value.  Long-term transactions can have portions  in both categories depending on the tenor.

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

 

***Concentrations ofCredit Risk***

 

Credit risk is the exposure to economic loss that would occur as aresult of nonperformance by counterparties, pursuant to the terms of theircontractual obligations.  Specificcomponents of credit risk include counterparty default risk, collateral risk,concentration risk, and settlement risk.

 

*Trade Receivables and Physical Power Portfolio*

 

Our concentration of credit risk with respect to trade accountsreceivable from electric and gas retail customers is limited.  The large number of customers anddiversified customer base of residential, commercial, and industrial customerssignificantly reduces our credit risk. Contracts within the physical portfolio of power marketing and tradingoperations are primarily with the traditional electric cooperatives andmunicipalities and other investor-owned utilities.  At December 31, 2002, we believe the likelihood of significantlosses associated with credit risk in our trade accounts receivable or ourphysical power portfolio is remote.

 

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*Energy Trading Credit Risk*

 

**Cinergy’s** extensionof credit for energy marketing and trading is governed by a Corporate CreditPolicy.  Written guidelines document themanagement approval levels for credit limits, evaluation of creditworthiness,and credit risk mitigation procedures. Exposures to credit risks are monitored daily by the Corporate CreditRisk function.  As of December 31, 2002,approximately 96 percent of the credit exposure related to energy trading andmarketing activity was with counterparties rated Investment Grade or thecounterparties’ obligations were guaranteed by a parent company or other entityrated Investment Grade.  No singlenon-investment grade counterparty accounts for more than one percent of ourtotal credit exposure.  Energy commodityprices can be extremely volatile and the market can, at times, lackliquidity.  Because of these issues,credit risk is generally greater than with other commodity trading.

 

In December 2001,Enron filed for protection under Chapter 11 of the U.S. Bankruptcy Code in theSouthern District of New York.  Wedecreased our trading activities with Enron in the months prior to itsbankruptcy filing.  We intend to resolve any contract differencespursuant to the terms of those contracts, business practices, and theapplicable provisions of the Bankruptcy Code, as approved by the court.  While we cannot predict the resolution ofthese matters, we do not believe that any exposure relating to those contractswould have a material impact on our financial position or results ofoperations.

 

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

 

*Financial Derivatives*

 

Potential exposure to credit risk also exists from our use of financialderivatives such as currency swaps, foreign exchange forward contracts,interest rate swaps, and treasury locks. Because these financial instruments are transacted with highly ratedfinancial institutions, we do not anticipate nonperformance by any of thecounterparties.

 

***Risk Management***

 

We manage, on a portfolio basis, the market risks in our energymarketing and trading transactions subject to parameters established by ourRisk Policy Committee.  Our market andcredit risks are monitored by the Global Risk Management function to ensurecompliance with stated risk management policies and procedures.  The Global Risk Management function operatesindependently from the business units and other corporate functions, whichoriginate and actively manage the market risk exposures.  Policies and procedures are periodicallyreviewed to ensure their responsiveness to changing market and businessconditions.  Credit risk mitigation practicesinclude requiring parent company guarantees, various forms of collateral, andthe use of mutual netting/closeout agreements.

 

**Exchange Rate Sensitivity**

** **

**Cinergy** hasexposure to fluctuations in exchange rates between the U.S. dollar and thecurrencies of foreign countries where we have investments.  When it is appropriate we will

 

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hedge our exposure to cash flow transactions, such as a dividendpayment by one of our foreign subsidiaries.

 

**Interest Rate Sensitivity**

 

Our net exposure to changes in interest rates primarily consists ofshort-term debt instruments (including net money pool borrowings) and certainpollution control debt.  The followingtable reflects the different instruments used and the method of benchmarkinginterest rates, as of December 31, 2002:

 
|                                               | **Interest  Benchmark** |   | **2002**                |   |
|----------------------------------------------------|-------------------------|--------|-------------------------|--------|
|                                               |                    |   |                    |   |   |   | **(in  millions)** |   |
|                                               |                    |   |                    |   |   |   |   |   |
| Short-term Bank  Loans/Commercial Paper/Money Pool | •                  |   | Short-term Money Market |   | **Cinergy** |   | **$** | **521** |   |
|                                               | •                  |   | Commercial Paper        |   | **CG&E** and  subsidiaries |   | **—** |   |
|                                               |                    |   | Composite  Rate(2)      |   | **PSI** |   | **138** |   |
|                                               | •                  |   | LIBOR(1)                |   | **ULH&P** |   | **14** |   |
|                                               |                    |   |                    |   |   |   |   |   |
| Pollution  Control Debt                            | •                  |   | Daily Market            |   | **Cinergy** |   | **147** |   |
|                                               | •                  |   | Auction Rate            |   | **CG&E** and  subsidiaries |   | **112** |   |
|                                               |                    |   |                    |   | **PSI** |   | **35** |   |
|                                                    |                         |        |                         |        |  |  |  |  |  |

 

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(1)             London Inter-BankOffered Rate (LIBOR)

(2)             30-day FederalReserve “AA” Industrial Commercial Paper Composite Rate

 

The weighted-average interest rates on the above instruments atDecember 31, were as follows:

 

|                                    |   | **2002** |   |
|-----------------------------------------|--------|----------|--------|
|                                    |   |     |   |
| Short-term Bank  Loans/Commercial Paper |   | **1.9**  | **%**  |
| Money Pool                              |   | **1.3**  | **%**  |
| Pollution  Control Debt                 |   | **1.8**  | **%**  |

 

At December 31, 2002, forward yield curves project an increase inapplicable short-term interest rates over the next five years.

 

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The following table presents principal cash repayments, by maturitydate and other selected information, for each registrant’s long-term fixed-ratedebt, other debt, and capital lease obligations as of December 31, 2002:

 
|                               |   | **Expected  Maturity Date** |   |
|------------------------------------|--------|-----------------------------|--------|
| **Liabilities**                    |   | **2003**                    |   | **2004** |   | **2005** |   | **2006** |   | **2007** |   | **There-  after** |   | **Total** |   | **Fair  Value** |   |
|                               |   | **(in  millions)**          |
| **Cinergy**                        |   |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Long-term  Debt(1)                 |   | $                           | 176    |   | $ | 812 |   | $ | 201 | (4)(5) | $ | 328 |   | $ | 367 |   | $ | 2,088 |   | $ | 3,972 |   | $ | 4,166 |   |
| Weighted-average  interest rate(2) |   | 6.2                         | %      | 5.6 | % | 6.8 | % | 6.7 | % | 7.6 | % | 6.2 | % | 6.3 | % |   |   |
|                               |   |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Other(3)                           |   | $                           | 15     |   | $ | 3 |   | $ | 3 |   | $ | 7 |   | $ | 7 |   | $ | 263 |   | $ | 298 |   | $ | 315 |   |
| Weighted-average  interest rate(2) |   | 6.7                         | %      | 5.9 | % | 6.0 | % | 5.3 | % | 5.4 | % | 6.3 | % | 6.3 | % |   |   |
|                               |   |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Capital Leases                     |   |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Fixed-rate  leases                 |   | $                           | 4      |   | $ | 4 |   | $ | 4 |   | $ | 4 |   | $ | 5 |   | $ | 22 |   | $ | 43 |   | $ | 43 |   |
| Interest rate(2)                   |   | 5.8                         | %      | 5.8 | % | 5.8 | % | 5.7 | % | 5.7 | % | 5.2 | % | 5.5 | % |   |   |
|                               |   |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **CG&E**  and subsidiaries     |   |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Long-term  Debt(1)                 |   | $                           | 120    |   | $ | 110 |   | $ | 150 | (5) | $ | — |   | $ | 100 |   | $ | 1,212 |   | $ | 1,692 |   | $ | 1,745 |   |
| Weighted-average  interest rate(2) |   | 6.3                         | %      | 6.5 | % | 6.9 | % |   |   | 6.9 | % | 6.1 | % | 6.2 | % |   |   |
|                               |   |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Capital Leases                     |   |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Fixed-rate  leases                 |   | $                           | 2      |   | $ | 2 |   | $ | 2 |   | $ | 3 |   | $ | 3 |   | $ | 13 |   | $ | 25 |   | $ | 25 |   |
| Interest rate(2)                   |   | 5.7                         | %      | 5.7 | % | 5.7 | % | 5.7 | % | 5.6 | % | 5.1 | % | 5.4 | % |   |   |
|                               |   |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **PSI**                            |   |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Long-term  Debt(1)                 |   | $                           | 56     |   | $ | 2 |   | $ | 51 | (4) | $ | 328 |   | $ | 267 |   | $ | 676 |   | $ | 1,380 |   | $ | 1,481 |   |
| Weighted-average  interest rate(2) |   | 5.9                         | %      | 6.0 | % | 6.5 | % | 6.7 | % | 7.8 | % | 6.4 | % | 6.7 | % |   |   |
|                               |   |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Capital Leases                     |   |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Fixed-rate  leases                 |   | $                           | 1      |   | $ | 2 |   | $ | 2 |   | $ | 2 |   | $ | 2 |   | $ | 9 |   | $ | 18 |   | $ | 18 |   |
| Interest rate(2)                   |   | 5.9                         | %      | 5.9 | % | 5.9 | % | 5.8 | % | 5.8 | % | 5.2 | % | 5.6 | % |   |   |
|                               |   |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **ULH&P**                      |   |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Long-term  Debt(1)                 |   | $                           | 20     |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | 55 |   | $ | 75 |   | $ | 79 |   |
| Weighted-average  interest rate(2) |   | 6.1                         | %      |   |   |   |   |   |   |   |   | 7.3 | % | 7.0 | % |   |   |
|                               |   |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Capital Leases                     |   |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Fixed-rate  leases                 |   | $                           | — |   | $ | — |   | $ | 1 |   | $ | 1 |   | $ | 1 |   | $ | 3 |   | $ | 6 |   | $ | 6 |   |
| Interest rate(2)                   |   |                        |   |   |   | 5.9 | % | 5.8 | % | 5.8 | % | 5.3 | % | 5.6 | % |   |   |

 

----

(1)             Long-term Debt includesamounts reflected as long-term debt due within one year.

(2)              The weighted-averageinterest rate is calculated as follows: (1) for Long-term Debt and Other, the weighted-average interest rate isbased on the interest rates at December 31, 2002 of the debt that is maturingin the year reported; and (2) for Capital Leases, the weighted-average interestrate is based on the average interest rate of the lease payments made duringthe year reported.

(3)             Long-term Debtrelated to investments under Global Resources.

(4)             Includes 6.50%Debentures due August 1, 2026, reflected as maturing in 2005, as the interestrate resets on August 1, 2005.

(5)             Includes 6.90%Debentures due June 1, 2025, reflected as maturing in 2005, as the debenturesare putable to **CG&E** at theoption of the holders on June 1, 2005.

 

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Our current policy in managing exposure to fluctuations in interestrates is to maintain approximately 30 percent of the total amount ofoutstanding debt in floating interest rate debt instruments.  In maintaining this level of exposure, weuse interest rate swaps.  Under theswaps, we agree with other parties to exchange, at specified intervals, thedifference between fixed-rate and floating-rate interest amounts calculated onan agreed upon notional amount.  **CG&E** has an outstanding interest rateswap agreement that decreased the percentage of floating-rate debt.  Under the provisions of the swap, which hasa notional amount of $100 million, **CG&E**pays a fixed-rate and receives a floating-rate through October 2007.  This swap qualifies as a cash flow hedgeunder the provisions of Statement 133. As the terms of the swap agreement mirror the terms of the debtagreement that it is hedging, we anticipate that this swap will continue to beeffective as a hedge.  Changes in fairvalue of this swap are recorded in *Accumulatedother comprehensive income (loss)*, beginning with our adoption ofStatement 133 on January 1, 2001.  **Cinergy Corp.** has three outstanding interestrate swaps with a combined notional amount of $250 million.  Under the provisions of the swaps, **Cinergy Corp.** will receive fixed-rateinterest payments and pay floating-rate interest payments through September2004.  These swaps qualify as fair valuehedges under the provisions of Statement 133. We anticipate that these swaps will continue to be effective ashedges.  See Note 1(l) of the “Notes toFinancial Statements” in “Item 8. Financial Statements and Supplementary Data” for additional information onfinancial derivatives.  In the future,we will continually monitor market conditions to evaluate whether to modify ourlevel of exposure to fluctuations in interest rates.

 

**INFLATION**

** **

We believe that the recent inflation rates do not materially impact ourfinancial condition.  However, underexisting regulatory practice for all of **PSI**,**ULH&P**, and the non-generatingportion of **CG&E**, only thehistorical cost of plant is recoverable from customers.  As a result, cash flows designed to providerecovery of historical plant costs may not be adequate to replace plant infuture years.

 

**ACCOUNTING MATTERS**

** **

**Critical Accounting Policies**

 

Preparation of financial statements and related disclosures incompliance with GAAP requires the use of assumptions and estimates.  In certain instances, the application ofGAAP requires judgments regarding future events, including the likelihood ofsuccess of particular initiatives, legal and regulatory challenges, andanticipated recovery of costs. Therefore, the possibility exists for materially different reportedamounts under different conditions or assumptions.  The following discusses relevant accounting policies and shouldbe read in conjunction with the “Notes to Financial Statements” in “Item8.  Financial Statements and SupplementaryData”.

 

***Fair ValueAccounting for Energy Marketing and Trading***

 

We use fair value accounting for energy trading contracts, which isrequired, with certain exceptions, by Statement 133.  Short-term contracts used in our trading activities are generallypriced using exchange based or over-the-counter price quotes.  Long-term contracts typically must be valuedusing model pricing due to the lack of actively quoted prices.  The period for which actively quoted pricesare available varies by commodity and pricing point, but is generally shorterfor electricity than gas.  Use of modelpricing requires estimation surrounding

 

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factors such as volatility and future price expectations beyond theactively quoted portion of the price curve. In addition, some contracts do not have fixed notional amounts andtherefore must be valued using estimates of volumes to be consumed by thecounterparty.  See “Changes in FairValue” for additional information.

 

We measure these risks by using complex valuation tools, both externaland proprietary, which allow us to model prices for periods for which activequotes are unavailable.  These modelsare dynamic and are continuously updated with the most recent data to improveestimates of future expectations.  Wemeasure risks for contracts that do not contain fixed notional amounts byobtaining historical data and projecting expected consumption.  These models incorporate expectationssurrounding the impacts that weather may play in future consumption.  The results of these measures assist us inmanaging such risks within our portfolio. We also have a Corporate Risk Management function within **Cinergy** that is independent of themarketing and trading function and is under the oversight of a risk policycommittee comprised primarily of senior company executives.  This group provides an independentevaluation of both forward price curves and the valuation of energy contracts.  See “Value at Risk” for additionalinformation.

 

There is inherent risk in valuation modeling given the complexity andvolatility of energy markets.  Fairvalue accounting has risk, including its application to short-term contracts,as gains and losses recorded through its use are not yet realized.  Therefore, it is possible that results infuture periods may be materially different as contracts are ultimately settled.

 

For financial reporting purposes, assets and liabilities associatedwith energy trading transactions accounted for using fair value are reflectedon the Balance Sheets as *Energy**risk management assets current*and*non-current*and*Energy risk management liabilities current*and*non-current*, classified as current ornon-current pursuant to each contract’s tenor. Net gains and losses resulting from revaluation of contracts during theperiod are recognized currently in the Statements of Income.

 

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***Retail CustomerRevenue Recognition***

 

Our retail revenues include amounts that are not yet billed to customers.  Customers are billed throughout the month asboth gas and electric meters are read. We recognize revenues for retail energy sales that have not yet beenbilled, but where gas or electricity has been consumed.  This is termed “unbilled revenue” and is awidely recognized and accepted practice for utilities.  In making our estimates of unbilled revenuewe use complex systems that consider various factors, including weather, in ourcalculation of retail customer consumption at the end of each month.  Given the use of these systems and the factthat customers are billed monthly, we believe it is unlikely that materiallydifferent results will occur in future periods when revenue is billed.  Related receivables are sold under theaccounts receivable sales agreement and therefore are not reflected on ourBalance Sheets.  See Note 6 of the“Notes to Financial Statements” in “Item 8. Financial Statements and Supplementary Data” for additional information.

 

The amount of unbilled revenues for **Cinergy**,**CG&E**, **PSI**, and **ULH&P**as of December 31, 2002, 2001, and 2000 were as follows:

 
|                           |   | **2002**          |    | **2001** |   | **2000** |   |
|--------------------------------|--------|-------------------|---------|----------|--------|----------|--------|
|                           |   | **(in millions)** |    |
|                           |   |              |    |     |   |     |   |
| **Cinergy**                    |   | **$**             | **153** |     | $      | 172      |   | $ | 231 |   |
| **CG&E**  and subsidiaries |   | **89**            |    | 104      |   | 153      |   |
| **PSI**                        |   | **64**            |    | 68       |   | 78       |   |
| **ULH&P**                  |   | **15**            |    | 18       |   | 26       |   |
|                                |        |                   |         |          |        |          |        |  |  |  |

 

***Regulatory Accounting***

** **

**PSI**, **CG&E**, and **ULH&P** are regulated utility companies.  Except with respect to the electricgeneration-related assets and liabilities of **CG&E**,the companies apply the provisions of Statement 71.  In accordance with Statement 71, regulatory actions may result inaccounting treatment different from that of non-rate regulated companies.  The deferral of costs (as regulatory assets)or accrual of refund obligations (as regulatory liabilities) may be appropriatewhen the future recovery of such costs or making of refunds is probable.  In assessing probability, we consider suchfactors as regulatory precedent and the current regulatory environment.  To the extent recovery of costs is no longerdeemed probable, related regulatory assets would be required to be recognizedin current period earnings.

 

At December 31, 2002, regulatory assets totaled $605 million for **CG&E** (including $5 million for **ULH&P**) and $418 million for **PSI**. Current rates include the recovery of $598 million for **CG&E** and $360 million for **PSI**. Of the $58 million not yet approved for recovery by **PSI**, $42 million relates to reorganizationcosts incurred in connection with the merger with **CG&E**.  Deferral ofthese costs for subsequent recovery was previously authorized by the IURC.  **PSI**will request recovery of these costs in its rate testimony expected to be filedin March 2003.  Should the IURC denyrecovery of those costs, a charge to current period earnings would be required.  See Note 1(c) of the “Notes to FinancialStatements” in “Item 8.  FinancialStatements and Supplementary Data” for additional detail regarding regulatoryassets.

 

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***Pension and OtherPostretirement Benefits***

 

**Cinergy’s** reportedcosts of providing pension and other postretirement benefits (as described inNote 9 of the “Notes to Financial Statements” in “Item 8.  Financial Statements and SupplementaryData”) are dependent upon numerous factors resulting from actual plan experienceand assumptions of future experience.

 

Pension costs associated with **Cinergy’s**defined benefit pension plans, for example, are impacted by employeedemographics (including age, compensation levels, and employment periods), thelevel of contributions we make to the plan, and earnings on plan assets.  Changes made to the provisions of the planmay impact current and future pension costs. Pension costs may also be significantly affected by changes in keyactuarial assumptions, including anticipated rates of return on plan assets andthe discount rates used in determining the projected benefit obligation andpension costs.

 

In accordance with Statement of Financial Accounting Standards No. 87, *Employers’ Accounting for Pensions*(Statement 87), changes in pension obligations associated with the abovefactors may not be immediately recognized as pension costs on the incomestatement, but may be deferred and amortized in the future over the averageremaining service period of active plan participants to the extent thatStatement 87 recognition provisions are triggered.  For the years ended December 31, 2002, 2001, and 2000, werecorded pension costs for our defined benefit pension plans (including earlyretirement program costs recognized in accordance with Statement of FinancialAccounting Standards No. 88, *Employers’Accounting for Settlements and Curtailments of Defined Benefit Pension Plansand for Termination Benefits*(Statement 88)) of approximately $68million, $32 million, and $44 million, respectively.

 

**Cinergy’s** pensionplan assets are principally comprised of equity and fixed incomeinvestments.  Differences between actualportfolio returns and expected returns may result in increased or decreasedpension costs in future periods. Likewise, changes in assumptions regarding current discount rates andexpected rates of return on plan assets could also increase or decreaserecorded pension costs.

 

In selecting our discount rate assumption we considered rates of returnon high-quality fixed-income investments that are expected to be availablethrough the maturity dates of the pension benefits.  In establishing our expected long-term rate of return assumption,we utilize analysis prepared by our investment advisor.  Our expected long-term rate of return onpension plan assets is based on our targeted asset allocation assumption of 60percent equity investments and 40 percent fixed income investments.  Our 60 percent equity investment targetincludes allocations to domestic, international, and emerging markets managers.  Our asset allocation is designed to achievea moderate level of overall portfolio risk in keeping with **Cinergy’s** desired risk objective.  We regularly review our asset allocation andperiodically rebalance our investments to our targeted allocation asappropriate.

 

We base our determination of pension cost on a market-related valuationof assets that reduces year-to-year volatility.  This market-related valuation recognizes investment gains orlosses over a five-year period from the year in which they occur.  Investment gains or losses for this purposeare the difference between the expected return calculated using themarket-related value of assets and the actual fair value of assets.

 

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Based on our assumed long-term rate of return of 9 percent, discountrate of 6.75 percent, and various other assumptions, we estimate that ourpension costs associated with our defined benefit pension plans will increasefrom $29 million (excluding Statement 88 costs) in 2002 to approximately $53million in 2003.  Modifying the expectedlong-term rate of return on our pension plan assets by .25 percent would changepension costs for 2003 by approximately $2 million.  Modifying the discount rate assumption by .25 percent wouldchange 2003 pension costs by approximately $3 million.

 

Other postretirement benefit costs are impacted by employeedemographics, per capita claims costs, and health care cost trend rates.  Other postretirement benefit costs may alsobe significantly affected by changes in key actuarial assumptions, includingthe discount rates used in determining the accumulated postretirement benefitobligation and the postretirement benefit costs.  In accordance with Statement of Financial Accounting Standards No.106, *Employers’ Accounting for PostretirementBenefits Other Than Pensions*(Statement 106), changes inpostretirement benefit obligations associated with these factors may not beimmediately recognized as postretirement benefit costs but may be deferred andamortized in the future over the average remaining service period of activeplan participants to the extent that Statement 106 recognition provisions aretriggered.  For the years ended December31, 2002, 2001, and 2000, we recorded other postretirement benefit costs ofapproximately $29 million, $27 million, and $25 million, respectively, inaccordance with the provisions of Statement 106.  Basedupon a discount rate of 6.75 percent and various other assumptions, we estimatethat our other postretirement benefit costs will increase from $29 million in2002 to approximately $35 million in 2003.

 

**Impairment of Long-lived Assets**

 

Current accounting standards require long-lived assets be measured forimpairment whenever indicators of impairment exist.  If deemed impaired under the standards, assets are written downto fair value with a charge to current period earnings.  As a producer of electricity, **Cinergy**, **CG&E**,and **PSI** are owners of generatingplants, which are largely coal-fired. At December 31, 2002, the carrying value of these generating plants is$4 billion for **Cinergy**, $2 billionfor **CG&E** and $2 billion for **PSI**. As a result of the various emissions and by-products of coalconsumption, the companies are subject to extensive environmental regulationsand are currently subject to a number of environmental contingencies.  See Note 11 of the “Notes to FinancialStatements” in “Item 8.  FinancialStatements and Supplementary Data” for additional information.  While we cannot predict the potential affectthe resolution of these matters will have on our financial position or resultsof operations, we believe that these assets are not impaired.  In making this assessment, we consider suchfactors as the expected ability to recover additional investment in environmentalcompliance expenditures, the relative pricing of wholesale electricity in theregion, the anticipated demand, and the cost of fuel.  We will continue to evaluate these assets for impairment whenevents or circumstances indicate the carrying value may not be recoverable.

 

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**Accounting Changes**

 

***Energy Trading***

 

The Emerging Issues Task Force (EITF) has been discussing severalissues related to the accounting and disclosure of energy trading activitiesunder EITF 98-10, *Accounting for Contracts Involved in Energy Trading and Risk ManagementActivities*(EITF 98-10).  InOctober 2002, the EITF reached consensus in EITF Issue 02-3, *Accounting for Contracts Involved in Energy Tradingand Risk Management Activities* to (a) rescind EITF 98-10, (b)generally preclude the recognition of gains at the inception of newderivatives, and (c) require all realized and unrealized gains and losses onenergy trading derivatives to be presented net in the Statements of Income,whether or not settled physically.

 

The consensus to rescind EITF 98-10 will require all energy tradingcontracts that do not qualify as derivatives to be accounted for on an accrualbasis, rather than at fair value.  Theconsensus was immediately effective for all new contracts executed afterOctober 25, 2002, and will require a cumulative effect adjustment to income,net of tax, on January 1, 2003, for all contracts executed on or prior toOctober 25, 2002.  The cumulative effectadjustment, on a net of tax basis, will be a loss of approximately $13 million,which includes primarily the impact of coal contracts accounted for at fairvalue, gas inventory accounted for at fair value, and certain gascontracts.  We expect the value of theseitems to be realized when the contracts settle.  The general restriction on recognition of inception gains is notexpected to have a material impact on our future financial position or resultsof operations.

 

The consensus to require all gains and losses on energy tradingderivatives to be presented net in the Statements of Income is effectivebeginning January 1, 2003 and will require restatement for all periodspresented.  This will result insubstantial reductions in reported *OperatingRevenues, Fuel and purchased and exchanged power*expense, and*Gas purchased*expense.  However, *OperatingIncome* and *Net Income*will not be affected by this change. Pro-forma *Operating Revenues*for**Cinergy**, **CG&E**, and **PSI** for the year ended December 31, 2002, under thisrequirement would have been as follows:

 
|                           |   | **2002**          |      |
|--------------------------------|--------|-------------------|-----------|
|                           |   | **(in millions)** |      |
|                           |   |              |      |
| **Cinergy**(1)                 |   | **$**             | **4,028** |   |
| **CG&E**  and subsidiaries |   | **2,154**         |      |
| **PSI**                        |   | **1,623**         |      |
|                                |        |                   |           |  |

 

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(1)    Theresults of **Cinergy** also includeamounts related to non-registrants.

 

***BusinessCombinations and Intangible Assets***

 

In June 2001, the FASB issued Statement of Financial AccountingStandards No. 141, *Business Combinations*(Statement 141), and Statement 142. Statement 141 requires all business combinations initiated after June30, 2001, to be accounted for using the purchase method.  With the adoption of Statement 142, goodwilland other intangibles with indefinite lives will no longer be subject toamortization.  Statement 142 requiresthat goodwill be assessed for impairment upon adoption and at least annuallythereafter by applying a fair-value-based test, as opposed to

 

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the undiscounted cash flow test applied under prior accountingstandards.  This test must be applied atthe “reporting unit” level, which is not permitted to be broader than thecurrent business segments discussed in Note 16 of the “Notes to FinancialStatements” in “Item 8. Financial Statements and Supplementary Data”.  Under Statement 142, an acquired intangibleasset should be separately recognized if the benefit of the intangible asset isobtained through contractual or other legal rights, or if the intangible assetcan be sold, transferred, licensed, rented, or exchanged, regardless of theacquirer’s intent to do so.

 

We began applying Statement 141 in the third quarter of 2001 andStatement 142 in the first quarter of 2002. The discontinuance of amortization of goodwill, which began in the firstquarter of 2002, was not material to our financial position or results ofoperations.  We finalized our transitionimpairment test in the fourth quarter of 2002 and have recognized a non-cashimpairment charge of approximately $11 million (net of tax) for goodwillrelated to certain of our international assets.  This charge reflects a general decline in value of internationalassets.  Additionally, **Cinergy’s** combined heat and power plantslocated in the Czech Republic faced downward pressure in their selling pricesfor electricity due to the continued restructuring of the market in thatcountry.  In calculating this impairmentcharge, the fair value of the reporting unit was determined through bothdiscounted cash flow analysis and offers being considered on certain businesseswithin the reporting unit.  This amountis reflected in **Cinergy’s**Statements of Income as a *Cumulative effectof a change in accounting principle*.  While Statement 142 did not require the initial transitionimpairment test to be completed until December 31, 2002, it requires anytransition impairment charge to be reflected as of January 1, 2002.  As such, Note 14 of the “Notes to FinancialStatements” in “Item 8.  FinancialStatements and Supplementary Data” reconciles *NetIncome*and *Earnings Per Share*from the amounts originally presented in the first quarter of 2002 to theamounts revised for this change.  Wewill continue to perform goodwill impairment tests annually, as required byStatement 142, or when circumstances indicate that the fair value of areporting unit has declined significantly.

 

***Asset RetirementObligations***

 

In July 2001, the FASB issued Statement of Financial AccountingStandards No. 143, *Accounting for AssetRetirement Obligations* (Statement 143), which requires fair valuerecognition of legal obligations associated with the retirement or removal oflong-lived assets at the time the obligations are incurred.  The initial recognition of this liabilitywill be accompanied by a corresponding increase in property, plant, andequipment.  Subsequent to the initialrecognition, the liability will be adjusted for any revisions to the expectedcash flows of the retirement obligation (with corresponding adjustments toproperty, plant, and equipment), and for accretion of the liability due to thepassage of time (recognized as an operating expense).  Additional depreciation expense will be recorded prospectivelyfor any property, plant, and equipment increases.  We adopted Statement 143 on January 1, 2003.  The impact of adoption on our results ofoperations will be reflected as a cumulative effect adjustment to income, netof tax.

 

We currently accrue costs of removal on many long-lived assets throughdepreciation expense if we believe removal of the assets at the end of theiruseful life is likely.  The SEC staffhas interpreted Statement 143 to disallow the accrual of cost of removal whenno obligation exists under Statement 143, even if removal of the asset islikely.  Any amounts currently recordedin *Accumulated depreciation* mustbe removed through the cumulative effect adjustment on January 1, 2003.  However, if accruing cost of removal isallowed for ratemaking purposes and Statement

 

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71 is applicable, accumulated cost of removal will not be reversed uponadoption of Statement 143.  Rather, theamount of accrued cost of removal will remain, but will be disclosed in allfuture periods.  **PSI**, **CG&E**,except for its generation assets, and **ULH&P**expect to continue to accrue costs of removal under Statement 71.

 

We are finalizing our evaluation of the impact of adopting Statement143.  However, we have not determinedwhether its impact will be material pending (a) resolution of certain legalconclusions and (b) final calculations on the amount of accumulated cost ofremoval to be reversed upon adoption for **CG&E’s**generation assets.

 

***Derivatives***

 

During 1998, the FASB issued Statement 133.  This standard was effective for **Cinergy**beginning in 2001, and requires us to record derivative instruments, which arenot exempt under certain provisions of Statement 133, as assets or liabilities,measured at fair value (i.e., mark-to-market). Our financial statements reflect the adoption of Statement 133 in thefirst quarter of 2001.  Since many ofour derivatives were previously required to use fair value accounting, theeffects of implementation were not material.

 

Our adoption did not reflect the potential impact of applying fairvalue accounting to selected electricity options and capacity contracts.  We had not historically accounted for theseinstruments at fair value because they were intended as either hedges of peakperiod exposure or sales contracts served with physical generation, neither ofwhich were considered trading activities. At adoption, we classified these contracts as normal purchases or salesbased on our interpretation of Statement 133 and in the absence of definitiveguidance on such contracts.  In June2001, the FASB staff issued guidance on the application of the normal purchasesand sales exemption to electricity contracts containing characteristics ofoptions.  While many of the criteria inthis guidance are consistent with the existing guidance in Statement 133, somecriteria were added.  We adopted the newguidance in the third quarter of 2001, and the effects of implementation forthese contracts were not material to our financial position or results ofoperations.  We will continue to applythis guidance to any new electricity contracts that meet the definition of aderivative.

 

In December 2001, the FASB staff revised the current guidance to makethe evaluation of whether electricity contracts qualify as normal purchases andsales more qualitative than quantitative. This new guidance uses several factors to distinguish between capacitycontracts, which qualify for the normal purchases and sales exemption, andoptions, which do not.  These factorsinclude deal tenor, pricing structure, specification of the source of power,and various other factors.  We adoptedthis guidance in the third quarter of 2002, and its impact was not material toour financial position or results of operations.

 

In October 2001, the FASB staff released final guidance on theapplicability of the normal purchases and sales exemption to contracts thatcontain a minimum quantity (a forward component) and flexibility to takeadditional quantity at a fixed price (an option component).  While this guidance was issued primarily toaddress optionality in fuel supply contracts, it applies to all derivatives(subject to certain exceptions for capacity contracts in electricity discussedin the previous paragraphs).  Thisguidance concludes that such contracts are not eligible for the normalpurchases and sales exemption due to the existence of optionality in the

 

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contract.  We adopted thisguidance in the second quarter of 2002, consistent with the transitionprovisions.  **Cinergy** has certain contracts that contain fixed-priceoptionality, primarily coal contracts, which we reviewed to determine theimpact of this new guidance.  Due to alack of liquidity with respect to coal markets in our region, we determinedthat our coal contracts do not meet the net settlement criteria of Statement133 and thus do not qualify as derivatives. Given these conclusions, the results of applying this new guidance werenot material to our financial position or results of operations.

 

In May 2002, the FASB issued an exposure draft that would amendStatement 133 to incorporate certain implementation conclusions reached by theFASB staff.  We do not believe theamendments, as currently drafted, will have a material effect on our financialposition or results of operations.

 

***Asset Impairment***

 

In August 2001, the FASB issued Statement 144, which addressesaccounting and reporting for the impairment or disposal of long-livedassets.  Statement 144 was effectivebeginning with the first quarter of 2002. The impact of implementation on our financial position or results ofoperations was not material.

 

***Exit Activities***

 

In August 2002, the FASB issued Statement of Financial AccountingStandards No. 146, *Accounting for CostsAssociated with Exit or Disposal Activities* (Statement 146).  Statement 146 addresses accounting andreporting for the recognition of exit costs, including, but not limited to,one-time employee benefit terminations, contract cancellations, and facilityconsolidations.  This statement requiresthat such costs be recognized only when they meet the definition of a liabilityunder GAAP.  However, Statement 146applies only to exit activities initiated in 2003 and after.  All costs recorded through December 31,2002, are unaffected by this pronouncement. The impact of implementation on our financial position or results ofoperations is not expected to be material.

 

***Accounting forStock-Based Compensation***

 

We have historically accounted for our stock-based compensation plansunder Accounting Principles Board (APB) Opinion No. 25, *Accounting for Stock Issued to Employees*(APB25)*. *In July 2002, **Cinergy**announced that it would adopt Statement of Financial Accounting Standards No.123, *Accounting for Stock-Based Compensation*(Statement 123) for all employee awards granted or modified afterJanuary 1, 2003, and would begin measuring the compensation cost of stock-basedawards under the fair value method.  InDecember 2002, the FASB issued Statement of Financial Accounting Standards No.148, *Accounting for Stock-BasedCompensation-Transition and Disclosure* (Statement 148), which amendsStatement 123 and APB Opinion No. 28, *InterimFinancial Reporting.* Statement 148 provides alternative methods of transition to Statement123 and more expanded disclosures about the method of accounting forstock-based employee compensation and the effect of the method used on reportedresults in both annual and interim financial statements.  **Cinergy**adoptedStatement 148 on January 1, 2003, and has adopted the transition provisionsthat require expensing options prospectively in the year of adoption,consistent with the original pronouncement. Existing awards will continue to follow

 

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the intrinsic value method prescribed by APB 25.  The impact of adoption on our financialposition and results of operations, assuming award levels and fair valuessimilar to past years, is not material. This change will primarily impact the accounting for stock options andother performance based awards related to the Cinergy Corp. 1996 Long-TermIncentive Compensation Plan and Cinergy Corp. Employee Stock Purchase andSavings Plan.  See Note 2 of the “Notesto Financial Statements” in “Item 8. Financial Statements and SupplementaryData” for additional information.

 

***Guarantees***

 

In November 2002, the FASB issued Interpretation No. 45, *Guarantor’s Accounting and Disclosure Requirementsfor Guarantees, Including Indirect Guarantees of Indebtedness of Others*(Interpretation 45).  Interpretation 45addresses accounting and reporting obligations under certain guarantees.  It requires a guarantor to recognize, at theinception of a guarantee, a liability for the fair value of the obligationundertaken in issuing the guarantee. The initial recognition and measurement provisions of Interpretation 45are applicable to guarantees issued or modified after December 31, 2002.  However, the incremental disclosurerequirements in Interpretation 45 are effective for this annual report.  The impact of implementation on ourfinancial position or results of operations is not expected to bematerial.  For a further discussion ofguarantees, see Note 11(b) of the “Notes to Financial Statements” in “Item 8.Financial Statements and Supplementary Data”.

 

***Consolidation of Special Purpose Entities***

 

The FASB issued Interpretation 46 in January 2003.  This interpretation will significantlychange the consolidation requirements for SPEs.  We have begun reviewing the impact of this interpretation buthave not yet concluded whether consolidation of certain SPEs will berequired.  There are two SPEs for whichconsolidation may be required.  TheseSPEs have individual power sale agreements to an unrelated third party forapproximately 45 MW, ending in 2009, and 35 MW, ending in 2016.  In addition, the SPEs have individual powerpurchase agreements with Capital & Trading to supply the power.  Capital & Trading also provides variousservices, including certain credit support facilities.

 

**Cinergy’s** quantifiableexposure to loss as a result of involvement with these two SPEs is $28 million,which includes investments in these entities of $3 million and exposure underthe capped credit facilities of approximately $25 million.  There is also a non-capped facility, but itcan only be called upon in the event the SPE breaches representations, violatescovenants, or other unlikely events.

 

If appropriate, consolidation of all assets and liabilities of thesetwo SPEs, at their carrying values, will be required in the third quarter of2003.  Approximately $225 million ofnon-recourse debt would be included in **Cinergy’s**Balance Sheets upon initial consolidation. However, the impact on our results of operations would be expected to beimmaterial.

 

**Cinergy** believes thatits accounts receivable sale facility, as discussed in Note 6 of the “Notes toFinancial Statements” in “Item 8. Financial Statements and Supplementary Data”, would remainunconsolidated since it involves transfers of financial assets to a qualifyingSPE, which is exempted from consolidation by Statement 140 and thisinterpretation.

 

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**Other Matters**

 

***Voluntary EarlyRetirement Programs (VERP)***

 

Throughout 2002, **Cinergy**offered various VERP to the following employee groups:

 

| **Employee  Group**                                              |   | **Number of  Employees  Offered VERP** |   | **Number of  Employees  Elected VERP** |   |
|------------------------------------------------------------------|--------|----------------------------------------|--------|----------------------------------------|--------|
|                                                             |   |                                   |   |                                   |   |
| Non-union                                                        |   | 279                                    |   | 213                                    |   |
|                                                             |   |                                   |   |                                   |   |
| Utility Workers  Union of America(1)                             |   | 70                                     |   | 41                                     |   |
|                                                             |   |                                   |   |                                   |   |
| International  Brotherhood of Electrical Workers #1393 and #1347 |   | 75                                     |   | 48                                     |   |
|                                                             |   |                                   |   |                                   |   |
| **Total**                                                        |   | 424                                    |   | 302                                    |   |

 

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(1)    Union wasformerly named the Independent Utilities Union.

 

As a result of the employees accepting a VERP in 2002, **Cinergy**, **CG&E**,and **PSI** recorded expenses ofapproximately $43 million, $19 million (including $3 million related to **ULH&P**), and $21 million, respectively.

 

***New BusinessInitiatives***

 

In the third quarter of 2002, Capital & Trading completed anacquisition of a coal-based synthetic fuel production facility which convertscoal feedstock into synthetic fuel for sale to a third party.  The cost of this acquisition wasapproximately $60 million.  Thesynthetic fuel produced at this facility qualifies for tax credits inaccordance with Section 29 of the Internal Revenue Code.  Eligibility for these tax credits expires in2007.  We anticipate these tax creditswill benefit our net income.

 

***Federal Tax LawChanges***

 

In March 2002,President Bush signed into law the Job Creation and Worker Assistance Act of2002, also known as the Economic Stimulus Package.  The primary benefit to **Cinergy**is the allowance of additional first-year depreciation deductions for taxpurposes, equal to 30 percent of the adjusted tax basis of qualifiedproperty.  This provision applies toqualifying additions after September 11, 2001. The provisions of this bill will not have a material impact on ourfinancial position or results of operations.

 

***Indiana Tax LawChanges***

 

In June 2002, the Indiana Legislature passed a bill, which was signedby the Governor, containing new tax law provisions in Indiana that apply toboth utility and non-utility companies with operations in the state.  After review of the new provisions, we donot believe that these changes will materially impact **Cinergy** or **PSI**.

 

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***PUCO Review ofFinancial Condition of Ohio Regulated Utilities***

 

In October 2002, as the result of recent financial problems experiencedby certain public utility companies and the current state of the economy, thePUCO issued an order initiating a review of the financial condition of the 19large public utilities (gas, electric, and telecommunication) serving Ohiocustomers, including **CG&E**.  The PUCO intends to identify availablemeasures to ensure that the regulated operations of the Ohio public utilitiesare not adversely impacted by the parent or affiliate companies’ unregulatedoperations.  The PUCO requested initialcomments and reply comments by November 12, 2002, and November 22, 2002, respectively,regarding how the review should be conducted and on the potential measures thePUCO could take to protect the financial condition of the regulatedutilities.  **CG&E** filed comments; however, we cannot predict theoutcome of this review at this time.

 

***Shareholder RightsPlan***

 

In July 2000, **Cinergy Corp.’s** board of directors approveda Shareholder Rights Plan.  Under theplan, each shareholder of record on October 30, 2000, received, as a dividend,a right to purchase from **Cinergy Corp.** one share of common stock ata price of $100.  The rights werescheduled to expire in October 2010.

 

As part of its dedication to ensure a leadership position in adoptingcorporate governance practices that are considered best in class, in August2002 **CinergyCorp.’s**board of directorsapproved a resolution to accelerate the termination date of the company’sShareholder Rights Plan.  Under theresolution, the company terminated the plan, effective September 16, 2002.  The company also amended the contract withthe plan’s agent and notified the SEC and the New York Stock Exchange of thechange.

 

**ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK**

 

Reference is made to the “Market Risk Sensitive Instruments andPositions” section of “Item 7. Management’s Discussion and analysis ofFinancial Condition and Results of Operations”.

 

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**INDEX TO FINANCIAL STATEMENTS****AND FINANCIAL STATEMENT SCHEDULES**

 
| **FINANCIAL STATEMENTS**                                                                                |
|---------------------------------------------------------------------------------------------------------|
|                                                                                                    |
| **Independent Auditors' Report**                                                                        |
|                                                                                                    |
| **Cinergy Corp. and Subsidiaries**                                                                      |
| Consolidated Statements  of Income for the three years ended December 31, 2002                          |
| Consolidated Balance Sheets  at December 31, 2002 and 2001                                              |
| Consolidated Statements of  Changes in Common Stock Equity for the three years ended December 31, 2002  |
| Consolidated  Statements of Cash Flows for the three years ended December 31, 2002                      |
| Consolidated  Statements of Capitalization of December 31, 2002 and 2001                                |
|                                                                                                    |
| **The Cincinnati Gas & Electric  Company and Subsidiaries**                                         |
| Consolidated  Statements of Income for the three years ended December 31, 2002                          |
| Consolidated Balance Sheets  at December 31, 2002 and 2001                                              |
| Consolidated  Statements of Changes in Common Stock Equity for the three years ended  December 31, 2002 |
| Consolidated Statements of  Cash Flows for the three years ended December 31, 2002                      |
| Consolidated  Statements of Capitalization at December 31, 2002 and 2001                                |
|                                                                                                    |
| **PSI Energy, Inc. and Subsidiary**                                                                     |
| Consolidated Statements  of Income for the three years ended December 31, 2002                          |
| Consolidated  Balance Sheets at December 31, 2002 and 2001                                              |
| Consolidated Statements  of Changes in Common Stock Equity for the three years ended December 31, 2002  |
| Consolidated Statements  of Cash Flows for the three years ended December 31, 2002                      |
| Consolidated Statements  of Capitalization at December 31, 2002 and 2001                                |
|                                                                                                    |
| **The Union Light, Heat and Power Company**                                                             |
| Statements  of Income for the three years ended December 31, 2002                                       |
| Balance Sheets at  December 31, 2002 and 2001                                                           |
| Statements  of Changes in Common Stock Equity for the three years ended December 31, 2002               |
| Statements  of Cash Flows for the three years ended December 31, 2002                                   |
| Statements of  Capitalization at December 31, 2002 and 2001                                             |
|                                                                                                    |
| **Notes to Financial  Statements**                                                                      |
|                                                                                                    |
| **FINANCIAL STATEMENT SCHEDULES**                                                                       |
|                                                                                                    |
| Schedule  II - Valuation and Qualifying Accounts                                                        |
| **Cinergy  Corp. and Subsidiaries**                                                                     |
| **The  Cincinnati Gas & Electric Company and Subsidiaries**                                         |
| **PSI Energy, Inc. and Subsidiary**                                                                     |
| **The Union Light, Heat and Power Company**                                                             |

 

The information required to be submitted in schedulesother than those indicated above has been included in the Balance Sheets, theStatements of Income, related schedules, the notes thereto, or omitted as notrequired by the Rules of Regulation S-X.

 

94

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**ITEM 8.  FINANCIAL STATEMENTS ANDSUPPLEMENTARY DATA**

 

**INDEPENDENT AUDITORS’ REPORT**

 

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

 

We have audited the accompanying consolidated balance sheets andstatements of capitalization of Cinergy Corp. and subsidiaries and the separateconsolidated balance sheets and statements of capitalization of The CincinnatiGas & Electric Company and subsidiaries and PSI Energy, Inc. and subsidiaryand the separate balance sheets and statements of capitalization of The UnionLight, Heat and Power Company as of December 31, 2002 and 2001 and the relatedconsolidated statements of income, changes in common stock equity and cashflows for each of the three years in the period ended December 31, 2002.  Our audits also included the financialstatement schedules listed in the Table of Contents at Item 15.  These financial statements and financialstatement schedules are the responsibility of the Company’s management.  Our responsibility is to express an opinionon the financial statements and financial statement schedules based on ouraudits.

 

We conducted our audits in accordance with auditing standards generallyaccepted in the United States of America. Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free ofmaterial misstatement.  An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation.  Webelieve that our audits provide a reasonable basis for our opinion.

 

In our opinion, such financial statements present fairly, in allmaterial respects, the consolidated financial position of Cinergy Corp. andsubsidiaries and the financial position of The Cincinnati Gas & ElectricCompany and subsidiaries and PSI Energy, Inc. and subsidiary and the financialposition of The Union Light, Heat & Power Company as of December 31, 2002and 2001, and the respective results of their operations and their cash flowsfor each of the three years in the period ended December 31, 2002, inconformity with accounting principles generally accepted in the United Statesof America.  Also, in our opinion, suchfinancial statement schedules, when considered in relation to the respectivebasic consolidated financial statements taken as a whole, present fairly in allmaterial respects the information set forth therein.

 

As discussed in Note 14 to the financial statements, in 2002 CinergyCorp. changed its method of accounting for goodwill to conform to Statement ofFinancial Accounting Standards No. 142, “Goodwill and Other Intangible Assets.”

 

DELOITTE & TOUCHE LLP

Cincinnati, Ohio

February 12, 2003

 

95

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**CINERGY****CORP.AND SUBSIDIARY COMPANIES**

 

96

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**CINERGYCORP.**

**CONSOLIDATED STATEMENTS OF INCOME**

 
|                                                                                                  |   | **2002**                                              |          | **2001**   |   | **2000**  |   |
|-------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------------|---------------|------------|--------|-----------|--------|
|                                                                                                  |   | **(dollars  in thousands, except per share amounts)** |          |
|                                                                                                  |   |                                                  | ** **    |       |   |      |   |
| **Operating  Revenues**(Note 1(q)(*i*))                                                               |   |                                                  | ** **    |       |   |      |   |
| Electric                                                                                              |   | **$**                                                 | **6,912,349** | ** ** | $      | 8,255,847 |   | $ | 5,359,358 |   |
| Gas                                                                                                   |   | **4,916,919**                                         | ** **    | 4,662,916  |   | 2,941,753 |   |
| Other                                                                                                 |   | **130,813**                                           | ** **    | 78,246     |   | 95,969    |   |
| **Total  Operating Revenues**                                                                         |   | **11,960,081**                                        | ** **    | 12,997,009 |   | 8,397,080 |   |
|                                                                                                  |   |                                                  | ** **    |       |   |      |   |
| **Operating  Expenses**                                                                               |   |                                                  | ** **    |       |   |      |   |
| Fuel and  purchased and exchanged power (Note 1(q)(*i*))                                              |   | **4,511,891**                                         | ** **    | 6,005,803  |   | 3,139,274 |   |
| Gas purchased  (Note 1(q)(*i*))                                                                       |   | **4,668,941**                                         | ** **    | 4,431,899  |   | 2,674,449 |   |
| Operation and  maintenance                                                                            |   | **1,298,398**                                         | ** **    | 1,013,326  |   | 1,112,255 |   |
| Depreciation                                                                                          |   | **414,004**                                           | ** **    | 374,399    |   | 341,927   |   |
| Taxes other than  income taxes                                                                        |   | **263,002**                                           | ** **    | 227,652    |   | 268,346   |   |
| **Total  Operating Expenses**                                                                         |   | **11,156,236**                                        | ** **    | 12,053,079 |   | 7,536,251 |   |
|                                                                                                  |   |                                                  | ** **    |       |   |      |   |
| **Operating  Income**                                                                                 |   | **803,845**                                           | ** **    | 943,930    |   | 860,829   |   |
|                                                                                                  |   |                                                  | ** **    |       |   |      |   |
| **Equity  in Earnings (Losses) of Unconsolidated Subsidiaries**                                       |   | **15,261**                                            | ** **    | 1,494      |   | 6,231     |   |
| **Miscellaneous  - Net**                                                                              |   | **12,288**                                            | ** **    | 39,672     |   | 13,282    |   |
| **Interest**                                                                                          |   | **249,906**                                           | ** **    | 265,792    |   | 223,615   |   |
| **Preferred  Dividend Requirement of Subsidiary Trust** (Note 3)                                      |   | **23,832**                                            | ** **    | 1,067      |   | —    |   |
|                                                                                                  |   |                                                  | ** **    |       |   |      |   |
| **Income  Before Taxes**                                                                              |   | **557,656**                                           | ** **    | 718,237    |   | 656,727   |   |
|                                                                                                  |   |                                                  | ** **    |       |   |      |   |
| **Income  Taxes** (Note 10)                                                                           |   | **157,320**                                           | ** **    | 255,978    |   | 251,607   |   |
| **Preferred  Dividend Requirements of Subsidiaries**                                                  |   | **3,433**                                             | ** **    | 3,433      |   | 4,585     |   |
|                                                                                                  |   |                                                  | ** **    |       |   |      |   |
| **Income  Before Discontinued Operations and Cumulative Effect of a Change in  Accounting Principle** |   | **396,903**                                           | ** **    | 458,826    |   | 400,535   |   |
|                                                                                                  |   |                                                  | ** **    |       |   |      |   |
| Discontinued  operations, net of tax (Note 15)                                                        |   | **(25,428**                                           | **)**         | (16,547    | )      | (1,069    | )      |
| Cumulative  effect of a change in accounting principle, net of tax (Note 14)                          |   | **(10,899**                                           | **)**         | —     |   | —    |   |
| **Net  Income**                                                                                       |   | **$**                                                 | **360,576**   | ** ** | $      | 442,279   |   | $ | 399,466 |   |
|                                                                                                  |   |                                                  | ** **    |       |   |      |   |
| **Average  Common Shares Outstanding**                                                                |   | **167,047**                                           | ** **    | 159,110    |   | 158,938   |   |
|                                                                                                  |   |                                                  | ** **    |       |   |      |   |
| **Earnings  Per Common Share**(Note 17)                                                               |   |                                                  | ** **    |       |   |      |   |
| Income Before  Discontinued Operations and Cumulative Effect of a Change in Accounting  Principle     |   | **$**                                                 | **2.37**      | ** ** | $      | 2.88      |   | $ | 2.52 |   |
| Discontinued  operations, net of tax                                                                  |   | **(0.15**                                             | **)**         | (0.10      | )      | (0.01     | )      |
| Cumulative  effect of a change in accounting principle, net of tax                                    |   | **(0.06**                                             | **)**         | —     |   | —    |   |
| Net Income                                                                                            |   | **$**                                                 | **2.16**      | ** ** | $      | 2.78      |   | $ | 2.51 |   |
|                                                                                                  |   |                                                  | ** **    |       |   |      |   |
| **Earnings  Per Common Share - Assuming Dilution** (Note 17)                                          |   |                                                  | ** **    |       |   |      |   |
| Income Before  Discontinued Operations and Cumulative Effect of a Change in Accounting  Principle     |   | **$**                                                 | **2.34**      | ** ** | $      | 2.85      |   | $ | 2.51 |   |
| Discontinued  operations, net of tax                                                                  |   | **(0.15**                                             | **)**         | (0.10      | )      | (0.01     | )      |
| Cumulative  effect of a change in accounting principle, net of tax                                    |   | **(0.06**                                             | **)**         | —     |   | —    |   |
| Net Income                                                                                            |   | **$**                                                 | **2.13**      | ** ** | $      | 2.75      |   | $ | 2.50 |   |
|                                                                                                  |   |                                                  | ** **    |       |   |      |   |
| **Dividends  Declared Per Common Share**                                                              |   | **$**                                                 | **1.80**      | ** ** | $      | 1.80      |   | $ | 1.80 |   |

 

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

 

97

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**CINERGY CORP.CONSOLIDATED BALANCE SHEETS**

 

**ASSETS**

 
|                                                                                                                                              |   | **December  31**            |           |
|---------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------|----------------|
|                                                                                                                                              |   | **2002**                    |           | **2001** |   |
|                                                                                                                                              |   | **(dollars  in thousands)** |           |
|                                                                                                                                              |   |                        |           |   |   |
| **Current  Assets**                                                                                                                               |   |                        |           |   |   |
| Cash and cash  equivalents                                                                                                                        |   | **$**                       | **221,083**    |   | $ | 111,067 |   |
| Restricted  deposits                                                                                                                              |   | **8,116**                   |           | 8,055 |   |
| Notes receivable  (Note 6)                                                                                                                        |   | **135,873**                 |           | 31,173 |   |
| Accounts  receivable less accumulated provision for doubtful accounts of $16,374 at  December 31, 2002, and $34,110 at December 31, 2001 (Note 6) |   | **1,292,410**               |           | 1,116,225 |   |
| Materials,  supplies, and fuel (Note 1(f))                                                                                                        |   | **319,456**                 |           | 239,648 |   |
| Energy risk  management current assets (Note 1(m))                                                                                                |   | **464,028**                 |           | 449,397 |   |
| Prepayments and  other                                                                                                                            |   | **118,208**                 |           | 110,102 |   |
| **Total  Current Assets**                                                                                                                         |   | **2,559,174**               |           | 2,065,667 |   |
|                                                                                                                                              |   |                        |           |   |   |
| **Property,  Plant, and Equipment - at Cost**                                                                                                     |   |                        |           |   |   |
| Utility plant in  service                                                                                                                         |   | **8,641,351**               |           | 8,089,961 |   |
| Construction  work in progress                                                                                                                    |   | **469,300**                 |           | 464,560 |   |
| **Total  Utility Plant**                                                                                                                          |   | **9,110,651**               |           | 8,554,521 |   |
| Non-regulated  property, plant, and equipment                                                                                                     |   | **4,704,904**               |           | 4,478,087 |   |
| Accumulated  depreciation                                                                                                                         |   | **5,166,881**               |           | 4,840,757 |   |
| **Net  Property, Plant, and Equipment**                                                                                                           |   | **8,648,674**               |           | 8,191,851 |   |
|                                                                                                                                              |   |                        |           |   |   |
| **Other  Assets**                                                                                                                                 |   |                        |           |   |   |
| Regulatory  assets (Note 1(c))                                                                                                                    |   | **1,022,696**               |           | 1,015,863 |   |
| Investments in  unconsolidated subsidiaries                                                                                                       |   | **417,188**                 |           | 332,027 |   |
| Energy risk  management non-current assets (Note 1(m))                                                                                            |   | **162,773**                 |           | 134,445 |   |
| Other  investments                                                                                                                                |   | **163,851**                 |           | 164,155 |   |
| Goodwill                                                                                                                                          |   | **43,717**                  |           | 53,587 |   |
| Other intangible  assets                                                                                                                          |   | **14,736**                  |           | 22,144 |   |
| Other                                                                                                                                             |   | **273,099**                 |           | 258,120 |   |
| **Total  Other Assets**                                                                                                                           |   | **2,098,060**               |           | 1,980,341 |   |
|                                                                                                                                              |   |                        |           |   |   |
| **Assets  of Discontinued Operations** (Note 15)                                                                                                  |   | **1,120**                   |           | 61,954 |   |
|                                                                                                                                              |   |                        |           |   |   |
| **Total  Assets**                                                                                                                                 |   | **$**                       | **13,307,028** |   | $ | 12,299,813 |   |

 

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

 

98

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**CINERGYCORP.CONSOLIDATED BALANCE SHEETS**

 

**LIABILITIES AND SHAREHOLDERS’ EQUITY**

 
|                                                                                                                                                          |   | **December  31**            |           |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------|----------------|
|                                                                                                                                                          |   | **2002**                    |           | **2001** |   |
|                                                                                                                                                          |   | **(dollars  in thousands)** | ** **     |
|                                                                                                                                                          |   |                        |           |   |   |
| **Current  Liabilities**                                                                                                                                      |   |                        |           |   |   |
| Accounts payable                                                                                                                                              |   | **$**                       | **1,321,968**  |   | $ | 1,024,412 |   |
| Accrued taxes                                                                                                                                                 |   | **254,823**                 |           | 195,976 |   |
| Accrued interest                                                                                                                                              |   | **64,340**                  |           | 56,216 |   |
| Notes payable  and other short-term obligations (Note 5)                                                                                                      |   | **667,973**                 |           | 1,144,955 |   |
| Long-term debt  due within one year (Note 4)                                                                                                                  |   | **191,454**                 |           | 148,431 |   |
| Energy risk  management current liabilities (Note 1(m))                                                                                                       |   | **407,710**                 |           | 429,794 |   |
| Other                                                                                                                                                         |   | **108,056**                 |           | 125,436 |   |
| **Total  Current Liabilities**                                                                                                                                |   | **3,016,324**               |           | 3,125,220 |   |
|                                                                                                                                                          |   |                        |           |   |   |
| **Non-Current  Liabilities**                                                                                                                                  |   |                        |           |   |   |
| Long-term debt  (Note 4)                                                                                                                                      |   | **4,080,768**               |           | 3,596,730 |   |
| Deferred income  taxes (Note 10)                                                                                                                              |   | **1,471,872**               |           | 1,302,042 |   |
| Unamortized  investment tax credits                                                                                                                           |   | **118,095**                 |           | 127,385 |   |
| Accrued pension  and other postretirement benefit costs (Note 9)                                                                                              |   | **626,167**                 |           | 498,801 |   |
| Energy risk  management non-current liabilities (Note 1(m))                                                                                                   |   | **143,991**                 |           | 135,619 |   |
| Other                                                                                                                                                         |   | **183,613**                 |           | 187,760 |   |
| **Total  Non-Current Liabilities**                                                                                                                            |   | **6,624,506**               |           | 5,848,337 |   |
|                                                                                                                                                          |   |                        |           |   |   |
| **Liabilities  of Discontinued Operations** (Note 15)                                                                                                         |   | **1,707**                   |           | 15,637 |   |
|                                                                                                                                                          |   |                        |           |   |   |
| **Total  Liabilities**                                                                                                                                        |   | **9,642,537**               |           | 8,989,194 |   |
|                                                                                                                                                          |   |                        |           |   |   |
| **Preferred  Trust Securities** (Note 3)                                                                                                                      |   |                        |           |   |   |
| Company  obligated, mandatorily redeemable, preferred trust securities of subsidiary,  holding solely debt securities of the company                          |   | **308,187**                 |           | 306,327 |   |
|                                                                                                                                                          |   |                        |           |   |   |
| **Cumulative  Preferred Stock of Subsidiaries**                                                                                                               |   |                        |           |   |   |
| Not subject to  mandatory redemption                                                                                                                          |   | **62,828**                  |           | 62,833 |   |
|                                                                                                                                                          |   |                        |           |   |   |
| **Common  Stock Equity** (Note 2)                                                                                                                             |   |                        |           |   |   |
| Common Stock -  $.01 par value; authorized shares - 600,000,000; outstanding shares -  168,663,115 at December 31, 2002, and 159,402,839 at December 31, 2001 |   | **1,687**                   |           | 1,594 |   |
| Paid-in capital                                                                                                                                               |   | **1,918,136**               |           | 1,619,659 |   |
| Retained  earnings                                                                                                                                            |   | **1,403,453**               |           | 1,337,135 |   |
| Accumulated  other comprehensive income (loss) (Note 19)                                                                                                      |   | **(29,800**                 | )              | (16,929 | ) |
| **Total  Common Stock Equity**                                                                                                                                |   | **3,293,476**               |           | 2,941,459 |   |
|                                                                                                                                                          |   |                        |           |   |   |
| **Commitments  and Contingencies** (Note 11)                                                                                                                  |   |                        |           |   |   |
|                                                                                                                                                          |   |                        |           |   |   |
| **Total  Liabilities and Shareholders’ Equity**                                                                                                          |   | **$**                       | **13,307,028** |   | $ | 12,299,813 |   |

 

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

 

99

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**CINERGY CORP.CONSOLIDATED STATEMENTS OF CHANGES INCOMMON STOCK EQUITY**

** **
|                                                                                              |   | **Common  Stock**          |       | **Paid-in  Capital** |       | **Retained  Earnings** |       | **Accumulated  Other  Comprehensive  Income (Loss)** |          | **Total  Common  Stock  Equity** |       |
|---------------------------------------------------------------------------------------------------|--------|----------------------------|------------|----------------------|------------|------------------------|------------|------------------------------------------------------|---------------|----------------------------------|------------|
|                                                                                              |   | **(dollars in thousands)** |       |
|                                                                                              |   |                       |       |                 |       |                   |       |                                                 |          |                             |       |
| **2000**                                                                                          |   |                       |       |                 |       |                   |       |                                                 |          |                             |       |
| Beginning balance  (158,923,399 shares)                                                           |   | $                          | 1,589      |                 | $          | 1,597,554              |       | $                                                    | 1,064,319     |                             | $          | (9,741 | ) | $ | 2,653,721 |   |
|                                                                                              |   |                       | ** ** |                 | ** ** |                   | ** ** |                                                 | ** **    |                             | ** ** |
| Comprehensive  income:                                                                            |   |                       |       |                 |       |                   |       |                                                 |          |                             |       |
| Net income                                                                                        |   | —                     |       | —               |       | 399,466                |       | —                                               |          | 399,466                          |       |
| Other  comprehensive income (loss), net of tax effect of $2,755 (Note 19)                         |   |                       |       |                 |       |                   |       |                                                 |          |                             |       |
| Foreign currency  translation adjustment (Note 1(r))                                              |   | —                     |       | —               |       | —                 |       | 2,074                                                |          | 2,074                            |       |
| Minimum pension  liability adjustment                                                             |   | —                     |       | —               |       | —                 |       | (1,099                                               | )             | (1,099                           | )          |
| Unrealized gain  (loss) on investment trusts                                                      |   | —                     |       | —               |       | —                 |       | (2,129                                               | )             | (2,129                           | )          |
| Total  comprehensive income                                                                       |   | —                     |       | —               |       | —                 |       | —                                               |          | 398,312                          |       |
|                                                                                              |   |                       | ** ** |                 | ** ** |                   | ** ** |                                                 | ** **    |                             | ** ** |
| Issuance of  common stock - net (44,262 shares)                                                   |   | 1                          |       | 1,769                |       | —                 |       | —                                               |          | 1,770                            |       |
| Treasury shares  purchased (1,764,758 shares)                                                     |   | —                     |       | (3,969               | )          | —                 |       | —                                               |          | (3,969                           | )          |
| Treasury shares  reissued (1,764,758 shares)                                                      |   | —                     |       | 11,008               |       | —                 |       | —                                               |          | 11,008                           |       |
| Dividends on  common stock ($1.80 per share)                                                      |   | —                     |       | —               |       | (285,242               | )          | —                                               |          | (285,242                         | )          |
| Other                                                                                             |   | —                     |       | 12,791               |       | 570                    |       | —                                               |          | 13,361                           |       |
| Ending balance  (158,967,661 shares)                                                              |   | $                          | 1,590      |                 | $          | 1,619,153              |       | $                                                    | 1,179,113     |                             | $          | (10,895 | ) | $ | 2,788,961 |   |
|                                                                                              |   |                       |       |                 |       |                   |       |                                                 |          |                             |       |
| **2001**                                                                                          |   |                       |       |                 |       |                   |       |                                                 |          |                             |       |
| Comprehensive  income:                                                                            |   |                       |       |                 |       |                   |       |                                                 |          |                             |       |
| Net income                                                                                        |   | —                     |       | —               |       | 442,279                |       | —                                               |          | 442,279                          |       |
| Other  comprehensive income (loss), net of tax effect of $1,454 (Note 19)                         |   |                       |       |                 |       |                   |       |                                                 |          |                             |       |
| Foreign currency  translation adjustment (Note 1(r))                                              |   | —                     |       | —               |       | —                 |       | 1,641                                                |          | 1,641                            |       |
| Minimum pension  liability adjustment                                                             |   | —                     |       | —               |       | —                 |       | (1,555                                               | )             | (1,555                           | )          |
| Unrealized gain  (loss) on investment trusts                                                      |   | —                     |       | —               |       | —                 |       | (841                                                 | )             | (841                             | )          |
| Cumulative  effect of change in accounting principle (Note 14)                                    |   | —                     |       | —               |       | —                 |       | (2,500                                               | )             | (2,500                           | )          |
| Cash flow hedges  (Note 1(l))                                                                     |   | —                     |       | —               |       | —                 |       | (2,779                                               | )             | (2,779                           | )          |
| Total  comprehensive income                                                                       |   | —                     |       | —               |       | —                 |       | —                                               |          | 436,245                          |       |
|                                                                                              |   |                       | ** ** |                 | ** ** |                   | ** ** |                                                 | ** **    |                             | ** ** |
| Issuance of  common stock - net (435,178 shares)                                                  |   | 4                          |       | 9,896                |       | —                 |       | —                                               |          | 9,900                            |       |
| Treasury shares  purchased (344,034 shares)                                                       |   | —                     |       | (10,015              | )          | —                 |       | —                                               |          | (10,015                          | )          |
| Treasury shares  reissued (344,034 shares)                                                        |   | —                     |       | 9,157                |       | —                 |       | —                                               |          | 9,157                            |       |
| Dividends on  common stock ($1.80 per share)                                                      |   | —                     |       | —               |       | (286,289               | )          | —                                               |          | (286,289                         | )          |
| Stock purchase  contracts (Note 2(e))                                                             |   | —                     |       | (23,200              | )          | —                 |       | —                                               |          | (23,200                          | )          |
| Other                                                                                             |   | —                     |       | 14,668               |       | 2,032                  |       | —                                               |          | 16,700                           |       |
| Ending balance  (159,402,839 shares)                                                              |   | $                          | 1,594      |                 | $          | 1,619,659              |       | $                                                    | 1,337,135     |                             | $          | (16,929 | ) | $ | 2,941,459 |   |
|                                                                                              |   |                       |       |                 |       |                   |       |                                                 |          |                             |       |
| **2002**                                                                                          |   |                       | ** ** |                 | ** ** |                   | ** ** |                                                 | ** **    |                             | ** ** |
| **Comprehensive  income:**                                                                        |   |                       | ** ** |                 | ** ** |                   | ** ** |                                                 | ** **    |                             | ** ** |
| **Net  income**                                                                                   |   | **—**                 | ** ** | **—**           | ** ** | **360,576**            | ** ** | **—**                                           | ** **    | **360,576**                      | ** ** |
| **Other  comprehensive income (loss), net of tax effect of $13,575**(Note  19)                    |   |                       | ** ** |                 | ** ** |                   | ** ** |                                                 | ** **    |                             | ** ** |
| **Foreign  currency translation adjustment, net of reclassification adjustments**(Note 1(r)) |   | **—**                 | ** ** | **—**           | ** ** | **—**             | ** ** | **25,917**                                           | ** **    | **25,917**                       | ** ** |
| **Minimum  pension liability adjustment**                                                         |   | **—**                 | ** ** | **—**           | ** ** | **—**             | ** ** | **(13,763**                                          | **)**         | **(13,763**                      | **)**      |
| **Unrealized  gain (loss) on investment trusts**                                                  |   | **—**                 | ** ** | **—**           | ** ** | **—**             | ** ** | **(5,277**                                           | **)**         | **(5,277**                       | **)**      |
| **Cash  flow hedges**(Note 1(l))                                                                  |   | **—**                 | ** ** | **—**           | ** ** | **—**             | ** ** | **(19,748**                                          | **)**         | **(19,748**                      | **)**      |
| **Total  comprehensive income**                                                                   |   | **—**                 | ** ** | **—**           | ** ** | **—**             | ** ** | **—**                                           | ** **    | **347,705**                      | ** ** |
|                                                                                              |   |                       | ** ** |                 | ** ** |                   | ** ** |                                                 | ** **    |                             | ** ** |
| **Issuance  of common stock - net**(9,260,276 shares)                                             |   | **93**                     | ** ** | **267,768**          | ** ** | **—**             | ** ** | **—**                                           | ** **    | **267,861**                      | ** ** |
| **Dividends  on common stock**($1.80 per share)                                                   |   | **—**                 | ** ** | **—**           | ** ** | **(298,292**           | **)**      | **—**                                           | ** **    | **(298,292**                     | **)**      |
| **Other**                                                                                         |   | **—**                 | ** ** | **30,709**           | ** ** | **4,034**              | ** ** | **—**                                           | ** **    | **34,743**                       | ** ** |
| **Ending  balance**(168,663,115 shares)                                                           |   | **$**                      | **1,687**  | ** **           | **$**      | **1,918,136**          | ** ** | **$**                                                | **1,403,453** | ** **                       | **$**      | **(29,800** | **)** | **$** | **3,293,476** | ** ** |

 

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

 

100

----

 

**CINERGY CORP.CONSOLIDATED STATEMENTS OF CASH FLOWS**

 
|                                                                                  |   | **2002**                   |        | **2001**   |   | **2000** |   |
|---------------------------------------------------------------------------------------|--------|----------------------------|-------------|------------|--------|----------|--------|
|                                                                                  |   | **(dollars in thousands)** |        |
|                                                                                  |   |                       |        |       |   |     |   |
| **Operating  Activities**                                                             |   |                       |        |       |   |     |   |
| Net income                                                                            |   | **$**                      | **360,576** |       | $      | 442,279  |   | $ | 399,466 |   |
| Items providing  or (using) cash currently:                                           |   |                       |        |       |   |     |   |
| Depreciation                                                                          |   | **414,004**                |        | 374,399    |   | 341,927  |   |
| Loss on  discontinued operations, net of tax                                          |   | **25,428**                 |        | 16,547     |   | 1,069    |   |
| Cumulative  effect of a change in accounting principle                                |   | **10,899**                 |        | —     |   | —   |   |
| Change in net  position of energy risk management activities                          |   | **(43,202**                | )           | (96,850    | )      | (22,533  | )      |
| Deferred income  taxes and investment tax credits - net                               |   | **148,467**                |        | 123,806    |   | 47,404   |   |
| Gain on sale of  investment in unconsolidated subsidiaries                            |   | **(16,518**                | )           | —     |   | —   |   |
| Equity in  earnings of unconsolidated subsidiaries                                    |   | **(15,261**                | )           | (1,494     | )      | (6,231   | )      |
| Allowance for  equity funds used during construction                                  |   | **(12,861**                | )           | (8,628     | )      | (5,813   | )      |
| Regulatory  assets deferrals                                                          |   | **(110,867**               | )           | (141,324   | )      | (99,661  | )      |
| Regulatory  assets amortization                                                       |   | **116,512**                |        | 119,344    |   | 92,856   |   |
| Accrued pension  and other postretirement benefit costs                               |   | **127,366**                |        | 34,246     |   | 58,549   |   |
| Changes in  current assets and current liabilities:                                   |   |                       |        |       |   |     |   |
| Restricted  deposits                                                                  |   | **(61**                    | )           | (1,409     | )      | (3,567   | )      |
| Accounts and  notes receivable, net of reserves on receivables sold                   |   | **(236,226**               | )           | 502,902    |   | (960,048 | )      |
| Materials,  supplies, and fuel                                                        |   | **(83,458**                | )           | (81,398    | )      | 46,269   |   |
| Prepayments                                                                           |   | **(10,041**                | )           | (14,385    | )      | (16,046  | )      |
| Accounts payable                                                                      |   | **307,860**                |        | (466,973   | )      | 761,708  |   |
| Accrued taxes  and interest                                                           |   | **66,971**                 |        | (42,165    | )      | 25,737   |   |
| Other assets                                                                          |   | **(15,793**                | )           | (21,675    | )      | (24,364  | )      |
| Other liabilities                                                                     |   | **(37,596**                | )           | (19,373    | )      | (4,677   | )      |
|                                                                                  |   |                       |        |       |   |     |   |
| **Net cash provided by (used in)  operating activities**                              |   | **996,199**                |        | 717,849    |   | 632,045  |   |
|                                                                                  |   |                       |        |       |   |     |   |
| **Financing  Activities**                                                             |   |                       |        |       |   |     |   |
| Change in  short-term debt                                                            |   | **(476,982**               | )           | 27,954     |   | 582,122  |   |
| Issuance of long-term  debt                                                           |   | **649,020**                |        | 940,785    |   | 126,420  |   |
| Issuance of  preferred trust securities                                               |   | **—**                 |        | 306,327    |   | —   |   |
| Redemption of  long-term debt                                                         |   | **(138,379**               | )           | (131,413   | )      | (234,247 | )      |
| Retirement of  preferred stock of subsidiaries                                        |   | **(3**                     | )           | (1         | )      | (29,393  | )      |
| Issuance of  common stock                                                             |   | **267,861**                |        | 9,900      |   | 1,770    |   |
| Dividends on  common stock                                                            |   | **(298,292**               | )           | (286,289   | )      | (285,242 | )      |
|                                                                                  |   |                       |        |       |   |     |   |
| **Net cash provided by (used in)  financing activities**                              |   | **3,225**                  |        | 867,263    |   | 161,430  |   |
|                                                                                  |   |                       |        |       |   |     |   |
| **Investing  Activities**                                                             |   |                       |        |       |   |     |   |
| Construction  expenditures (less allowance for equity funds used during construction) |   | **(857,104**               | )           | (858,870   | )      | (531,896 | )      |
| Acquisitions and  other investments                                                   |   | **(118,375**               | )           | (708,229   | )      | (250,444 | )      |
| Proceeds from  sale of subsidiaries and equity investments                            |   | **86,071**                 |        | —     |   | —   |   |
|                                                                                  |   |                       |        |       |   |     |   |
| **Net cash provided by (used in)  investing activities**                              |   | **(889,408**               | )           | (1,567,099 | )      | (782,340 | )      |
|                                                                                  |   |                       |        |       |   |     |   |
| **Net  increase (decrease) in cash and cash equivalents**                             |   | **110,016**                |        | 18,013     |   | 11,135   |   |
|                                                                                  |   |                       |        |       |   |     |   |
| **Cash  and cash equivalents at beginning of period**                                 |   | **111,067**                |        | 93,054     |   | 81,919   |   |
|                                                                                  |   |                       |        |       |   |     |   |
| **Cash  and cash equivalents at end of period**                                       |   | **$**                      | **221,083** |       | $      | 111,067  |   | $ | 93,054 |   |
|                                                                                  |   |                       |        |       |   |     |   |
| **Supplemental  Disclosure of Cash Flow Information**                                 |   |                       |        |       |   |     |   |
| Cash paid during  the year for:                                                       |   |                       |        |       |   |     |   |
| Interest (net of  amount capitalized)                                                 |   | **$**                      | **253,266** |       | $      | 271,323  |   | $ | 236,104 |   |
| Income taxes                                                                          |   | **$**                      | **57,739**  |       | $      | 153,092  |   | $ | 216,556 |   |

 

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

 

101

----

 

**CINERGY CORP.CONSOLIDATED STATEMENTS OF CAPITALIZATION**

 
|                                                                                                                                                                                                 |   | **December  31**            |          |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------|---------------|
|                                                                                                                                                                                                 |   | **2002**                    |          | **2001** |   |
|                                                                                                                                                                                                 |   | **(dollars  in thousands)** | ** **    |
|                                                                                                                                                                                                 |   |                        | ** **    |   |   |
| **Long-term  Debt**(excludes current portion)                                                                                                                                                        |   |                        | ** **    |   |   |
| **Cinergy  Corp.**                                                                                                                                                                                   |   |                        | ** **    |   |   |
| Other Long-term  Debt:                                                                                                                                                                               |   |                        | ** **    |   |   |
| 6.53% Debentures  due December 16, 2008                                                                                                                                                              |   | **$**                       | **200,000**   | ** ** | $ | 200,000 |   |
| 6.125%  Debentures due April 15, 2004                                                                                                                                                                |   | **200,000**                 | ** **    | 200,000 |   |
| 6.25% Debentures  due September 1, 2004 (Executed interest rate swaps of $250 million set at  London Inter-Bank Offered Rate (LIBOR) plus 2.44%)                                                     |   | **512,554**                 | ** **    | 500,341 |   |
| **Total  Other Long-term Debt**                                                                                                                                                                      |   | **912,554**                 | ** **    | 900,341 |   |
| Unamortized  Premium and Discount - Net                                                                                                                                                              |   | **(165**                    | **)**         | (255 | ) |
| **Total  - Cinergy Corp.**                                                                                                                                                                           |   | **912,389**                 | ** **    | 900,086 |   |
|                                                                                                                                                                                                 |   |                        | ** **    |   |   |
| **Cinergy  Global Resources, Inc.**                                                                                                                                                                  |   |                        | ** **    |   |   |
| Other Long-term  Debt:                                                                                                                                                                               |   |                        | ** **    |   |   |
| 6.20% Debentures  due November 3, 2008                                                                                                                                                               |   | **150,000**                 | ** **    | 150,000 |   |
| Variable  interest rate of LIBOR plus 1.75%, due July 2012                                                                                                                                           |   | **12,792**                  | ** **    | 14,042 |   |
| Variable  interest rate of LIBOR plus 2.5%, due July 2009                                                                                                                                            |   | **5,281**                   | ** **    | 5,840 |   |
| Variable  interest rates ranging between the 3 month Prague Inter-Bank Offered Rate  plus 0.55% to the 3 month Euro Inter-Bank Offered Rate (EURIBOR) plus 4.12%,  maturing March 2004 to March 2005 |   | **—**                  | ** **    | 2,752 |   |
| Fixed interest  rates 6.1% - 7.4%, maturing March 2003 to May 2003                                                                                                                                   |   | **—**                  | ** **    | 10,271 |   |
| Fixed interest  rates ranging between 6.35% and 9.911%, maturing September 2010 to September  2019                                                                                                   |   | **33,277**                  | ** **    | 13,420 |   |
| Fixed interest  rate of 11.5%, maturing November 2023 to November 2024                                                                                                                               |   | **17,850**                  | ** **    | 17,850 |   |
| Variable  interest rate of EURIBOR plus 1.2%, maturing November 2016                                                                                                                                 |   | **63,675**                  | ** **    | 52,274 |   |
| **Total  Other Long-term Debt**                                                                                                                                                                      |   | **282,875**                 | ** **    | 266,449 |   |
| Unamortized  Premium and Discount - Net                                                                                                                                                              |   | **(193**                    | **)**         | (227 | ) |
| **Total  - Cinergy Global Resources, Inc.**                                                                                                                                                          |   | **282,682**                 | ** **    | 266,222 |   |
|                                                                                                                                                                                                 |   |                        | ** **    |   |   |
| **Operating  Companies**(See operating companies’ Consolidated Statements  of Capitalization for details)                                                                                       |   |                        | ** **    |   |   |
| The Cincinnati  Gas & Electric Company **(CG&E)**and  subsidiaries                                                                                                                           |   |                        | ** **    |   |   |
| First Mortgage  Bonds                                                                                                                                                                                |   | **470,200**                 | ** **    | 470,200 |   |
| Other Long-term  Debt                                                                                                                                                                                |   | **1,101,721**               | ** **    | 637,721 |   |
| Unamortized  Premium and Discount - Net                                                                                                                                                              |   | **(2,208**                  | **)**         | (2,588 | ) |
| **Total  Long-term Debt**                                                                                                                                                                            |   | **1,569,713**               | ** **    | 1,105,333 |   |
| PSI Energy, Inc. **(PSI)**                                                                                                                                                                           |   |                        | ** **    |   |   |
| First Mortgage  Bonds                                                                                                                                                                                |   | **620,720**                 | ** **    | 620,720 |   |
| Secured  Medium-term Notes                                                                                                                                                                           |   | **104,300**                 | ** **    | 160,300 |   |
| Other Long-term  Debt                                                                                                                                                                                |   | **598,700**                 | ** **    | 552,079 |   |
| Unamortized  Premium and Discount - Net                                                                                                                                                              |   | **(7,736**                  | **)**         | (8,010 | ) |
| **Total  Long-term Debt**                                                                                                                                                                            |   | **1,315,984**               | ** **    | 1,325,089 |   |
|                                                                                                                                                                                                 |   |                        | ** **    |   |   |
| **Total  Consolidated Long-term Debt**                                                                                                                                                               |   | **$**                       | **4,080,768** | ** ** | $ | 3,596,730 |   |
|                                                                                                                                                                                                 |   |                        | ** **    |   |   |
| **Preferred  Trust Securities**                                                                                                                                                                      |   |                        | ** **    |   |   |
| Company  obligated, mandatorily redeemable, preferred trust securities of subsidiary,  holding solely debt securities of the company (Note 3)                                                        |   | **$**                       | **308,187**   | ** ** | $ | 306,327 |   |
|                                                                                                                                                                                                 |   |                        | ** **    |   |   |
| **Cumulative  Preferred Stock of Subsidiaries** (See operating companies’  Consolidated Statements of Capitalization for details)                                                               |   |                        | ** **    |   | ** ** |
|                                                                                                                                                                                                 |   |                        | ** **    |   |   |
| **CG&E** and subsidiaries                                                                                                                                                                   |   | **$**                       | **20,485**    | ** ** | $ | 20,486 |   |
| **PSI**                                                                                                                                                                                              |   | **42,343**                  | ** **    | 42,347 |   |
| **Total  Cumulative Preferred Stock of Subsidiaries**                                                                                                                                                |   | **$**                       | **62,828**    | ** ** | $ | 62,833 |   |
|                                                                                                                                                                                                 |   |                        | ** **    |   |   |
| **Common  Stock Equity**                                                                                                                                                                             |   |                        | ** **    |   |   |
| Common Stock -  $.01 par value; authorized shares - 600,000,000; outstanding shares - 168,663,115  at December 31, 2002, and 159,402,839   at December 31, 2001                                 |   | **$**                       | **1,687**     | ** ** | $ | 1,594 |   |
| Paid-in capital                                                                                                                                                                                      |   | **1,918,136**               | ** **    | 1,619,659 |   |
| Retained  earnings                                                                                                                                                                                   |   | **1,403,453**               | ** **    | 1,337,135 |   |
| Accumulated  other comprehensive income (loss) (Note 19)                                                                                                                                             |   | **(29,800**                 | **)**         | (16,929 | ) |
| **Total  Common Stock Equity**                                                                                                                                                                       |   | **3,293,476**               | ** **    | 2,941,459 |   |
|                                                                                                                                                                                                 |   |                        | ** **    |   |   |
| **Total  Consolidated Capitalization**                                                                                                                                                               |   | **$**                       | **7,745,259** | ** ** | $ | 6,907,349 |   |

 

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

** **

102

----

 

**THE CINCINNATI GAS & ELECTRICCOMPANYAND SUBSIDIARY COMPANIES**

 

103

----

 

**THE CINCINNATI GAS & ELECTRIC COMPANYCONSOLIDATED STATEMENTS OF INCOME**

 
|                                                     |   | **2002**                   |          | **2001**  |   | **2000**  |   |
|----------------------------------------------------------|--------|----------------------------|---------------|-----------|--------|-----------|--------|
|                                                     |   | **(dollars in thousands)** |          |
|                                                     |   |                       |          |      |   |      |   |
| **Operating  Revenues** (Note 1(q)(*i*))                 |   |                       |          |      |   |      |   |
| Electric                                                 |   | **$**                      | **4,514,283** |      | $      | 4,155,827 |   | $ | 2,745,852 |   |
| Gas                                                      |   | **437,092**                |          | 596,429   |   | 490,972   |   |
| **Total  Operating Revenues**                            |   | **4,951,375**              |          | 4,752,256 |   | 3,236,824 |   |
|                                                     |   |                       |          |      |   |      |   |
| **Operating  Expenses**                                  |   |                       |          |      |   |      |   |
| Fuel and  purchased and exchanged power (Note 1(q)(*i*)) |   | **3,286,278**              |          | 2,940,442 |   | 1,562,036 |   |
| Gas purchased  (Note 1(q)(*i*))                          |   | **232,558**                |          | 396,764   |   | 266,339   |   |
| Operation and  maintenance                               |   | **533,255**                |          | 442,173   |   | 491,545   |   |
| Depreciation                                             |   | **196,539**                |          | 186,986   |   | 180,978   |   |
| Taxes other than  income taxes                           |   | **197,827**                |          | 174,320   |   | 208,385   |   |
| **Total  Operating Expenses**                            |   | **4,446,457**              |          | 4,140,685 |   | 2,709,283 |   |
|                                                     |   |                       |          |      |   |      |   |
| **Operating  Income**                                    |   | **504,918**                |          | 611,571   |   | 527,541   |   |
|                                                     |   |                       |          |      |   |      |   |
| **Miscellaneous  - Net**                                 |   | **9,742**                  |          | 4,657     |   | (2,119    | )      |
| **Interest**                                             |   | **95,623**                 |          | 103,047   |   | 99,204    |   |
|                                                     |   |                       |          |      |   |      |   |
| **Income  Before Taxes**                                 |   | **419,037**                |          | 513,181   |   | 426,218   |   |
|                                                     |   |                       |          |      |   |      |   |
| **Income  Taxes** (Note 10)                              |   | **155,341**                |          | 186,527   |   | 159,398   |   |
|                                                     |   |                       |          |      |   |      |   |
| **Net  Income**                                          |   | **$**                      | **263,696**   |      | $      | 326,654   |   | $ | 266,820 |   |
|                                                     |   |                       |          |      |   |      |   |
| **Preferred  Dividend Requirement**                      |   | **846**                    |          | 846       |   | 847       |   |
|                                                     |   |                       |          |      |   |      |   |
| **Net  Income Applicable to Common Stock**               |   | **$**                      | **262,850**   |      | $      | 325,808   |   | $ | 265,973 |   |

 

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

 

104

----

 

**THE CINCINNATI GAS & ELECTRIC COMPANYCONSOLIDATED BALANCE SHEETS**

 

**ASSETS**

 
|                                                                                                                                             |   | **December  31**            |          |
|--------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------|---------------|
|                                                                                                                                             |   | **2002**                    |          | **2001** |   |
|                                                                                                                                             |   | **(dollars  in thousands)** |          |
|                                                                                                                                             |   |                        |          |   |   |
| **Current  Assets**                                                                                                                              |   |                        |          |   |   |
| Cash and cash  equivalents                                                                                                                       |   | **$**                       | **45,336**    |   | $ | 9,074 |   |
| Restricted  deposits                                                                                                                             |   | **3,071**                   |          | 3,540 |   |
| Notes receivable  from affiliated companies (Note 6)                                                                                             |   | **148,823**                 |          | — |   |
| Accounts  receivable less accumulated provision for doubtful accounts of $5,942 at  December 31, 2002, and $25,874 at December 31, 2001 (Note 6) |   | **117,269**                 |          | 332,970 |   |
| Accounts  receivable from affiliated companies                                                                                                   |   | **97,584**                  |          | 12,112 |   |
| Materials,  supplies, and fuel                                                                                                                   |   | **121,881**                 |          | 138,119 |   |
| Energy risk  management current assets (Note 1(m))                                                                                               |   | **57,912**                  |          | 44,360 |   |
| Prepayments and  other                                                                                                                           |   | **8,560**                   |          | 13,087 |   |
| **Total  Current Assets**                                                                                                                        |   | **600,436**                 |          | 553,262 |   |
|                                                                                                                                             |   |                        |          |   |   |
| **Property,  Plant, and Equipment - at Cost**                                                                                                    |   |                        |          |   |   |
| Utility plant in  service                                                                                                                        |   |                        |          |   |   |
| Electric                                                                                                                                         |   | **2,073,133**               |          | 2,000,595 |   |
| Gas                                                                                                                                              |   | **1,003,870**               |          | 926,381 |   |
| Common                                                                                                                                           |   | **248,938**                 |          | 253,978 |   |
| **Total  Utility Plant In Service**                                                                                                              |   | **3,325,941**               |          | 3,180,954 |   |
| Construction  work in progress                                                                                                                   |   | **84,249**                  |          | 96,247 |   |
| **Total  Utility Plant**                                                                                                                         |   | **3,410,190**               |          | 3,277,201 |   |
| Non-regulated  property, plant, and equipment                                                                                                    |   | **3,445,056**               |          | 3,314,285 |   |
| Accumulated  depreciation                                                                                                                        |   | **2,712,105**               |          | 2,555,639 |   |
| **Net  Property, Plant, and Equipment**                                                                                                          |   | **4,143,141**               |          | 4,035,847 |   |
|                                                                                                                                             |   |                        |          |   |   |
| **Other  Assets**                                                                                                                                |   |                        |          |   |   |
| Regulatory  assets (Note 1(c))                                                                                                                   |   | **604,776**                 |          | 592,491 |   |
| Energy risk  management non-current assets (Note 1(m))                                                                                           |   | **64,762**                  |          | 48,982 |   |
| Other  Investments                                                                                                                               |   | **1,082**                   |          | 1,080 |   |
| Other                                                                                                                                            |   | **127,550**                 |          | 128,082 |   |
| **Total  Other Assets**                                                                                                                          |   | **798,170**                 |          | 770,635 |   |
|                                                                                                                                             |   |                        |          |   |   |
| **Total  Assets**                                                                                                                                |   | **$**                       | **5,541,747** |   | $ | 5,359,744 |   |

 

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

 

105

----

 

**THE CINCINNATI GAS & ELECTRIC COMPANYCONSOLIDATED BALANCE SHEETS**

 

**LIABILITIESAND SHAREHOLDER’S EQUITY**

** **
|                                                                                                                                           |   | **December 31**            |          |
|------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------|---------------|
|                                                                                                                                           |   | **2002**                   |          | **2001** |   |
|                                                                                                                                           |   | **(dollars in thousands)** |          |
| **Current  Liabilities**                                                                                                                       |   |                       |          |   |   |
| Accounts payable                                                                                                                               |   | **$**                      | **195,812**   |   | $ | 350,589 |   |
| Accounts payable  to affiliated companies                                                                                                      |   | **146,558**                |          | 30,419 |   |
| Accrued taxes                                                                                                                                  |   | **159,199**                |          | 116,616 |   |
| Accrued interest                                                                                                                               |   | **22,872**                 |          | 16,570 |   |
| Notes payable  and other short-term obligations (Note 5)                                                                                       |   | **112,100**                |          | 196,100 |   |
| Notes payable to  affiliated companies (Note 5)                                                                                                |   | **8,947**                  |          | 444,801 |   |
| Long-term debt  due within one year (Note 4)                                                                                                   |   | **120,000**                |          | 100,000 |   |
| Energy risk  management current liabilities (Note 1(m))                                                                                        |   | **49,288**                 |          | 23,341 |   |
| Other                                                                                                                                          |   | **37,160**                 |          | 33,217 |   |
| **Total  Current Liabilities**                                                                                                                 |   | **851,936**                |          | 1,311,653 |   |
|                                                                                                                                           |   |                       |          |   |   |
| **Non-Current  Liabilities**                                                                                                                   |   |                       |          |   |   |
| Long-term debt  (Note 4)                                                                                                                       |   | **1,569,713**              |          | 1,105,333 |   |
| Deferred income  taxes (Note 10)                                                                                                               |   | **882,628**                |          | 779,295 |   |
| Unamortized  investment tax credits                                                                                                            |   | **85,198**                 |          | 91,246 |   |
| Accrued pension  and other postretirement benefit costs (Note 9)                                                                               |   | **201,284**                |          | 180,725 |   |
| Energy risk  management non-current liabilities (Note 1(m))                                                                                    |   | **31,326**                 |          | 41,773 |   |
| Other                                                                                                                                          |   | **88,843**                 |          | 92,143 |   |
| **Total  Non-Current Liabilities**                                                                                                             |   | **2,858,992**              |          | 2,290,515 |   |
|                                                                                                                                           |   |                       |          |   |   |
| **Total  Liabilities**                                                                                                                         |   | **3,710,928**              |          | 3,602,168 |   |
|                                                                                                                                           |   |                       |          |   |   |
| **Cumulative  Preferred Stock**                                                                                                                |   |                       |          |   |   |
| Not subject to  mandatory redemption                                                                                                           |   | **20,485**                 |          | 20,486 |   |
|                                                                                                                                           |   |                       |          |   |   |
| **Common  Stock Equity** (Note 2)                                                                                                              |   |                       |          |   |   |
| Common Stock -  $8.50 par value; authorized shares - 120,000,000; outstanding shares -  89,663,086 at December 31, 2002, and December 31, 2001 |   | **762,136**                |          | 762,136 |   |
| Paid-in capital                                                                                                                                |   | **586,292**                |          | 571,926 |   |
| Retained  earnings                                                                                                                             |   | **487,652**                |          | 408,706 |   |
| Accumulated  other comprehensive income (loss) (Note 19)                                                                                       |   | **(25,746**                | )             | (5,678 | ) |
| **Total  Common Stock Equity**                                                                                                                 |   | **1,810,334**              |          | 1,737,090 |   |
|                                                                                                                                           |   |                       |          |   |   |
| **Commitments  and Contingencies** (Note 11)                                                                                                   |   |                       |          |   |   |
|                                                                                                                                           |   |                       |          |   |   |
| **Total  Liabilities and Shareholder’s Equity**                                                                                           |   | **$**                      | **5,541,747** |   | $ | 5,359,744 |   |

 

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

 

106

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**THE CINCINNATI GAS & ELECTRIC COMPANYCONSOLIDATED STATEMENTS OF CHANGESIN COMMON STOCK EQUITY**

 
|                                                                           |   | **Common  Stock**          |        | **Paid-in  Capital** |       | **Retained  Earnings** |       | **Accumulated  Other  Comprehensive  Income (Loss)** |        | **Total  Common  Stock  Equity** |       |
|--------------------------------------------------------------------------------|--------|----------------------------|-------------|----------------------|------------|------------------------|------------|------------------------------------------------------|-------------|----------------------------------|------------|
|                                                                           |   | **(dollars in thousands)** |        |
|                                                                           |   |                       |        |                 |       |                   |       |                                                 |        |                             |       |
| **2000**                                                                       |   |                       |        |                 |       |                   |       |                                                 |        |                             |       |
| Beginning  balance                                                             |   | $                          | 762,136     |                 | $          | 562,851                |       | $                                                    | 335,144     |                             | $          | (966 | ) | $ | 1,659,165 |   |
|                                                                           |   |                       |        |                 |       |                   |       |                                                 |        |                             |       |
| Comprehensive  income:                                                         |   |                       |        |                 |       |                   |       |                                                 |        |                             |       |
| Net income                                                                     |   | —                     |        | —               |       | 266,820                |       | —                                               |        | 266,820                          |       |
| Other  comprehensive income (loss), net of tax effect of $15 (Note 19)         |   |                       |        |                 |       |                   |       |                                                 |        |                             |       |
| Minimum pension  liability adjustment                                          |   | —                     |        | —               |       | —                 |       | (28                                                  | )           | (28                              | )          |
| Total  comprehensive income                                                    |   | —                     |        | —               |       | —                 |       | —                                               |        | 266,792                          |       |
|                                                                           |   |                       |        |                 |       |                   |       |                                                 |        |                             |       |
| Dividends on  preferred stock                                                  |   | —                     |        | —               |       | (847                   | )          | —                                               |        | (847                             | )          |
| Dividends on  common stock                                                     |   | —                     |        | —               |       | (232,334               | )          | —                                               |        | (232,334                         | )          |
| Contribution  from parent company for reallocation of taxes                    |   | —                     |        | 2,894                |       | —                 |       | —                                               |        | 2,894                            |       |
| Other                                                                          |   | —                     |        | 32                   |       | 128                    |       | —                                               |        | 160                              |       |
| Ending balance                                                                 |   | $                          | 762,136     |                 | $          | 565,777                |       | $                                                    | 368,911     |                             | $          | (994 | ) | $ | 1,695,830 |   |
|                                                                           |   |                       |        |                 |       |                   |       |                                                 |        |                             |       |
| **2001**                                                                       |   |                       |        |                 |       |                   |       |                                                 |        |                             |       |
| Comprehensive  income:                                                         |   |                       |        |                 |       |                   |       |                                                 |        |                             |       |
| Net income                                                                     |   | —                     |        | —               |       | 326,654                |       | —                                               |        | 326,654                          |       |
| Other  comprehensive income (loss), net of tax effect of $2,970 (Note 19)      |   | —                     |        | —               |       | —                 |       | 134                                                  |        | 134                              |       |
| Minimum pension  liability adjustment                                          |   |                       |        |                 |       |                   |       |                                                 |        |                             |       |
| Unrealized gain  (loss) on investment trust                                    |   | —                     |        | —               |       | —                 |       | 461                                                  |        | 461                              |       |
| Cumulative  effect of change in accounting principle                           |   | —                     |        | —               |       | —                 |       | (2,500                                               | )           | (2,500                           | )          |
| Cash flow hedges  (Note 1(l))                                                  |   | —                     |        | —               |       | —                 |       | (2,779                                               | )           | (2,779                           | )          |
| Total  comprehensive income                                                    |   | —                     |        | —               |       | —                 |       | —                                               |        | 321,970                          |       |
|                                                                           |   |                       |        |                 |       |                   |       |                                                 |        |                             |       |
| Dividends on  preferred stock                                                  |   | —                     |        | —               |       | (846                   | )          | —                                               |        | (846                             | )          |
| Dividends on  common stock                                                     |   | —                     |        | —               |       | (286,269               | )          | —                                               |        | (286,269                         | )          |
| Contribution  from parent company for reallocation of taxes                    |   | —                     |        | 6,149                |       | —                 |       | —                                               |        | 6,149                            |       |
| Other                                                                          |   | —                     |        | —               |       | 256                    |       | —                                               |        | 256                              |       |
| Ending balance                                                                 |   | $                          | 762,136     |                 | $          | 571,926                |       | $                                                    | 408,706     |                             | $          | (5,678 | ) | $ | 1,737,090 |   |
|                                                                           |   |                       |        |                 |       |                   |       |                                                 |        |                             |       |
| **2002**                                                                       |   |                       | ** **  |                 | ** ** |                   | ** ** |                                                 | ** **  |                             | ** ** |
| **Comprehensive  income:**                                                     |   |                       | ** **  |                 | ** ** |                   | ** ** |                                                 | ** **  |                             | ** ** |
| **Net  income**                                                                |   | **—**                 | ** **  | **—**           | ** ** | **263,696**            | ** ** | **—**                                           | ** **  | **263,696**                      | ** ** |
| **Other  comprehensive income (loss), net of tax effect of $13,060**(Note  19) |   | **—**                 | ** **  | **—**           | ** ** | **—**             | ** ** | **—**                                           | ** **  |                             | ** ** |
| **Minimum  pension liability adjustment**                                      |   | **—**                 | ** **  | **—**           | ** ** | **—**             | ** ** | **(872**                                             | **)**       | **(872**                         | **)**      |
| **Unrealized  gain (loss) on investment trusts**                               |   | **—**                 | ** **  | **—**           | ** ** | **—**             | ** ** | **(462**                                             | **)**       | **(462**                         | **)**      |
| **Cash  flow hedges**(Note 1(l))                                               |   | **—**                 | ** **  | **—**           | ** ** | **—**             | ** ** | **(18,734**                                          | **)**       | **(18,734**                      | **)**      |
| **Total  comprehensive income**                                                |   | **—**                 | ** **  | **—**           | ** ** | **—**             | ** ** | **—**                                           | ** **  | **243,628**                      | ** ** |
|                                                                           |   |                       | ** **  |                 | ** ** |                   | ** ** |                                                 | ** **  |                             | ** ** |
| **Dividends  on preferred stock**                                              |   | **—**                 | ** **  | **—**           | ** ** | **(846**               | **)**      | **—**                                           | ** **  | **(846**                         | **)**      |
| **Dividends  on common stock**                                                 |   | **—**                 | ** **  | **—**           | ** ** | **(185,909**           | **)**      | **—**                                           | ** **  | **(185,909**                     | **)**      |
| **Contribution  from parent company for reallocation of taxes**                |   | **—**                 | ** **  | **14,366**           | ** ** | **—**             | ** ** | **—**                                           | ** **  | **14,366**                       | ** ** |
| **Other**                                                                      |   | **—**                 | ** **  | **—**           | ** ** | **2,005**              | ** ** | **—**                                           | ** **  | **2,005**                        | ** ** |
| **Ending  balance**                                                            |   | **$**                      | **762,136** | ** **           | **$**      | **586,292**            | ** ** | **$**                                                | **487,652** | ** **                       | **$**      | **(25,746** | **)** | **$** | **1,810,334** | ** ** |

 

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

 

107

----

 

**THE CINCINNATI GAS & ELECTRIC COMPANYCONSOLIDATED STATEMENTS OF CASH FLOWS**

 
|                                                                                  |   | **2002**                    |         | **2001**   |     | **2000** |     |
|---------------------------------------------------------------------------------------|--------|-----------------------------|--------------|------------|----------|----------|----------|
|                                                                                  |   | **(dollars  in thousands)** |         |
|                                                                                  |   |                        | *** *** |       | * * |     | * * |
| **Operating Activities**                                                              |   |                        | ** **   |       |     |     |     |
| Net income                                                                            |   | **$**                       | **263,696**  | ** ** | $        | 326,654  |     | $ | 266,820 |   |
| Items providing  or (using) cash currently:                                           |   |                        | ** **   |       |     |     |     |
| Depreciation                                                                          |   | **196,539**                 | ** **   | 186,986    |     | 180,978  |     |
| Deferred income  taxes and investment tax credits - net                               |   | **104,103**                 | ** **   | 43,834     |     | 36,238   |     |
| Change in net  position of energy risk management activities                          |   | **(7,061**                  | **)**        | (67,979    | )        | (7,077   | )        |
| Allowance for  equity funds used during construction                                  |   | **(356**                    | **)**        | (2,672     | )        | (4,459   | )        |
| Regulatory  assets deferrals                                                          |   | **(61,321**                 | **)**        | (116,365   | )        | (35,777  | )        |
| Regulatory  assets amortization                                                       |   | **44,339**                  | ** **   | 56,703     |     | 18,154   |     |
| Accrued pension  and other postretirement benefit costs                               |   | **20,559**                  | ** **   | (632       | )        | 4,972    |     |
| Changes in  current assets and current liabilities:                                   |   |                        | ** **   |       |     |     |     |
| Restricted  deposits                                                                  |   | **469**                     | ** **   | (3,380     | )        | (28      | )        |
| Accounts and  notes receivable, net of reserves on receivables sold                   |   | **84,193**                  | ** **   | 174,385    |     | (235,094 | )        |
| Materials,  supplies, and fuel                                                        |   | **16,238**                  | ** **   | (39,058    | )        | (62      | )        |
| Prepayments                                                                           |   | **1,750**                   | ** **   | 19,192     |     | (3,281   | )        |
| Accounts payable                                                                      |   | **(38,441**                 | **)**        | (183,982   | )        | 248,630  |     |
| Accrued taxes  and interest                                                           |   | **48,885**                  | ** **   | (37,209    | )        | 16,902   |     |
| Other assets                                                                          |   | **5,020**                   | ** **   | 8,516      |     | 11,648   |     |
| Other  liabilities                                                                    |   | **(25,583**                 | **)**        | (21,875    | )        | (28,394  | )        |
|                                                                                  |   |                        | ** **   |       |     |     |     |
| **Net  cash provided by (used in) operating activities**                              |   | **653,029**                 | ** **   | 343,118    |     | 470,170  |     |
|                                                                                  |   |                        | ** **   |       |     |     |     |
| **Financing Activities**                                                              |   |                        | ** **   |       |     |     |     |
| Change in  short-term debt, including net affiliate notes                             |   | **(587,259**                | **)**        | 305,155    |     | 40,684   |     |
| Issuance of  long-term debt                                                           |   | **580,570**                 | ** **   | —     |     | —   |     |
| Redemption of  long-term debt                                                         |   | **(100,000**                | **)**        | (1,200     | )        | —   |     |
| Retirement of  preferred stock                                                        |   | **(1**                      | **)**        | —     |     | (168     | )        |
| Dividends on  preferred stock                                                         |   | **(846**                    | **)**        | (845       | )        | (847     | )        |
| Dividends on  common stock                                                            |   | **(185,909**                | **)**        | (286,269   | )        | (232,334 | )        |
|                                                                                  |   |                        | ** **   |       |     |     |     |
| **Net  cash provided by (used in) financing activities**                              |   | **(293,445**                | **)**        | 16,841     |     | (192,665 | )        |
|                                                                                  |   |                        | ** **   |       |     |     |     |
| **Investing Activities**                                                              |   |                        | ** **   |       |     |     |     |
| Construction  expenditures (less allowance for equity funds used during construction) |   | **(323,320**                | **)**        | (371,885   | )        | (266,455 | )        |
| Other  investments                                                                    |   | **(2**                      | **)**        | 363        |     | 33       |     |
|                                                                                  |   |                        | ** **   |       |     |     |     |
| **Net  cash provided by (used in) investing activities**                              |   | **(323,322**                | **)**        | (371,522   | )        | (266,422 | )        |
|                                                                                  |   |                        | ** **   |       |     |     |     |
| **Net increase (decrease) in cash and  cash equivalents**                             |   | **36,262**                  | ** **   | (11,563    | )        | 11,083   |     |
|                                                                                  |   |                        | ** **   |       |     |     |     |
| **Cash and cash equivalents at  beginning of period**                                 |   | **9,074**                   | ** **   | 20,637     |     | 9,554    |     |
|                                                                                  |   |                        | ** **   |       |     |     |     |
| **Cash and cash equivalents at end of  period**                                       |   | **$**                       | **45,336**   | ** ** | $        | 9,074    |     | $ | 20,637 |   |
|                                                                                  |   |                        | ** **   |       |     |     |     |
| **Supplemental Disclosure of Cash  Flow Information**                                 |   |                        | ** **   |       |     |     |     |
| Cash paid during  the year for:                                                       |   |                        | ** **   |       |     |     |     |
| Interest (net of  amount capitalized)                                                 |   | **$**                       | **86,895**   | ** ** | $        | 101,579  |     | $ | 94,018 |   |
| Income taxes                                                                          |   | **$**                       | **28,687**   | ** ** | $        | 147,471  |     | $ | 121,158 |   |

 

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

 

108

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**THE CINCINNATI GAS & ELECTRIC COMPANYCONSOLIDATED STATEMENTS OFCAPITALIZATION**

 
|                                                                                                                                                     |   | **December  31**           |          |
|----------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------|---------------|
|                                                                                                                                                     |   | **2002**                   |          | **2001** |   |
|                                                                                                                                                     |   | **(dollars in thousands)** |          |
|                                                                                                                                                     |   |                       |          |   |   |
| **Long-term  Debt**(excludes current portion)                                                                                                            |   |                       |          |   |   |
| **CG&E**                                                                                                                                             |   |                       |          |   |   |
| First Mortgage  Bonds:                                                                                                                                   |   |                       |          |   |   |
| 6.45% Series due  February 15, 2004                                                                                                                      |   | **$**                      | **110,000**   |   | $ | 110,000 |   |
| 7.20% Series due  October 1, 2023                                                                                                                        |   | **265,500**                |          | 265,500 |   |
| 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**                                                                                                                          |   | **470,200**                |          | 470,200 |   |
|                                                                                                                                                     |   |                       |          |   |   |
| Other Long-term  Debt:                                                                                                                                   |   |                       |          |   |   |
| Liquid Asset  Notes with Coupon Exchange due October 1, 2007 (Executed interest rate swap  set at 6.87% through maturity commencing at October 19, 2000) |   | **100,000**                |          | 100,000 |   |
| 6.40% Debentures  due April 1, 2008                                                                                                                      |   | **100,000**                |          | 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 (Interest rate resets June 15, 2003)                                                                                 |   | **—**                 |          | 100,000 |   |
| 5.70% Debentures  due September 15, 2012                                                                                                                 |   | **500,000**                |          | — |   |
| Series 2002A,  Ohio Air Quality Development Revenue Refunding Bonds, due September 1, 2037  (Pollution Control)                                          |   | **42,000**                 |          | — |   |
| Series 2002B,  Ohio Air Quality Development Revenue Refunding Bonds, due September 1, 2037  (Pollution Control)                                          |   | **42,000**                 |          | — |   |
| Series 1992A,  6.50% Collateralized Pollution Control Revenue Refunding Bonds, due November  15, 2022                                                    |   | **12,721**                 |          | 12,721 |   |
| **Total  Other Long-term Debt**                                                                                                                          |   | **1,046,721**              |          | 562,721 |   |
|                                                                                                                                                     |   |                       |          |   |   |
| Unamortized  Premium and Discount - Net                                                                                                                  |   | **(1,861**                 | )             | (2,209 | ) |
| **Total  Long-term Debt**                                                                                                                                |   | **1,515,060**              |          | 1,030,712 |   |
|                                                                                                                                                     |   |                       |          |   |   |
| **The  Union Light, Heat and Power Company (ULH&P)**                                                                                                 |   |                       |          |   |   |
| Other Long-term  Debt:                                                                                                                                   |   |                       |          |   |   |
| 6.11% Debentures  due December 8, 2003                                                                                                                   |   | **—**                 |          | 20,000 |   |
| 6.50% Debentures  due April 30, 2008                                                                                                                     |   | **20,000**                 |          | 20,000 |   |
| 7.65% Debentures  due July 15, 2025                                                                                                                      |   | **15,000**                 |          | 15,000 |   |
| 7.875%  Debentures due September 15, 2009                                                                                                                |   | **20,000**                 |          | 20,000 |   |
| **Total  Other Long-term Debt**                                                                                                                          |   | **55,000**                 |          | 75,000 |   |
|                                                                                                                                                     |   |                       |          |   |   |
| Unamortized  Premium and Discount - Net                                                                                                                  |   | **(347**                   | )             | (379 | ) |
| **Total  Long-term Debt**                                                                                                                                |   | **54,653**                 |          | 74,621 |   |
|                                                                                                                                                     |   |                       |          |   |   |
| **Total  Consolidated Long-term Debt**                                                                                                                   |   | **$**                      | **1,569,713** |   | $ | 1,105,333 |   |

 

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

 

109

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|                                                                                                                                           |   | **December  31**           |          |
|------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------|---------------|
|                                                                                                                                           |   | **2002**                   |          | **2001** |   |
|                                                                                                                                           |   | **(dollars in thousands)** |          |
|                                                                                                                                           |   |                       |          |   |   |
| **Cumulative  Preferred Stock**                                                                                                                |   |                       |          |   |   |
|                                                                                                                                           |   |                       |          |   |   |
| **Par/Stated  Value**                                                                                                                          |   | **Authorized  Shares**     | ** **    | **Shares  Outstanding at  December 31, 2002** | ** ** | **Series** | ** ** | **Mandatory  Redemption** |   |   |   |   |   |
| $                                                                                                                                              | 100    |                       | 6,000,000     |   | 204,849 |   | 4% - 4 3⁄4 | % | No |   | **$** | **20,485** |   | $ | 20,486 |   |
|                                                                                                                                           |   |
| **Common Stock Equity**                                                                                                                        |   |                       |          |   |   |
| Common Stock -  $8.50 par value; authorized shares - 120,000,000; outstanding shares -  89,663,086 at December 31, 2002, and December 31, 2001 |   | **$**                      | **762,136**   |   | $ | 762,136 |   |
| Paid-in capital                                                                                                                                |   | **586,292**                |          | 571,926 |   |
| Retained  earnings                                                                                                                             |   | **487,652**                |          | 408,706 |   |
| Accumulated  other comprehensive income (loss)                                                                                                 |   | **(25,746**                | )             | (5,678 | ) |
| **Total  Common Stock Equity**                                                                                                                 |   | **1,810,334**              |          | 1,737,090 |   |
|                                                                                                                                           |   |                       |          |   |   |
| **Total  Consolidated Capitalization**                                                                                                         |   | **$**                      | **3,400,532** |   | $ | 2,862,909 |   |
|                                                                                                                                                |        |                            |               |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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

 

110

----

 

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

 

111

----

 

**PSI ENERGY, INC.CONSOLIDATED STATEMENTS OF INCOME**

 
|                                                     |   | **2002**                    |          | **2001**  |   | **2000**  |   |
|----------------------------------------------------------|--------|-----------------------------|---------------|-----------|--------|-----------|--------|
|                                                     |   | **(dollars  in thousands)** |          |
|                                                     |   |                        |          |      |   |      |   |
| **Operating  Revenues** (Note 1(q)(*i*))                 |   |                        |          |      |   |      |   |
| Electric                                                 |   | **$**                       | **2,359,178** |      | $      | 4,108,182 |   | $ | 2,691,274 |   |
|                                                     |   |                        |          |      |   |      |   |
|                                                     |   |                        |          |      |   |      |   |
| **Operating  Expenses**                                  |   |                        |          |      |   |      |   |
| Fuel and  purchased and exchanged power (Note 1(q)(*i*)) |   | **1,275,960**               |          | 3,165,652 |   | 1,731,733 |   |
| Operation and  maintenance                               |   | **488,903**                 |          | 413,275   |   | 463,649   |   |
| Depreciation                                             |   | **156,102**                 |          | 149,467   |   | 141,512   |   |
| Taxes other than  income taxes                           |   | **56,695**                  |          | 49,955    |   | 56,908    |   |
| **Total  Operating Expenses**                            |   | **1,977,660**               |          | 3,778,349 |   | 2,393,802 |   |
|                                                     |   |                        |          |      |   |      |   |
|                                                     |   |                        |          |      |   |      |   |
| **Operating  Income**                                    |   | **381,518**                 |          | 329,833   |   | 297,472   |   |
|                                                     |   |                        |          |      |   |      |   |
|                                                     |   |                        |          |      |   |      |   |
| **Miscellaneous  - Net**                                 |   | **20,582**                  |          | 19,541    |   | 4,723     |   |
| **Interest**                                             |   | **73,142**                  |          | 80,955    |   | 78,250    |   |
|                                                     |   |                        |          |      |   |      |   |
|                                                     |   |                        |          |      |   |      |   |
| **Income  Before Taxes**                                 |   | **328,958**                 |          | 268,419   |   | 223,945   |   |
|                                                     |   |                        |          |      |   |      |   |
|                                                     |   |                        |          |      |   |      |   |
| **Income  Taxes**(Note 10)                               |   | **114,709**                 |          | 106,086   |   | 88,547    |   |
|                                                     |   |                        |          |      |   |      |   |
| **Net  Income**                                          |   | **$**                       | **214,249**   |      | $      | 162,333   |   | $ | 135,398 |   |
|                                                     |   |                        |          |      |   |      |   |
| **Preferred  Dividend Requirement**                      |   | **2,587**                   |          | 2,587     |   | 3,738     |   |
|                                                     |   |                        |          |      |   |      |   |
| **Net  Income Applicable to Common Stock**               |   | **$**                       | **211,662**   |      | $      | 159,746   |   | $ | 131,660 |   |

 

**The accompanying notes as they relateto PSI Energy, Inc. are an integral part of these consolidated financialstatements.**

 

112

----

 

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

 

**ASSETS**

 
|                                                                                                                                            |   | **December  31**            |          |
|-------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------|---------------|
|                                                                                                                                            |   | **2002**                    |          | **2001** |   |
|                                                                                                                                            |   | **(dollars  in thousands)** |          |
|                                                                                                                                            |   |                        |          |   |   |
| **Current  Assets**                                                                                                                             |   |                        |          |   |   |
| Cash and cash  equivalents                                                                                                                      |   | **$**                       | **2,007**     |   | $ | 1,587 |   |
| Restricted  deposits                                                                                                                            |   | **20**                      |          | 519 |   |
| Notes receivable  from affiliated companies (Note 6)                                                                                            |   | **53,755**                  |          | 444,801 |   |
| Accounts receivable  less accumulated provision for doubtful accounts of $5,656 at December 31,  2002, and $6,773 at December 31, 2001 (Note 6) |   | **84,819**                  |          | 336,994 |   |
| Accounts  receivable from affiliated companies                                                                                                  |   | **437**                     |          | 10,470 |   |
| Materials,  supplies, and fuel                                                                                                                  |   | **137,292**                 |          | 87,661 |   |
| Energy risk  management current assets (Note 1(m))                                                                                              |   | **8,701**                   |          | 28,201 |   |
| Prepayments and  other                                                                                                                          |   | **44,725**                  |          | 41,041 |   |
| **Total  Current Assets**                                                                                                                       |   | **331,756**                 |          | 951,274 |   |
|                                                                                                                                            |   |                        |          |   |   |
|                                                                                                                                            |   |                        |          |   |   |
| **Property,  Plant, and Equipment - at Cost**                                                                                                   |   |                        |          |   |   |
| Utility plant in  service                                                                                                                       |   | **5,315,410**               |          | 4,909,007 |   |
| Construction  work in progress                                                                                                                  |   | **385,051**                 |          | 368,313 |   |
| **Total  Utility Plant**                                                                                                                        |   | **5,700,461**               |          | 5,277,320 |   |
| Accumulated  depreciation                                                                                                                       |   | **2,334,157**               |          | 2,216,908 |   |
| **Net  Property, Plant, and Equipment**                                                                                                         |   | **3,366,304**               |          | 3,060,412 |   |
|                                                                                                                                            |   |                        |          |   |   |
|                                                                                                                                            |   |                        |          |   |   |
| **Other  Assets**                                                                                                                               |   |                        |          |   |   |
| Regulatory  assets (Note 1(c))                                                                                                                  |   | **417,920**                 |          | 423,372 |   |
| Energy risk  management non-current assets (Note 1(m))                                                                                          |   | **16,590**                  |          | 30,164 |   |
| Other  investments                                                                                                                              |   | **54,683**                  |          | 57,633 |   |
| Other                                                                                                                                           |   | **35,703**                  |          | 47,927 |   |
| **Total  Other Assets**                                                                                                                         |   | **524,896**                 |          | 559,096 |   |
|                                                                                                                                            |   |                        |          |   |   |
|                                                                                                                                            |   |                        |          |   |   |
| **Total  Assets**                                                                                                                               |   | **$**                       | **4,222,956** |   | $ | 4,570,782 |   |

 

**The accompanying notes as they relateto PSI Energy, Inc. are an integral part of these consolidated financialstatements.**

 

113

----

 

**PSIENERGY, INC.CONSOLIDATED BALANCE SHEETS**

 

**LIABILITIES AND SHAREHOLDER’S EQUITY**

 
|                                                                                                                                                                |   | **December  31**            |          |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------|---------------|
|                                                                                                                                                                |   | **2002**                    |          | **2001** |   |
|                                                                                                                                                                |   | **(dollars  in thousands)** |          |
| **Current  Liabilities**                                                                                                                                            |   |                        |          |   |   |
| Accounts payable                                                                                                                                                    |   | **$**                       | **113,563**   |   | $ | 312,707 |   |
| Accounts payable  to affiliated companies                                                                                                                           |   | **107,364**                 |          | 27,370 |   |
| Accrued taxes                                                                                                                                                       |   | **105,960**                 |          | 102,317 |   |
| Accrued interest                                                                                                                                                    |   | **23,078**                  |          | 23,760 |   |
| Notes payable  and other short-term obligations (Note 5)                                                                                                            |   | **35,000**                  |          | 148,600 |   |
| Notes payable to  affiliated companies (Note 5)                                                                                                                     |   | **138,055**                 |          | 422,263 |   |
| Long-term debt  due within one year (Note 4)                                                                                                                        |   | **56,000**                  |          | 23,000 |   |
| Energy risk  management current liabilities (Note 1(m))                                                                                                             |   | **8,000**                   |          | 23,185 |   |
| Other                                                                                                                                                               |   | **22,335**                  |          | 41,695 |   |
| **Total  Current Liabilities**                                                                                                                                      |   | **609,355**                 |          | 1,124,897 |   |
|                                                                                                                                                                |   |                        |          |   |   |
|                                                                                                                                                                |   |                        |          |   |   |
| **Non-Current  Liabilities**                                                                                                                                        |   |                        |          |   |   |
| Long-term debt  (Note 4)                                                                                                                                            |   | **1,315,984**               |          | 1,325,089 |   |
| Deferred income  taxes (Note 10)                                                                                                                                    |   | **538,745**                 |          | 486,694 |   |
| Unamortized  investment tax credits                                                                                                                                 |   | **32,897**                  |          | 36,139 |   |
| Accrued pension  and other postretirement benefit costs (Note 9)                                                                                                    |   | **184,299**                 |          | 160,169 |   |
| Energy risk  management non-current liabilities (Note 1(m))                                                                                                         |   | **17,157**                  |          | 41,773 |   |
| Other                                                                                                                                                               |   | **80,879**                  |          | 58,187 |   |
| **Total  Non-Current Liabilities**                                                                                                                                  |   | **2,169,961**               |          | 2,108,051 |   |
|                                                                                                                                                                |   |                        |          |   |   |
|                                                                                                                                                                |   |                        |          |   |   |
| **Total  Liabilities**                                                                                                                                              |   | **2,779,316**               |          | 3,232,948 |   |
|                                                                                                                                                                |   |                        |          |   |   |
|                                                                                                                                                                |   |                        |          |   |   |
| **Cumulative  Preferred Stock**                                                                                                                                     |   |                        |          |   |   |
| Not subject to  mandatory redemption                                                                                                                                |   | **42,343**                  |          | 42,347 |   |
|                                                                                                                                                                |   |                        |          |   |   |
|                                                                                                                                                                |   |                        |          |   |   |
| **Common  Stock Equity** (Note 2)                                                                                                                                   |   |                        |          |   |   |
| Common Stock -  without par value; $0.01 stated value; authorized shares - 60,000,000;  outstanding shares - 53,913,701 at December 31, 2002, and December 31, 2001 |   | **539**                     |          | 539 |   |
| Paid-in capital                                                                                                                                                     |   | **426,931**                 |          | 416,414 |   |
| Retained  earnings                                                                                                                                                  |   | **981,946**                 |          | 880,129 |   |
| Accumulated  other comprehensive income (loss) (Note 19)                                                                                                            |   | **(8,119**                  | )             | (1,595 | ) |
| **Total  Common Stock Equity**                                                                                                                                      |   | **1,401,297**               |          | 1,295,487 |   |
|                                                                                                                                                                |   |                        |          |   |   |
| **Commitments  and Contingencies** (Note 11)                                                                                                                        |   |                        |          |   |   |
|                                                                                                                                                                |   |                        |          |   |   |
| **Total  Liabilities and Shareholder’s Equity**                                                                                                                |   | **$**                       | **4,222,956** |   | $ | 4,570,782 |   |

 

**The accompanying notes as they relateto PSI Energy, Inc. are an integral part of these consolidated financialstatements.**

 

114

----

 

**PSI ENERGY, INC.CONSOLIDATED STATEMENTS OF CHANGES INCOMMON STOCK EQUITY**

 
|                                                                         |   | **Common  Stock**           |       | **Paid-in  Capital** |       | **Retained  Earnings** |       | **Accumulated  Other  Comprehensive  Income (Loss)** |        | **Total  Common  Stock  Equity** |       |
|------------------------------------------------------------------------------|--------|-----------------------------|------------|----------------------|------------|------------------------|------------|------------------------------------------------------|-------------|----------------------------------|------------|
|                                                                         |   | **(dollars  in thousands)** |       |
|                                                                         |   |                        |       |                 |       |                   |       |                                                 |        |                             |       |
| **2000**                                                                     |   |                        |       |                 |       |                   |       |                                                 |        |                             |       |
| Beginning  balance                                                           |   | $                           | 539        |                 | $          | 411,198                |       | $                                                    | 642,569     |                             | $          | 1,391 |   | $ | 1,055,697 |   |
|                                                                         |   |                        |       |                 |       |                   |       |                                                 |        |                             |       |
| Comprehensive  income:                                                       |   |                        |       |                 |       |                   |       |                                                 |        |                             |       |
| Net income                                                                   |   | —                      |       | —               |       | 135,398                |       | —                                               |        | 135,398                          |       |
| Other  comprehensive income (loss), net of tax effect of $584 (Note 19)      |   |                        |       |                 |       |                   |       |                                                 |        |                             |       |
| Minimum pension  liability adjustment                                        |   | —                      |       | —               |       | —                 |       | (47                                                  | )           | (47                              | )          |
| Unrealized gain  (loss) on investment trust                                  |   | —                      |       | —               |       | —                 |       | (1,864                                               | )           | (1,864                           | )          |
| Total  comprehensive income                                                  |   | —                      |       | —               |       | —                 |       | —                                               |        | 133,487                          |       |
|                                                                         |   |                        |       |                 |       |                   |       |                                                 |        |                             |       |
| Dividends on  preferred stock                                                |   | —                      |       | —               |       | (3,738                 | )          | —                                               |        | (3,738                           | )          |
| Dividends on  common stock                                                   |   | —                      |       | —               |       | (54,000                | )          | —                                               |        | (54,000                          | )          |
| Contribution  from parent company for reallocation of taxes                  |   | —                      |       | 1,989                |       | —                 |       | —                                               |        | 1,989                            |       |
| Other                                                                        |   | —                      |       | 336                  |       | (76                    | )          | —                                               |        | 260                              |       |
| Ending balance                                                               |   | $                           | 539        |                 | $          | 413,523                |       | $                                                    | 720,153     |                             | $          | (520 | ) | $ | 1,133,695 |   |
|                                                                         |   |                        |       |                 |       |                   |       |                                                 |        |                             |       |
|                                                                         |   |                        |       |                 |       |                   |       |                                                 |        |                             |       |
| **2001**                                                                     |   |                        |       |                 |       |                   |       |                                                 |        |                             |       |
| Comprehensive  income:                                                       |   |                        |       |                 |       |                   |       |                                                 |        |                             |       |
| Net income                                                                   |   | —                      |       | —               |       | 162,333                |       | —                                               |        | 162,333                          |       |
| Other  comprehensive income (loss), net of tax effect of $538 (Note 19)      |   |                        |       |                 |       |                   |       |                                                 |        |                             |       |
| Minimum pension  liability adjustment                                        |   | —                      |       | —               |       | —                 |       | (49                                                  | )           | (49                              | )          |
| Unrealized gain  (loss) on investment trusts                                 |   | —                      |       | —               |       | —                 |       | (1,026                                               | )           | (1,026                           | )          |
| Total  comprehensive income                                                  |   | —                      |       | —               |       | —                 |       | —                                               |        | 161,258                          |       |
|                                                                         |   |                        |       |                 |       |                   |       |                                                 |        |                             |       |
| Dividends on preferred  stock                                                |   | —                      |       | —               |       | (2,587                 | )          | —                                               |        | (2,587                           | )          |
| Contribution  from parent company for reallocation of taxes                  |   | —                      |       | 2,894                |       | —                 |       | —                                               |        | 2,894                            |       |
| Other                                                                        |   | —                      |       | (3                   | )          | 230                    |       | —                                               |        | 227                              |       |
| Ending balance                                                               |   | $                           | 539        |                 | $          | 416,414                |       | $                                                    | 880,129     |                             | $          | (1,595 | ) | $ | 1,295,487 |   |
|                                                                         |   |                        |       |                 |       |                   |       |                                                 |        |                             |       |
|                                                                         |   |                        |       |                 |       |                   |       |                                                 |        |                             |       |
| **2002**                                                                     |   |                        |       |                 |       |                   |       |                                                 |        |                             |       |
| **Comprehensive  income:**                                                   |   |                        | ** ** |                 | ** ** |                   | ** ** |                                                 | ** **  |                             | ** ** |
| **Net  income**                                                              |   | **—**                  | ** ** | **—**           | ** ** | **214,249**            | ** ** | **—**                                           | ** **  | **214,249**                      | ** ** |
| **Other  comprehensive income (loss), net of tax effect of $4,189**(Note 19) |   |                        | ** ** |                 | ** ** |                   | ** ** |                                                 | ** **  |                             | ** ** |
| **Minimum  pension liability adjustment**                                    |   | **—**                  | ** ** | **—**           | ** ** | **—**             | ** ** | **(2,138**                                           | **)**       | **(2,138**                       | **)**      |
| **Unrealized  gain (loss) on investment trusts**                             |   | **—**                  | ** ** | **—**           | ** ** | **—**             | ** ** | **(4,386**                                           | **)**       | **(4,386**                       | **)**      |
| **Total  comprehensive income**                                              |   | **—**                  | ** ** | **—**           | ** ** | **—**             | ** ** | **—**                                           | ** **  | **207,725**                      | ** ** |
|                                                                         |   |                        | ** ** |                 | ** ** |                   | ** ** |                                                 | ** **  |                             | ** ** |
| **Dividends  on preferred stock**                                            |   | **—**                  | ** ** | **—**           | ** ** | **(2,587**             | **)**      | **—**                                           | ** **  | **(2,587**                       | **)**      |
| **Dividends  on common stock**                                               |   | **—**                  | ** ** | **—**           | ** ** | **(111,842**           | **)**      | **—**                                           | ** **  | **(111,842**                     | **)**      |
| **Contribution  from parent company for reallocation of taxes**              |   | **—**                  | ** ** | **10,519**           | ** ** | **—**             | ** ** | **—**                                           | ** **  | **10,519**                       | ** ** |
| **Other**                                                                    |   | **—**                  | ** ** | **(2**               | **)**      | **1,997**              | ** ** | **—**                                           | ** **  | **1,995**                        | ** ** |
| **Ending  balance**                                                          |   | **$**                       | **539**    | ** **           | **$**      | **426,931**            | ** ** | **$**                                                | **981,946** | ** **                       | **$**      | **(8,119** | **)** | **$** | **1,401,297** | ** ** |

 

**The accompanying notes as they relateto PSI Energy, Inc. are an integral part of these consolidated financialstatements.**

 

115

----

 

**PSI ENERGY, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS**

 
|                                                                                  |   | **2002**                    |        | **2001**   |   | **2000** |   |
|---------------------------------------------------------------------------------------|--------|-----------------------------|-------------|------------|--------|----------|--------|
|                                                                                  |   | **(dollars  in thousands)** |        |
|                                                                                  |   |                        | ** **  |       |   |     |   |
| **Operating  Activities**                                                             |   |                        | ** **  |       |   |     |   |
| Net income                                                                            |   | **$**                       | **214,249** | ** ** | $      | 162,333  |   | $ | 135,398 |   |
| Items providing  or (using) cash currently:                                           |   |                        | ** **  |       |   |     |   |
| Depreciation                                                                          |   | **156,102**                 | ** **  | 149,467    |   | 141,512  |   |
| Deferred income  taxes and investment tax credits - net                               |   | **33,908**                  | ** **  | 41,543     |   | (6,582   | )      |
| Change in net  position of energy risk management activities                          |   | **9,544**                   | ** **  | (33,158    | )      | (7,077   | )      |
| Allowance for  equity funds used during construction                                  |   | **(12,505**                 | **)**       | (5,956     | )      | (1,354   | )      |
| Regulatory  assets deferrals                                                          |   | **(49,546**                 | **)**       | (24,959    | )      | (63,884  | )      |
| Regulatory  assets amortization                                                       |   | **72,173**                  | ** **  | 62,641     |   | 74,702   |   |
| Accrued pension  and other postretirement benefit costs                               |   | **24,130**                  | ** **  | 10,597     |   | 11,794   |   |
| Changes in  current assets and current liabilities:                                   |   |                        | ** **  |       |   |     |   |
| Restricted  deposits                                                                  |   | **499**                     | ** **  | (178       | )      | (341     | )      |
| Accounts and  notes receivable, net of reserves on receivables sold                   |   | **233,040**                 | ** **  | 119,311    |   | (178,453 | )      |
| Materials,  supplies, and fuel                                                        |   | **(49,631**                 | **)**       | (33,823    | )      | 49,652   |   |
| Prepayments                                                                           |   | **(2,908**                  | **)**       | (120       | )      | (677     | )      |
| Accounts payable                                                                      |   | **(119,032**                | **)**       | (84,577    | )      | 176,820  |   |
| Accrued taxes  and interest                                                           |   | **2,961**                   | ** **  | 21,374     |   | (15,342  | )      |
| Other assets                                                                          |   | **(22,161**                 | **)**       | 17,074     |   | (4,322   | )      |
| Other  liabilities                                                                    |   | **8,224**                   | ** **  | 342        |   | 31,192   |   |
|                                                                                  |   |                        | ** **  |       |   |     |   |
| **Net  cash provided by (used in) operating activities**                              |   | **499,047**                 | ** **  | 401,911    |   | 343,038  |   |
|                                                                                  |   |                        | ** **  |       |   |     |   |
| **Financing  Activities**                                                             |   |                        | ** **  |       |   |     |   |
| Change in  short-term debt, including net affiliate notes                             |   | **46,993**                  | ** **  | (195,912   | )      | 143,030  |   |
| Issuance of  long-term debt                                                           |   | **47,600**                  | ** **  | 322,471    |   | 53,075   |   |
| Redemption of  long-term debt                                                         |   | **(23,979**                 | **)**       | (89,248    | )      | (187,097 | )      |
| Retirement of  preferred stock                                                        |   | **(2**                      | **)**       | (1         | )      | (29,225  | )      |
| Dividends on  preferred stock                                                         |   | **(2,587**                  | **)**       | (2,587     | )      | (3,738   | )      |
| Dividends on  common stock                                                            |   | **(111,842**                | **)**       | —     |   | (54,000  | )      |
|                                                                                  |   |                        | ** **  |       |   |     |   |
| **Net  cash provided by (used in) financing activities**                              |   | **(43,817**                 | **)**       | 34,723     |   | (77,955  | )      |
|                                                                                  |   |                        | ** **  |       |   |     |   |
| **Investing  Activities**                                                             |   |                        | ** **  |       |   |     |   |
| Construction  expenditures (less allowance for equity funds used during construction) |   | **(451,326**                | **)**       | (427,787   | )      | (263,317 | )      |
| Other  investments                                                                    |   | **(3,484**                  | **)**       | (8,571     | )      | (9,297   | )      |
|                                                                                  |   |                        | ** **  |       |   |     |   |
| **Net  cash provided by (used in) investing activities**                              |   | **(454,810**                | **)**       | (436,358   | )      | (272,614 | )      |
|                                                                                  |   |                        | ** **  |       |   |     |   |
| **Net  increase (decrease) in cash and cash equivalents**                             |   | **420**                     | ** **  | 276        |   | (7,531   | )      |
|                                                                                  |   |                        | ** **  |       |   |     |   |
| **Cash  and cash equivalents at beginning of period**                                 |   | **1,587**                   | ** **  | 1,311      |   | 8,842    |   |
|                                                                                  |   |                        | ** **  |       |   |     |   |
| **Cash  and cash equivalents at end of period**                                       |   | **$**                       | **2,007**   | ** ** | $      | 1,587    |   | $ | 1,311 |   |
|                                                                                  |   |                        | ** **  |       |   |     |   |
|                                                                                  |   |                        | ** **  |       |   |     |   |
| **Supplemental  Disclosure of Cash Flow Information**                                 |   |                        | ** **  |       |   |     |   |
| Cash paid during  the year for:                                                       |   |                        | ** **  |       |   |     |   |
| Interest (net of  amount capitalized)                                                 |   | **$**                       | **89,865**  | ** ** | $      | 97,917   |   | $ | 98,283 |   |
| Income taxes                                                                          |   | **$**                       | **27,401**  | ** ** | $      | 41,419   |   | $ | 112,210 |   |

 

**The accompanying notes as they relateto PSI Energy, Inc. are an integral part of these consolidated financialstatements.**

 

116

----

 

**PSI ENERGY, INC.CONSOLIDATED STATEMENTS OF CAPITALIZATION**

 
|                                                                                                                                                                |   | **December  31**            |          |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------|---------------|
|                                                                                                                                                                |   | **2002**                    |          | **2001** |   |
|                                                                                                                                                                |   | **(dollars  in thousands)** |          |
| **Long-term  Debt** (excludes current portion)                                                                                                                      |   |                        |          |   |   |
|                                                                                                                                                                |   |                        |          |   |   |
| First Mortgage  Bonds:                                                                                                                                              |   |                        |          |   |   |
| Series ZZ, 53/4% due  February 15, 2028 (Pollution Control)                                                                                                         |   | **$**                       | **50,000**    | ** ** | $ | 50,000 |   |
| Series AAA, 71/8% due  February 1, 2024                                                                                                                             |   | **30,000**                  | ** **    | 30,000 |   |
| Series BBB, 8.0%  due July 15, 2009                                                                                                                                 |   | **124,665**                 | ** **    | 124,665 |   |
| Series CCC,  8.85% due January 15, 2022                                                                                                                             |   | **53,055**                  | ** **    | 53,055 |   |
| Series DDD,  8.31% due September 1, 2032                                                                                                                            |   | **38,000**                  | ** **    | 38,000 |   |
| Series EEE,  6.65% due June 15, 2006                                                                                                                                |   | **325,000**                 | ** **    | 325,000 |   |
| **Total  First Mortgage Bonds**                                                                                                                                     |   | **620,720**                 | ** **    | 620,720 |   |
|                                                                                                                                                                |   |                        | ** **    |   |   |
| Secured  Medium-term Notes:                                                                                                                                         |   |                        | ** **    |   |   |
| Series A, 8.37%  to 8.81%, due November 8, 2006 to June 1, 2022                                                                                                     |   | **34,300**                  | ** **    | 34,300 |   |
| Series B, 6.37%  to 8.24%, due August 15, 2008 to August 22, 2022                                                                                                   |   | **70,000**                  | ** **    | 126,000 |   |
| (Series A and B,  7.623% weighted average interest rate and 13.9 year weighted average  remaining life)                                                             |   |                        | ** **    |   |   |
| **Total  Secured Medium-term Notes**                                                                                                                                |   | **104,300**                 | ** **    | 160,300 |   |
|                                                                                                                                                                |   |                        | ** **    |   |   |
| Other Long-term  Debt:                                                                                                                                              |   |                        | ** **    |   |   |
| Series 2000A,  Indiana Development Finance Authority Environmental Refunding Revenue Bonds,  due May 1, 2035                                                        |   | **44,025**                  | ** **    | 44,025 |   |
| Series 2000B,  Indiana Development Finance Authority Environmental Refunding Revenue Bonds,  due April 1, 2022                                                      |   | **10,000**                  | ** **    | 10,000 |   |
| 6.35% Debentures  due November 15, 2006                                                                                                                             |   | **50**                      | ** **    | 50 |   |
| 6.50% Synthetic  Putable Yield Securities due August 1, 2026 (Interest rate resets August 1,  2005)                                                                 |   | **50,000**                  | ** **    | 50,000 |   |
| 7.25% Junior  Maturing Principal Securities due March 15, 2028                                                                                                      |   | **2,658**                   | ** **    | 2,658 |   |
| 6.00% Rural  Utilities Service Obligation payable in annual installments                                                                                            |   | **82,025**                  | ** **    | 83,004 |   |
| 6.52% Senior  Notes due March 15, 2009                                                                                                                              |   | **97,342**                  | ** **    | 97,342 |   |
| 7.85% Debentures  due October 15, 2007                                                                                                                              |   | **265,000**                 | ** **    | 265,000 |   |
| Series 2002A,  Indiana Development Finance Authority Environmental Refunding Revenue Bonds,  due March 1, 2031                                                      |   | **23,000**                  | ** **    | — |   |
| Series 2002B,  Indiana Development Finance Authority Environmental Refunding Revenue Bonds,  due March 1, 2019                                                      |   | **24,600**                  | ** **    | — |   |
| **Total  Other Long-term Debt**                                                                                                                                     |   | **598,700**                 | ** **    | 552,079 |   |
|                                                                                                                                                                |   |                        | ** **    |   |   |
| Unamortized  Premium and Discount - Net                                                                                                                             |   | **(7,736**                  | **)**         | (8,010 | ) |
| **Total  Long-term Debt**                                                                                                                                           |   | **1,315,984**               | ** **    | 1,325,089 |   |
|                                                                                                                                                                |   |                        |          |   |   |
| **Cumulative  Preferred Stock**                                                                                                                                     |   |                        |          |   |   |
|                                                                                                                                                                |   |                        |          |   |   |
| **Par/Stated  Value**                                                                                                                                               |   | **Authorized  Shares**      |          | **Shares  Outstanding at  December 31, 2002** |   | **Series** |   | **Mandatory  Redemption** |   |   |   |   |   |
| $                                                                                                                                                                   | 100    |                        | 5,000,000     |   | 347,545 |   | 31/2% - 67/8% |   | No |   | **$** | **34,754** |   | $ | 34,758 |   |
| $                                                                                                                                                                   | 25     |                        | 5,000,000     |   | 303,544 |   | 4.16% - 4.32% |   | No |   | **7,589** |   | 7,589 |   |
| **Total  Preferred Stock**                                                                                                                                          |   | **42,343**                  |          | 42,347 |   |
|                                                                                                                                                                |   |                        |          |   |   |
| **Common Stock Equity**                                                                                                                                             |   |                        |          |   |   |
|                                                                                                                                                                |   |                        |          |   |   |
| Common Stock -  without par value; $0.01 stated value; authorized shares - 60,000,000;  outstanding shares - 53,913,701 at December 31, 2002, and December 31, 2001 |   | **$**                       | **539**       |   | $ | 539 |   |
| Paid-in  capital                                                                                                                                                    |   | **426,931**                 |          | 416,414 |   |
| Retained  earnings                                                                                                                                                  |   | **981,946**                 |          | 880,129 |   |
| Accumulated  other comprehensive income (loss)                                                                                                                      |   | **(8,119**                  | **)**         | (1,595 | ) |
| **Total  Common Stock Equity**                                                                                                                                      |   | **1,401,297**               |          | 1,295,487 |   |
|                                                                                                                                                                |   |                        |          |   |   |
| **Total  Consolidated Capitalization**                                                                                                                              |   | **$**                       | **2,759,624** |   | $ | 2,662,923 |   |

 

**The accompanying notes as they relateto PSI Energy, Inc. are an integral part of these consolidated financialstatements.**

 

117

----

 

**THE UNION LIGHT****, HEAT AND POWER COMPANY**

 

118

----

 

**THE UNION LIGHT, HEAT AND POWER COMPANYSTATEMENTS OF INCOME**

 
|                                                                    |   | **2002**                    |        | **2001**   |   | **2000** |   |
|-------------------------------------------------------------------------|--------|-----------------------------|-------------|------------|--------|----------|--------|
|                                                                    |   | **(dollars  in thousands)** |        |
|                                                                    |   |                        |        |
| **Operating  Revenues**                                                 |   |                        | ** **  |       |   |     |   |
| Electric                                                                |   | **$**                       | **226,856** | ** ** | $      | 230,960  |   | $ | 225,601 |   |
| Gas                                                                     |   | **81,706**                  | ** **  | 109,333    |   | 91,950   |   |
| **Total  Operating Revenues**                                           |   | **308,562**                 | ** **  | 340,293    |   | 317,551  |   |
|                                                                    |   |                        | ** **  |       |   |     |   |
| **Operating  Expenses**                                                 |   |                        | ** **  |       |   |     |   |
| Electricity  purchased from parent company for resale (Note 1(s)(*ii*)) |   | **159,734**                 | ** **  | 151,562    |   | 159,915  |   |
| Gas purchased                                                           |   | **46,886**                  | ** **  | 72,593     |   | 51,591   |   |
| Operation and  maintenance                                              |   | **50,223**                  | ** **  | 39,501     |   | 40,699   |   |
| Depreciation                                                            |   | **17,350**                  | ** **  | 17,039     |   | 15,685   |   |
| Taxes other than  income taxes                                          |   | **4,598**                   | ** **  | 3,901      |   | 3,938    |   |
| **Total  Operating Expenses**                                           |   | **278,791**                 | ** **  | 284,596    |   | 271,828  |   |
|                                                                    |   |                        | ** **  |       |   |     |   |
| **Operating  Income**                                                   |   | **29,771**                  | ** **  | 55,697     |   | 45,723   |   |
|                                                                    |   |                        | ** **  |       |   |     |   |
| **Miscellaneous  - Net**                                                |   | **666**                     | ** **  | 239        |   | (982     | )      |
| **Interest**                                                            |   | **5,938**                   | ** **  | 6,313      |   | 6,308    |   |
|                                                                    |   |                        | ** **  |       |   |     |   |
| **Income  Before Taxes**                                                |   | **24,499**                  | ** **  | 49,623     |   | 38,433   |   |
|                                                                    |   |                        | ** **  |       |   |     |   |
| **Income  Taxes** (Note 10)                                             |   | **12,349**                  | ** **  | 13,699     |   | 13,801   |   |
|                                                                    |   |                        | ** **  |       |   |     |   |
| **Net  Income**                                                         |   | **$**                       | **12,150**  | ** ** | $      | 35,924   |   | $ | 24,632 |   |

 

**The accompanying notes as they relateto The Union Light, Heat and Power Company are an integral part of thesefinancial statements.**

 

119

----

 

**THE UNION LIGHT, HEAT AND POWER COMPANYBALANCE SHEETS**

 

**ASSETS**

 
|                                                                                                                                         |   | **December  31**            |        |
|----------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------|-------------|
|                                                                                                                                         |   | **2002**                    |        | **2001** |   |
|                                                                                                                                         |   | **(dollars  in thousands)** |        |
|                                                                                                                                         |   |                        |        |
| **Current  Assets**                                                                                                                          |   |                        |        |   |   |
| Cash and cash  equivalents                                                                                                                   |   | **$**                       | **3,926**   | ** ** | $ | 4,099 |   |
| Notes receivable  from affiliated companies (Note 6)                                                                                         |   | **13,337**                  | ** **  | — |   |
| Accounts  receivable less accumulated provision for doubtful accounts of $84 at  December 31, 2002, and $1,196 at December 31, 2001 (Note 6) |   | **703**                     | ** **  | 16,785 |   |
| Accounts  receivable from affiliated companies                                                                                               |   | **1,671**                   | ** **  | 2,401 |   |
| Materials,  supplies, and fuel                                                                                                               |   | **8,182**                   | ** **  | 10,835 |   |
| Prepayments and  other                                                                                                                       |   | **316**                     | ** **  | 300 |   |
| **Total  Current Assets**                                                                                                                    |   | **28,135**                  | ** **  | 34,420 |   |
|                                                                                                                                         |   |                        | ** **  |   |   |
| **Property,  Plant, and Equipment - at Cost**                                                                                                |   |                        | ** **  |   |   |
| Utility plant in  service                                                                                                                    |   |                        | ** **  |   |   |
| Electric                                                                                                                                     |   | **258,094**                 | ** **  | 248,223 |   |
| Gas                                                                                                                                          |   | **215,505**                 | ** **  | 197,301 |   |
| Common                                                                                                                                       |   | **31,679**                  | ** **  | 50,289 |   |
| **Total  Utility Plant In Service**                                                                                                          |   | **505,278**                 | ** **  | 495,813 |   |
| Construction  work in progress                                                                                                               |   | **14,745**                  | ** **  | 11,004 |   |
| **Total  Utility Plant**                                                                                                                     |   | **520,023**                 | ** **  | 506,817 |   |
| Accumulated  depreciation                                                                                                                    |   | **187,876**                 | ** **  | 178,567 |   |
| **Net  Property, Plant, and Equipment**                                                                                                      |   | **332,147**                 | ** **  | 328,250 |   |
|                                                                                                                                         |   |                        | ** **  |   |   |
| **Other  Assets**                                                                                                                            |   |                        | ** **  |   |   |
| Regulatory  assets (Note 1(c))                                                                                                               |   | **5,134**                   | ** **  | 7,838 |   |
| Other                                                                                                                                        |   | **16,811**                  | ** **  | 6,582 |   |
| **Total  Other Assets**                                                                                                                      |   | **21,945**                  | ** **  | 14,420 |   |
|                                                                                                                                         |   |                        | ** **  |   |   |
| **Total  Assets**                                                                                                                            |   | **$**                       | **382,227** | ** ** | $ | 377,090 |   |

 

**The accompanying notes as they relateto The Union Light, Heat and Power Company are an integral part of thesefinancial statements.**

 

120

----

 

**THEUNION LIGHT, HEAT AND POWER COMPANYBALANCE SHEETS**

 

**LIABILITIESAND SHAREHOLDER’S EQUITY**

 
|                                                                                                                                       |   | **December  31**            |        |
|--------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------|-------------|
|                                                                                                                                       |   | **2002**                    |        | **2001** |   |
|                                                                                                                                       |   | **(dollars  in thousands)** |        |
| **Current  Liabilities**                                                                                                                   |   |                        |        |   |   |
| Accounts payable                                                                                                                           |   | **$**                       | **8,816**   | ** ** | $ | 7,960 |   |
| Accounts payable  to affiliated companies                                                                                                  |   | **22,297**                  | ** **  | 16,156 |   |
| Accrued taxes                                                                                                                              |   | **1,487**                   | ** **  | 7,051 |   |
| Accrued interest                                                                                                                           |   | **1,226**                   | ** **  | 643 |   |
| Long-term debt  due within one year (Note 4)                                                                                               |   | **20,000**                  | ** **  | — |   |
| Notes payable to  affiliated companies (Note 5)                                                                                            |   | **14,076**                  | ** **  | 26,432 |   |
| Other                                                                                                                                      |   | **6,368**                   | ** **  | 5,322 |   |
| **Total  Current Liabilities**                                                                                                             |   | **74,270**                  | ** **  | 63,564 |   |
|                                                                                                                                       |   |                        | ** **  |   |   |
| **Non-Current  Liabilities**                                                                                                               |   |                        | ** **  |   |   |
| Long-term debt  (Note 4)                                                                                                                   |   | **54,653**                  | ** **  | 74,621 |   |
| Deferred income  taxes (Note 10)                                                                                                           |   | **43,360**                  | ** **  | 28,323 |   |
| Unamortized  investment tax credits                                                                                                        |   | **3,143**                   | ** **  | 3,411 |   |
| Accrued pension  and other postretirement benefit costs (Note 9)                                                                           |   | **15,620**                  | ** **  | 13,277 |   |
| Other                                                                                                                                      |   | **14,017**                  | ** **  | 21,691 |   |
| **Total  Non-Current Liabilities**                                                                                                         |   | **130,793**                 | ** **  | 141,323 |   |
|                                                                                                                                       |   |                        | ** **  |   |   |
| **Total  Liabilities**                                                                                                                     |   | **205,063**                 | ** **  | 204,887 |   |
|                                                                                                                                       |   |                        | ** **  |   |   |
| **Common  Stock Equity** (Note 2)                                                                                                          |   |                        | ** **  |   |   |
| Common Stock -  $15.00 par value; authorized shares - 1,000,000; outstanding shares - 585,333  at December 31, 2002, and December 31, 2001 |   | **8,780**                   | ** **  | 8,780 |   |
| Paid-in capital                                                                                                                            |   | **23,644**                  | ** **  | 21,111 |   |
| Retained  earnings                                                                                                                         |   | **144,800**                 | ** **  | 142,320 |   |
| Accumulated  other comprehensive income (loss)                                                                                             |   | **(60**                     | **)**       | (8 | ) |
| **Total  Common Stock Equity**                                                                                                             |   | **177,164**                 | ** **  | 172,203 |   |
|                                                                                                                                       |   |                        | ** **  |   |   |
| **Commitments  and Contingencies** (Note 11)                                                                                               |   |                        | ** **  |   |   |
|                                                                                                                                       |   |                        | ** **  |   |   |
| **Total  Liabilities and Shareholder’s Equity**                                                                                       |   | **$**                       | **382,227** | ** ** | $ | 377,090 |   |

 

**The accompanying notes as they relateto The Union Light, Heat and Power Company are an integral part of thesefinancial statements.**

 

121

----

 

**THE UNION LIGHT, HEAT AND POWER COMPANYSTATEMENTS OF CHANGES IN COMMONSTOCK EQUITY**

 
|                                                                                                   |   | **Common  Stock**           | ** ** | **Paid-in  Capital** | ** ** | **Retained  Earnings** | ** ** | **Accumulated  Other  Comprehensive  Income (Loss)** | ** **  | **Total  Common  Stock  Equity** | ** ** |
|--------------------------------------------------------------------------------------------------------|--------|-----------------------------|------------|----------------------|------------|------------------------|------------|------------------------------------------------------|-------------|----------------------------------|------------|
|                                                                                                   |   | **(dollars  in thousands)** | ** ** |
|                                                                                                   |   |                        |       |
| **2000**                                                                                               |   |                        |       |                 |       |                   |       |                                                 |        |                             |       |
| Beginning  balance                                                                                     |   | $                           | 8,780      |                 | $          | 20,142                 |       | $                                                    | 103,128     |                             | $          | — |   | $ | 132,050 |   |
|                                                                                                   |   |                        |       |                 |       |                   |       |                                                 |        |                             |       |
| Net income                                                                                             |   | —                      |       | —               |       | 24,632                 |       | —                                               |        | 24,632                           |       |
| Dividends on  common stock                                                                             |   | —                      |       | —               |       | (9,657                 | )          | —                                               |        | (9,657                           | )          |
| Contribution  from parent company for reallocation of taxes                                            |   | —                      |       | 163                  |       | —                 |       | —                                               |        | 163                              |       |
| Ending balance                                                                                         |   | $                           | 8,780      |                 | $          | 20,305                 |       | $                                                    | 118,103     |                             | $          | — |   | $ | 147,188 |   |
|                                                                                                   |   |                        |       |                 |       |                   |       |                                                 |        |                             |       |
| **2001**                                                                                               |   |                        |       |                 |       |                   |       |                                                 |        |                             |       |
| Comprehensive  income:                                                                                 |   |                        |       |                 |       |                   |       |                                                 |        |                             |       |
| Net income                                                                                             |   | —                      |       | —               |       | 35,924                 |       | —                                               |        | 35,924                           |       |
| Other  comprehensive income (loss), net of tax effect of $5 Minimum pension  liability adjustment      |   | —                      |       | —               |       | —                 |       | (8                                                   | )           | (8                               | )          |
| Total  comprehensive income (loss)                                                                     |   | —                      |       | —               |       | —                 |       | —                                               |        | 35,916                           |       |
|                                                                                                   |   |                        |       |                 |       |                   |       |                                                 |        |                             |       |
| Dividends on  common stock                                                                             |   | —                      |       | —               |       | (11,707                | )          | —                                               |        | (11,707                          | )          |
| Contribution  from parent company for reallocation of taxes                                            |   | —                      |       | 806                  |       | —                 |       | —                                               |        | 806                              |       |
| Ending balance                                                                                         |   | $                           | 8,780      |                 | $          | 21,111                 |       | $                                                    | 142,320     |                             | $          | (8 | ) | $ | 172,203 |   |
|                                                                                                   |   |                        |       |                 |       |                   |       |                                                 |        |                             |       |
| **2002**                                                                                               |   |                        |       |                 |       |                   |       |                                                 |        |                             |       |
| **Comprehensive  income:**                                                                             |   |                        |       |                 |       |                   |       |                                                 |        |                             |       |
| **Net  income**                                                                                        |   | **—**                  | ** ** | **—**           | ** ** | **12,150**             | ** ** | **—**                                           | ** **  | **12,150**                       | ** ** |
| **Other  comprehensive income (loss), net of tax effect of $36 Minimum pension  liability adjustment** |   | **—**                  | ** ** | **—**           | ** ** | **—**             | ** ** | **(52**                                              | **)**       | **(52**                          | **)**      |
| **Total  comprehensive income (loss)**                                                                 |   | **—**                  | ** ** | **—**           | ** ** | **—**             | ** ** | **—**                                           | ** **  | **12,098**                       | ** ** |
|                                                                                                   |   |                        | ** ** |                 | ** ** |                   | ** ** |                                                 | ** **  |                             | ** ** |
| **Dividends  on common stock**                                                                         |   | **—**                  | ** ** | **—**           | ** ** | **(9,670**             | **)**      | **—**                                           | ** **  | **(9,670**                       | **)**      |
| **Contribution  from parent company for reallocation of taxes**                                        |   | **—**                  | ** ** | **2,533**            | ** ** | **—**             | ** ** | **—**                                           | ** **  | **2,533**                        | ** ** |
| **Ending  balance**                                                                                    |   | **$**                       | **8,780**  | ** **           | **$**      | **23,644**             | ** ** | **$**                                                | **144,800** | ** **                       | **$**      | **(60** | **)** | **$** | **177,164** | ** ** |

 

**The accompanying notes as they relateto The Union Light, Heat and Power Company are an integral part of thesefinancial statements.**

 

122

----

 

**THE UNION LIGHT, HEAT AND POWER COMPANYSTATEMENTS OF CASH FLOWS**

 
|                                                                                  |   | **2002**                    |       | **2001**   |   | **2000** |   |
|---------------------------------------------------------------------------------------|--------|-----------------------------|------------|------------|--------|----------|--------|
|                                                                                  |   | **(dollars  in thousands)** |       |
|                                                                                  |   |                        |       |
| **Operating  Activities**                                                             |   |                        | ** ** |       |   |     |   |
| Net income                                                                            |   | **$**                       | **12,150** | ** ** | $      | 35,924   |   | $ | 24,632 |   |
| Items providing  or (using) cash currently:                                           |   |                        | ** ** |       |   |     |   |
| Depreciation                                                                          |   | **17,350**                  | ** ** | 17,039     |   | 15,685   |   |
| Deferred income  taxes and investment tax credits - net                               |   | **3,116**                   | ** ** | (7,116     | )      | 8,926    |   |
| Allowance for  equity funds used during construction                                  |   | **(794**                    | **)**      | (143       | )      | (61      | )      |
| Regulatory  assets deferrals                                                          |   | **3,954**                   | ** ** | 1,098      |   | (12      | )      |
| Regulatory  assets amortization                                                       |   | **(1,452**                  | **)**      | 1,038      |   | 271      |   |
| Accrued pension  and other postretirement benefit costs                               |   | **2,343**                   | ** ** | 154        |   | 790      |   |
| Changes in  current assets and current liabilities:                                   |   |                        | ** ** |       |   |     |   |
| Accounts and  notes receivable, net of reserves on receivables sold                   |   | **8,997**                   | ** ** | 12,112     |   | (14,269  | )      |
| Materials,  supplies, and fuel                                                        |   | **2,653**                   | ** ** | (4,535     | )      | 1,354    |   |
| Prepayments                                                                           |   | **(16**                     | **)**      | (26        | )      | (55      | )      |
| Accounts payable                                                                      |   | **6,997**                   | ** ** | (20,325    | )      | 15,832   |   |
| Accrued taxes  and interest                                                           |   | **(4,981**                  | **)**      | 12,239     |   | (6,582   | )      |
| Other assets                                                                          |   | **2,852**                   | ** ** | (1,838     | )      | 2,158    |   |
| Other  liabilities                                                                    |   | **7,538**                   | ** ** | 2,145      |   | 890      |   |
|                                                                                  |   |                        | ** ** |       |   |     |   |
| **Net  cash provided by (used in) operating activities**                              |   | **60,707**                  | ** ** | 47,766     |   | 49,559   |   |
|                                                                                  |   |                        | ** ** |       |   |     |   |
| **Financing  Activities**                                                             |   |                        | ** ** |       |   |     |   |
| Change in  short-term debt                                                            |   | **(12,356**                 | **)**      | (2,971     | )      | (8,349   | )      |
| Dividends on  common stock                                                            |   | **(9,670**                  | **)**      | (11,707    | )      | (9,657   | )      |
|                                                                                  |   |                        | ** ** |       |   |     |   |
| **Net  cash provided by (used in) financing activities**                              |   | **(22,026**                 | **)**      | (14,678    | )      | (18,006  | )      |
|                                                                                  |   |                        | ** ** |       |   |     |   |
| **Investing  Activities**                                                             |   |                        | ** ** |       |   |     |   |
| Construction  expenditures (less allowance for equity funds used during construction) |   | **(38,854**                 | **)**      | (35,449    | )      | (28,734  | )      |
|                                                                                  |   |                        | ** ** |       |   |     |   |
| **Net  cash provided by (used in) investing activities**                              |   | **(38,854**                 | **)**      | (35,449    | )      | (28,734  | )      |
|                                                                                  |   |                        | ** ** |       |   |     |   |
| **Net  increase (decrease) in cash and cash equivalents**                             |   | **(173**                    | **)**      | (2,361     | )      | 2,819    |   |
|                                                                                  |   |                        | ** ** |       |   |     |   |
| **Cash  and cash equivalents at beginning of period**                                 |   | **4,099**                   | ** ** | 6,460      |   | 3,641    |   |
|                                                                                  |   |                        | ** ** |       |   |     |   |
| **Cash  and cash equivalents at end of period**                                       |   | **$**                       | **3,926**  | ** ** | $      | 4,099    |   | $ | 6,460 |   |
|                                                                                  |   |                        | ** ** |       |   |     |   |
| **Supplemental  Disclosure of Cash Flow Information**                                 |   |                        | ** ** |       |   |     |   |
| Cash paid during  the year for:                                                       |   |                        | ** ** |       |   |     |   |
| Interest (net of  amount capitalized)                                                 |   | **$**                       | **5,067**  | ** ** | $      | 6,594    |   | $ | 6,103 |   |
| Income taxes                                                                          |   | **$**                       | **2,398**  | ** ** | $      | 10,848   |   | $ | 11,760 |   |

 

**The accompanying notes as they relateto The Union Light, Heat and Power Company are an integral part of thesefinancial statements.**

 

123

----

 

**THE UNION LIGHT, HEAT AND POWER COMPANYSTATEMENTS OF CAPITALIZATION**

 
|                                                                                                                                       |   | **December  31**            |        |
|--------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------|-------------|
|                                                                                                                                       |   | **2002**                    |        | **2001** |   |
|                                                                                                                                       |   | **(dollars  in thousands)** |        |
|                                                                                                                                       |   |                        |        |
| **Long-term  Debt** (excludes current portion)                                                                                             |   |                        |        |   |   |
|                                                                                                                                       |   |                        |        |   |   |
| Other Long-term  Debt:                                                                                                                     |   |                        |        |   |   |
| 6.11% Debentures  due December 8, 2003                                                                                                     |   | **$**                       | **—**  | ** ** | $ | 20,000 |   |
| 6.50% Debentures  due April 30, 2008                                                                                                       |   | **20,000**                  | ** **  | 20,000 |   |
| 7.65% Debentures  due July 15, 2025                                                                                                        |   | **15,000**                  | ** **  | 15,000 |   |
| 7.875%  Debentures due September 15, 2009                                                                                                  |   | **20,000**                  | ** **  | 20,000 |   |
| **Total  Other Long-term Debt**                                                                                                            |   | **55,000**                  | ** **  | 75,000 |   |
|                                                                                                                                       |   |                        | ** **  |   |   |
| Unamortized  Premium and Discount - Net                                                                                                    |   | **(347**                    | **)**       | (379 | ) |
| **Total  Long-term Debt**                                                                                                                  |   | **54,653**                  | ** **  | 74,621 |   |
|                                                                                                                                       |   |                        | ** **  |   |   |
| **Common  Stock Equity**                                                                                                                   |   |                        | ** **  |   |   |
| Common Stock -  $15.00 par value; authorized shares - 1,000,000; outstanding shares - 585,333  at December 31, 2002, and December 31, 2001 |   | **$**                       | **8,780**   | ** ** | $ | 8,780 |   |
| Paid-in capital                                                                                                                            |   | **23,644**                  | ** **  | 21,111 |   |
| Retained  earnings                                                                                                                         |   | **144,800**                 | ** **  | 142,320 |   |
| Accumulated  other comprehensive income (loss)                                                                                             |   | **(60**                     | **)**       | (8 | ) |
| **Total  Common Stock Equity**                                                                                                             |   | **177,164**                 | ** **  | 172,203 |   |
|                                                                                                                                       |   |                        | ** **  |   |   |
| **Total  Capitalization**                                                                                                                  |   | **$**                       | **231,817** | ** ** | $ | 246,824 |   |

 

**The accompanying notes as they relateto The Union Light, Heat and Power Company are an integral part of thesefinancial statements.**

 

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**NOTES TO FINANCIAL STATEMENTS**

 

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

 

**1.****              Summary ofSignificant Accounting Policies**

 

**(a)*****                                  Nature of Operations***

 

**Cinergy Corp.**, aDelaware corporation created in October 1994, owns all outstanding common stockof The Cincinnati Gas & Electric Company (**CG&E**)and PSI Energy, Inc. (**PSI**), bothof which are public utility subsidiaries. As a result of this ownership, we are considered a utility holdingcompany.  Because we are a holdingcompany with material utility subsidiaries operating in multiple states, we areregistered with and are subject to regulation by the Securities and ExchangeCommission (SEC) under the Public Utility Holding Company Act of 1935, asamended (PUHCA).  Our other principalsubsidiaries are:

 

•                  CinergyServices, Inc. (Services);

•                  CinergyInvestments, Inc. (Investments);

•                  CinergyGlobal Resources, Inc. (Global Resources); and

•      CinergyWholesale Energy, Inc. (Wholesale Energy).

 

**CG&E**, an Ohiocorporation, is a combination electric and gas public utility company thatprovides service in the southwestern portion of Ohio and, through itssubsidiaries, in nearby areas of Kentucky and Indiana.  **CG&E’s**principal subsidiary, The Union Light, Heat and Power Company (**ULH&P**), is a Kentucky corporation thatprovides electric and gas service in northern Kentucky.  **CG&E’s**other subsidiaries are insignificant to its results of operations.

 

In 2001, **CG&E** began atransition to electric deregulation and customer choice.  Currently, the competitive retail electricmarket in Ohio is in the development stage. **CG&E** is recovering itsPublic Utilities Commission of Ohio (PUCO) approved costs and retail electricrates are frozen during this market development period.  See Note 18 for a discussion of key elementsof Ohio deregulation.

 

**PSI**, an Indianacorporation, is a vertically integrated and regulated electric utility thatprovides service in north central, central, and southern Indiana.

 

125

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The following table presents further information related to theoperations of our domestic utility companies (our operating companies):

 

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

 

Services is a service company that provides our subsidiaries with avariety of centralized administrative, management, and support services.  Investments holds most of our domesticnon-regulated, energy-related businesses and investments, including gas marketingand trading operations.  Global Resourcesholds most of our international businesses and investments.

 

Wholesale Energy, through a wholly-owned subsidiary, Cinergy PowerGeneration Services, LLC (Generation Services), provides electricproduction-related construction, operation, and maintenance services to certainaffiliates and non-affiliated third parties.

 

We conduct operations through our subsidiaries and manage through thefollowing three business units:

 

•                  EnergyMerchant Business Unit (Energy Merchant);

•                  RegulatedBusinesses Business Unit (Regulated Businesses); and

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

 

For further discussion of business units see Note 16.

 

**(b)*****                                  Presentation***

 

Management makes estimates and assumptions when preparing financial statementsunder generally accepted accounting principles (GAAP).  Actual results could differ, as theseestimates and assumptions involve judgment. These estimates and assumptions affect various matters, including:

 

•                  thereported amounts of assets and liabilities in our Balance Sheets at the datesof the financial statements;

•                  thedisclosure of contingent assets and liabilities at the dates of the financialstatements; and

•                  thereported amounts of revenues and expenses in our Statements of Income duringthe reporting periods.

 

126

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Additionally, we have reclassified certain prior-year amounts in thefinancial statements of **Cinergy**, **CG&E**, **PSI**,and **ULH&P** to conform tocurrent presentation.

 

We use three different methods to report investments in subsidiaries orother companies: the consolidation method, the equity method, and the costmethod.

 

*(i)**                                  ConsolidationMethod*

 

We use the consolidation method when we own a majority of the votingstock of or have the ability to control a subsidiary.  We eliminate all significant intercompany transactions when weconsolidate these accounts.  Ourconsolidated financial statements include the accounts of **Cinergy**, **CG&E**,and **PSI**, and their wholly-ownedsubsidiaries.

 

*(ii)**                              EquityMethod*

 

We use the equity method to report investments, joint ventures,partnerships, subsidiaries, and affiliated companies in which we do not havecontrol, but have the ability to exercise influence over operating andfinancial policies (generally, 20 percent to 50 percent ownership).  Under the equity method we report:

 

•                  ourinvestment in the entity as *Investments inunconsolidated subsidiaries* in our Consolidated Balance Sheets; and

•                  ourpercentage share of the earnings from the entity as *Equity in earnings (losses) of unconsolidated subsidiaries*in our Consolidated Statements of Income.

 

*(iii)**                          CostMethod*

 

We use the cost method to report investments, joint ventures,partnerships, subsidiaries, and affiliated companies in which we do not havecontrol and are unable to exercise significant influence over operating andfinancial policies (generally, up to 20 percent ownership).  Under the cost method we report ourinvestments in the entity as *Otherinvestments*in our Balance Sheets.

 

**(c)*****                                  Regulation***

 

Our operating companies and certain of our non-utility subsidiariesmust comply with the rules prescribed by the SEC under the PUHCA.  Our operating companies must also complywith the rules prescribed by the Federal Energy Regulatory Commission (FERC) andthe state utility commissions of Ohio, Indiana, and Kentucky.

 

Our operating companies use the same accounting policies and practicesfor financial reporting purposes as non-regulated companies under GAAP.  However, sometimes actions by the FERC andthe state utility commissions result in accounting treatment different fromthat used by non-regulated companies. When this occurs, we apply the provisions of Financial AccountingStandards Board (FASB) Statement of Financial Accounting Standards No. 71, *Accounting for the Effects of Certain Types ofRegulation*(Statement 71). In accordance with Statement 71, we record regulatory assets andliabilities (expenses deferred for future recovery from customers orobligations to be refunded to customers) on our Balance Sheets.

 

127

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Comprehensive electric deregulation legislation was passed in Ohio onJuly 6, 1999.  As required by thelegislation, **CG&E** filed itsProposed Transition Plan for approval by the PUCO on December 28, 1999.  On August 31, 2000, the PUCO approved astipulation agreement relating to **CG&E’s**transitionplan.  This plan created a RegulatoryTransition Charge (RTC), designed to recover **CG&E’s**generation-related regulatory assets and transition costs over a ten-yearperiod which began January 1, 2001. Accordingly, Statement 71 was discontinued for the generation portion of**CG&E’s** business and Statementof Financial Accounting Standards No. 101, *RegulatedEnterprises - Accounting for the Discontinuation of Application of FASBStatement No. 71* was applied. The effect of this change on the financial statements wasimmaterial.  Except with respect to thegeneration-related assets and liabilities of **CG&E**,as of December 31, 2002, **PSI**, **CG&E**, and **ULH&P** continue to meet the criteria of Statement 71.  However, to the extent other statesimplement deregulation legislation, the application of Statement 71 will needto be reviewed.  Based on our operatingcompanies’ current regulatory orders and the regulatory environment in whichthey currently operate, the recovery of regulatory assets recognized in theaccompanying Balance Sheets as of December 31, 2002, is probable.  For a further discussion of Ohioderegulation see Note 18.

 

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Our regulatory assets and amounts authorized for recovery throughregulatory orders at December 31, 2002, and 2001, are as follows:

 
|                                                                  |   | **2002**           |       | **2001**   |       |
|-----------------------------------------------------------------------|--------|--------------------|------------|------------|------------|
|                                                                  |   | **CG&E**(1)    |       | **PSI**    |       | **Cinergy** |   | **CG&E**(1) |   | **PSI** |   | **Cinergy** |   |
|                                                                  |   | **(in  millions)** |       |
|                                                                  |   |               |       |
| Amounts due from  customers - income taxes(2)                         |   | **$**              | **53**     | ** ** | **$**      | **25** | ** ** | **$** | **78** | ** ** | $ | 57 |   | $ | 5 |   | $ | 62 |   |
| Gasification  services agreement buyout costs(3)(7)                   |   | **—**         | ** ** | **240**    | ** ** | **240** | ** ** | — |   | 244 |   | 244 |   |
| Post-in-service  carrying costs and deferred operating expenses(7)(8) |   | **1**              | ** ** | **42**     | ** ** | **43** | ** ** | — |   | 39 |   | 39 |   |
| Coal contract  buyout costs(4)(7)                                     |   | **—**         | ** ** | **10**     | ** ** | **10** | ** ** | — |   | 26 |   | 26 |   |
| Deferred  demand-side management costs                                |   | **—**         | ** ** | **3**      | ** ** | **3** | ** ** | — |   | 9 |   | 9 |   |
| Deferred merger  costs                                                |   | **1**              | ** ** | **51**     | ** ** | **52** | ** ** | 6 |   | 56 |   | 62 |   |
| Unamortized  costs of reacquiring debt                                |   | **9**              | ** ** | **30**     | ** ** | **39** | ** ** | 10 |   | 33 |   | 43 |   |
| Coal gasification  services expenses(7)                               |   | **—**         | ** ** | **4**      | ** ** | **4** | ** ** | — |   | 8 |   | 8 |   |
| RTC recoverable  assets(5)(7)                                         |   | **537**            | ** ** | **—** | ** ** | **537** | ** ** | 511 |   | — |   | 511 |   |
| Other                                                                 |   | **4**              | ** ** | **13**     | ** ** | **17** | ** ** | 9 |   | 3 |   | 12 |   |
|                                                                  |   |               | ** ** |       | ** ** |   | ** ** |   |   |   |   |   |   |
| Total regulatory  assets                                              |   | **$**              | **605**    | ** ** | **$**      | **418** | ** ** | **$** | **1,023** | ** ** | $ | 593 |   | $ | 423 |   | $ | 1,016 |   |
|                                                                  |   |               | ** ** |       | ** ** |   | ** ** |   |   |   |   |   |   |
| Authorized for  recovery(6)                                           |   | **$**              | **598**    | ** ** | **$**      | **360** | ** ** | **$** | **958** | ** ** | $ | 573 |   | $ | 379 |   | $ | 952 |   |

 

----

| (1) | Includes $5 million at December 31, 2002, and $8  million at December 31, 2001, related to **ULH&P**.  Of these amounts, $3.6 million at December  31, 2002, and $.6 million at December 31, 2001, have been authorized for  recovery.                                                                                                                                                                                                                                                                                                    |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | The various regulatory commissions overseeing the  regulated business operations of our operating companies regulate income tax  provisions reflected in customer rates.   In accordance with the provisions of Statement 71, we have recorded  net regulatory assets for **CG&E**  and**PSI**.                                                                                                                                                                                                                                           |
| (3) | **PSI** reached an  agreement with Dynegy, Inc. to purchase the remainder of its 25-year contract  for coal gasification services.  In  accordance with an order from the Indiana Utility Regulatory Commission  (IURC), **PSI** began recovering  this asset over an 18-year period that commenced upon the termination of the  gas services agreement in 2000.                                                                                                                                                                              |
| (4) | In August 1996, **PSI**  entered into a coal supply agreement, which expired December 31, 2000.  The agreement provided for a buyout  charge, which is being recovered through the fuel adjustment clause.                                                                                                                                                                                                                                                                                                                                    |
| (5) | In August 2000, **CG&E’s**  deregulation transition plan was approved.   Effective January 1, 2001, a RTC went into effect and provides for  recovery of all then existing generation-related regulatory assets and  various transition costs over a ten-year period.  Because a separate charge provides for recovery, these assets  were aggregated and are included as a single amount in this presentation.  The classification of all transmission and  distribution related regulatory assets has remained the same. |
| (6) | At December 31, 2002, these amounts were being  recovered through rates charged to customers over a period ranging from 1 to  50 years for **CG&E**, 1 to 31  years for **PSI**, and 1 to 18 years  for **ULH&P**.                                                                                                                                                                                                                                                                                                                         |
| (7) | Regulatory assets earning a return at December 31,  2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| (8) | For **PSI**  amount includes $10 million that is not yet authorized for recovery and  currently is not earning a return at December 31, 2002.                                                                                                                                                                                                                                                                                                                                                                                                      |

 

**(d)*****                                  Cash and Cash Equivalents***

 

We define *Cash equivalents*on our Balance Sheets and Statements of Cash Flows as investments withmaturities of three months or less when acquired.

 

**(e)*****                                  Operating Revenues, Energy Purchases, andFuel Costs***

 

Our operating companies record *OperatingRevenues*and associated expenses for electric and gas service whenthey provide the service to customers. Customers are billed throughout the month as both gas and electricmeters are read.  We recognize revenuesfor retail energy sales that have not yet been billed, but where gas orelectricity has been consumed.  This istermed

 

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“unbilled revenue” and is a widely recognized and accepted practice forutilities.  In making our estimates ofunbilled revenue we use complex systems that consider various factors,including weather, in our calculation of retail customer consumption at the endof each month.  Given the use of thesesystems and the fact that customers are billed monthly, we believe it isunlikely that materially different results will occur in future periods whenrevenue is billed.  Related receivablesare sold under the accounts receivable sales agreement and therefore are notreflected on our Balance Sheets.  SeeNote 6 for additional information.

 

The amount of unbilled revenues for **Cinergy**,**CG&E**, **PSI**, and **ULH&P**as of December 31, 2002, 2001, and 2000, were as follows:

 

|                         |   | **2002**           |    | **2001** |   | **2000** |   |
|------------------------------|--------|--------------------|---------|----------|--------|----------|--------|
|                         |   | **(in  millions)** |    |
|                         |   |               |    |
| **Cinergy**                  |   | **$**              | **153** |     | $      | 172      |   | $ | 231 |   |
| **CG&E**and subsidiaries |   | **89**             |    | 104      |   | 153      |   |
| **PSI**                      |   | **64**             |    | 68       |   | 78       |   |
| **ULH&P**                |   | **15**             |    | 18       |   | 26       |   |
|                              |        |                    |         |          |        |          |        |  |  |  |

 

The expenses associated with these electric and gas services include:

 

•                  fuelused to generate electricity;

•                  electricitypurchased from others;

•                  naturalgas purchased from others; and

•                  transportationcosts associated with the purchase of fuel, electricity, and natural gas.

 

These expenses are shown in the Statements of Income of **Cinergy**, **CG&E**,and **PSI** as *Fuel and purchased and exchanged power*expense and *Gas purchased*expense.  These expenses are shown in **ULH&P’s** Statements of Income as *Electricity purchased from parent for resale*expenseand *Gas purchased*expense.  Any portion of these costs that arerecoverable or refundable to customers in future periods is deferred in either *Accounts receivable*or *Accounts payable* in our Balance Sheets.

 

Indiana law limits the amount of fuel costs that **PSI** can recover to an amount that will notresult in earning a return in excess of that allowed by the IURC.  Due to deregulation in the state of Ohio,the recovery of fuel costs in retail electric rates has been frozen.

 

**PSI** utilizes apurchased power tracking mechanism (Tracker) approved by the IURC for therecovery of costs related to purchases of power necessary to meet native loadrequirements to the extent such costs are not recovered through the existingfuel adjustment clause.  See Note 11(m)for additional information.

 

**(f)*****                                    Inventory***

 

Natural gas inventory for Cinergy Marketing & Trading, LP(Marketing & Trading) is accounted for at fair value.  All other inventory is accounted for at thelower of cost or market, cost being determined through the weighted averagemethod.  Effective January 1, 2003,

 

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Marketing & Trading’s gas inventory will be adjusted to the costmethod with a cumulative effect adjustment, as required by Emerging Issues TaskForce (EITF) Issue 02-3, *Accounting forContracts Involved in Energy Trading and Risk Management Activities*(EITF 02-3).  See 1(q)(*i*) below for additional discussion of theimpacts of EITF 02-3.

 

**(g)*****                                 Property, Plant, and Equipment***

* *

*Property, Plant, and Equipment*includes the utility and non-regulated business property and equipment that isin use, being held for future use, or under construction.  We report our *Property, Plant, and Equipment* at its original cost, whichincludes:

 

•                  materials;

•                  salaries;

•                  payrolltaxes;

•                  fringebenefits;

•                  financingcosts of funds used during construction (described below in (i) and (j)); and

•                  othermiscellaneous amounts.

 

We capitalize costs for regulated property, plant, and equipment thatare associated with the replacement or the addition of equipment that isconsidered a property unit.  Property units are intended to describe anitem or group of items.  The cost ofnormal repairs and maintenance is expensed as incurred.  When regulated property, plant, andequipment is retired, **Cinergy**charges the original cost plus the cost of retirement, less salvage, toaccumulated depreciation.  A gain orloss is recorded on the sale of regulated property, plant, and equipment if anentire operating unit, as defined by the FERC, is sold.  A gain or loss is recorded on non-regulatedproperty, plant, and equipment whenever there is a related sale or retirement.

 

In August 2000, the generation assets of **CG&E** were released from the first mortgage indenturelien.  **CG&E’s**transmission and distribution assets, and any generating assets added afterAugust 2000, remain subject to the lien of the first mortgage bondindenture.  The utility property of **PSI** is also subject to the lien of itsfirst mortgage bond indenture.

 

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**(h)*****                                 Depreciation***

 

We determine the provisions for depreciation expense using thestraight-line method.  The depreciationrates are based on periodic studies of the estimated useful lives and the netcost to remove the properties. Inclusion of cost of removal in depreciation rates will be discontinuedfor all non-regulated property beginning in 2003 as a result of adoptingStatement of Financial Accounting Standards No. 143, *Accounting for Asset Retirement Obligations* (Statement143).  See (q)(*iii*) below for additional discussion ofthis change.  Our operating companiesuse composite depreciation rates, which are approved by the respective statecommissions.  The average depreciationrates for *Property, Plant, and Equipment*,excluding software, are presented in the table below.

 

|                           |   | **2002** |       | **2001** |   | **2000** |   |
|--------------------------------|--------|----------|------------|----------|--------|----------|--------|
|                           |   |     |       |     |   |     |   |
| **Cinergy**(1)                 |   | **3.0**  | **%**      | 3.0      | %      | 3.0      | %      |
|                           |   |     | ** ** |     |   |     |   |
| **CG&E**  and subsidiaries |   | **2.9**  | ** ** | 2.9      |   | 2.9      |   |
|                           |   |     | ** ** |     |   |     |   |
| **PSI**                        |   | **3.0**  | ** ** | 3.0      |   | 3.0      |   |
|                           |   |     | ** ** |     |   |     |   |
| **ULH&P**                  |   | **3.2**  | ** ** | 3.3      |   | 3.3      |   |

 

----

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

 

**(i)*****                                    Allowance for Funds Used During Construction(AFUDC)***

 

Our operating companies finance construction projects with borrowedfunds and equity funds.  Regulatoryauthorities allow us to record the costs of these funds as part of the cost ofconstruction projects.  AFUDC iscalculated using a methodology authorized by the regulatory authorities.  The borrowed funds component of AFUDC, whichis recorded on a pre-tax basis, for the years ended December 31, 2002, 2001,and 2000, were as follows:

 

|                           |   | **2002**           |     | **2001** |   | **2000** |   |
|--------------------------------|--------|--------------------|----------|----------|--------|----------|--------|
|                           |   | **(in  millions)** |     |
|                           |   |               |     |
| **Cinergy**                    |   | **$**              | **10.1** |     | $      | 8.4      |   | $ | 8.2 |   |
| **CG&E**  and subsidiaries |   | **1.0**            |     | 1.0      |   | 5.0      |   |
| **PSI**                        |   | **9.1**            |     | 7.4      |   | 3.2      |   |
| **ULH&P**                  |   | **0.2**            |     | 0.2      |   | 0.4      |   |
|                                |        |                    |          |          |        |          |        |  |  |  |

 

With the deregulation of **CG&E’s**generation assets, the AFUDC method is no longer used to capitalize the cost offunds used during generation-related construction at **CG&E**.  See (j) belowfor a discussion of capitalized interest.

 

**(j)*****                                    Capitalized Interest***

 

**Cinergy** capitalizesinterest costs for non-regulated construction projects in accordance withStatement of Financial Accounting Standards No. 34, *Capitalization of Interest Cost* (Statement 34).

 

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The primary differences from AFUDC are that Statement 34 methodologydoes not include a component for equity funds and does not emphasize short-termborrowings over long-term borrowings.  Capitalizedinterest costs, which are recorded on a pre-tax basis, for the years endedDecember 31, 2002, 2001, and 2000, were as follows:

 

|                           |   | **2002**           |       | **2001**   |   | **2000****(1)** |   |
|--------------------------------|--------|--------------------|------------|------------|--------|-----------------|--------|
|                           |   | **(in  millions)** |       |
|                           |   |               |       |
| **Cinergy**(2)                 |   | **$**              | **7.2**    | ** ** | $      | 7.1             |   | $ | — |   |
| **CG&E**  and subsidiaries |   | **7.2**            | ** ** | 5.5        |   | —          |   |
|                                |        |                    |            |            |        |                 |        |  |  |  |

 

----

| (1) | Amounts for 2000 were immaterial.                                            |
|-----|------------------------------------------------------------------------------|
| (2) | The results of **Cinergy**  also include amounts related to non-registrants. |

 

**(k)*****                                Federal and State Income Taxes***

 

Statement of Financial Accounting Standards No. 109, *Accounting for Income Taxes*, requires anasset and liability approach for financial accounting and reporting of incometaxes.  The tax effects of differencesbetween the financial reporting and tax basis of accounting are reported as *Deferred income tax assets*or*liabilities* in our Balance Sheets and arebased on currently enacted income tax rates.

 

Investment tax credits, which have been used to reduce our federalincome taxes payable, have been deferred for financial reporting purposes.  These deferred investment tax credits arebeing amortized over the useful lives of the property to which they arerelated.  For a further discussion ofincome taxes see Note 10.

 

**(l)*****                                    Financial Derivatives***

 

We use derivative financial instruments to manage:

 

•                  fundingcosts;

•                  exposureto fluctuations in interest rates; and

•                  exposureto foreign currency exchange rates.

 

We account for derivatives under Statement of Financial AccountingStandards No. 133, *Accounting for DerivativeInstruments and Hedging Activities* (Statement 133), which requiresall derivatives that are not exempted to be accounted for at fair value.  Changes in the derivative’s fair value mustbe recognized currently in earnings unless specific hedge accounting criteriaare met.  Gains and losses onderivatives that qualify as hedges can (a) offset related fair value changes onthe hedged item in the income statement for fair value hedges; or (b) berecorded in other comprehensive income for cash flow hedges.  To qualify for hedge accounting, financialinstruments must be designated as a hedge (for example, an offset of foreignexchange or interest rate risks) at the inception of the contract and must beeffective at reducing the risk associated with the hedged item.  Accordingly, changes in the fair values orcash flows of instruments designated as hedges must be highly correlated withchanges in the fair values or cash flows of the related hedged items.

 

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From time to time, we may use foreign currency contracts (for example,a contract obligating one party to buy, and the other to sell, a specifiedquantity of a foreign currency for a fixed price at a future date) and currencyswaps (for example, a contract whereby two parties exchange principal andinterest cash flows denominated in different currencies) to hedge foreigncurrency denominated purchase and sale commitments (cash flow hedges) andcertain of our net investments in foreign operations (net investment hedges)against currency exchange rate fluctuations. Reclassification of unrealized gains or losses on foreign currency cashflow hedges from other comprehensive income occurs when the underlying hedgeditem is recorded in income.

 

We also use interest rate swaps (an agreement by two parties toexchange fixed-interest rate cash flows for floating-interest rate cash flows)and treasury locks (an agreement that fixes the yield or price on a specifictreasury security for a specific period, which we sometimes use in connectionwith the issuance of fixed rate debt). Through December 31, 2000, we utilized the accrual method to account forthese interest rate swaps and treasury locks. Accordingly, gains and losses were calculated based on the currentperiod difference between the fixed-rate and the floating-rate interestamounts, using agreed upon notional amounts. These gains and losses were recognized in our Statements of Income as acomponent of *Interest* over thelife of the agreement.  Effective withour adoption of Statement 133 in the first quarter of 2001, we began accountingfor all derivatives (including interest rate swaps and treasury locks) usingfair value accounting, and we assess the effectiveness of any interest rateswaps and/or treasury locks used in hedging activities.

 

At December 31, 2002, the ineffectiveness of instruments that we haveclassified as cash flow hedges of variable-rate debt instruments was notmaterial.  Reclassification ofunrealized gains or losses on cash flow hedges of debt instruments from *Accumulated other comprehensive income* (*loss*) occurs as interest is accrued on thedebt instrument.  We currently estimatethat on an after-tax basis, $5 million of unrealized losses will bereclassified as a charge to *Interest*during the twelve-month period ending December 31, 2003.  See (q)(*iv*)below for further discussion of Statement 133.

 

**(m)*****                              Energy Marketing and Trading***

 

We market and trade electricity, natural gas, coal, and otherenergy-related products.  We designatetransactions as accrual or trading at the time they are originated.  Contracts are classified as accrual onlywhen we (a) have the intent and projected ability to fulfill substantially allobligations from company-owned assets, and (b) meet the requirements toconsider the contract a normal purchase or sale under Statement 133 (if aderivative), or meet the requirements to consider the contract non-tradingunder EITF Issue 98-10, *Accounting for Contracts Involved in Energy Tradingand Risk Management Activities*(EITF 98-10) (if not a derivativeunder Statement 133).  Suchclassification is generally limited to the sale of generation to third partieswhen it is not required to meet native load requirements (end-use customerswithin our public utility companies’ franchise service territory).  All other energy contracts (excludingelectric, coal, and gas purchase contracts for use in serving our native loadrequirements) are classified as trading. Gas trading is comprised of transactions for which gas is physicallydelivered to a customer (physical gas trading), as well as transactions thatare financial in nature for which delivery rarely occurs (financial gastrading).  Since **Cinergy** owns no gas production and haslimited transmission capabilities, all gas transactions (other than

 

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procurement and sale of gas to **CG&E**and **ULH&P** retail customers)are considered trading whether physical or financial.

 

We account for accrual transactions by recognizing revenues and costswhen the underlying commodity is delivered and trading transactions using thefair value method of accounting.  Underthe fair value method of accounting, unrealized trading transactions are shownat fair value in our Balance Sheets as *Energy risk management assets* and *Energy riskmanagement liabilities*.  InOctober 2002, the EITF reached a consensus in EITF 02-3 to rescind EITF98-10.  This decision will require thatnon-derivative contracts currently accounted for at fair value be accounted foron an accrual basis in the future.  See(q)(*i*) below for furtherdiscussion.

 

We reflect unrealized gains and losses, resulting from changes in fairvalue, on a net basis in *Operating Revenues*.  For physical gas trading and for all powertrading, we recognize both revenues and costs on a gross basis in *OperatingRevenues* and in *Fuel and purchased and exchanged power*expense and *Gas purchased*expense, respectively, whentransactions are settled.  For financialgas trading, realized gains and losses are recorded on a net basis in *Operating Revenues*when transactions aresettled*.*  EITF 02-3 will also require realized andunrealized gains and losses on all energy trading derivatives to be presentednet in *Operating Revenues*,beginning in 2003.  See (q)(*i*) below for further discussion.

 

Although we intend to settle accrual contracts with company-ownedassets, occasionally we settle these contracts with purchases on the opentrading markets.  The cost of thesepurchases could be in excess of the associated revenues.  We recognize the gains or losses on thesetransactions as delivery occurs.  Due tothe infrequency of such settlements, both historical and projected, and thefact that physical settlement to the customer still occurs, we continue toapply the normal purchases and sales exemption to such physical contracts thatconstitute derivatives.  Open market purchasesmay occur for the following reasons:

 

•                  generating station outages;

•                  least-costalternative;

•                  nativeload requirements; and

•                  extremeweather.

 

We anticipate that some of the electricity obligations, even thoughconsidered trading contracts, will ultimately be settled using company-ownedgeneration.  The cost of this generationis usually below the market price at which the trading portfolio has beenvalued.  The potential for earningsvolatility from period to period is increased due to the risks associated withmarketing and trading electricity, natural gas, and other energy-relatedproducts.

 

We value contracts in the trading portfolio using end-of-the-periodfair values, utilizing the following factors (as applicable):

 

•                  closingexchange prices (that is, closing prices for standardized electricity andnatural gas products traded on an organized exchange, such as the New YorkMercantile Exchange);

•                  broker-dealerand over-the-counter price quotations; and

 

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•                  modelpricing (which considers time value and historical volatility factors ofelectricity and natural gas).

 

**(n)*****                                 Business Combinations and Intangible Assets***

 

We account for business combinations using the purchase method.  Goodwill and other intangibles withindefinite lives are no longer amortized. Prior to January 1, 2002, we amortized goodwill on a straight-line basisover its estimated useful life, not to exceed 40 years.  The discontinuance of this amortization wasnot material to our financial position or results of operations.  Goodwill is assessed for impairmentannually, or when circumstances indicate that the fair value of a reportingunit has declined significantly, by applying a fair-value-based test.  This test is applied at the “reporting unit”level, which is not broader than the current business segments discussed inNote 16.  Acquired intangible assets areseparately recognized if the benefit of the intangible asset is obtained throughcontractual or other legal rights, or if the intangible asset can be sold,transferred, licensed, rented, or exchanged, regardless of intent to do so.

 

**(o)*****                                  Impairment of Long-Lived Assets***

 

We evaluate long-lived assets for impairment when events or changes incircumstances indicate that the carrying value of such assets may not berecoverable.  The determination ofwhether an impairment has occurred is based on an estimate of undiscountedfuture cash flows attributable to the assets, as compared with the carryingvalue of the assets.  If an impairmenthas occurred, the amount of the impairment recognized is determined byestimating the fair value of the assets and recording a provision for animpairment loss if the carrying value is greater than the fair value.  Until the assets are disposed of, theirestimated fair value is reevaluated when circumstances or events change.

 

In 2002, **Cinergy** soldand/or classified as held for sale, certain non-core investments.  Pursuant to Statement of FinancialAccounting Standards No. 144, *Accounting forImpairment of Long-Lived Assets* (Statement 144), these investmentshave been classified as *Discontinuedoperations, net of tax* in our financial statements.  See Note 15 for further information.

 

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**(p)*****                                  Stock-Based Compensation***

 

We have historically accounted for our stock-based compensation plansusing the intrinsic value method under Accounting Principles Board (APB)Opinion No. 25, *Accounting for Stock Issuedto Employees* (APB 25) (see Note 2 for further information on ourstock-based compensation plans).  InJuly 2002, we announced that we would prospectively adopt the fair valuerecognition provisions of Statement of Financial Accounting Standards No. 123, *Accounting for Stock-Based Compensation*(Statement123), as amended by Statement of Financial Accounting Standards No. 148, *Accounting for Stock-Based Compensation-Transitionand Disclosure* (Statement 148), for all employee awards granted ormodified after January 1, 2003.  Thefollowing table illustrates the effect on our *Netincome* and *Earnings per share*(EPS) if the fair value based method had been applied to all outstanding andunvested awards in each period.

 

|                                 |                                                                                                                            | **Year Ended  December 31**                          |       |
|--------------------------------------|---------------------------------------------------------------------------------------------------------------------------------|------------------------------------------------------|------------|
|                                 |                                                                                                                            | **(dollars  in millions, except per share amounts)** |       |
|                                 |                                                                                                                            | **2002**                                             |       | **2001** |   | **2000** |   |
|                                 |                                                                                                                            |                                                 |       |
|                                 |                                                                                                                            |                                                 |       |
| Net income, as  reported             |                                                                                                                            | **$**                                                | **361**    | ** ** | $ | 442 |   | $ | 399 |   |
|                                 |                                                                                                                            |                                                 | ** ** |   |   |   |   |
| Add:                                 | Stock-based employee compensation expense included  in reported net income, net of related tax effects.                         |                                                 | **24**     | ** ** | 13 |   | 9 |   |
|                                 |                                                                                                                            |                                                 |       |   |   |   |   |   |
| Deduct:                              | Stock-based employee compensation expense determined  under fair value based method for all awards, net of related tax effects. |                                                 | **23**     | ** ** | 13 |   | 9 |   |
|                                 |                                                                                                                            |                                                 |       |   |   |   |   |
| Pro-forma net  income                |                                                                                                                            | **$**                                                | **362**    | ** ** | $ | 442 |   | $ | 399 |   |
|                                 |                                                                                                                            |                                                 | ** ** |   |   |   |   |
| EPS - as  reported                   |                                                                                                                            | **$**                                                | **2.16**   | ** ** | $ | 2.78 |   | $ | 2.51 |   |
| EPS - pro-forma                      |                                                                                                                            | **$**                                                | **2.17**   | ** ** | $ | 2.78 |   | $ | 2.51 |   |
|                                 |                                                                                                                            |                                                 | ** ** |   |   |   |   |
| EPS assuming  dilution - as reported |                                                                                                                            | **$**                                                | **2.13**   | ** ** | $ | 2.75 |   | $ | 2.50 |   |
| EPS assuming  dilution - pro-forma   |                                                                                                                            | **$**                                                | **2.14**   | ** ** | $ | 2.75 |   | $ | 2.50 |   |

 

In estimating the pro-forma amounts, the fair value method ofaccounting was not applied to options granted prior to January 1, 1995.  This is in accordance with the provisions ofStatement 123, as amended by Statement 148. As a result, the pro-forma effect on *NetIncome* and *EPS* may notbe representative of future years.  Inaddition, the pro-forma amounts reflect certain assumptions used in estimatingfair values.  These fair valueassumptions are described in Note 2.

 

**(q)*****                                  Accounting Changes***

 

*(i)**                                  EnergyTrading*

 

The EITF has been discussing several issues related to the accountingand disclosure of energy trading activities under EITF 98-10.  In October 2002, the EITF reached consensusin EITF 02-3, to (a) rescind EITF 98-10, (b) generally preclude the recognitionof gains at the inception of new derivatives, and (c) require all realized andunrealized gains and losses on energy trading derivatives to be presented netin the Statements of Income, whether or not settled physically.

 

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The consensus to rescind EITF 98-10 will require all energy tradingcontracts that do not qualify as derivatives to be accounted for on an accrualbasis, rather than at fair value.  Theconsensus was immediately effective for all new contracts executed afterOctober 25, 2002, and will require a cumulative effect adjustment to income,net of tax, on January 1, 2003, for all contracts executed on or prior toOctober 25, 2002.  The cumulative effectadjustment, on a net of tax basis, will be a loss of approximately $13 million,which includes primarily the impact of coal contracts accounted for at fairvalue, gas inventory accounted for at fair value, and certain gascontracts.  We expect the value of theseitems to be realized when the contracts settle.  The general restriction on recognition of inception gains is notexpected to have a material impact on our future financial position or resultsof operations.

 

The consensus to require all gains and losses on energy tradingderivatives to be presented net in the Statements of Income is effectivebeginning January 1, 2003, and will require restatement for all periodspresented.  This will result insubstantial reductions in reported *OperatingRevenues, Fuel and purchased and exchanged power*expense, and*Gas purchased*expense.  However, *OperatingIncome* and *Net Income*will not be affected by this change. Pro-forma *Operating Revenues*for**Cinergy**, **CG&E**, and **PSI** for the year ended December 31, 2002, under thisrequirement would have been as follows:

 

|                           |   | **2002**           |      |
|--------------------------------|--------|--------------------|-----------|
|                           |   | **(in  millions)** |      |
|                           |   |               |      |
| **Cinergy**(1)                 |   | **$**              | **4,028** |   |
| **CG&E**  and subsidiaries |   | **2,154**          |      |
| **PSI**                        |   | **1,623**          |      |
|                                |        |                    |           |  |

 

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

 

*(ii)**                              BusinessCombinations and Intangible Assets*

 

In June 2001, the FASB issued Statement of Financial AccountingStandards No. 141, *Business Combinations*(Statement 141), and No. 142, *Goodwill andOther Intangible Assets* (Statement 142).  Statement 141 requires all business combinations initiated afterJune 30, 2001, to be accounted for using the purchase method.  With the adoption of Statement 142, goodwilland other intangibles with indefinite lives will no longer be subject toamortization.  Statement 142 requiresthat goodwill be assessed for impairment upon adoption and at least annuallythereafter by applying a fair-value-based test, as opposed to the undiscountedcash flow test applied under prior accounting standards.  This test must be applied at the “reportingunit” level, which is not permitted to be broader than the current businesssegments discussed in Note 16.  UnderStatement 142, an acquired intangible asset should be separately recognized ifthe benefit of the intangible asset is obtained through contractual or otherlegal rights, or if the intangible asset can be sold, transferred, licensed,rented, or exchanged, regardless of the acquirer’s intent to do so.

 

We began applying Statement 141 in the third quarter of 2001 andStatement 142 in the first quarter of 2002. The discontinuance of amortization of goodwill, which began in the firstquarter of 2002, was not material to our financial position or results ofoperations.  We finalized our transitionimpairment test in the fourth quarter of 2002 and have recognized a non-cashimpairment charge of approximately $11 million (net of tax) for goodwillrelated to certain of

 

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our international assets.  Thischarge reflects a general decline in value of international assets.  Additionally, **Cinergy’s** combined heat and power plants located in the CzechRepublic faced downward pressure in their selling prices for electricity due tothe continued restructuring of the market in that country.  In calculating this impairment charge, thefair value of the reporting unit was determined through both discounted cashflow analysis and offers being considered on certain businesses within thereporting unit.  This amount isreflected in **Cinergy’s** Statementsof Income as a *Cumulative effect of a changein accounting principle*. While Statement 142 did not require the initial transition impairmenttest to be completed until December 31, 2002, it requires any transitionimpairment charge to be reflected as of January 1, 2002.  As such, Note 14 reconciles *Net Income*and *EPS* from the amounts originally presented in the firstquarter of 2002 to the amounts revised for this change.  We will continue to perform goodwillimpairment tests annually, as required by Statement 142, or when circumstancesindicate that the fair value of a reporting unit has declined significantly.

 

*(iii)**                          AssetRetirement Obligations*

 

In July 2001, the FASB issued Statement 143, which requires fair valuerecognition of legal obligations associated with the retirement or removal oflong-lived assets at the time the obligations are incurred.  The initial recognition of this liabilitywill be accompanied by a corresponding increase in property, plant, andequipment.  Subsequent to the initialrecognition, the liability will be adjusted for any revisions to the expectedcash flows of the retirement obligation (with corresponding adjustments toproperty, plant, and equipment), and for accretion of the liability due to thepassage of time (recognized as an operating expense).  Additional depreciation expense will be recorded prospectivelyfor any property, plant, and equipment increases.  We adopted Statement 143 on January 1, 2003.  The impact of adoption on our results ofoperations will be reflected as a cumulative effect adjustment to income, netof tax.

 

We currently accrue costs of removal on many long-lived assets throughdepreciation expense if we believe removal of the assets at the end of theiruseful life is likely.  The SEC staffhas interpreted Statement 143 to disallow the accrual of cost of removal whenno obligation exists under Statement 143, even if removal of the asset islikely.  Any amounts currently recordedin *Accumulated depreciation* mustbe removed through the cumulative effect adjustment on January 1, 2003.  However, if accruing cost of removal isallowed for ratemaking purposes and Statement 71 is applicable, accumulatedcost of removal will not be reversed upon adoption of Statement 143.  Rather, the amount of accrued cost ofremoval will remain, but will be disclosed in all future periods.  **PSI**,**CG&E**, except for itsgeneration assets, and **ULH&P**expect to continue to accrue costs of removal under Statement 71.

 

We are finalizing our evaluation of the impact of adopting Statement143.  However, we have not determinedwhether its impact will be material pending (a) resolution of certain legalconclusions and (b) final calculations on the amount of accumulated cost ofremoval to be reversed upon adoption for **CG&E’s**generation assets.

 

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*(iv)**                            Derivatives*

 

During 1998, the FASB issued Statement 133.  This standard was effective for **Cinergy**beginning in 2001, and requires us to record derivative instruments, which arenot exempt under certain provisions of Statement 133, as assets or liabilities,measured at fair value (i.e., mark-to-market). Our financial statements reflect the adoption of Statement 133 in thefirst quarter of 2001.  Since many ofour derivatives were previously required to use fair value accounting, theeffects of implementation were not material.

 

Our adoption did not reflect the potential impact of applying fairvalue accounting to selected electricity options and capacity contracts.  We had not historically accounted for theseinstruments at fair value because they were intended as either hedges of peakperiod exposure or sales contracts served with physical generation, neither ofwhich were considered trading activities. At adoption, we classified these contracts as normal purchases or salesbased on our interpretation of Statement 133 and in the absence of definitiveguidance on such contracts.  In June2001, the FASB staff issued guidance on the application of the normal purchasesand sales exemption to electricity contracts containing characteristics ofoptions.  While many of the criteria inthis guidance are consistent with the existing guidance in Statement 133, somecriteria were added.  We adopted the newguidance in the third quarter of 2001, and the effects of implementation forthese contracts were not material to our financial position or results ofoperations.  We will continue to applythis guidance to any new electricity contracts that meet the definition of aderivative.

 

In December 2001, the FASB staff revised the current guidance to makethe evaluation of whether electricity contracts qualify as normal purchases andsales more qualitative than quantitative. This new guidance uses several factors to distinguish between capacitycontracts, which qualify for the normal purchases and sales exemption, andoptions, which do not.  These factorsinclude deal tenor, pricing structure, specification of the source of power,and various other factors.  We adoptedthis guidance in the third quarter of 2002, and its impact was not material toour financial position or results of operations.

 

In October 2001, the FASB staff released final guidance on theapplicability of the normal purchases and sales exemption to contracts thatcontain a minimum quantity (a forward component) and flexibility to takeadditional quantity at a fixed price (an option component).  While this guidance was issued primarily toaddress optionality in fuel supply contracts, it applies to all derivatives(subject to certain exceptions for capacity contracts in electricity discussedin the previous paragraphs).  Thisguidance concludes that such contracts are not eligible for the normalpurchases and sales exemption due to the existence of optionality in thecontract.  We adopted this guidance inthe second quarter of 2002, consistent with the transition provisions.  **Cinergy**has certain contracts that contain fixed-price optionality, primarily coalcontracts, which we reviewed to determine the impact of this new guidance.  Due to a lack of liquidity with respect tocoal markets in our region, we determined that our coal contracts do not meetthe net settlement criteria of Statement 133 and thus do not qualify as derivatives.  Given these conclusions, the results ofapplying this new guidance were not material to our financial position orresults of operations.

 

In May 2002, the FASB issued an exposure draft that would amendStatement 133 to incorporate certain implementation conclusions reached by theFASB staff.  We do not believe the

 

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amendments, as currently drafted, will have a material effect on ourfinancial position or results of operations.

 

*(v)**                                AssetImpairment*

 

In August 2001, the FASB issued Statement 144, which addressesaccounting and reporting for the impairment or disposal of long-livedassets.  Statement 144 was effectivebeginning with the first quarter of 2002. The impact of implementation on our financial position or results ofoperations was not material.

 

*(vi)**                            ExitActivities*

 

In August 2002, the FASB issued Statement of Financial AccountingStandards No. 146, *Accounting for CostsAssociated with Exit or Disposal Activities* (Statement 146).  Statement 146 addresses accounting andreporting for the recognition of exit costs, including, but not limited to,one-time employee benefit terminations, contract cancellations, and facilityconsolidations.  This statement requiresthat such costs be recognized only when they meet the definition of a liabilityunder GAAP.  However, Statement 146applies only to exit activities initiated in 2003 and after.  All costs recorded through December 31,2002, are unaffected by this pronouncement. The impact of implementation on our financial position or results ofoperations is not expected to be material.

 

*(vii)**                        Accountingfor Stock-Based Compensation*

 

We have historically accounted for our stock-based compensation plansunder APB 25*. *In July 2002, **Cinergy**announced that it would adopt Statement 123 for all employee awards granted ormodified after January 1, 2003, and would begin measuring the compensation costof stock-based awards under the fair value method.  In December 2002, the FASB issued Statement 148, which amendsStatement 123 and APB Opinion No. 28, *InterimFinancial Reporting.* Statement 148 provides alternative methods of transition to Statement123 and more expanded disclosures about the method of accounting forstock-based employee compensation and the effect of the method used on reportedresults in both annual and interim financial statements.  **Cinergy**adoptedStatement 148 on January 1, 2003, and has adopted the transition provisionsthat require expensing options prospectively in the year of adoption,consistent with the original pronouncement. Existing awards will continue to follow the intrinsic value methodprescribed by APB 25.  The impact ofadoption on our financial position and results of operations, assuming awardlevels and fair values similar to past years, is not material.  This change will primarily impact theaccounting for stock options and other performance based awards related to theCinergy Corp. 1996 Long-Term Incentive Compensation Plan (LTIP) and CinergyCorp. Employee Stock Purchase and Savings Plan.  See Note 2 for additional information.

 

*(viii)**                    Guarantees*

 

In November 2002, the FASB issued Interpretation No. 45, *Guarantor’s Accounting and Disclosure Requirementsfor Guarantees, Including Indirect Guarantees of Indebtedness of Others*(Interpretation 45).  Interpretation 45addresses accounting and reporting obligations under certain guarantees.  It requires a guarantor to recognize, at theinception of a guarantee, a liability for the fair value of the obligationundertaken in issuing the guarantee. The initial

 

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recognition and measurement provisions of Interpretation 45 areapplicable to guarantees issued or modified after December 31, 2002.  However, the incremental disclosurerequirements in Interpretation 45 are effective for this annual report.  The impact of implementation on ourfinancial position or results of operations is not expected to be material.  For a further discussion of guarantees, seeNote 11(b).

 

*(ix)**                            Consolidationof Special Purpose Entities*

 

The FASB issued Interpretation No. 46, *Consolidationof Variable Interest Entities* in January 2003.  This interpretation will significantlychange the consolidation requirements for special purpose entities (SPE).  We have begun reviewing the impact of thisinterpretation but have not yet concluded whether consolidation of certain SPEswill be required.  There are two SPEsfor which consolidation may be required. These SPEs have individual power sale agreements to an unrelated thirdparty for approximately 45 megawatts (MW), ending in 2009, and 35 MW, ending in2016.  In addition, the SPEs haveindividual power purchase agreements with Cinergy Capital & Trading, Inc.(Capital & Trading) to supply the power.  Capital & Trading also provides various services, including certaincredit support facilities.

 

**Cinergy’s**quantifiable exposure to loss as a result of involvement with these two SPEs is$28 million, which includes investments in these entities of $3 million and exposureunder the capped credit facilities of approximately $25 million.  There is also a non-capped facility, but itcan only be called upon in the event the SPE breaches representations, violatescovenants, or other unlikely events.

 

If appropriate, consolidation of all assets and liabilities of thesetwo SPEs, at their carrying values, will be required in the third quarter of2003.  Approximately $225 million ofnon-recourse debt would be included in **Cinergy’s**Balance Sheets upon initial consolidation. However, the impact on results of operations would be expected to beimmaterial.

 

**Cinergy** believesthat its accounts receivable sale facility, as discussed in Note 6, wouldremain unconsolidated since it involves transfers of financial assets to aqualifying SPE, which is exempted from consolidation by Statement of FinancialAccounting Standards No. 140, *Accounting forTransfers and Servicing of Financial Assets and Extinguishments of Liabilities*(Statement 140) and this interpretation.

 

**(r)****                                  *Translationof Foreign Currency***

 

We translate the assets and liabilities of foreign subsidiaries, whosefunctional currency (generally, the local currency of the country in which thesubsidiary is located) is not the United States (U.S.) dollar, using theappropriate exchange rate as of the end of the year.  We translate income and expense items using the average exchangerate prevailing during the month the respective transaction occurs.  We record translation gains and losses in *Accumulated other comprehensive income (loss)*,which is a component of common stock equity. When a foreign subsidiary is sold, the cumulative translation gain orloss as of the date of sale is removed from *Accumulatedother comprehensive income (loss)* and is recognized as a componentof the gain or loss on the sale of the subsidiary in our Statements of Income.

 

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**(s)****                                  *RelatedParty Transactions***

 

**Cinergy** and itssubsidiaries engage in related party transactions.  These transactions, which are eliminated upon consolidation, aregenerally performed at cost and in accordance with the SEC regulations underthe PUHCA and the applicable state and federal commission regulations.  The Balance Sheets of our operatingcompanies reflect amounts payable to and/or receivable from related parties as *Accounts payable to affiliated companies*and *Accounts receivable from affiliatedcompanies*.  The significantrelated party transactions are disclosed below.

 

*(i)**                                  Services*

 

Services provides our regulated and non-regulated subsidiaries with avariety of centralized administrative, management, and support services inaccordance with agreements approved by the SEC under the PUHCA.  The cost of these services are charged toour operating companies on a direct basis, or for general costs which cannot bedirectly attributed, based on predetermined allocation factors, including thefollowing ratios:

 

•                  sales;

•                  electricpeak load;

•                  numberof employees;

•                  numberof customers;

•                  constructionexpenditures; and

•                  otherstatistical information.

 

These costs were as follows for the years ended December 31, 2002,2001, and 2000:

 

|                           |   | **2002**           |    | **2001** |   | **2000** |   |
|--------------------------------|--------|--------------------|---------|----------|--------|----------|--------|
|                           |   | **(in  millions)** |    |
|                           |   |               |    |
| **Cinergy**(1)                 |   | **$**              | **472** |     | $      | 483      |   | $ | 479 |   |
| **CG&E**  and subsidiaries |   | **206**            |    | 240      |   | 250      |   |
| **PSI**                        |   | **190**            |    | 196      |   | 187      |   |
| **ULH&P**                  |   | **23**             |    | 24       |   | 25       |   |
|                                |        |                    |         |          |        |          |        |  |  |  |

 

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

 

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Generation Services, which began operations on January 1, 2001,supplies electric production-related construction, operation and maintenanceservices to certain of our subsidiaries pursuant to agreements approved by theSEC under the PUHCA.  The cost of theseservices were as follows for the years ended December 31, 2002 and 2001:

 

|           |   | **2002(2)**       |    | **2001** |   |
|----------------|--------|-------------------|---------|----------|--------|
|           |   | **(in millions)** |    |
|           |   |              |    |
| **Cinergy**(1) |   | **$**             | **179** |     | $      | 92 |   |
| **CG&E**   |   | **104**           |    | 67       |   |
| **PSI**        |   | **58**            |    | 21       |   |
|                |        |                   |         |          |        |  |  |

 

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| (1) | The results of **Cinergy**  also include amounts related to non-registrants.    |
|-----|---------------------------------------------------------------------------------|
| (2) | Increase reflects movement of Services’ employees to  Generation Services. |

 

*(ii)**                              PurchasedEnergy*

 

**ULH&P** purchasesenergy from **CG&E** pursuant to anew contract effective January 1, 2002, which was approved by the FERC and theKentucky Public Service Commission (KPSC). This five-year agreement is a negotiated fixed-rate contract with **CG&E** and replaces the previouscost-of-service based contract, which expired on December 31, 2001.  **ULH&P**purchased energy from **CG&E** forresale in the amounts of $160 million, $152 million, and $160 million for theyears ended 2002, 2001, and 2000, respectively.  These amounts are reflected in the Statements of Income for **ULH&P** as *Electricity purchased from parent company for resale*.

 

**PSI** and **CG&E** purchase energy from each otherunder various federal and state approved joint operating agreements.  These sales and purchases are reflected inthe Statements of Income of **PSI**and **CG&E** as *Electric operating revenues* and *Fuel and purchased and exchanged power*expense and were as follows for the years ended December 31, 2002, 2001, and2000:

 

|                                    |   | **2002**           |   | **2001** |   | **2000** |   |
|-----------------------------------------|--------|--------------------|--------|----------|--------|----------|--------|
|                                    |   | **(in  millions)** |   |
|                                    |   |               |   |
| **CG&E**                            |   |               |   |     |   |     |   |
| Electric  operating revenues            |   | **$**              | **59** |     | $      | 90       |   | $ | 111 |   |
| Fuel and  purchased and exchanged power |   | **43**             |   | 92       |   | 94       |   |
| **PSI**                                 |   |               |   |     |   |     |   |
| Electric  operating revenues            |   | **43**             |   | 92       |   | 94       |   |
| Fuel and  purchased and exchanged power |   | **59**             |   | 90       |   | 111      |   |
|                                         |        |                    |        |          |        |          |        |  |  |  |

 

To supplement native load requirements for 2002, **CG&E** and **PSI** agreed to purchase peaking power from Capital &Trading, an indirect wholly-owned subsidiary of **Cinergy Corp.**, pursuant to the terms of a wholesalemarket-based tariff.  For the year endedDecember 31, 2002, payments under these contracts totaled approximately $27million for **CG&E** and $28million for **PSI**.  To the extent these payments were deferredfor future recovery, the amounts are included in *Regulatory assets* on the Balance Sheets of **CG&E** and **PSI**.  The remaining

 

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payments are reflected as *Fuel andpurchased and exchanged power* expense on the Statements of Incomefor **CG&E** and **PSI**.

 

**CG&E** and **PSI** have an agreement with Marketing &Trading to purchase gas for certain gas-fired peaking plants pursuant to theterms of the wholesale market-based agreements.  **CG&E** purchasednatural gas from Marketing & Trading in the amount of $9 million and $12million for the years ended December 31, 2002 and 2001, respectively.  **PSI**purchased natural gas from Marketing & Trading in the amount of $5 millionand $4 million for the years ended December 31, 2002 and 2001,respectively.  The amounts are reflectedin the Statements of Income of **CG&E**and **PSI** as *Fuel and purchased and exchanged power*expense.

 

*(iii)**                          Other*

 

In December 2001, **CG&E**and **ULH&P** entered intoagreements with Mirant Americas Energy Marketing, LP (Mirant) in which **CG&E** and **ULH&P** assigned Mirant the rights to **CG&E’s** and **ULH&P’s** gas supply contracts, interstate pipelinetransportation contracts and gas in storage, and Mirant agreed to deliver gasto meet **CG&E’s** and **ULH&P’s** firm gas requirements, and topay **CG&E** and **ULH&P** monthly fees.  Mirant assigned these contracts and theagreements to Marketing & Trading in November 2002, and **CG&E** and **ULH&P** consented to such assignments.  The agreements will expire in October2003.  Payments under these agreementswere approximately $33 million and $7 million for **CG&E** and **ULH&P**,respectively.  These amounts arerecorded in the Statements of Income for **CG&E**and **ULH&P** as *Gas purchased* expense.  The assignment of the Mirant/**ULH&P** agreements are subject to theapproval of the KPSC, and **ULH&P**has filed an application with the KPSC seeking such approval.  No other regulatory approvals are required.

 

**Cinergy Corp.** andour operating companies participate in a money pool arrangement by which thosecompanies with surplus cash provide short-term loans to others.   For a further discussion on the money poolagreement see Note 5.

 

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**2.****              Common Stock**

 

**(a)****                                  *Changes InCommon Stock Outstanding***

 

The following table reflects information related to shares of commonstock issued for stock-based plans.

 
|                                                                     |   | **Shares**          |   |                         |   |
|--------------------------------------------------------------------------|--------|---------------------|--------|------------------------------|--------|
|                                                                     |   | **Authorized  for** |   | **Shares  Used to Grant or** |   |
|                                                                     |   | **Issuance  under** |   | **Settle  Awards**           |   |
|                                                                     |   | **Plan**            |   | **2002**                     |   | **2001** |   | **2000** |   |
| LTIP                                                                     |   | 14,500,000          |   | **674,005**                  |   | 72,225 |   | 93,855 |   |
|                                                                     |   |                |   |                         |   |   |   |   |   |
| Cinergy Corp.  Stock Option Plan (SOP)                                   |   | 5,000,000           |   | **870,867**                  |   | 263,070 |   | 108,941 |   |
|                                                                     |   |                |   |                         |   |   |   |   |   |
| Cinergy Corp.  Employee Stock Purchase and Savings Plan                  |   | 2,000,000           |   | **4,912**                    |   | 227,847 |   | 2,718 |   |
|                                                                     |   |                |   |                         |   |   |   |   |   |
| Cinergy Corp. UK  Sharesave Scheme                                       |   | 75,000              |   | **8,878**                    |   | 121 |   | — |   |
|                                                                     |   |                |   |                         |   |   |   |   |   |
| Cinergy Corp.  Retirement Plan for Directors                             |   | 175,000             | (1)    | **1,768**                    |   | 29,135 |   | 9,435 |   |
|                                                                     |   |                |   |                         |   |   |   |   |   |
| Cinergy Corp.  Directors’ Equity Compensation Plan                  |   | 75,000              |   | **196**                      |   | 1,858 |   | 150 |   |
|                                                                     |   |                |   |                         |   |   |   |   |   |
| Cinergy Corp.  Directors’ Deferred Compensation Plan                |   | 200,000             |   | **—**                   |   | 14,211 |   | — |   |
|                                                                     |   |                |   |                         |   |   |   |   |   |
| Cinergy Corp.  401(k) Plans                                              |   | 6,469,373           | (1)    | **964,615**                  |   | 69,500 |   | — |   |
|                                                                     |   |                |   |                         |   |   |   |   |   |
| Cinergy Corp.  Direct Stock Purchase and Dividend Reinvestment  Plan (2) |   | 3,000,000           | (1)    | **657,943**                  |   | 649,834 |   | 533,932 |   |
|                                                                     |   |                |   |                         |   |   |   |   |   |
| Cinergy Corp.  401(k) Excess Plan                                        |   | 100,000             | (1)    | **—**                   |   | — |   | — |   |
|                                                                     |   |                |   |                         |   |   |   |   |   |
| Director,  Officer, and Key Employee Stock Purchase Program              |   | 2,110,817           | (3)    | **—**                   |   | — |   | 1,627,788 |   |
|                                                                     |   |                |   |                         |   |   |   |   |   |
| Cinergy Corp.  Long-Term Incentive Compensation Sub-Scheme               |   | 7,000,000           |   | **—**                   |   | — |   | — |   |

 

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(1)          Plan does not contain anauthorization limit.  The number ofshares presented reflects amounts registered with the SEC as of December 31,2002.

(2)          Shares issued prior toApril 2001 were for the previous Cinergy Corp. Dividend Reinvestment and StockPurchase Plan, which is no longer active.

(3)          Plan authorized amaximum amount of $50 million of **CinergyCorp.** common stock to be purchased. The number of shares presented reflects amounts registered with the SECas of December 31, 2002.  See Note 2(d)for additional information.

 

We retired 422,908 shares of common stock in 2002, 72,739 shares in 2001,and 32,988 shares in 2000, mainly representing shares tendered as payment forthe exercise of previously granted stock options.

 

In April 2001, **Cinergy**adopted the Direct Stock Purchase and Dividend Reinvestment Plan, a plandesigned to provide investors with a convenient method to purchase shares of **Cinergy Corp.** common stock and to reinvestcash dividends in the purchase of additional shares.  This plan replaced the Dividend Reinvestment and Stock PurchasePlan.

 

In November 2001, **Cinergy**chose to reinstitute the practice of issuing new **Cinergy Corp.** common shares to satisfy obligations under itsvarious employee stock plans and the Cinergy

 

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Corp. Direct Stock Purchase and Dividend Reinvestment Plan.  This replaces our previous practice ofpurchasing shares in the open market to fulfill certain plan obligations.

 

In January 2002, **Cinergy**registered 100,000 shares of common stock under the Cinergy Corp. 401(k) ExcessPlan.

 

In February 2002, **Cinergy**sold6.5 million shares of **Cinergy Corp.**commonstock with net proceeds of approximately $200 million.

 

**Cinergy Corp.** ownsall of the common stock of **CG&E**and **PSI**.  All of **ULH&P’s**common stock is held by **CG&E**.

 

**(b)           *Dividend Restrictions***

 

**Cinergy Corp.’s**ability to pay dividends to holders of its common stock is principallydependent on the ability of **CG&E**and **PSI** to pay **Cinergy Corp.** common stock dividends.  **CinergyCorp.**, **CG&E**, and **PSI** cannot pay dividends on their commonstock if their respective preferred stock dividends or preferred trustdividends are in arrears.  The amount ofcommon stock dividends that each company can pay is also limited by certaincapitalization and earnings requirements under **CG&E’s** and **PSI’s**credit instruments.  Currently, these requirementsdo not impact the ability of either company to pay dividends on its commonstock.

 

**(c)           *Stock-based Compensation Plans***

 

We currently have the following stock-based compensation plans:

 

•                  LTIP;

•                  SOP;

•                  EmployeeStock Purchase and Savings Plan;

•                  UKSharesave Scheme;

•                  RetirementPlan for Directors;

•                  Directors’Equity Compensation Plan;

•                  Directors’Deferred Compensation Plan;

•                  401(k)Excess Plan; and

•                  2001Long-Term Incentive Compensation Sub-Scheme.

 

The LTIP, the SOP, and the Employee Stock Purchase and Savings Plan arediscussed below.  The activity in 2002,2001, and 2000 for the remaining stock-based compensation plans was notsignificant.

 

We have historically accounted for our stock-based compensation plansin accordance with APB 25.  However, wewill prospectively adopt the fair value recognition provisions of Statement123, as amended by Statement 148, effective with all employee awards granted ormodified after January 1, 2003.  See“Stock-Based Compensation” in Note 1(p) for additional information on costs werecognized in 2002, 2001, and 2000, related to stock-based compensation plans,and for our pro-forma disclosure assuming compensation costs for these planshad been determined at fair value, consistent with Statement 123, as amended byStatement 148.

 

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*(i)**                                  LTIP*

 

The LTIP was originally adopted in 1996 and was subsequently amendedeffective January 2002.  Under thisplan, certain key employees may be granted incentive and non-qualified stockoptions, stock appreciation rights (SAR), restricted stock, dividendequivalents, the opportunity to earn performance-based shares and certain otherstock-based awards.  Stock options aregranted to participants with an option price equal to or greater than the fairmarket value on the grant date, and generally with a vesting period of eitherthree or five years.  The vesting periodbegins on the grant date and all options expire within 10 years from that date.  The number of shares of common stockissuable under the LTIP is limited to a total of 14.5 million shares.

 

Entitlement to performance-based shares is based on **Cinergy’s** total shareholder return (TSR)over designated Cycles as measured against a pre-defined peer group.  Target grants of performance-based shareswere made for the following Cycles:

 

| **Cycle** |   | **Grant  Date** |   | **Performance  Period** |   | **Target   Grant of Shares** |   |
|-----------|--------|-----------------|--------|-------------------------|--------|------------------------------|--------|
|      |   |            |   |                    |   | **(in thousands)**           |   |
|      |   |            |   |                    |   |                         |   |
| V         |   | 1/2001          |   | 2001-2003               |   | 301                          |   |
| VI        |   | 1/2002          |   | 2002-2004               |   | 343                          |   |
| VII       |   | 1/2003          |   | 2003-2005               |   | 371                          |   |

 

Participants may earn additional performance shares if **Cinergy’s** TSR exceeds that of the peergroup.  For the three-year performanceperiod ended December 31, 2002 (Cycle IV), approximately 817,000 shares wereearned, based on our relative TSR.

 

*(ii)**                              SOP*

 

The SOP is designed to align executive compensation with shareholderinterests.  Under the SOP, incentive andnon-qualified stock options, SARs, and SARs in tandem with stock options may begranted to key employees, officers, and outside directors.  The activity under this plan haspredominantly consisted of the issuance of stock options.  Options are granted with an option priceequal to the fair market value of the shares on the grant date.  Options generally vest over five years at arate of 20 percent per year, beginning on the grant date, and expire 10 yearsfrom the grant date.  The total numberof shares of common stock issuable under the SOP may not exceed 5,000,000shares.  No stock options may be grantedunder the plan after October 24, 2004.

 

*(iii)**                          EmployeeStock Purchase and Savings Plan*

 

The Employee Stock Purchase and Savings Plan allows essentially allfull-time, regular employees to purchase shares of common stock pursuant to astock option feature.  Under theEmployee Stock Purchase and Savings Plan, after-tax funds are withheld from aparticipant’s compensation during a 26-month offering period and are depositedin an interest-bearing account.  At theend of the offering period, participants may apply amounts deposited in theaccount, plus interest, toward the purchase of shares of common stock.  The purchase price is equal to 95 percent ofthe fair market value of a share of common stock on the first date of the

 

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offering period.  Any funds notapplied toward the purchase of shares are returned to the participant.  A participant may elect to terminateparticipation in the plan at any time. Participation also will terminate if the participant’s employmentceases.  Upon termination of participation,all funds, including interest, are returned to the participant withoutpenalty.  The sixth (current) offeringperiod began May 1, 2001, and ends June 30, 2003.  The purchase price for all shares under this offering is$32.78.  The fifth offering period endedApril 30, 2001, with 227,968 shares purchased and the remaining cashdistributed to the respective participants. The total number of shares of common stock issuable under the EmployeeStock Purchase and Savings Plan may not exceed 2,000,000.

 

Activity for 2002, 2001, and 2000 for the LTIP, SOP, and Employee StockPurchase and Savings Plan is summarized as follows:

 
|                              |   | **LTIP and  SOP**              |       | **Employee  Stock Purchase and   Savings Plan** |      |
|-----------------------------------|--------|--------------------------------|------------|-------------------------------------------------|-----------|
|                              |   | **Shares  Subject  to Option** |       | **Weighted  Average  Exercise Price**           |      | **Shares  Subject  to Option** |   | **Weighted  Average  Exercise Price** |   |
| Balance at  December 31, 1999     |   | 6,187,249                      |       | $                                               | 27.17     |   | 359,305 |   | $ | 27.73 |   |
|                              |   |                           |       |                                            |      |   |   |   |   |
| Options granted                   |   | 1,329,800                      |       | 24.59                                           |      | — |   | — |   |
| Options  exercised                |   | (123,978                       | )          | 23.50                                           |      | (2,718 | ) | 27.73 |   |
| Options  forfeited                |   | (402,200                       | )          | 26.68                                           |      | (76,261 | ) | 27.73 |   |
|                              |   |                           |       |                                            |      |   |   |   |   |
| Balance at  December 31, 2000     |   | 6,990,871                      |       | 26.77                                           |      | 280,326 |   | 27.73 |   |
|                              |   |                           |       |                                            |      |   |   |   |   |
| Options granted                   |   | 811,700                        |       | 33.90                                           |      | 299,793 |   | 32.78 |   |
| Options  exercised                |   | (275,393                       | )          | 24.39                                           |      | (227,968 | ) | 27.73 |   |
| Options forfeited                 |   | (79,400                        | )          | 27.29                                           |      | (73,826 | ) | 29.20 |   |
|                              |   |                           |       |                                            |      |   |   |   |   |
| Balance at  December 31, 2001     |   | 7,447,778                      |       | 27.63                                           |      | 278,325 |   | 32.78 |   |
|                              |   |                           |       |                                            |      |   |   |   |   |
| **Options  granted**              |   | **1,241,200**                  | (2)        | **32.27**                                       |      | **—** | ** ** | **—** |   |
| **Options  exercised**            |   | **(1,308,738**                 | **)**      | **23.96**                                       |      | **(4,912** | **)** | **32.78** |   |
| **Options  forfeited**            |   | **(18,540**                    | **)**      | **31.57**                                       |      | **(55,243** | **)** | **32.78** |   |
|                              |   |                           |       |                                            |      |   |   |   |   |
| **Balance  at December 31, 2002** |   | **7,361,700**                  |       | **$**                                           | **29.06** |   | **218,170** |   | **$** | **32.78** |   |
|                              |   |                           |       |                                            |      |   |   |   |   |
| **Options Exercisable**(1)**:**   |   |                           |       |                                            |      |   |   |   |   |
| At December 31,  2000             |   | 3,195,191                      |       | $                                               | 26.20     |   |   |   |   |   |
| At December 31,  2001             |   | 3,763,558                      |       | $                                               | 27.32     |   |   |   |   |   |
| **At  December 31, 2002**         |   | **3,744,420**                  | ** ** | **$**                                           | **28.98** |   |   |   |   |   |

 

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(1)        The options under theEmployee Stock Purchase and Savings Plan are only exercisable at the end of theoffering period.

(2)        Options were not grantedunder the SOP during 2002.

 

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The weighted average fair value of options granted under the combinedLTIP and the SOP plans was $4.95 in 2002, $5.42 in 2001, and $2.75 in2000.  The weighted average fair valueof options granted under the Employee Stock Purchase and Savings Plan was $5.85in 2001 (no options were granted in 2002 or 2000).  The fair values of options granted were estimated as of the grantdate using the Black-Scholes option-pricing model and the followingassumptions:

 

|                     |   | **LTIP and  SOP(1)** |           | **Employee Stock Purchase   and Savings Plan(2)** |       |
|--------------------------|--------|----------------------|----------------|---------------------------------------------------|------------|
|                     |   | **2002**             |           | **2001**                                          |       | **2000** |   | **2001** |   |
| Risk-free  interest rate |   | **3.92**             | **%**          | 4.78                                              | %          | 6.57 | % | 4.22 | % |
| Expected  dividend yield |   | **5.66**             | **%**          | 5.42                                              | %          | 7.32 | % | 5.26 | % |
| Expected lives           |   | **5.42**             | ** yrs.** | 5.37                                              |  yrs. | 4.86 |  yrs. | 2.17 |  yrs. |
| Expected  volatility     |   | **26.45**            | **%**          | 25.01                                             | %          | 20.18 | % | 30.67 | % |

 

----

| (1) | Options were not granted under the SOP in 2002.                                               |
|-----|-----------------------------------------------------------------------------------------------|
| (2) | Options were not granted under the Employee Stock  Purchase and Savings Plan in 2002 or 2000. |

 

Price ranges, along with certain other information, for optionsoutstanding under the combined LTIP and SOP plans at December 31, 2002, were asfollows:

 

|                      |   | **Outstanding**       |   | **Exercisable**                        |   |
|---------------------------|--------|-----------------------|--------|----------------------------------------|--------|
| **Exercise  Price Range** |   | **Number  of Shares** |   | **Weighted  Average  Exercise  Price** |   | **Weighted  Average  Remaining  Contractual  Life** |   | **Number  of Shares** |   | **Weighted  Average  Exercise  Price** |   |
| $                         | 22.88  | -                     | $      | 23.81                                  |   |   | 2,100,970 |   | $ | 23.69 |   | 6.33 yrs. |   | 1,433,890 |   | $ | 23.64 |   |
| $                         | 23.88  | -                     | $      | 32.65                                  |   |   | 2,492,830 |   | $ | 26.82 |   | 6.70 yrs. |   | 768,330 |   | $ | 25.63 |   |
| $                         | 33.31  | -                     | $      | 38.59                                  |   |   | 2,767,900 |   | $ | 35.15 |   | 6.69 yrs. |   | 1,542,200 |   | $ | 35.62 |   |

 

**(d)           *Director, Officer, and Key EmployeeStock Purchase Program***

 

In December 1999, **Cinergy Corp.**adopted the Director, Officer, and Key Employee Stock Purchase Program (StockPurchase Program).  The purpose of theStock Purchase Program is to facilitate the purchase and ownership of **Cinergy Corp.’s** common stock by itsdirectors, officers, and key employees, thereby further aligning theirinterests with those of its shareholders.

 

In February 2000, **Cinergy Corp.**purchased approximately 1.6 million shares of common stock on behalf of theparticipants at an average price of $24.82 per share.

 

Participants had the option of financing the purchases through afive-year credit facility arranged by **CinergyCorp.** with a bank.  Eachparticipant is obligated to repay the bank any loan principal, interest, andprepayment fees, and each has assigned his or her dividend rights on thepurchased shares to the bank to be applied to interest payments as due on theloan.

 

Services, and in part, **Cinergy Corp.**,have guaranteed repayment to the bank of 100 percent of each participant’s loanobligations and the associated interest, and each participant has agreed toindemnify the guarantor for any payments made by it under the guaranty on theparticipant’s

 

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behalf.  A participant’sobligations to the bank are unsecured and no restrictions are placed on theparticipant’s ability to sell, pledge, or otherwise encumber or dispose of hisor her purchased shares.

 

**(e)****                                  *StockPurchase Contracts***

 

In December 2001, **Cinergy Corp.**issuedapproximately $316 million notional amount of combined securities, a componentof which was stock purchase contracts. These contracts obligate the holder to purchase common shares of **Cinergy Corp.** stock in, and/or before,February 2005.  The number of shares tobe issued is contingent upon the market price of **Cinergy Corp.** stock, but subject to predetermined ceiling andfloor prices.  See Note 3 for furtherdiscussion of these combined securities.

 

**3.****              Preferred TrustSecurities**

 

In December 2001, **Cinergy Corp.**issuedapproximately $316 million notional amount of combined securities consisting of(a) 6.9 percent preferred trust securities, due February 2007, and (b) stockpurchase contracts obligating the holders to purchase between 9.2 and 10.8million shares of **Cinergy Corp.**common stock in, and/or before, February 2005. A $50 preferred trust security and stock purchase contract were soldtogether as a single security unit (Unit). The proceeds of $306 million, which is net of approximately $10 millionof issuance costs, were used to pay down **CinergyCorp.’s** short-term indebtedness. In February 2005, the preferred trust securities will be remarketed andthe dividend rate reset, no lower than 6.9 percent, to yield $316 million inthe remarketing.  The holders will usethe proceeds from this remarketing to fund their obligation to purchase sharesof **Cinergy Corp.** common stockunder the stock purchase contract.  Theholders will pay the market price for the stock at that time, subject to aceiling of $34.40 per share and a floor of $29.15 per share.  The number of shares to be issued will varyaccording to the stock price, subject to the total proceeds equaling $316 million.  These preferred trust securities were issuedthrough a wholly-owned trust of **Cinergy Corp**.and are recorded on **Cinergy Corp.’s**Balance Sheets, net of discount and expense, as *Company obligated, mandatorily redeemable, preferred trust securitiesof subsidiary, holding solely debt securities of the company*.  The fair value of the stock purchasecontracts was charged to *Paid-in capital*with a corresponding credit to *Non-CurrentLiabilities-Other*.

 

Each Unit will receive quarterly cash payments of 9.5 percent per annumof the notional amount, which includes the preferred trust security dividend of6.9 percent and payment of 2.6 percent, which represents principal and intereston the stock purchase contracts.  Upondelivery of the shares, these stock purchase contract payments will cease.

 

**4.****              Long-Term Debt**

 

Refer to the Statements of Capitalization for detailed information for **Cinergy’s**, **CG&E’s**, **PSI’s**,and **ULH&P’s**long-term debt.

 

In January 2002, **PSI**repaid at maturity $23 million principal amount of its Medium-Term Notes,Series A.  The securities were notreplaced by new issues of long-term debt.

 

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In May 2002, an indirect, wholly-owned subsidiary of Global Resourcesentered into a senior term loan and a junior term loan, borrowing $13.8 millionand $7.1 million, respectively.  Each ofthe loans have periodic principal reduction payments, with the senior loanhaving a final maturity of March 15, 2019, and the junior loan having a finalmaturity of March 15, 2012.  The annualinterest rate on the senior loan is fixed at 6.97 percent and the junior loanis fixed at 6.35 percent.

 

On September 1, 2002, **CG&E**repaid at maturity $100 million principal amount of its First Mortgage Bonds, 71⁄4% Series.

 

On September 10, 2002, **CG&E**borrowed the proceeds from the issuance by the Ohio Air Quality DevelopmentAuthority of $84 million principal amount of its State of Ohio Air QualityDevelopment Revenue Refunding Bonds 2002 Series A, due September 1, 2037.  The issuance consists of two $42 milliontranches, with the interest rate on one tranche being reset every 35 days byauction and the interest rate on the other tranche being reset every 7 days byauction.  The initial interest rates forthe 35-day and 7-day tranches were 1.40 percent and 1.35 percent,respectively.  Proceeds from theborrowing were used on October 7, 2002 to redeem, at par, two $42 millionSeries 1985 A&B Air Quality Development Authority State of Ohio CustomizedPurchase Revenue Bonds, due December 1, 2015. The redeemed bonds had been classified in *Notes payable and other short-term obligations*.

 

On September 12, 2002, **PSI**borrowed the proceeds from the issuance by the Indiana Development FinanceAuthority of $23 million principal amount of its Environmental RefundingRevenue Bonds Series 2002A, due March 1, 2031. The initial interest rate for the bonds was 1.40 percent.  The interest rate resets every 35 days byauction.  Proceeds from the borrowingwere used on October 1, 2002 to redeem, at par, the $23 million principalamount of Indiana Development Finance Authority Environmental Refunding RevenueBonds Series 1998, due August 1, 2028. The redeemed bonds had been classified in *Notes payable and other short-term obligations*.

 

On September 12, 2002, **PSI**borrowed the proceeds from the issuance by the Indiana Development FinanceAuthority of $24.6 million principal amount of its Environmental RefundingRevenue Bonds Series 2002B, due March 1, 2019. The initial interest rate for the bonds was 1.35 percent.  The interest rate resets every 7 days byauction.  Proceeds from the issuancewere used on October 1, 2002 to redeem, at par, the $24.6 million principalamount of City of Princeton, Indiana Pollution Control Revenue Refunding Bonds1996 Series, due March 1, 2019.  Theredeemed bonds had been classified in *Notespayable and other short-term obligations*.

 

The holders of the newly issued Ohio Air Quality Development Authorityand Indiana Development Finance Authority bonds mentioned above have the benefitof a financial guaranty insurance policy that insures the payment of principalof, and interest on, the bonds when due. **CG&E** and **PSI** have each entered into an insuranceagreement with the bond insurer and have pledged first mortgage bonds to securetheir respective reimbursement obligations under such agreements.

 

On September 23, 2002, **CG&E**issued $500 million principal amount of its 5.70 percent Debentures dueSeptember 15, 2012.  Proceeds from theoffering were used to repay short-term

 

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indebtedness incurred in connection with general corporate purposesincluding capital expenditures related to environmental complianceconstruction, and the repayment at maturity of $100 million principal amount of**CG&E’s** First Mortgage Bonds, 71⁄4% Series.  In July 2002, **CG&E** executed a treasury lock with anotional amount of $250 million, which was designated as a cash flow hedge of50 percent of the forecasted interest payments on this debt offering.  With the issuance of the debt, the treasurylock was settled.  See Note 8(a) foradditional information on this treasury lock.

 

The following table reflects the long-term debt maturities excludingany redemptions due to the exercise of call provisions or capital lease obligations.  Callable means the issuer has the right tobuy back a given security from the holder at a specified price beforematurity.  Putable means the holder hasthe right to sell a given security back to the issuer at a specified pricebefore maturity.

 

**Long-termDebt Maturities**

 

|       |   | **Cinergy(1)** |   | **CG&E and  subsidiaries** |   | **PSI** |   |
|------------|--------|----------------|--------|--------------------------------|--------|---------|--------|
|       |   |           |   | **(in millions)**              |   |    |   |
|       |   |           |   |                           |   |    |   |
| 2003       |   | $              | 191    |                           | $      | 120     | (2)    | $ | 56 |   |
| 2004       |   | 815            |   | 110                            |   | 2       |   |
| 2005(3)    |   | 204            |   | 150                            |   | 51      |   |
| 2006       |   | 335            |   | —                         |   | 328     |   |
| 2007       |   | 374            |   | 100                            |   | 267     |   |
| Thereafter |   | 2,351          |   | 1,212                          | (4)    | 676     |   |
|       |   |           |   |                           |   |    |   |
|       |   | $              | 4,270  |                           | $      | 1,692   |   | $ | 1,380 |   |

 

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| (1) | The results of **Cinergy**  also include amounts related to non-registrants.                                                                                                            |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | Includes $100  million of **CG&E’s** long-term  debt with a periodic put provision beginning in June 2003, and **ULH&P’s**  $20 million maturing in 2003.             |
| (3) | **CG&E**  and subsidiaries includes long-term debt with put provisions of $150 million  in 2005.  **PSI** includes long-term debt with put provisions of $50  million in 2005. |
| (4) | Includes **ULH&P’s**  $55 million of long-term debt.                                                                                                                           |

 

Maintenance and replacement fund provisions contained in **PSI’s** first mortgage bond indenturerequire:  (1) cash payments, (2) bondretirements, or (3) pledges of unfunded property additions each year based onan amount related to **PSI’s** netrevenues.

 

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

 

Short-term obligations may include:

 

•                  short-termnotes;

•                  commercialpaper;

•                  variablerate pollution control notes; and

•                  moneypool.

 

***Short-term Notes***

 

Short-term borrowings mature within one year from the date ofissuance.  We primarily use unsecuredrevolving lines of credit and the sale of commercial paper for short-termborrowings.  A portion of each company’srevolving lines is used to provide credit support for commercial paper.  When revolving lines are reserved forcommercial paper or backing letters of credit, they are not available foradditional borrowings.  The fees we paidto secure short-term borrowings were immaterial during each of the years endedDecember 31, 2002, 2001, and 2000.

 

At December 31, 2002, **Cinergy Corp.**had $494 million remaining unused and available capacity relating to its $1billion revolving credit facilities. These revolving credit facilities include the following:

 

| **Credit  Facility**         |   | **Expiration** |   | **Established    Lines** |   | **Outstanding  and   Committed** |   | **Unused and    Available** |   |
|------------------------------|--------|----------------|--------|--------------------------|--------|----------------------------------|--------|-----------------------------|--------|
|                         |   |           |   |                     |   | **(in  millions)**               |   |                        |   |
|                         |   |           |   |                     |   |                             |   |                        |   |
| 364-day senior  revolving    |   | April 2003     |   |                     |   |                             |   |                        |   |
| Direct  borrowing            |   |           |   | $                        |   |                             | $      | —                      |   | $ |   |   |
| Commercial  Paper support    |   |           |   |                     |   | 473                              |   |                        |   |
|                         |   |           |   |                     |   |                             |   |                        |   |
| Total 364-day  facility      |   |           |   | 600                      |   | 473                              |   | 127                         |   |
|                         |   |           |   |                     |   |                             |   |                        |   |
| Three-year  senior revolving |   | May 2004       |   |                     |   |                             |   |                        |   |
| Direct borrowing             |   |           |   |                     |   | 25                               |   |                        |   |
| Commercial Paper  support    |   |           |   |                     |   | —                           |   |                        |   |
| Letter of Credit  support    |   |           |   |                     |   | 8                                |   |                        |   |
|                         |   |           |   |                     |   |                             |   |                        |   |
| Total Three-year  facility   |   |           |   | 400                      |   | 33                               |   | 367                         |   |
|                         |   |           |   |                     |   |                             |   |                        |   |
| Total Credit  Facilities     |   |           |   | $                        | 1,000  |                             | $      | 506                         |   | $ | 494 |   |
|                              |        |                |        |                          |        |                                  |        |                             |        |  |  |  |  |  |

 

In addition to revolving credit facilities, **Cinergy Corp.**, **CG&E**,and **PSI**also maintain uncommittedlines of credit.  These facilities arenot guaranteed sources of capital and represent an informal agreement to lendmoney, subject to availability, with pricing to be determined at the time ofadvance.  **Cinergy Corp.**, **CG&E**,and **PSI** have establisheduncommitted lines of $65 million, $15 million, and $60 million, respectively,all of which remained unused as of December 31, 2002.

 

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***Commercial Paper***

 

**Cinergy Corp.’s**$800 million commercial paper program is supported by **Cinergy Corp.’s** $1 billion revolving creditfacilities.  The commercial paperprogram at the **Cinergy Corp.** levelsupports, in part, the short-term borrowing needs of **CG&E** and **PSI**and eliminates their need for separate commercial paper programs.  As of December 31, 2002, **Cinergy Corp.**had $473 million incommercial paper outstanding.

 

***Variable RatePollution Control Notes***

 

**CG&E** and **PSI** have issued certain variable ratepollution control notes (tax-exempt notes obtained to finance equipment or landdevelopment for pollution control purposes). Because the holders of these notes have the right to have their notesredeemed on a daily, monthly, or annual basis, they are reflected in *Notes payable and other short-term obligations*on the Balance Sheets of **Cinergy**, **CG&E**, and **PSI**.

 

In October 2002, **CG&E**and **PSI** caused the redemption ofcertain series’ of variable rate pollution control notes with a principalamount of $84 million and $47.6 million, respectively.  Holders of the notes had the option ofhaving their notes redeemed at various times ranging from any business day toannually.  The notes were redeemed withproceeds from the issuance of new series’ of variable rate pollution controlnotes that do not have the redemption features mentioned above, and are thereforeclassified as *Long-term debt* obligations.  See Note 4 for further discussion of thisredemption.

 

***Money Pool***

 

**Cinergy Corp.**,Services, and our operating companies participate in a money pool arrangementto better manage cash and working capital requirements.  Under this arrangement, those companies withsurplus short-term funds provide short-term loans to affiliates (other than **Cinergy Corp.**) participating under thisarrangement.  This surplus cash may befrom internal or external sources.  Theamounts outstanding under this money pool arrangement are shown as a componentof *Notes receivable from affiliatedcompanies* and/or *Notes payable toaffiliated companies* on the Balance Sheets of **CG&E**, **PSI**,and **ULH&P**.  Any money pool borrowings outstanding reducethe unused and available short-term debt regulatory authority of **CG&E**, **PSI**,and **ULH&P**.

 

155

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The following table summarizes our *Notespayable and other short-term obligations*, and *Notes payable to affiliated companies*.

 
|                           |   | **December  31, 2002** |       | **December  31, 2001** |       |
|--------------------------------|--------|------------------------|------------|------------------------|------------|
|                           |   | **Established  Lines** |       | **Outstanding**        |       | **Weighted  Average  Rate** |   | **Established  Lines** |   | **Outstanding** |   | **Weighted  Average  Rate** |   |
|                           |   | **(in millions)**      |       |
|                           |   |                   |       |
| **Cinergy**                    |   |                   |       |                   |       |   |   |   |   |   |   |   |   |
| **Cinergy  Corp.**             |   |                   |       |                   |       |   |   |   |   |   |   |   |   |
| Revolving lines                |   | **$**                  | **1,000**  | ** **             | **$**      | **25** | ** ** | **2.02** | **%** | $ | 1,175 |   | $ | 599 |   | 2.55 | % |
| Uncommitted  lines(1)          |   | **65**                 | ** ** | **—**             | ** ** | **—** | ** ** | 40 |   | — |   | — |   |
| Commercial  paper(2)           |   | **800**                | ** ** | **473**                | ** ** | **1.81** | ** ** | 800 |   | 125 |   | 3.49 |   |
|                           |   |                   | ** ** |                   | ** ** |   | ** ** |   |   |   |   |   |   |
| Operating  companies           |   |                   | ** ** |                   | ** ** |   | ** ** |   |   |   |   |   |   |
| Uncommitted  lines(1)          |   | **75**                 | ** ** | **—**             | ** ** | **—** | ** ** | 75 |   | 66 |   | 3.73 |   |
| Pollution  control notes       |   |                   |       | **147**                | ** ** | **1.82** |   |   |   | 279 |   | 2.10 |   |
|                           |   |                   | ** ** |                   | ** ** |   | ** ** |   |   |   |   |   |   |
| Non-regulated  subsidiaries    |   |                   | ** ** |                   | ** ** |   | ** ** |   |   |   |   |   |   |
| Revolving lines                |   | **7**                  | ** ** | **1**                  | ** ** | **3.28** | ** ** | 46 |   | 32 |   | 2.94 |   |
| Short-term debt                |   | **22**                 | ** ** | **22**                 | ** ** | **2.93** | ** ** | 49 |   | 44 |   | 4.81 |   |
|                           |   |                   | ** ** |                   | ** ** |   | ** ** |   |   |   |   |   |   |
| **Cinergy  Total**             |   |                   |       | **$**                  | **668**    | ** ** | **1.86** | **%** |   |   | $ | 1,145 |   | 2.71 | % |
|                           |   |                   | ** ** |                   | ** ** |   | ** ** |   |   |   |   |   |   |
| **CG&E**  and subsidiaries |   |                   | ** ** |                   | ** ** |   | ** ** |   |   |   |   |   |   |
| Uncommitted  lines(1)          |   | **$**                  | **15**     | ** **             | **$**      | **—** | ** ** | **—** | **%** | $ | 15 |   | $ | — |   | — | % |
| Pollution  control notes       |   |                   |       | **112**                | ** ** | **1.87** |   |   |   | 196 | ** ** | 2.00 |   |
| Money Pool                     |   |                   |       | **9**                  | ** ** | **1.29** |   |   |   | 445 |   | 2.73 |   |
|                           |   |                   | ** ** |                   | ** ** |   | ** ** |   |   |   |   |   |   |
| **CG&E  Total**            |   |                   | ** ** | **$**                  | **121**    | ** ** |   | ** ** |   |   | $ | 641 |   |   |   |
|                           |   |                   | ** ** |                   | ** ** |   | ** ** |   |   |   |   |   |   |
| **PSI**                        |   |                   | ** ** |                   | ** ** |   | ** ** |   |   |   |   |   |   |
| Uncommitted  lines(1)          |   | **$**                  | **60**     | ** **             | **$**      | **—** | ** ** | **—** | **%** | $ | 60 |   | $ | 66 |   | 3.73 | % |
| Pollution  control notes       |   |                   |       | **35**                 | ** ** | **1.65** |   |   |   | 83 |   | 2.33 |   |
| Money Pool                     |   |                   |       | **138**                | ** ** | **1.29** |   |   |   | 422 |   | 2.58 |   |
|                           |   |                   | ** ** |                   | ** ** |   | ** ** |   |   |   |   |   |   |
| **PSI  Total**                 |   |                   | ** ** | **$**                  | **173**    | ** ** |   | ** ** |   |   | $ | 571 |   |   |   |
|                           |   |                   | ** ** |                   | ** ** |   | ** ** |   |   |   |   |   |   |
| **ULH&P**                  |   |                   | ** ** |                   | ** ** |   | ** ** |   |   |   |   |   |   |
| Money Pool                     |   |                   |       | **$**                  | **14**     | ** ** | **1.29** | **%** |   |   | $ | 26 |   | 2.73 | % |
|                           |   |                   | ** ** |                   | ** ** |   | ** ** |   |   |   |   |   |   |
| **ULH&P  Total**           |   |                   | ** ** | **$**                  | **14**     | ** ** |   | ** ** |   |   | $ | 26 |   |   |   |
|                                |        |                        |            |                        |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

| (1) | Outstanding amounts may be greater than established  lines as uncommitted lenders are, at times, willing to loan funds in excess  of the established lines. |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | The commercial paper program is supported by **Cinergy Corp.’s** revolving lines.                                                                      |

 

In our credit facilities, **CinergyCorp.** has covenanted to maintain:

 

•                  aconsolidated net worth of $2 billion; and

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

 

A breach of these covenants could result in the termination of thecredit facilities and the acceleration of the related indebtedness.  In addition to breaches of covenants,certain other

 

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events that could result in the termination of available credit andacceleration of the related indebtedness include:

 

•                  bankruptcy;

•                  defaultsin the payment of other indebtedness; and

•                  judgmentsagainst the company that are not paid or insured.

 

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

 

**6.****              Sales of AccountsReceivable**

 

During 2001, **CG&E**, **PSI**, and **ULH&P**had an agreement to sell, on a revolving basis, undivided percentage interestsin certain of their accounts receivable and the related collections up to anaggregate maximum of $350 million.  **CG&E** retained servicingresponsibilities for its role as a collection agent of the amounts due on thesold receivables.  However, thepurchaser assumed the risk of collection on the sold receivables withoutrecourse to **CG&E**, **PSI**, and **ULH&P**in the event of a loss. Proceeds from a portion of the sold receivables were held back as areserve to reduce the purchaser’s credit risk. **CG&E**, **PSI**, and **ULH&P**did not retain any ownership interest in the sold receivables, but did retainundivided interests in their remaining balances of accounts receivable.  The recorded amounts of the retainedinterests were measured at net realizable value.  The *Accounts receivable*on the Balance Sheets of **Cinergy**, **CG&E**, **PSI**,and **ULH&P** were net of theamounts sold at December 31, 2001.

 

In February 2002, **CG&E**,**PSI**, and **ULH&P** replaced their previous agreementto sell certain of their accounts receivable and related collections.  **CinergyCorp.** formed Cinergy Receivables Company, LLC (Cinergy Receivables)to purchase, on a revolving basis, nearly all of the retail accounts receivableand related collections of **CG&E,****PSI,** and **ULH&P.** **Cinergy Corp.** does notconsolidate Cinergy Receivables since it meets the requirements to be accountedfor as a qualifying SPE.  The sales ofreceivables are accounted for under Statement 140.

 

The proceeds obtained from the sales of receivables are largely cashbut do include a subordinated note from Cinergy Receivables for a portion ofthe purchase price (typically approximates 25 percent of the total proceeds).  The note is subordinate to senior loans thatCinergy Receivables obtains from commercial paper conduits controlled byunrelated financial institutions. Cinergy Receivables provides credit enhancement related to senior loansin the form of over-collateralization of the purchased receivables.  However, the over-collateralization iscalculated monthly and does not extend to the entire pool of receivables heldby Cinergy Receivables at any point in time. As such, these senior loans do not have recourse to all assets of CinergyReceivables.  These loans provide thecash portion of the proceeds paid to **CG&E,****PSI,** and **ULH&P.**

 

This subordinated note is a retained interest (right to receive aspecified portion of cash flows from the sold assets) under Statement 140 andis classified within *Notes receivable fromaffiliated companies* in the accompanying Balance Sheets of **CG&E**, **PSI**,and **ULH&P** and is classifiedwithin *Notes receivable* on **Cinergy Corp.’s** Balance Sheets.  In addition, **Cinergy Corp.’s** investment in Cinergy Receivables constitutesa purchased beneficial interest (purchased right to receive specified cashflows, in our case residual cash flows), which is subordinate to the

 

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retained interests held by **CG&E**,**PSI**, and **ULH&P**. The carrying values of the retained interests are determined byallocating the carrying value of the receivables between the assets sold andthe interests retained based on relative fair value.  The key assumptions in estimating fair value are credit lossesand selection of discount rates. Because (a) the receivables generally turn in less than two months, (b)credit losses are reasonably predictable due to each company’s broad customerbase and lack of significant concentration, and (c) the purchased beneficialinterest is subordinate to all retained interests and thus would absorb lossesfirst, the allocated basis of the subordinated notes are not materiallydifferent than their face value. Interest accrues to **CG&E**,**PSI**, and **ULH&P** on the retained interests usingthe accretable yield method, which generally approximates the stated rate onthe notes since the allocated basis and the face value are nearlyequivalent.  **Cinergy Corp.** records income from Cinergy Receivables in asimilar manner.  We record an impairmentcharge against the carrying value of both the retained interests and purchasedbeneficial interest whenever we determine that an other-than-temporaryimpairment has occurred (which is unlikely unless credit losses on thereceivables far exceed the anticipated level).

 

The key assumptions used in measuring the retained interests for salessince the inception of the new agreement are as follows (all amounts areaverages of the assumptions used in each sale during the period):

 

|                                  |   | **Cinergy** |   | **CG&E and    subsidiaries** |   | **PSI** |   | **ULH&P** |   |
|---------------------------------------|--------|-------------|--------|----------------------------------|--------|---------|--------|---------------|--------|
|                                  |   |        |   |                             |   |    |   |          |   |
| Anticipated  credit loss rate         |   | 0.6         | %      | 0.6                              | %      | 0.5     | %      | 1.0           | %      |
| Discount rate on  expected cash flows |   | 5.0         | %      | 5.0                              | %      | 5.0     | %      | 5.0           | %      |
| Receivables  turnover rate(1)         |   | 12.9        | %      | 13.7                             | %      | 11.8    | %      | 13.5          | %      |

 

----

| (1) | Receivables at each month-end divided by annualized  sales for the month. |
|-----|---------------------------------------------------------------------------|

 

The hypothetical effect on the fair value of the retained interestsassuming both a 10 percent and 20 percent unfavorable variation in creditlosses or discount rates is not material due to the short turnover ofreceivables and historically low credit loss history.

 

**CG&E** retains servicing responsibilities for itsrole as a collection agent on the amounts due on the sold receivables.  However, Cinergy Receivables assumes therisk of collection on the purchased receivables without recourse to **CG&E**, **PSI**,and **ULH&P** in the eventof a loss.  While no direct recourse to **CG&E**, **PSI**,and **ULH&P** exists,these entities risk loss in the event collections are not sufficient to allowfor full recovery of their retained interests. No servicing asset or liability is recorded since the servicing fee paidto **CG&E** approximates a market rate.

 

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The following table shows the gross and netreceivables sold, retained interests, purchased beneficial interest, salesduring the period, and cash flows during the period as of December 31, 2002.

 

|                                   |   | **Cinergy**                |   | **CG&E and subsidiaries** |   | **PSI** |   | **ULH&P** |   |
|----------------------------------------|--------|----------------------------|--------|-------------------------------|--------|---------|--------|---------------|--------|
|                                   |   | **(dollars  in millions)** |   |
|                                   |   |                       |   |
| Receivables sold  as of period end     |   | $                          | 483    |                          | $      | 299     |   | $             | 184    |   | $ | 45 |   |
| Less:  Retained interests         |   | 135                        |   | 81                            |   | 54      |   | 13            |   |
|                                   |   |                       |   |                          |   |    |   |          |   |
| Net receivables  sold as of period end |   | $                          | 348    |                          | $      | 218     |   | $             | 130    |   | $ | 32 |   |
|                                   |   |                       |   |                          |   |    |   |          |   |
| Purchased  beneficial interests        |   | $                          | 10     |                          | $      | —  |   | $             | — |   | $ | — |   |
|                                   |   |                       |   |                          |   |    |   |          |   |
| **Sales  during period**               |   |                       |   |                          |   |    |   |          |   |
| Receivables sold                       |   | $                          | 3,233  |                          | $      | 1,840   |   | $             | 1,392  |   | $ | 287 |   |
| Loss recognized  on sale               |   | 32                         |   | 19                            |   | 13      |   | 3             |   |
|                                   |   |                       |   |                          |   |    |   |          |   |
| **Cash  flows during period**          |   |                       |   |                          |   |    |   |          |   |
| Cash proceeds  from sold receivables   |   | $                          | 3,184  |                          | $      | 1,813   |   | $             | 1,371  |   | $ | 283 |   |
| Collection fees  received              |   | 2                          |   | 1                             |   | 1       |   | —        |   |
| Return received  on retained interests |   | 16                         |   | 9                             |   | 7       |   | 1             |   |

 

A decline in the long-term senior unsecured credit ratings of **CG&E**, **PSI**,or **ULH&P** below investmentgrade would result in a termination of the sale program and discontinuance offuture sales of receivables, and could prevent Cinergy Receivables fromborrowing additional funds from commercial paper conduits.

 

159

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**7.****              Leases**

 

**(a)****                                  *OperatingLeases***

 

We have entered into operating lease agreements for various facilitiesand properties such as computer, communication and transportation equipment,and office space.  Total rental paymentson operating leases for each of the past three years are detailed in the tablebelow.  This table also shows futureminimum lease payments required for operating leases with remainingnon-cancelable lease terms in excess of one year as of December 31, 2002:

 
|                           |   | **Actual Payments** |       | **Estimated Minimum Payments** |   |
|--------------------------------|--------|---------------------|------------|--------------------------------|--------|
|                           |   | **2000**            |       | **2001**                       |   | **2002** |   | **2003** |   | **2004** |   | **2005** |   | **2006** |   | **2007** |   | **After  2007** |   | **Total** |   |
|                           |   | **(in  millions)**  | ** ** |
|                           |   |                |       |
| **Cinergy**(1)                 |   | $                   | 56         |                           | $      | 61 |   | **$** | **64** |   | $ | 43 |   | $ | 33 |   | $ | 26 |   | $ | 22 |   | $ | 18 |   | $ | 52 |   | $ | 194 |   |
| **CG&E**  and subsidiaries |   | 30                  |       | 33                             |   | **30** |   | 9 |   | 7 |   | 7 |   | 6 |   | 5 |   | 12 |   | 46 |   |
| **PSI**                        |   | 21                  |       | 21                             |   | **23** |   | 10 |   | 8 |   | 7 |   | 7 |   | 6 |   | 19 |   | 57 |   |
| **ULH&P**(2)               |   | 4                   |       | 5                              |   | **4** |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
|                                |        |                     |            |                                |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

| (1) | The results of **Cinergy**  also include amounts related to non-registrants. |
|-----|------------------------------------------------------------------------------|
| (2) | Estimated minimum lease payments are immaterial.                             |

 

**(b)****                                  *CapitalLeases***

 

In each of the years 1999 through 2002, **CG&E**, **PSI**,and **ULH&P** entered into capitallease agreements to fund the purchase of gas and electric meters.  The lease terms are for 120 monthscommencing with the date of purchase and contain various buyout options rangingfrom 48 to 105 months.  It is ourobjective to own the meters indefinitely and the operating companies plan toexercise the buyout option at month 105. The effective lease rates given the early buyout option at 105 monthsare 6.71 percent for the 1999 leases, 6.09 percent for the 2000 leases, 6.00percent for the 2001 leases, and 4.48 percent for the 2002 leases.  The meters are depreciated at the same rateas if owned by the operating companies. **CG&E**, **PSI**, and **ULH&P**each recorded a capital lease obligation, included in *Non-Current Liabilities-Other*.

 

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The total minimum lease payments and the present values for thesecapital lease items are shown below:

 
|                                     |   | **Total  Minimum Lease Payments** |   |
|------------------------------------------|--------|-----------------------------------|--------|
|                                     |   | **Cinergy**                       |   | **CG&E****and  subsidiaries** |   | **PSI** |   | **ULH&P** |   |
|                                     |   | **(in millions)**                 |   |
|                                     |   |                              |   |
| Total minimum  lease payments(1)         |   | $                                 | 55     |   | $ | 32 |   | $ | 23 |   | $ | 8 |   |
| Less: amount  representing interest      |   | (12                               | )      | (7 | ) | (5 | ) | (2 | ) |
|                                     |   |                              |   |   |   |   |   |   |   |
| Present value of  minimum lease payments |   | $                                 | 43     |   | $ | 25 |   | $ | 18 |   | $ | 6 |   |

 

----

| (1) Annual minimum lease payments are immaterial. |   |
|---------------------------------------------------|--------|

 

**8.**                    **Financial Instruments**

 

**(a)**                                  ***Financial Derivatives***

 

We have entered into financial derivative contracts for the purposedescribed below.

 

*Interest Rate Risk Management*

 

Our current policy of managing exposure to fluctuations in interestrates is to maintain approximately 30 percent of the total amount ofoutstanding debt in floating interest rate debt instruments.  In maintaining this level of exposure, weuse interest rate swaps.  Under theswaps, we agree with other parties to exchange, at specified intervals, thedifference between fixed-rate and floating-rate interest amounts calculated onan agreed notional amount.  **CG&E** has an outstanding interest rateswap agreement that decreased the percentage of floating-rate debt.  Under the provisions of the swap, which hasa notional amount of $100 million, **CG&E**pays a fixed-rate and receives a floating-rate through October 2007.  This swap qualifies as a cash flow hedgeunder the provisions of Statement 133. As the terms of the swap agreement mirror the terms of the debtagreement that it is hedging, we anticipate that this swap will continue to beeffective as a hedge.  Changes in fairvalue of this swap are recorded in *Accumulated other comprehensive income (loss)*,beginning with our adoption of Statement 133 on January 1, 2001.  **CinergyCorp.** has three outstanding interest rate swaps with a combinednotional amount of $250 million.  Underthe provisions of the swaps, **Cinergy Corp.**receives fixed-rate interest payments and pays floating-rate interest paymentsthrough September 2004.  These swapsqualify as fair value hedges under the provisions of Statement 133.  We anticipate that these swaps will continueto be effective as hedges.

 

Treasury locks are agreements that fix the yield or price on aspecified treasury security for a specified period, which we sometimes use inconnection with the issuance of fixed-rate debt.  On September 23, 2002, **CG&E**issued $500 million principal amount senior unsecured debentures due September15, 2012, with an interest rate of 5.70 percent.  In July 2002, **CG&E**executed a treasury lock with a notional amount of $250 million, which wasdesignated as a cash flow hedge of 50 percent of the forecasted interestpayments on this debt offering.  Thetreasury lock effectively fixed the benchmark interest rate (i.e., the treasurycomponent of the interest rate, but

 

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not the credit spread) for 50 percent of the offering from July 2002through the issuance date in order to reduce the exposure associated withtreasury rate volatility.  With theissuance of the debt, the treasury lock was settled.  Given the use of hedge accounting, this settlement is reflected in*Accumulated other comprehensive income(loss)* on an after-tax basis in the amount of $13 million, ratherthan a charge to net income.  Thisamount will be reclassified to*Interest*expense over the 10-year life of the related debt as interest is accrued.

 

See Note 1(l) for additional information on financial derivatives.   In the future, we will continually monitormarket conditions to evaluate whether to modify our level of exposure tofluctuations in interest rates.

 

**(b)**                                  ***Fair Value of Other Financial Instruments***

 

The estimated fair values of other financial instruments were as follows(this information does not claim to be a valuation of the companies as awhole):

 
|                                              |   | **December 31, 2002** |       | **December 31, 2001** |   |
|---------------------------------------------------|--------|-----------------------|------------|-----------------------|--------|
| **Financial  Instruments**                        |   | **Carrying  Amount**  |       | **Fair  Value**       |   | **Carrying  Amount** |   | **Fair  Value** |   |
|                                              |   |                  |       | **(in  millions)**    |   |   |   |
|                                              |   |                  |       |                  |   |   |   |
| **Cinergy**(1)                                    |   |                  |       |                  |   |   |   |   |   |
| First mortgage  bonds and other long-term debt(2) |   | **$**                 | **4,272**  | ** **            | **$**  | **4,483** |   | $ | 3,745 |   | $ | 3,805 |   |
|                                              |   |                  | ** ** |                  |   |   |   |   |   |
| **CG&E** and subsidiaries                |   |                  | ** ** |                  |   |   |   |   |   |
| First mortgage  bonds and other long-term debt(2) |   | **$**                 | **1,690**  | ** **            | **$**  | **1,743** |   | $ | 1,205 |   | $ | 1,214 |   |
|                                              |   |                  | ** ** |                  |   |   |   |   |   |
| **PSI**                                           |   |                  | ** ** |                  |   |   |   |   |   |
| First mortgage  bonds and other long-term debt(2) |   | **$**                 | **1,372**  | ** **            | **$**  | **1,473** |   | $ | 1,348 |   | $ | 1,379 |   |
|                                              |   |                  | ** ** |                  |   |   |   |   |   |
| **ULH&P**                                     |   |                  | ** ** |                  |   |   |   |   |   |
| Other long-term  debt(2)                          |   | **$**                 | **75**     | ** **            | **$**  | **78** |   | $ | 75 |   | $ | 76 |   |

 

----

(1)          Theresults of **Cinergy** also includeamounts related to non-registrants.

(2)          Includesamounts reflected as *Long-term debt duewithin one year*.

 

The following methods and assumptions were used to estimate the fairvalues of each major class of instruments:

 

*(i)*               *Cash and cash equivalents, Restricted deposits, andNotes payable and other short-term obligations*

 

Due to the short period to maturity, the carrying amounts reflected onthe Balance Sheets approximate fair values.

 

*(ii)*           *Long-term debt*

 

The fair values of long-term debt issues were estimated based on thelatest 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 forsimilar instruments.

 

162

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**(c)**                                  ***Concentrations of Credit Risk***

 

Credit risk is the exposure to economic loss that would occur as aresult of nonperformance by counterparties, pursuant to the terms of theircontractual obligations.  Specificcomponents of credit risk include counterparty default risk, collateral risk,concentration risk, and settlement risk.

 

*(i)*               *Trade Receivables and Physical Power Portfolio*

 

Our concentration of credit risk with respect to trade accountsreceivable from electric and gas retail customers is limited.  The large number of customers anddiversified customer base of residential, commercial, and industrial customerssignificantly reduces our credit risk. Contracts within the physical portfolio of power marketing and tradingoperations are primarily with the traditional electric cooperatives andmunicipalities and other investor-owned utilities.  At December 31, 2002, we believe the likelihood of significantlosses associated with credit risk in our trade accounts receivable or physicalpower portfolio is remote.

 

*(ii)*           *Energy Trading Credit Risk*

 

**Cinergy’s** extensionof credit for energy marketing and trading is governed by a Corporate CreditPolicy.  Written guidelines document themanagement approval levels for credit limits, evaluation of creditworthiness,and credit risk mitigation procedures. Exposures to credit risks are monitored daily by the Corporate CreditRisk function.  As of December 31, 2002,approximately 96 percent of the credit exposure related to energy trading andmarketing activity was with counterparties rated Investment Grade or thecounterparties’ obligations were guaranteed by a parent company or other entityrated Investment Grade.  No singlenon-investment grade counterparty accounts for more than one percent of ourtotal credit exposure.  Energy commodityprices can be extremely volatile and the market can, at times, lackliquidity.  Because of these issues,credit risk is generally greater than with other commodity trading.

 

In December 2001, Enron Corp. (Enron) filed for protection underChapter 11 of the U.S. Bankruptcy Code in the Southern District of NewYork.  We decreased our tradingactivities with Enron in the months prior to its bankruptcy filing.  We intend to resolve any contractdifferences pursuant to the terms of those contracts, business practices, andthe applicable provisions of the Bankruptcy Code, as approved by thecourt.  While we cannot predict theresolution of these matters, we do not believe that any exposure relating tothose contracts would have a material impact on our financial position orresults of operations.

 

We continually review and monitor our credit exposure to allcounterparties and secondary counterparties. If appropriate, we may adjust our credit reserves to attempt to compensatefor increased credit risk within the industry. Counterparty credit limits may be adjusted on a daily basis in responseto changes in a counterparty’s financial status or public debt ratings.

 

*(iii)*       *Financial Derivatives*

 

Potential exposure to credit risk also exists from our use of financialderivatives such as currency swaps, foreign exchange forward contracts,interest rate swaps, and treasury locks. Because

 

163

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these financial instruments are transacted with highly rated financialinstitutions, we do not anticipate nonperformance by any of the counterparties.

 

**9.**              **Pension and Other Postretirement Benefits**

 

We provide benefits to retirees in the form of pensions and otherpostretirement benefits.

 

Our qualified defined benefit pension plans cover substantially allU.S. employees meeting certain minimum age and service requirements.  A final average pay formula determines planbenefits.  These plan benefits are basedon:

 

•                       years ofparticipation;

•                       age atretirement; and

•                       theapplicable average Social Security wage base or benefit amount.

 

Our pension plan funding policy for U.S. employees is to contribute atleast the amount required by the Employee Retirement Income Security Act of1974, and up to the amount deductible for income tax purposes.  The pension plans’ assets consist ofinvestments in equity and fixed income securities.

 

We provide certain health care and life insurance benefits to retiredU.S. employees and their eligible dependents. These benefits are subject to minimum age and service requirements.  The health care benefits include medicalcoverage, dental coverage, and prescription drugs and are subject to certainlimitations, such as deductibles and co-payments.  Neither **CG&E** nor**ULH&P** pre-fund theirobligations for these postretirement benefits. In 1999, **PSI** beganpre-funding its obligations through a grantor trust as authorized by theIURC.  This trust, which consists ofequity and fixed income securities, is not restricted to the payment of planbenefits and therefore, not considered plan assets under Statement of FinancialAccounting Standards No. 106, *Employers’Accounting for Postretirement Benefits Other Than Pensions*.  At December 31, 2002 and 2001, trust assetswere approximately $52 million and $53 million, respectively, and are reflectedin **Cinergy’s** Balance Sheets as *Other investments*.

 

In addition, we sponsor non-qualified pension plans (plans that do notmeet the criteria for tax benefits) that cover officers, certain other keyemployees, and non-employee directors. We began funding certain of these non-qualified plans through a rabbitrust in 1999.  This trust, whichconsists of equity and fixed income securities, is not restricted to thepayment of plan benefits and therefore, not considered plan assets underStatement of Financial Accounting Standards No. 87, *Employers’ Accounting for Pensions*.  At December 31, 2002 and 2001, trust assetswere approximately $8 million and are reflected in **Cinergy’s** Balance Sheets as *Otherinvestments*.

 

In 2000 and 2002, **Cinergy**offered voluntary early retirement programs to certain individuals.  In accordance with Statement of FinancialAccounting Standards No. 88, *Employers’Accounting for Settlements and Curtailments of Defined Benefit Pension Plansand for Termination Benefits*(Statement 88), **Cinergy** recognized an expense of $12.8million and $39.1 million in 2000 and 2002, respectively.

 

164

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Our benefit plans’ costs for the past three years included thefollowing components:

 
|                                             |   | **Qualified  Pension Benefits** |       | **Non-Qualified  Pension Benefits** |   | **Other  Postretirement Benefits** |   |
|--------------------------------------------------|--------|---------------------------------|------------|-------------------------------------|--------|------------------------------------|--------|
|                                             |   | **2002**                        |       | **2001**                            |   | **2000**                           |   | **2002** |   | **2001** |   | **2000** |   | **2002** |   | **2001** |   | **2000** |   |
|                                             |   | **(in  millions)**              |       |
|                                             |   |                            |       |
| Service cost                                     |   | **$**                           | **27.3**   | ** **                          | $      | 27.9                               |   | $ | 27.4 |   | **$** | **2.7** |   | $ | 2.1 |   | $ | 2.0 |   | **$** | **3.5** |   | $ | 3.8 |   | $ | 3.4 |   |
| Interest cost                                    |   | **79.2**                        | ** ** | 77.5                                |   | 73.0                               |   | **5.1** |   | 4.8 |   | 4.1 |   | **19.6** |   | 17.9 |   | 17.0 |   |
| Expected return  on plans’ assets           |   | **(86.3**                       | **)**      | (81.9                               | )      | (77.0                              | )      | **—** |   | — |   | — |   | **(0.3** | **)** | — |   | — |   |
| Amortization of  transition (asset) obligation   |   | **(1.3**                        | **)**      | (1.3                                | )      | (1.3                               | )      | **0.1** |   | 0.1 |   | 0.1 |   | **5.0** | ** ** | 5.0 |   | 5.0 |   |
| Amortization of  prior service cost              |   | **6.2**                         | ** ** | 4.6                                 |   | 4.5                                |   | **0.9** |   | 1.1 |   | 1.1 |   | **—** |   | — |   | — |   |
| Recognized  actuarial (gain) loss                |   | **(5.4**                        | **)**      | (3.2                                | )      | (2.4                               | )      | **0.8** |   | 0.6 |   | 0.1 |   | **1.1** |   | 0.1 |   | — |   |
| Voluntary early  retirement costs (Statement 88) |   | **38.6**                        | ** ** | —                              |   | 11.9                               |   | **0.5** |   | — |   | 0.9 |   | **—** |   | — |   | — |   |
| Net periodic  benefit cost                       |   | **$**                           | **58.3**   | ** **                          | $      | 23.6                               |   | $ | 36.1 |   | **$** | **10.1** |   | $ | 8.7 |   | $ | 8.3 |   | **$** | **28.9** |   | $ | 26.8 |   | $ | 25.4 |   |

 

 

The net periodic benefit cost by registrant was as follows:

 
|                           |   | **Qualified  Pension Benefits** |       | **Non-Qualified  Pension Benefits** |   | **Other  Postretirement Benefits** |   |
|--------------------------------|--------|---------------------------------|------------|-------------------------------------|--------|------------------------------------|--------|
|                           |   | **2002**                        |       | **2001**                            |   | **2000**                           |   | **2002** |   | **2001** |   | **2000** |   | **2002** |   | **2001** |   | **2000** |   |
|                           |   | **(in  millions)**              |       |
|                           |   |                            |       |
| **Cinergy**(1)                 |   | **$**                           | **58.3**   | ** **                          | $      | 23.6                               |   | $ | 36.1 |   | **$** | **10.1** |   | $ | 8.7 |   | $ | 8.3 |   | **$** | **28.9** |   | $ | 26.8 |   | $ | 25.4 |   |
| **CG&E**  and subsidiaries |   | **7.2**                         | ** ** | 1.9                                 |   | 5.3                                |   | **1.1** |   | 1.7 |   | 1.3 |   | **7.2** |   | 6.9 |   | 8.8 |   |
| **PSI**                        |   | **12.2**                        |       | 7.5                                 |   | 9.4                                |   | **0.6** |   | 0.7 |   | 0.7 |   | **15.3** |   | 13.5 |   | 12.9 |   |
| **ULH&P**                  |   | **1.7**                         |       | 0.3                                 |   | 0.5                                |   | **—** |   | **—** |   | **—** |   | **0.4** |   | 0.4 |   | 0.4 |   |
|                                |        |                                 |            |                                     |        |                                    |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(1)  The resultsof **Cinergy** also include amountsrelated to non-registrants.

 

165

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The following table provides a reconciliation of the changes in theplans’ benefit obligations and fair value of assets over the two-year periodended December 31, 2002, and a statement of the funded status as of December 31of both years.

 
|                                              |   | **Qualified  Pension Benefits** |        | **Non-Qualified  Pension Benefits** |   | **Other  Postretirement  Benefits** |       |
|---------------------------------------------------|--------|---------------------------------|-------------|-------------------------------------|--------|-------------------------------------|------------|
|                                              |   | **2002**                        |        | **2001**                            |   | **2002**                            |       | **2001** |   | **2002** |   | **2001** |   |
|                                              |   | **(in  millions)**              |        |
|                                              |   |                            |        |
| **Change  in benefit obligation**                 |   |                            | ** **  |                                |   |                                |       |   |   |   | ** ** |   |   |
|                                              |   |                            | ** **  |                                |   |                                |       |   |   |   | ** ** |   |   |
| Benefit  obligation at beginning of period        |   | **$**                           | **1,083.5** | ** **                          | $      | 1,064.5                             |       | **$** | **70.9** | ** ** | $ | 67.0 |   | **$** | **270.4** | ** ** | $ | 247.1 |   |
|                                              |   |                            | ** **  |                                |   |                                | ** ** |   |   |   | ** ** |   |   |
| Service cost                                      |   | **27.3**                        | ** **  | 27.9                                |   | **2.7**                             | ** ** | 2.1 |   | **3.5** | ** ** | 3.8 |   |
| Interest cost                                     |   | **79.2**                        | ** **  | 77.5                                |   | **5.1**                             | ** ** | 4.8 |   | **19.6** | ** ** | 17.9 |   |
| Amendments(1)                                     |   | **43.3**                        | ** **  | 18.0                                |   | **4.5**                             | ** ** | (1.8 | ) | **(12.3** | **)** | — |   |
| Actuarial (gain)  loss                            |   | **156.5**                       | ** **  | (43.6                               | )      | **20.6**                            | ** ** | 4.3 |   | **80.2** | ** ** | 17.9 |   |
| Benefits paid                                     |   | **(74.9**                       | **)**       | (60.8                               | )      | **(6.0**                            | **)**      | (5.5 | ) | **(18.2** | **)** | (16.3 | ) |
|                                              |   |                            | ** **  |                                |   |                                | ** ** |   |   |   | ** ** |   |   |
| Benefit  obligation at end of period              |   | **1,314.9**                     | ** **  | 1,083.5                             |   | **97.8**                            | ** ** | 70.9 |   | **343.2** | ** ** | 270.4 |   |
|                                              |   |                            | ** **  |                                |   |                                | ** ** |   |   |   | ** ** |   |   |
| **Change  in plan assets**                        |   |                            | ** **  |                                |   |                                | ** ** |   |   |   | ** ** |   |   |
|                                              |   |                            | ** **  |                                |   |                                | ** ** |   |   |   | ** ** |   |   |
| Fair value of  plan assets at beginning of period |   | **875.4**                       | ** **  | 1,043.6                             |   | **—**                          | ** ** | — |   | **—** | ** ** | — |   |
|                                              |   |                            | ** **  |                                |   |                                | ** ** |   |   |   | ** ** |   |   |
| Actual return on  plan assets                     |   | **(48.0**                       | **)**       | (108.1                              | )      | **—**                          | ** ** | — |   | **—** | ** ** | — |   |
| Employer  contribution                            |   | **4.0**                         | ** **  | 0.7                                 |   | **6.0**                             | ** ** | 5.5 |   | **18.2** | ** ** | 16.3 |   |
| Benefits paid                                     |   | **(74.9**                       | **)**       | (60.8                               | )      | **(6.0**                            | **)**      | (5.5 | ) | **(18.2** | **)** | (16.3 | ) |
|                                              |   |                            | ** **  |                                |   |                                | ** ** |   |   |   | ** ** |   |   |
| Fair value of  plan assets at end of period       |   | **756.5**                       | ** **  | 875.4                               |   | **—**                          | ** ** | — |   | **—** | ** ** | — |   |
|                                              |   |                            | ** **  |                                |   |                                | ** ** |   |   |   | ** ** |   |   |
| **Funded  status**                                |   | **(558.4**                      | **)**       | (208.1                              | )      | **(97.8**                           | **)**      | (70.9 | ) | **(343.2** | **)** | (270.4 | ) |
|                                              |   |                            | ** **  |                                |   |                                | ** ** |   |   |   | ** ** |   |   |
| Unrecognized  prior service cost                  |   | **48.4**                        | ** **  | 50.0                                |   | **13.5**                            | ** ** | 10.2 |   | **—** | ** ** | — |   |
| Unrecognized net  actuarial (gain) loss           |   | **196.2**                       | ** **  | (100.1                              | )      | **37.6**                            | ** ** | 17.7 |   | **125.5** | ** ** | 45.7 |   |
| Unrecognized net  transition (asset) obligation   |   | **(1.9**                        | **)**       | (3.2                                | )      | **0.1**                             | ** ** | 0.1 |   | **33.5** | ** ** | 50.8 |   |
|                                              |   |                            | ** **  |                                |   |                                | ** ** |   |   |   | ** ** |   |   |
| Benefit cost at  December 31                      |   | **$**                           | **(315.7**  | **)**                               | $      | (261.4                              | )          | **$** | **(46.6** | **)** | $ | (42.9 | ) | **$** | **(184.2** | **)** | $ | (173.9 | ) |
|                                              |   |                            | ** **  |                                |   |                                | ** ** |   |   |   | ** ** |   |   |
| **Amounts  recognized in balance sheets**         |   |                            | ** **  |                                |   |                                | ** ** |   |   |   | ** ** |   |   |
|                                              |   |                            | ** **  |                                |   |                                | ** ** |   |   |   | ** ** |   |   |
| Accrued benefit  liability                        |   | **$**                           | **(353.0**  | **)**                               | $      | (261.4                              | )          | **$** | **(89.0** | **)** | $ | (63.3 | ) | **$** | **(184.2** | **)** | $ | (173.9 | ) |
| Intangible asset                                  |   | **32.6**                        | ** **  | —                              |   | **13.6**                            | ** ** | 10.3 |   | **—** | ** ** | — |   |
| Accumulated  other comprehensive income (pre-tax) |   | **4.7**                         | ** **  | —                              |   | **28.8**                            | ** ** | 10.1 |   | **—** | ** ** | — |   |
|                                              |   |                            | ** **  |                                |   |                                | ** ** |   |   |   | ** ** |   |   |
| Net recognized  at end of period                  |   | **$**                           | **(315.7**  | **)**                               | $      | (261.4                              | )          | **$** | **(46.6** | **)** | $ | (42.9 | ) | **$** | **(184.2** | **)** | $ | (173.9 | ) |

 

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(1)               For 2002, theamounts of $43.3 million and $4.5 million include $38.6 million and $.5million, respectively of voluntary early retirement expenses in accordance withStatement 88, as previously discussed.

 

166

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The following table provides the weighted average actuarialassumptions.

 
|                                  |   | **Qualified  Pension Benefits** |       | **Non-Qualified  Pension Benefits** |   | **Other  Postretirement Benefits** |   |
|---------------------------------------|--------|---------------------------------|------------|-------------------------------------|--------|------------------------------------|--------|
|                                  |   | **2002**                        |       | **2001**                            |   | **2000**                           |   | **2002** |   | **2001** |   | **2000** |   | **2002** |   | **2001** |   | **2000** |   |
|                                  |   | **(in  millions)**              |       |
|                                  |   |                            |       |
| Actuarial assumptions:                |   |                            |       |
| Discount rate                         |   | **6.75**                        | **%**      | 7.50                                | %      | 7.50                               | %      | **6.75** | **%** | 7.50 | % | 7.50 | % | **6.75** | **%** | 7.50 | % | 7.50 | % |
| Rate of future  compensation increase |   | **4.00**                        | ** ** | 4.00                                |   | 4.50                               |   | **4.00** | ** ** | 4.00 |   | 4.50 |   | **N/A** | ** ** | N/A |   | N/A |   |
| Rate of return  on plans’ assets |   | **9.00**                        | ** ** | 9.25                                |   | 9.00                               |   | **N/A** | ** ** | N/A |   | N/A |   | **N/A** | ** ** | 3.00 |   | N/A |   |
|                                       |        |                                 |            |                                     |        |                                    |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

For measurement purposes, we assumed a seven percent annual rate ofincrease in the per capita cost of covered health care benefits for 2002.  It was assumed that the rate would decreasegradually to five percent in 2008 and remain at that level thereafter.

 

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

 
|                                                     |   | **One-Percentage-  Point Increase** |   | **One-Percentage-  Point Decrease** |   |
|----------------------------------------------------------|--------|-------------------------------------|--------|-------------------------------------|--------|
|                                                     |   | **(in  millions)**                  |   |
|                                                     |   |                                |   |                                |   |
| Effect on total  of service and interest cost components |   | $                                   | 3.4    |                                | $      | (2.9 | ) |
| Effect on  postretirement benefit obligation             |   | 44.3                                |   | (38.7                               | )      |
|                                                          |        |                                     |        |                                     |        |  |  |

 

During 2002, eligible **Cinergy**employees were offered the opportunity to make a one-time election, effectiveJanuary 1, 2003, to either continue to have their pension benefit determined bythe current defined benefit pension formula or to have their benefit determinedusing a cash balance formula. Participants in the cash balance plan may request a lump-sum cashpayment based upon termination of their employment which may result inincreased cash requirements from pension plan assets.

 

Since 85 percent of eligible employees chose to continue with thetraditional pension formula, we do not believe the cash balance features willhave a material effect on our financial position or results of operations.

 

167

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**10.**       **Income Taxes**

 

The following table shows the significant components of **Cinergy’s**, **CG&E’s**, and **PSI’s**net deferred income tax liabilities as of December 31:

 
|                                                    |   | **Cinergy(1)**     |        | **CG&E and subsidiaries** |   | **PSI**     |   |
|---------------------------------------------------------|--------|--------------------|-------------|-------------------------------|--------|-------------|--------|
|                                                    |   | **2002**           |        | **2001**                      |   | **2002**    |   | **2001** |   | **2002** |   | **2001** |   |
|                                                    |   | **(in  millions)** |        |
|                                                    |   |               |        |                          |   |        |   |   |   |   |   |   |   |
| **Deferred  Income Tax Liability**                      |   |               |        |                          |   |        |   |   |   |   |   |   |   |
| Property, plant,  and equipment                         |   | **$**              | **1,356.5** |                          | $      | 1,172.0     |   | **$** | **803.1** |   | $ | 708.0 |   | **$** | **520.3** |   | $ | 453.2 |   |
| Unamortized  costs of reacquiring debt                  |   | **13.9**           |        | 13.4                          |   | **2.8**     |   | 3.2 |   | **11.0** |   | 10.2 |   |
| Deferred  operating expenses and carrying costs         |   | **4.4**            |        | 10.3                          |   | **—**  |   | — |   | **4.4** |   | 10.3 |   |
| Purchased power  tracker                                |   | **11.6**           |        | 9.7                           |   | **—**  |   | — |   | **11.6** |   | 9.7 |   |
| RTC                                                     |   | **213.2**          |        | 206.0                         |   | **213.2**   |   | 206.0 |   | **—** |   | — |   |
| Net energy risk  management assets                      |   | **8.8**            |        | 12.2                          |   | **1.0**     |   | 8.4 |   | **—** |   | — |   |
| Amounts due from  customers-income taxes                |   | **37.4**           |        | 22.9                          |   | **20.1**    |   | 16.0 |   | **17.3** |   | 6.9 |   |
| Gasification  services agreement buyout costs           |   | **89.8**           |        | 92.3                          |   | **—**  |   | — |   | **89.8** |   | 92.3 |   |
| Other                                                   |   | **45.2**           |        | 48.2                          |   | **10.9**    |   | 8.7 |   | **1.2** |   | 2.3 |   |
|                                                    |   |               |        |                          |   |        |   |   |   |   |   |   |   |
| **Total  Deferred Income Tax Liability**                |   | **1,780.8**        |        | 1,587.0                       |   | **1,051.1** |   | 950.3 |   | **655.6** |   | 584.9 |   |
|                                                    |   |               |        |                          |   |        |   |   |   |   |   |   |   |
| **Deferred  Income Tax Asset**                          |   |               |        |                          |   |        |   |   |   |   |   |   |   |
| Unamortized  investment tax credits                     |   | **42.5**           |        | 45.9                          |   | **32.9**    |   | 36.0 |   | **9.6** |   | 10.0 |   |
| Accrued pension  and other postretirement benefit costs |   | **196.3**          |        | 162.4                         |   | **107.5**   |   | 96.6 |   | **60.1** |   | 47.2 |   |
| Net energy risk  management liabilities                 |   | **—**         |        | —                        |   | **—**  |   | — |   | **9.0** |   | 5.5 |   |
| Rural Utilities  Service obligation                     |   | **28.2**           |        | 28.2                          |   | **—**  |   | — |   | **28.2** |   | 28.2 |   |
| Other                                                   |   | **41.9**           |        | 48.5                          |   | **28.1**    |   | 38.4 |   | **10.0** |   | 7.3 |   |
|                                                    |   |               |        |                          |   |        |   |   |   |   |   |   |   |
| **Total  Deferred Income Tax Asset**                    |   | **308.9**          |        | 285.0                         |   | **168.5**   |   | 171.0 |   | **116.9** |   | 98.2 |   |
|                                                    |   |               |        |                          |   |        |   |   |   |   |   |   |   |
| **Net  Deferred Income Tax Liability**                  |   | **$**              | **1,471.9** |                          | $      | 1,302.0     |   | **$** | **882.6** |   | $ | 779.3 |   | **$** | **538.7** |   | $ | 486.7 |   |

 

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(1)          Theresults of **Cinergy** also includeamounts related to non-registrants.

 

We will file a consolidated federal income tax return for the yearended December 31, 2002.  The currenttax liability is allocated among the members of the **Cinergy** consolidated group, pursuant to a tax sharingagreement filed with the SEC under the PUHCA.

 

168

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The following table summarizes federal and state income taxes charged(credited) to income for **Cinergy**, **CG&E**, and **PSI**:

 
|                                                                    |   | **Cinergy(1)**     |       | **CG&E  and subsidiaries** |   | **PSI**  |   |
|-------------------------------------------------------------------------|--------|--------------------|------------|--------------------------------|--------|----------|--------|
|                                                                    |   | **2002**           |       | **2001**                       |   | **2000** |   | **2002** |   | **2001** |   | **2000** |   | **2002** |   | **2001** |   | **2000** |   |
|                                                                    |   | **(in  millions)** |       |
|                                                                    |   |               |       |                           |   |     |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Current  Income Taxes**                                               |   |               |       |                           |   |     |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Federal                                                                 |   | **$**              | **13.3**   | ** **                     | $      | 122.9    |   | $ | 187.3 |   | **$** | **50.6** | ** ** | $ | 135.1 |   | $ | 121.5 |   | **$** | **71.1** | ** ** | $ | 59.9 |   | $ | 84.4 |   |
| State                                                                   |   | **(4.1**           | **)**      | 9.3                            |   | 16.9     |   | **0.6** | ** ** | 7.6 |   | 1.6 |   | **9.7** | ** ** | 4.6 |   | 10.8 |   |
| **Total  Current Income Taxes**                                         |   | **9.2**            | ** ** | 132.2                          |   | 204.2    |   | **51.2** | ** ** | 142.7 |   | 123.1 |   | **80.8** | ** ** | 64.5 |   | 95.2 |   |
|                                                                    |   |               | ** ** |                           |   |     |   |   | ** ** |   |   |   |   |   | ** ** |   |   |   |   |
| **Deferred  Income Taxes**                                              |   |               | ** ** |                           |   |     |   |   | ** ** |   |   |   |   |   | ** ** |   |   |   |   |
| Federal                                                                 |   |               | ** ** |                           |   |     |   |   | ** ** |   |   |   |   |   | ** ** |   |   |   |   |
| Depreciation and  other property, plant, and equipment-related items(2) |   | **172.2**          | ** ** | 42.7                           |   | 26.1     |   | **73.6** | ** ** | 23.3 |   | 19.0 |   | **79.6** | ** ** | 10.7 |   | 7.1 |   |
| Pension and  other benefit costs                                        |   | **(17.4**          | **)**      | (11.8                          | )      | (21.3    | )      | **(4.7** | **)** | (4.2 | ) | (7.5 | ) | **(7.4** | **)** | (7.6 | ) | (11.5 | ) |
| Deferred excise  taxes                                                  |   | **—**         | ** ** | 14.5                           |   | —   |   | **—** | ** ** | 14.5 |   | — |   | **—** | ** ** | — |   | — |   |
| Unrealized  energy risk management transactions                         |   | **9.0**            | ** ** | 44.0                           |   | 10.9     |   | **2.2** | ** ** | 23.9 |   | 5.6 |   | **(2.8** | **)** | 11.6 |   | 2.0 |   |
| Fuel costs                                                              |   | **(22.7**          | **)**      | 5.7                            |   | 28.7     |   | **8.8** | ** ** | (8.0 | ) | 26.7 |   | **(31.5** | **)** | 13.7 |   | 2.0 |   |
| Purchased power  tracker                                                |   | **1.5**            | ** ** | 8.5                            |   | —   |   | **—** | ** ** | — |   | — |   | **1.5** | ** ** | 8.5 |   | — |   |
| Gasification  services agreement buyout costs                           |   | **(2.6**           | **)**      | (2.2                           | )      | (0.1     | )      | **—** | ** ** | — |   | — |   | **(2.6** | **)** | (2.2 | ) | (0.1 | ) |
| Other-net                                                               |   | **(14.1**          | **)**      | 16.1                           |   | 11.0     |   | **8.3** | ** ** | (4.8 | ) | (3.0 | ) | **(7.5** | **)** | 5.3 |   | (1.2 | ) |
|                                                                    |   |               | ** ** |                           |   |     |   |   | ** ** |   |   |   |   |   | ** ** |   |   |   |   |
| **Total  Deferred Federal Income Taxes**                                |   | **125.9**          | ** ** | 117.5                          |   | 55.3     |   | **88.2** | ** ** | 44.7 |   | 40.8 |   | **29.3** | ** ** | 40.0 |   | (1.7 | ) |
|                                                                    |   |               | ** ** |                           |   |     |   |   | ** ** |   |   |   |   |   | ** ** |   |   |   |   |
| State                                                                   |   | **30.4**           | ** ** | 15.4                           |   | 1.7      |   | **20.8** | ** ** | 5.0 |   | 1.5 |   | **7.8** | ** ** | 4.8 |   | (1.4 | ) |
|                                                                    |   |               | ** ** |                           |   |     |   |   | ** ** |   |   |   |   |   | ** ** |   |   |   |   |
| **Total  Deferred Income Taxes**                                        |   | **156.3**          | ** ** | 132.9                          |   | 57.0     |   | **109.0** | ** ** | 49.7 |   | 42.3 |   | **37.1** | ** ** | 44.8 |   | (3.1 | ) |
|                                                                    |   |               | ** ** |                           |   |     |   |   | ** ** |   |   |   |   |   | ** ** |   |   |   |   |
| **Investment  Tax Credits-Net**                                         |   | **(8.2**           | **)**      | (9.1                           | )      | (9.6     | )      | **(4.9** | **)** | (5.9 | ) | (6.0 | ) | **(3.2** | **)** | (3.2 | ) | (3.6 | ) |
|                                                                    |   |               | ** ** |                           |   |     |   |   | ** ** |   |   |   |   |   | ** ** |   |   |   |   |
| **Total  Income Taxes**                                                 |   | **$**              | **157.3**  | ** **                     | $      | 256.0    |   | $ | 251.6 |   | **$** | **155.3** | ** ** | $ | 186.5 |   | $ | 159.4 |   | **$** | **114.7** | ** ** | $ | 106.1 |   | $ | 88.5 |   |

 

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(1)          Theresults of **Cinergy** also includeamounts related to non-registrants.

(2)          Theincrease in deferred income taxes for depreciation and other property, plant,and equipment-related items includes a change in accounting method for taxpurposes related to capitalized costs.

 

Internal Revenue Code Section 29 provides a tax credit (nonconventionalfuel source credit) for qualified fuels produced and sold by a taxpayer to anunrelated person during the taxable year. The nonconventional fuel source credit reduced current federal incometax expense $41.6 million and $1.1 million for 2002 and 2001, respectively.

 

Internal Revenue Code Section 45 provides a tax credit for electricityproduced from certain renewable resources during the taxable year.  The renewable resource credit reducedcurrent federal income tax expense $4.1 million, $3.2 million, and $2.5 millionfor 2002, 2001, and 2000, respectively.

 

169

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The following table presents a reconciliation of federal income taxes(which are calculated by multiplying the statutory federal income tax rate bybook income before federal income tax) to the federal income tax expensereported in the Statements of Income for **Cinergy**,**CG&E**, and **PSI**.

 
|                                                                       |   | **Cinergy(1)**     |       | **CG&E  and subsidiaries** |   | **PSI**  |   |
|----------------------------------------------------------------------------|--------|--------------------|------------|--------------------------------|--------|----------|--------|
|                                                                       |   | **2002**           |       | **2001**                       |   | **2000** |   | **2002** |   | **2001** |   | **2000** |   | **2002** |   | **2001** |   | **2000** |   |
|                                                                       |   | **(in  millions)** |       |
|                                                                       |   |               |       |                           |   |     |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Statutory  federal income tax provision                                    |   | **$**              | **184.8**  | ** **                     | $      | 235.6    |   | $ | 221.3 |   | **$** | **139.2** | ** ** | $ | 175.2 |   | $ | 148.1 |   | **$** | **109.0** | ** ** | $ | 90.7 |   | $ | 75.1 |   |
| Increases  (reductions) in taxes resulting from:                           |   |               | ** ** |                           |   |     |   |   | ** ** |   |   |   |   |   | ** ** |   |   |   |   |
| Amortization of  investment tax credits                                    |   | **(8.2**           | **)**      | (9.1                           | )      | (9.6     | )      | **(4.9** | **)** | (5.9 | ) | (6.0 | ) | **(3.2** | **)** | (3.2 | ) | (3.6 | ) |
| Depreciation and  other property, plant, and equipment-related differences |   | **0.2**            | ** ** | 3.2                            |   | 17.7     |   | **1.0** | ** ** | 2.6 |   | 14.0 |   | **(0.8** | **)** | 0.6 |   | 3.6 |   |
| Preferred  dividend requirements of subsidiaries                           |   | **1.2**            | ** ** | 1.2                            |   | 1.6      |   | **—** | ** ** | — |   | — |   | **—** | ** ** | **—** |   | — |   |
| Income tax  credits                                                        |   | **(45.7**          | **)**      | (4.3                           | )      | (2.5     | )      | **—** | ** ** | **—** |   | **—** |   | **—** | ** ** | **—** |   | **—** |   |
| Foreign tax  adjustments                                                   |   | **5.0**            | ** ** | (1.3                           | )      | —   |   | **—** | ** ** | — |   | — |   | **—** | ** ** | **—** |   | — |   |
| Employee Stock  Option Plan dividend                                       |   | **(3.0**           | **)**      | —                         |   | —   |   | **—** | ** ** | — |   | — |   | **—** | ** ** | — |   | — |   |
| Other-net                                                                  |   | **(3.3**           | **)**      | 6.0                            |   | 4.5      |   | **(1.4** | **)** | 2.0 |   | 0.2 |   | **(7.8** | **)** | 8.6 |   | 4.0 |   |
|                                                                       |   |               | ** ** |                           |   |     |   |   | ** ** |   |   |   |   |   | ** ** |   |   |   |   |
| **Federal  Income Tax Expense**                                            |   | **$**              | **131.0**  | ** **                     | $      | 231.3    |   | $ | 233.0 |   | **$** | **133.9** | ** ** | $ | 173.9 |   | $ | 156.3 |   | **$** | **97.2** | ** ** | $ | 96.7 |   | $ | 79.1 |   |

 

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(1)          Theresults of **Cinergy** also includeamounts related to non-registrants.

 

The following table shows the significant components of **ULH&P’s** net deferred income taxliability as of December 31, 2002 and 2001:

 

|                                                    |   | **ULH&P**      |       |
|---------------------------------------------------------|--------|--------------------|------------|
|                                                    |   | **2002**           |       | **2001** |   |
|                                                    |   | **(in thousands)** |       |
| **Deferred Income Tax Liability**                       |   |               |       |   |   |
| Property, plant,  and equipment                         |   | **$**              | **44,309** |   | $ | 34,218 |   |
| Unamortized  costs of reacquiring debt                  |   | **652**            |       | 699 |   |
| Amounts due from  customers-income taxes                |   | **2,194**          |       | — |   |
| Deferred fuel  costs                                    |   | **—**         |       | — |   |
| Other                                                   |   | **6,340**          |       | 4,158 |   |
|                                                    |   |               |       |   |   |
| **Total  Deferred Income Tax Liability**                |   | **53,495**         |       | 39,075 |   |
|                                                    |   |               |       |   |   |
| **Deferred  Income Tax Asset**                          |   |               |       |   |   |
| Unamortized  investment tax credits                     |   | **1,309**          |       | 1,035 |   |
| Amounts due to  customers-income taxes                  |   | **—**         |       | 2,524 |   |
| Deferred fuel  costs                                    |   | **1,987**          |       | 520 |   |
| Accrued pension  and other postretirement benefit costs |   | **4,410**          |       | 3,947 |   |
| Other                                                   |   | **2,429**          |       | 2,726 |   |
|                                                    |   |               |       |   |   |
| **Total  Deferred Income Tax Asset**                    |   | **10,135**         |       | 10,752 |   |
|                                                    |   |               |       |   |   |
| **Net  Deferred Income Tax Liability**                  |   | **$**              | **43,360** |   | $ | 28,323 |   |

 

170

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The following table summarizes federal and state income taxes charged(credited) to income for **ULH&P**:

 
|                                                                 |   | **ULH&P**      |       |
|----------------------------------------------------------------------|--------|--------------------|------------|
|                                                                 |   | **2002**           |       | **2001** |   | **2000** |   |
|                                                                 |   | **(in thousands)** |       |
|                                                                 |   |               | ** ** |   |   |   |   |
| **Current Income Taxes**                                             |   |               | ** ** |   |   |   |   |
| Federal                                                              |   | **$**              | **3,250**  | ** ** | $ | 23,109 |   | $ | 5,003 |   |
| State                                                                |   | **5,984**          | ** ** | (2,293 | ) | (129 | ) |
| **Total Current Income Taxes**                                       |   | **9,234**          | ** ** | 20,816 |   | 4,874 |   |
|                                                                 |   |               | ** ** |   |   |   |   |
| **Deferred Income Taxes**                                            |   |               | ** ** |   |   |   |   |
| Federal                                                              |   |               | ** ** |   |   |   |   |
| Depreciation and  other property, plant, and equipment-related items |   | **2,797**          | ** ** | 1,042 |   | 1,059 |   |
| Pension and  other benefit costs                                     |   | **(309**           | **)**      | (140 | ) | (605 | ) |
| Fuel costs                                                           |   | **(696**           | **)**      | (7,338 | ) | 8,564 |   |
| Unamortized  costs of reacquiring debt                               |   | **(70**            | **)**      | (30 | ) | (30 | ) |
| Service company  allocations                                         |   | **—**         | ** ** | 192 |   | 251 |   |
| Other-net                                                            |   | **1,138**          | ** ** | 212 |   | (338 | ) |
|                                                                 |   |               | ** ** |   |   |   |   |
| **Total  Deferred Federal Income Taxes**                             |   | **2,860**          | ** ** | (6,062 | ) | 8,901 |   |
|                                                                 |   |               | ** ** |   |   |   |   |
| **Deferred  State Income Taxes**                                     |   | **522**            | ** ** | (781 | ) | 303 |   |
|                                                                 |   |               | ** ** |   |   |   |   |
| **Total  Deferred Income Taxes**                                     |   | **3,382**          | ** ** | (6,843 | ) | 9,204 |   |
|                                                                 |   |               | ** ** |   |   |   |   |
| **Investment  Tax Credits-Net**                                      |   | **(267**           | **)**      | (274 | ) | (277 | ) |
|                                                                 |   |               | ** ** |   |   |   |   |
| **Total  Income Taxes**                                              |   | **$**              | **12,349** | ** ** | $ | 13,699 |   | $ | 13,801 |   |

 

The following table presents a reconciliation of federal income taxes(which are calculated by multiplying the statutory federal income tax rate bybook income before federal income tax) to the federal income tax expensereported in the Statements of Income for **ULH&P**.

 
|                                                                        |   | **ULH&P**       |       |
|-----------------------------------------------------------------------------|--------|---------------------|------------|
|                                                                        |   | **2002**            |       | **2001** |   | **2000** |   |
|                                                                        |   | **(in  thousands)** |       |
|                                                                        |   |                | ** ** |   |   |   |   |
| Statutory  federal income tax provision                                     |   | **$**               | **6,298**  | ** ** | $ | 18,444 |   | $ | 13,391 |   |
| Increases  (reductions) in taxes resulting from:                            |   |                | ** ** |   |   |   |   |
| Amortization of  investment tax credits                                     |   | **(267**            | **)**      | (274 | ) | (277 | ) |
| Depreciation and  other property, plant, and equipment- related differences |   | **(387**            | **)**      | 23 |   | 830 |   |
| Other-net                                                                   |   | **199**             | ** ** | (1,420 | ) | (317 | ) |
|                                                                        |   |                | ** ** |   |   |   |   |
| **Federal  Income Tax Expense**                                             |   | **$**               | **5,843**  | ** ** | $ | 16,773 |   | $ | 13,627 |   |

 

171

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**11.**       **Commitments and Contingencies**

 

**(a)**                                  ***Construction and Other Commitments***

 

Forecasted construction and other committed expenditures, includingcapitalized financing costs, for the year 2003 and for the five-year period2003-2007 (in nominal dollars) are presented in the table below:

 

|                         |   | **2003**           |    | **2003-2007** |   |
|------------------------------|--------|--------------------|---------|---------------|--------|
|                         |   | **(in  millions)** |    |
|                         |   |               |    |          |   |
| **Cinergy**(1)               |   | **$**              | **759** |          | $      | 3,102 |   |
| **CG&E**and subsidiaries |   | **326**            |    | 1,477         |   |
| **PSI**(2)                   |   | **367**            |    | 1,369         |   |
| **ULH&P**                |   | **43**             |    | 242           |   |
|                              |        |                    |         |               |        |  |  |

 

----

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

(2)          Excludes intercompanypurchase of peaking plants from a non-regulated affiliate.

 

This forecast includes an estimate of expenditures in accordance withthe companies’ plans regarding nitrogen oxide (NOX) emission controlstandards and other environmental compliance (excluding implementation of thetentative U.S. Environmental Protection Agency (EPA) Agreement), as discussedbelow.

 

**(b)**                                  ***Guarantees***

 

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

 

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

 

**Cinergy**hasguaranteed the payment of $33 million as of December 31, 2002, forunconsolidated subsidiaries’ debt and for borrowings by individuals under theDirector, Officer, and Key Employee Stock Purchase Program (see Note 2(d) forfurther information).  **Cinergy**may be obligated to pay the debt’sprincipal and any related interest in the event of an unexcused breach of aguaranteed payment obligation by the unconsolidated subsidiary or an unexcusedbreach of guaranteed payment obligations by certain directors, officers, andkey employees.  The majority of theseguarantees expire in three years.

 

172

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**Cinergy Corp.** hasalso provided performance guarantees on behalf of certain unconsolidatedsubsidiaries and joint ventures.  Theseguarantees support performance under various agreements and instruments (suchas construction contracts, operations and maintenance agreements and energyservice agreements).  **Cinergy Corp.**may be liable in the event ofan unexcused breach of a guaranteed performance obligation by an unconsolidatedsubsidiary.  **Cinergy Corp.** has estimated its maximum potential amount to be$133 million under these guarantees as of December 31, 2002.  **CinergyCorp.** may also have recourse to third parties for claims required tobe paid under certain of these guarantees. The majority of these guarantees expire at the completion of theunderlying performance agreement, generally 15 to 20 years.

 

**Cinergy**has enteredinto contracts that include indemnification provisions as a routine part of itsbusiness activities.  Examples of these****contracts include purchase and saleagreements and operating agreements.  Ingeneral, these provisions indemnify the counterparty for matters such asbreaches of representations and warranties and covenants contained in thecontract.  In some cases, particularlywith respect to purchase and sale agreements, the potential liability forcertain indemnification obligations is capped, in whole or in part (generallyat an aggregate amount not exceeding the sale price), and subject to adeductible amount before****anypayments would become due.** **In other cases (such asindemnifications for willful misconduct of employees in a joint venture), themaximum potential amount is not estimable given that the magnitude of anyclaims under those indemnifications would be a function of the extent ofdamages actually incurred, which is not practicable to estimate unless anduntil the event occurs.  **Cinergy** has estimated the maximum potentialamount, where estimable, to be $131 million under these indemnificationprovisions and considers the likelihood of making any material payments underthese provisions to be remote.  Thetermination period for the majority of matters covered under indemnificationprovisions in purchase and sale agreements generally ranges from two to sevenyears.

 

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

 

**(c)**                                  ***Ozone Transport Rulemakings***

 

In June 1997, the Ozone Transport Assessment Group, which consisted of37 states, made a wide range of recommendations to the EPA to address theimpact of ozone transport on serious non-attainment areas (geographic areasdefined by the EPA as non-compliant with ozone standards) in the Northeast,Midwest, and South.  Ozone transportrefers to wind-blown movement of ozone and ozone-causing materials across cityand state boundaries.

 

*(i)*                                  *NOX State Implementation Plan (SIP) Call*

 

In October 1998, the EPA finalized its ozone transport rule, also knownas the NOX SIP Call.  Itapplied to 22 states in the eastern half of the U.S., including the threestates in which our electric utilities operate, and proposed a model NOXemission allowance trading program. This rule recommended that states reduce NOX emissionsprimarily from industrial and utility sources to a certain level by May 2003.

 

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Ohio, Indiana, a number of other states, and various industry groups(some of which we are a member), filed legal challenges to the NOXSIP Call with the U.S. Circuit Court of Appeals for the District of Columbia(Court of Appeals).  In August 2000, theCourt of Appeals extended the deadline for NOX reductions to May 31,2004.  In June 2001, the Court ofAppeals remanded portions of the NOX SIP Call to the EPA forreconsideration of how growth was factored into the state NOXbudgets.  On May 1, 2002, the EPApublished, in the Federal Register, a final rule reaffirming its growth factorsand state NOX budgets, with additional explanation.  The states of West Virginia and Illinois,along with various industry groups (some of which we are a member), havechallenged the growth factors and state NOX budgets in an actionfiled in the Court of Appeals.  It isunclear when the Court of Appeals will reach a decision in this case, orwhether this decision will result in an increase or decrease in the size of theNOX reduction requirement, or a deferral of the May 31, 2004compliance deadline.

 

The states of Indiana and Kentucky developed final NOX SIPrules in response to the NOX SIP Call, through cap and trade programs,in June and July of 2001, respectively. On November 8, 2001, the EPA approved Indiana’s SIP rules, which becameeffective December 10, 2001.  On April 11, 2002, the EPA proposed directfinal approval of Kentucky’s rules and they became effective on June 10, 2002.  The state of Ohio completed its NOXSIP rules in response to the NOX SIP Call on July 8, 2002, with aneffective date of July 18, 2002.  OnJanuary 16, 2003, the EPA proposed a direct final rule to approve Ohio’sSIP.  The rule will be effective March17, 2003, assuming no adverse comments are received.  **Cinergy’s** currentplans for compliance with the EPA’s NOX SIP Call would also satisfycompliance with Indiana’s, Kentucky’s, and Ohio’s SIP rules.

 

On September 25, 2000, **Cinergy**announced a plan for its subsidiaries, **CG&E**and **PSI**, to invest in pollutioncontrol equipment and other methods to reduce NOX emissions.  This plan includes the following:

 

•                  completeinstallation of 9 selective catalytic reduction units at several different generatingstations;

•                  install otherpollution control technologies, including new computerized combustion controls,at all generating stations;

•                  make combustionimprovements; and

•                  utilize the NOXallowance market to buy or sell NOX allowances as appropriate.

 

The current estimate for additional expenditures for this investment isapproximately $275 million and is in addition to the $578 million alreadyincurred to comply with this program.

 

*(ii)*                              *Section 126 Petitions*

 

In February 1998, several northeast states filed petitions seeking theEPA’s assistance in reducing ozone in the Eastern U.S. under Section 126 of theClean Air Act (CAA).  The EPA believesthat Section 126 petitions allow a state to claim that sources in another stateare contributing to its air quality problem and request that the EPA requirethe upwind sources to reduce their emissions.

 

174

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In December 1999, the EPA granted four Section 126 petitions relatingto NOX emissions.  Thisruling affected all of our Ohio and Kentucky facilities, as well as some of ourIndiana facilities, and requires us to reduce our NOX emissions to acertain level by May 2003.  In May 2001,the Court of Appeals substantially upheld a challenge to the Section 126 requirements,and remanded portions of the rule to the EPA for reconsideration of how growthwas factored into the emission limitations. On August 24, 2001, the Court of Appeals temporarily suspended theSection 126 compliance deadline, pending the EPA’s reconsideration of growthfactors.  On May 1, 2002, the EPA issueda final rule extending the Section 126 rule compliance deadline to May 31,2004, thus harmonizing the deadline with that for the NOX SIP Call.

 

The Section 126 rule will not apply, however, in states with approvedSIPs under the NOX SIP Call, which include the states of Indiana andKentucky.  In addition, the EPA hasissued a direct final rule approving Ohio’s SIP.  As a result of these actions, we anticipate that the Section 126rule will not affect any of our facilities.

 

*(iii)*                          *State Ozone Plans*

 

On November 15, 1999, the states of Indiana and Kentucky (along withJefferson County, Kentucky) jointly filed an amendment to their attainmentdemonstration on how they intend to bring the Greater Louisville Area(including Floyd and Clark Counties in Indiana) into attainment with theone-hour ozone standard.  The GreaterLouisville Area has since attained the one-hour ozone standard, and on October23, 2001, the EPA re-designated the area as being in attainment with thatstandard.  Previous SIP amendmentscalled for, among other things, statewide NOX reductions fromutilities in Indiana, Kentucky, and surrounding states which are less stringentthan the EPA’s NOX SIP Call. In lieu of continuing rulemakings for NOX emission reductionsunder this demonstration, the states completed more stringent NOXemission reduction regulations in response to the NOX SIP Call.

 

See (f) below for a discussion of the tentative EPA Agreement, theimplementation of which could affect our strategy for compliance with the finalNOX SIP Call.

 

**(d)**                                  ***New Source Review (NSR)***

 

The CAA’s NSR provisions require that a company obtain apre-construction permit if it plans to build a new stationary source ofpollution or make a major modification to an existing facility, unless thechanges are exempt.

 

On November 3, 1999, the United States sued a number of holdingcompanies and electric utilities, including **Cinergy,CG&E,**and **PSI,** invarious U.S. District Courts (District Court). The **Cinergy, CG&E,**and **PSI** suit alleged violations of the CAA attwo of our generating stations relating to NSR and New Source PerformanceStandards requirements.  The suit sought(1) injunctive relief to require installation of pollution control technology oneach of the generating units at **CG&E’s**W.C. Beckjord Generating Station (Beckjord Station) and at **PSI’s** Cayuga Generating Station, and (2)civil penalties in amounts of up to $27,500 per day for each violation.  Since that time, two amendments to the complainthave been filed by the United States, alleging additional violations of theCAA, including allegations involving different generating units.  In addition, three northeast states and twoenvironmental groups have intervened in the case.

 

On December 21, 2000, **Cinergy,CG&E**, and **PSI**reached an agreement in principle with the parties in the litigation for anegotiated resolution of the CAA claims in the litigation.  See (f) below for a discussion of thetentative EPA Agreement.

 

On October 4, 2002, the Indiana District Court issued a Revised CaseManagement Plan in **Cinergy’s** casethat sets forth the dates by which various events in the litigation, such asdiscovery and the filing of dispositive motions, must be completed.  Consistent with the plan, on October 9,2002, the Indiana District Court set the case for trial by jury commencing onOctober 4, 2004.

 

At this time, it is not possible to predict whether a final agreementimplementing the agreement in principle can be reached.  The parties continue to negotiate.  If the settlement is not completed, weintend to defend against the allegations vigorously in court.  In such an event, it is not possible todetermine the likelihood that the plaintiffs would prevail upon their claims orwhether resolution of these matters would have a material effect on ourfinancial position or results of operations.

 

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**(e)*****                                  Beckjord Station NOV***

** **

On November 30, 1999, the EPA filed an NOV against **Cinergy** and **CG&E**, alleging that emissions of particulate matter at theBeckjord Station exceeded the allowable limit. The allegations contained in this NOV were incorporated within the March1, 2000 amended complaint, as discussed in (d) above.  On June 22, 2000, the EPA issued an NOV and a finding ofviolation (FOV) alleging additional particulate emission violations at BeckjordStation.  The NOV/FOV indicated the EPAmay issue an administrative compliance order, issue an administrative penaltyorder, or bring a civil or criminal action.

 

See (f) below for a discussion of the tentative EPA Agreement, whichrelates to matters discussed within this note.

 

**(f)*****                                    EPA Agreement***

** **

On December 21, 2000, **Cinergy**,**CG&E**, and **PSI** reached an agreement in principle withthe United States, three northeast states, and two environmental groups for anegotiated resolution of CAA claims and other related matters brought againstcoal-fired power plants owned and operated by **Cinergy’s**operating subsidiaries.  The completeresolution of these issues is contingent upon establishing a final agreementwith the EPA and other parties.  If afinal agreement is reached with these parties, it would resolve past claims ofalleged NSR violations as well as the Beckjord Station NOVs/FOV discussedpreviously under (d) and (e).

 

In addition, the intent of the tentative agreement is that we would beallowed to continue on-going activities to maintain reliability andavailability without subjecting the plants to future litigation regardingfederal NSR permitting requirements.

 

In return for resolution of claims regarding past maintenanceactivities, as well as future operational certainty, we have tentatively agreedto:

 

•                  shutdown or repower with natural gas, nine small coal-fired boilers at three powerplants beginning in 2004;

•                  buildfour additional sulfur dioxide (SO2) scrubbers, the first of whichmust be operational by December 31, 2007;

•                  upgradeexisting particulate control systems;

•                  phasein the operation of NOX reduction technology year-round starting in2004;

 

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•                  reduceour existing Title IV SO2 cap by 35 percent in 2013;

•                  paya civil penalty of $8.5 million to the U.S. government; and

•                  implement$21.5 million in environmental mitigation projects, including retiring 50,000tons of SO2 allowances by 2005.

 

The estimated cost for these capital expenditures is expected to beapproximately $700 million through 2013. These capital expenditures are inaddition to our previously announced commitment to install NOX controlsas discussed in (c) above, but does include capital costs that **Cinergy** would expect to spend regardless ofthe settlement due to new environmental requirements expected in the secondhalf of this decade.

 

**Cinergy**, **CG&E**, and **PSI** have accrued costs related to certain aspects of thetentative agreement.  In reaching thetentative agreement, we did not admit any wrongdoing and remain free tocontinue our current maintenance practices, as well as implement future projectsfor improved reliability.

 

At this time, it is not possible to predict whether a final agreementimplementing the agreement in principle can be reached.  The parties continue to negotiate.  If the settlement is not completed, weintend to defend against the allegations, discussed in (d) and (e) above,vigorously in court.  In such an event,it is not possible to determine the likelihood that the plaintiffs wouldprevail upon their claims or whether resolution of these matters would have amaterial effect on our financial position or results of operations.

 

**(g)****                                 *ManufacturedGas Plant (MGP) Sites***

** **

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

 

Coal tar residues, related hydrocarbons, and various metals associatedwith MGP sites have been found at former MGP sites in Indiana, including atleast 21 sites which **PSI** or itspredecessors previously owned.  **PSI** acquired four of the sites from NIPSCOin 1931.  At the same time, **PSI** sold NIPSCO the sites located in Goshenand Warsaw, Indiana.  In 1945, **PSI** sold 19 of these sites (including thefour sites it acquired from NIPSCO) to the predecessor of the Indiana GasCompany, Inc. (IGC).  IGC later sold thesite located in Rochester, Indiana to NIPSCO.

 

IGC and NIPSCO have both made claims against **PSI** alleging that **PSI**is a Potentially Responsible Party with respect to the 21 MGP sites under theComprehensive Environmental Response, Compensation and Liability Act(CERCLA).  The claims further assertedthat **PSI** was legally responsiblefor the costs of investigating and remediating the sites.  In August 1997, NIPSCO filed suit against **PSI** in federal court, claiming recovery(pursuant to CERCLA) of NIPSCO’s past and future costs of investigating andremediating MGP-related contamination at the Goshen, Indiana MGP site.

 

In November 1998, NIPSCO, IGC, and **PSI**entered into a Site Participation and Cost Sharing Agreement (Agreement).  This Agreement allocated CERCLA liabilityfor past and future costs at seven MGP sites in Indiana among the threecompanies.  As a result of theAgreement, NIPSCO’s lawsuit against **PSI**was dismissed.  Similar agreements werereached between IGC and **PSI** thatallocate CERCLA liability at 14 MGP sites with which NIPSCO was notinvolved.  These agreements concludedall CERCLA and similar claims between the three companies related to MGPsites.  The parties continue toinvestigate and remediate the sites, as appropriate, under the agreements andapplicable laws.  The Indiana Departmentof Environmental Management (IDEM) oversees investigation and cleanup of someof the sites.

 

**PSI** notified itsinsurance carriers of the claims related to MGP sites raised by IGC, NIPSCO,and IDEM.  In April 1998, **PSI** filed suit in Hendricks County CircuitCourt in the State of Indiana against its general liability insurancecarriers.  **PSI** sought a declaratory judgment to obligate its insurancecarriers to (1) defend MGP claims against **PSI**,or (2) pay **PSI’s** costs of defenseand compensate **PSI** for its costsof investigating, preventing, mitigating, and remediating damage to propertyand paying claims related to MGP sites. The lawsuit was moved to the Hendricks County Superior Court (SuperiorCourt) in July 1998.  The trial courtissued a variety of rulings with respect to the claims and defenses in thelitigation.  **PSI** has appealed certain adverse rulings to the Indiana Courtof Appeals.  At the present time, **PSI** cannot predict the outcome of thislitigation, including the outcome of the appeals to the Indiana Court ofAppeals.

 

177

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**PSI** and **CG&E**, including its utilitysubsidiaries, have accrued costs for the sites related to investigation,remediation, and groundwater monitoring to the extent such costs are probableand can be reasonably estimated.  **PSI** and **CG&E**,including its utility subsidiaries, do not believe they can provide an estimateof the reasonably possible total remediation costs for any site before aremedial investigation/feasibility study is performed.  To the extent remediation is necessary, thetiming of the remediation activities impacts the cost of remediation.  Therefore, **PSI**and **CG&E**, including itsutility subsidiaries, currently cannot determine the total costs that may beincurred in connection with remediation of all sites, to the extent thatremediation is required.  Untilinvestigation and remediation activities have been completed on these sites,and the extent of insurance coverage for these costs, if any, is determined, weare unable to reasonably estimate the total costs and impact on our financialposition or results of operations.

 

**(h)*****                                 Asbestos Claims Litigation***

** **

**CG&E** and **PSI** have been named in lawsuits related toAsbestos at their electric generating stations.  In these lawsuits, plaintiffs claim to have been exposed toAsbestos containing products in the course of their work at the **CG&E** and **PSI** generating stations. The plaintiffs further claim that as the property owner of thegenerating stations,**CG&E** and **PSI** should be held liable for theirinjuries and illnesses based on an alleged duty to warn and protect them fromany Asbestos exposure.  A majority ofthe lawsuits to date have been brought against **PSI**.  The impact on **CG&E’s** and **PSI’s** financial position or results of operations of thesecases to date has not been material.

 

One specific case filed against **PSI**has been tried to verdict.  Following a10 week trial of the case entitled *WilliamLee Roberts, Jr. and Beverly Roberts v. AC&S, Inc., et al., PSI Energy,Inc.*, Marion Superior Court 2, on May 24, 2002, the jury returned averdict against **PSI** in the amountof approximately $500,000 on a negligence claim and for **PSI** on punitive damages.  **PSI**is appealing the judgment in this case. The total damages were immaterial to **PSI’s**financial position and results of operations. However, future verdicts in any of the pending lawsuits could bematerial.  At this time, **CG&E** and **PSI**are not able to predict the ultimate outcome of theselawsuits or the impact on **CG&E’s**and **PSI’s** financial position orresults of operations.

 

**(i)*****                                    Gas Customer Choice***

** **

In January 2000, Investments sold CinergyResources, Inc. (Resources), a former subsidiary, to Licking RuralElectrification, Inc., doing business as The Energy Cooperative (EnergyCooperative).  In February 2001, **Cinergy**, **CG&E**, and Resources were named as defendants in

 

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three class action lawsuits brought bycustomers relating to Energy Cooperative’s removal from the Ohio Gas CustomerChoice program and the failure to deliver gas to customers.

 

Subsequently, these class action suits wereamended and consolidated into one suit. **CG&E** has beendismissed as a defendant in the consolidated suit.  In March 2001, **Cinergy**, **CG&E**, andInvestments were named as defendants in a lawsuit filed by both EnergyCooperative and Resources.  This lawsuitconcerns any obligations or liabilities Investments may have to EnergyCooperative following its sale of Resources. This lawsuit is pending in the Licking County Common Pleas Court.  Trial is anticipated to occur in late 2003or early 2004.  In October 2001, **Cinergy**, **CG&E**,and Investments initiated litigation against the Energy Cooperative requestingindemnification by the Energy Cooperative for the claims asserted by formercustomers in the class action litigation. This customer litigation is pending in the Hamilton County Common PleasCourt.  A trial date has not beenset.  We intend to vigorously defend these lawsuits.  At the present time, we cannot predict the outcome of thesesuits.

 

**(j)*****                                    PSI Fuel Adjustment Charge***

** **

**PSI** defers fuelcosts that are recoverable in future periods subject to IURC approval under afuel recovery mechanism.  In June 2001,the IURC issued an order in a **PSI**fuel recovery proceeding, disallowing approximately $14 million of deferredcosts.  On June 26, 2001, **PSI** formally requested that the IURCreconsider its disallowance decision. In August 2001, the IURC indicated that it would reconsider itsdecision.  In August 2002, the IURCissued its final ruling allowing **PSI**to fully recover the $14 million.

 

In June 2001, **PSI** filed apetition with the IURC requesting authority to recover $16 million in underbilled deferred fuel costs incurred from March 2001 through May 2001.  The IURC approved recovery of these costssubject to refund pending the findings of an investigative sub-docket.  The sub-docket was opened to investigate thereasonableness of, and underlying reasons for, the under billed deferred fuelcosts.  A hearing was held in July 2002,and we anticipate a decision in the first quarter of 2003.

 

**(k)*****                                PSI Retail Rate Case***

** **

In December 2002, **PSI**filed a petition with the IURC seeking approval of a base retail electric rateincrease.  **PSI’s** proposed increase reflects an average increase ofapproximately 16 to 19 percent over **PSI’s**current retail electric rates.  Ifapproved by regulators, **PSI**estimates the rate request will become effective in early 2004.  **PSI**plans to file initial testimony in this case in March 2003.  An IURC decision is expected in the firstquarter of 2004.

 

**(l)*****                                    Construction Work in Progress (CWIP)Ratemaking Treatment for NOX Equipment***

** **

During the third quarter of 2001, **PSI**filed an application with the IURC requesting CWIP ratemaking treatment forcosts related to NOX equipment currently being installed at certain **PSI** generation facilities.  CWIP ratemaking treatment allows for therecovery of carrying costs on the equipment during the constructionperiod.  **PSI** filed its case-in-chief testimony in January 2002.  In July 2002, the IURC approved theapplication allowing **PSI**tocommence CWIP ratemaking treatment for its NOX equipment investmentsmade through December 31, 2001.

 

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Initially this rate adjustment will result in approximately a onepercent increase in customer rates. Under the IURC’s CWIP rules, **PSI**mayupdate its CWIP tracker at six-month intervals.  The IURC’s July order also authorized **PSI** to defer, for subsequent recovery, post-in-servicedepreciation and to continue the accrual for AFUDC.  Pursuant to Statement of Financial Accounting Standards No. 92, *Regulated Enterprises-Accounting for Phase-in Plans*,the equity component of AFUDC will not be deferred for financial reporting.

 

In October 2002, **PSI** filedits first six-month CWIP tracker update with the IURC requesting approximately$11 million of additional revenue associated with investments made January 1,2002, through June 30, 2002, for NOX emission reductionequipment.  The IURC authorized therecovery of these incremental expenditures in an order issued on January 29,2003.  The cumulative annual revenue tobe recovered under this tracker is $28 million.

 

**(m)***                              **Purchased Power Tracker***

 

In May 1999, **PSI**filed apetition with the IURC seeking approval of a Tracker.  This request was designed to provide for the recovery of costsrelated to purchases of power necessary to meet native load requirements to theextent such costs are not recovered through the existing fuel adjustmentclause.

 

A hearing was held before the IURC in February 2001, to determinewhether it was appropriate for **PSI**tocontinue the Tracker for future periods. In April 2001, a favorable order was received extending the Tracker fortwo years, through the summer of 2002.  **PSI** is authorized to seek recovery of 90percent of its purchased power expenses through the Tracker (net of thedisplaced energy portion recovered through the fuel recovery process and net ofthe mitigation credit portion), with the remaining 10 percent deferred forsubsequent recovery in **PSI’s**next****general rate case.  In March 2002, **PSI** filed a petition with the IURC seeking approval to extendthe Tracker process beyond the summer of 2002. A hearing was held on January 16, 2003. We cannot predict the outcome of this proceeding at this time.

 

In June 2002, **PSI** alsofiled a petition with the IURC seeking approval of the recovery through theTracker of its actual summer 2002 purchased power costs.  A hearing on this matter is scheduled forthe first quarter of 2003.

 

**(n)***                                 **CG&E Gas Rate Case***

 

In the third quarter of 2001, **CG&E**filed a retail gas rate case with the PUCO seeking to increase base rates fornatural gas distribution service and requesting recovery through a trackingmechanism of the costs of an accelerated gas main replacement program with anestimated capital cost of $716 million over the next 10 years.  **CG&E**entered into a settlement agreement with most of the parties and a hearing onthis matter was held in April 2002.  Anorder was issued in May 2002, in which the PUCO approved the settlementagreement and authorized a base rate increase of approximately $15 million, or3.3 percent overall, to be effective on May 30, 2002.  In addition, the PUCO authorized **CG&E** to implement the tracking mechanism to recover thecosts of the accelerated gas main replacement program, subject to certain ratecaps that increase in amount annually through May 2007, through the effectivedate of new rates in **CG&E’s**next retail gas rate case.  The

 

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PUCO’s order was not appealed. In the fourth quarter of 2002, **CG&E**filed an application to increase its rates under the trackingmechanism by approximately $8 million or 2.4 percent.  The PUCO is investigating the application and **CG&E** expects that the increase willbecome effective in May 2003.

 

**(o)***                                  **ULH&P Gas Rate Case***

 

In the second quarter of 2001, **ULH&P** filed a retail gas rate case with the KPSCseeking to increase base rates for natural gas distribution services andrequesting recovery through a tracking mechanism of the costs of an acceleratedgas main replacement program with an estimated capital cost of $112 millionover the next 10 years.  A hearing onthis matter was held in November 2001 and an order was issued in January2002.  In the order, the KPSC authorizeda base rate increase of $2.7 million, or 2.8 percent overall, to be effectiveon January 31, 2002.  In addition, theKPSC authorized **ULH&P** to implement the tracking mechanism to recover the costs of theaccelerated gas main replacement program for an initial period of three years,with the possibility of renewal for the full 10 years.  Per the terms of the order, the trackingmechanism will be set annually.  Thefirst filing was made in March 2002 and was approved by the KPSC in an orderissued in August 2002.  **ULH&P** filed an application for a certificate forpublic convenience and necessity with the KPSC in November 2002, to do castiron and bare steel main replacement work in 2003 at an estimated cost of $14.1million.  The Kentucky Attorney General(Attorney General) has appealed the KPSC’s approval of the tracking mechanismto the Franklin Circuit Court (Court) and has also appealed the KPSC’s August2002 order approving the new tracking mechanism rates.  The KPSC’s August 2002 order requires **ULH&P** to maintain records of the revenuescollected under the tracking mechanism to enable **ULH&P** to refund such revenues, in case theAttorney General’s appeal is upheld and the KPSC orders a refund.  Amounts collected to date under thistracking mechanism are not material.  **ULH&P** filed an application for rehearing with theKPSC in September 2002, in which **ULH&P** requested that the KPSC eliminate this requirement.  In October 2002, the KPSC issued an ordergranting **ULH&P’s**application for rehearing in part.  TheKPSC’s order clarified that **ULH&P** must maintain its records of the revenues collected under the trackingmechanism in case a refund is ordered at a later date; however, the KPSC’sorder stated that it will not address the issue of whether to order a refundunless the Court rules that the KPSC lacked the requisite authority to approvethe tracking mechanism.  As a result, **ULH&P** will not record these revenues as subject torefund unless the Court so rules.  Atthe present time, **ULH&P** cannot predict the outcome of this litigation.

 

**(p)*****                                  Contract Disputes***

** **

**Cinergy**, through asubsidiary of Investments, is currently involved in negotiations to resolve acustomer billing dispute.  The primaryissue of contention between the parties relates to the determinants used incalculating the monthly charge billed for electricity.  **Cinergy**has reserved for a portion of the amount billed based on our current estimateof net realizable value.

 

**Cinergy**, through asubsidiary of Capital & Trading, is involved in a billing dispute withrespect to billings for the supply of wholesale natural gas to a customer.  This dispute, if not satisfactorily resolvedby the parties, is subject to arbitration. **Cinergy** has reserved for aportion of the amount billed based on the current estimate of net realizablevalue.

 

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Although we cannot predict the outcome of these matters, we believe theultimate impact on **Cinergy’s**financial position and results of operations, beyond amounts reserved, will notbe material.

 

**12.Jointly-Owned Plant**

 

**CG&E**, CSP, andDP&L jointly own electric generating units and related transmissionfacilities.  **PSI** is a joint-owner of Gibson Station Unit No. 5 with WabashValley Power Association, Inc. (WVPA), and Indiana Municipal Power Agency(IMPA).  Additionally, **PSI** is a joint-owner with WVPA and IMPA ofcertain transmission property and local facilities.  These facilities constitute part of the integrated transmissionand distribution systems, which are operated and maintained by **PSI**. The Statements of Income reflect **CG&E’s**and **PSI’s** portions of alloperating costs associated with the jointly-owned facilities.

 

As of December 31, 2002, **CG&E’s**and **PSI’s** investments injointly-owned plant or facilities were as follows:

 

**(in millions)**

 
|                                |   | **Ownership  Share** |   | **Property,  Plant, and  Equipment** |   | **Accumulated  Depreciation** |   | **Construction  Work in  Progress** |   |
|-------------------------------------|--------|----------------------|--------|--------------------------------------|--------|-------------------------------|--------|-------------------------------------|--------|
| **CG&E**                        |   |                 |   |                                 |   |                          |   |                                |   |
| Production:                         |   |                 |   |                                 |   |                          |   |                                |   |
| Miami Fort  Station (Units 7 and 8) |   | 64.00                | %      | $288                                 |   | $135                          |   | $34                                 |   |
| Beckjord Station  (Unit 6)          |   | 37.50                |   | 46                                   |   | 30                            |   | —                              |   |
| Stuart  Station(1)                  |   | 39.00                |   | 298                                  |   | 157                           |   | 67                                  |   |
| Conesville  Station (Unit 4)(1)     |   | 40.00                |   | 77                                   |   | 48                            |   | —                              |   |
| Zimmer Station                      |   | 46.50                |   | 1,239                                |   | 402                           |   | 23                                  |   |
| East Bend  Station                  |   | 69.00                |   | 398                                  |   | 200                           |   | —                              |   |
| Killen  Station(1)                  |   | 33.00                |   | 187                                  |   | 110                           |   | 17                                  |   |
| Transmission                        |   | Various              |   | 85                                   |   | 38                            |   | —                              |   |
|                                |   |                 |   |                                 |   |                          |   |                                |   |
| **PSI**                             |   |                 |   |                                 |   |                          |   |                                |   |
| Production:                         |   |                 |   |                                 |   |                          |   |                                |   |
| Gibson Station  (Unit 5)            |   | 50.05                |   | 215                                  |   | 119                           |   | 14                                  |   |
| Transmission and  local facilities  |   | 94.37                |   | 2                                    |   | 1                             |   | —                              |   |

 

----

(1)               Stationis not operated by **CG&E**.

 

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**13.Quarterly Financial Data (unaudited)**

 
|                                                                                              |   | **First  Quarter**                           |       | **Second  Quarter** |       | **Third  Quarter** |       | **Fourth  Quarter** |       | **Total**  |       |
|---------------------------------------------------------------------------------------------------|--------|----------------------------------------------|------------|---------------------|------------|--------------------|------------|---------------------|------------|------------|------------|
|                                                                                              |   | **(in  millions, except per share amounts)** |       |
|                                                                                              |   |                                         |       |                |       |               |       |                |       |       |       |
| **Cinergy(1)**                                                                                    |   |                                         |       |                |       |               |       |                |       |       |       |
|                                                                                              |   |                                         |       |                |       |               |       |                |       |       |       |
| **2002**                                                                                          |   |                                         |       |                |       |               |       |                |       |       |       |
|                                                                                              |   |                                         |       |                |       |               |       |                |       |       |       |
| **Results  of Operations:**                                                                       |   |                                         |       |                |       |               |       |                |       |       |       |
| Operating  Revenues(2)                                                                            |   | **$**                                        | **2,192**  | ** **          | **$**      | **2,471**          | ** ** | **$**               | **3,880**  | ** ** | **$**      | **3,417** | ** ** | **$** | **11,960** | ** ** |
| Operating Income                                                                                  |   | **213**                                      | ** ** | **137**             | ** ** | **239**            | ** ** | **215**             | ** ** | **804**    | ** ** |
|                                                                                              |   |                                         | ** ** |                | ** ** |               | ** ** |                | ** ** |       | ** ** |
| Income before  discontinued operations and cumulative effect of a change in accounting  principle |   | **96**                                       | ** ** | **45**              | ** ** | **131**            | ** ** | **125**             | ** ** | **397**    | ** ** |
| Discontinued  operations, net of tax(3)                                                           |   | **—**                                   | ** ** | **—**          | ** ** | **—**         | ** ** | **(25**             | **)**      | **(25**    | **)**      |
| Cumulative  effect of a change in accounting principle, net of tax(4)                             |   | **(11**                                      | **)**      | **—**          | ** ** | **—**         | ** ** | **—**          | ** ** | **(11**    | **)**      |
| Net Income                                                                                        |   | **$**                                        | **85**     | ** **          | **$**      | **45**             | ** ** | **$**               | **131**    | ** ** | **$**      | **100** | ** ** | **$** | **361** | ** ** |
|                                                                                              |   |                                         | ** ** |                | ** ** |               | ** ** |                | ** ** |       | ** ** |
| **Per  Share Data:**                                                                              |   |                                         | ** ** |                | ** ** |               | ** ** |                | ** ** |       | ** ** |
| EPS                                                                                               |   |                                         | ** ** |                | ** ** |               | ** ** |                | ** ** |       | ** ** |
| Income before  discontinued operations and cumulative effect of a change in accounting  principle |   | **0.58**                                     | ** ** | **0.27**            | ** ** | **0.78**           | ** ** | **0.74**            | ** ** | **2.37**   | ** ** |
| Discontinued  operations, net of tax(3)                                                           |   | **—**                                   | ** ** | **—**          | ** ** | **—**         | ** ** | **(0.15**           | **)**      | **(0.15**  | **)**      |
| Cumulative  effect of a change in accounting principle, net of tax(4)                             |   | **(0.06**                                    | **)**      | **—**          | ** ** | **—**         | ** ** | **—**          | ** ** | **(0.06**  | **)**      |
| Net Income                                                                                        |   | **$**                                        | **0.52**   | ** **          | **$**      | **0.27**           | ** ** | **$**               | **0.78**   | ** ** | **$**      | **0.59** | ** ** | **$** | **2.16** | ** ** |
| EPS - assuming  dilution                                                                          |   |                                         | ** ** |                | ** ** |               | ** ** |                | ** ** |       | ** ** |
| Income before  discontinued operations and cumulative effect of a change in accounting  principle |   | **0.58**                                     | ** ** | **0.26**            | ** ** | **0.77**           | ** ** | **0.73**            | ** ** | **2.34**   | ** ** |
| Discontinued  operations, net of tax(3)                                                           |   | **—**                                   | ** ** | **—**          | ** ** | **—**         | ** ** | **(0.15**           | **)**      | **(0.15**  | **)**      |
| Cumulative  effect of a change in accounting principle, net of tax(4)                             |   | **(0.06**                                    | **)**      | **—**          | ** ** | **—**         | ** ** | **—**          | ** ** | **(0.06**  | **)**      |
| Net Income                                                                                        |   | **$**                                        | **0.52**   | ** **          | **$**      | **0.26**           | ** ** | **$**               | **0.77**   | ** ** | **$**      | **0.58** | ** ** | **$** | **2.13** | ** ** |
|                                                                                              |   |                                         |       |                |       |               |       |                |       |       |       |
| **2001**                                                                                          |   |                                         |       |                |       |               |       |                |       |       |       |
|                                                                                              |   |                                         |       |                |       |               |       |                |       |       |       |
| **Results  of Operations:**                                                                       |   |                                         |       |                |       |               |       |                |       |       |       |
| Operating  Revenues(2)                                                                            |   | $                                            | 3,715      |                | $          | 3,654              |       | $                   | 3,340      |       | $          | 2,288 |   | $ | 12,997 |   |
| Operating Income                                                                                  |   | 249                                          |       | 178                 |       | 278                |       | 239                 |       | 944        |       |
|                                                                                              |   |                                         |       |                |       |               |       |                |       |       |       |
| Income before  discontinued operations                                                            |   | 121                                          |       | 82                  |       | 130                |       | 126                 |       | 459        |       |
| Discontinued  operations, net of tax(3)                                                           |   | (1                                           | )          | 1                   |       | (2                 | )          | (15                 | )          | (17        | )          |
| Net Income                                                                                        |   | $                                            | 120        |                | $          | 83                 |       | $                   | 128        |       | $          | 111 |   | $ | 442 |   |
|                                                                                              |   |                                         |       |                |       |               |       |                |       |       |       |
| **Per  Share Data:**                                                                              |   |                                         |       |                |       |               |       |                |       |       |       |
| EPS                                                                                               |   |                                         |       |                |       |               |       |                |       |       |       |
| Income before  discontinued operations                                                            |   | 0.76                                         |       | 0.50                |       | 0.82               |       | 0.80                |       | 2.88       |       |
| Discontinued  operations, net of tax(3)                                                           |   | —                                       |       | 0.01                |       | (0.01              | )          | (0.10               | )          | (0.10      | )          |
| Net Income                                                                                        |   | $                                            | 0.76       |                | $          | 0.51               |       | $                   | 0.81       |       | $          | 0.70 |   | $ | 2.78 |   |
| EPS - assuming  dilution                                                                          |   |                                         |       |                |       |               |       |                |       |       |       |
| Income before  discontinued operations                                                            |   | 0.75                                         |       | 0.50                |       | 0.81               |       | 0.79                |       | 2.85       |       |
| Discontinued  operations, net of tax(3)                                                           |   | —                                       |       | 0.01                |       | (0.01              | )          | (0.10               | )          | (0.10      | )          |
| Net Income                                                                                        |   | $                                            | 0.75       |                | $          | 0.51               |       | $                   | 0.80       |       | $          | 0.69 |   | $ | 2.75 |   |
|                                                                                              |   |                                         |       |                |       |               |       |                |       |       |       |
| **CG&E****and subsidiaries**                                                                  |   |                                         |       |                |       |               |       |                |       |       |       |
|                                                                                              |   |                                         |       |                |       |               |       |                |       |       |       |
| **2002**                                                                                          |   |                                         |       |                |       |               |       |                |       |       |       |
|                                                                                              |   |                                         |       |                |       |               |       |                |       |       |       |
| **Results  of Operations:**                                                                       |   |                                         |       |                |       |               |       |                |       |       |       |
| Operating  Revenues(2)                                                                            |   | **$**                                        | **815**    | ** **          | **$**      | **922**            | ** ** | **$**               | **1,789**  | ** ** | **$**      | **1,425** | ** ** | **$** | **4,951** |   |
| Operating Income                                                                                  |   | **155**                                      | ** ** | **101**             | ** ** | **135**            | ** ** | **114**             | ** ** | **505**    |       |
| Net Income                                                                                        |   | **78**                                       | ** ** | **53**              | ** ** | **72**             | ** ** | **61**              | ** ** | **264**    |       |
|                                                                                              |   |                                         |       |                |       |               |       |                |       |       |       |
| **2001**                                                                                          |   |                                         |       |                |       |               |       |                |       |       |       |
|                                                                                              |   |                                         |       |                |       |               |       |                |       |       |       |
| **Results  of Operations:**                                                                       |   |                                         |       |                |       |               |       |                |       |       |       |
| Operating  Revenues(2)                                                                            |   | $                                            | 1,267      |                | $          | 1,282              |       | $                   | 1,329      |       | $          | 874 |   | $ | 4,752 |   |
| Operating Income                                                                                  |   | 154                                          |       | 98                  |       | 166                |       | 194                 |       | 612        |       |
| Net Income                                                                                        |   | 82                                           |       | 49                  |       | 89                 |       | 107                 |       | 327        |       |
|                                                                                              |   |                                         |       |                |       |               |       |                |       |       |       |
| **PSI**                                                                                           |   |                                         |       |                |       |               |       |                |       |       |       |
|                                                                                              |   |                                         |       |                |       |               |       |                |       |       |       |
| **2002**                                                                                          |   |                                         |       |                |       |               |       |                |       |       |       |
|                                                                                              |   |                                         |       |                |       |               |       |                |       |       |       |
| **Results  of Operations:**                                                                       |   |                                         |       |                |       |               |       |                |       |       |       |
| Operating  Revenues(2)                                                                            |   | **$**                                        | **630**    | ** **          | **$**      | **467**            | ** ** | **$**               | **777**    | ** ** | **$**      | **485** | ** ** | **$** | **2,359** |   |
| Operating Income                                                                                  |   | **74**                                       | ** ** | **52**              | ** ** | **120**            | ** ** | **136**             | ** ** | **382**    |       |
| Net Income                                                                                        |   | **38**                                       | ** ** | **30**              | ** ** | **68**             | ** ** | **78**              | ** ** | **214**    |       |
|                                                                                              |   |                                         |       |                |       |               |       |                |       |       |       |
| **2001**                                                                                          |   |                                         |       |                |       |               |       |                |       |       |       |
|                                                                                              |   |                                         |       |                |       |               |       |                |       |       |       |
| **Results  of Operations:**                                                                       |   |                                         |       |                |       |               |       |                |       |       |       |
| Operating  Revenues(2)                                                                            |   | $                                            | 925        |                | $          | 1,189              |       | $                   | 1,267      |       | $          | 727 |   | $ | 4,108 |   |
| Operating Income                                                                                  |   | 85                                           |       | 66                  |       | 110                |       | 69                  |       | 330        |       |
| Net Income                                                                                        |   | 41                                           |       | 34                  |       | 57                 |       | 30                  |       | 162        |       |

 

----

(1)                                  Theresults of **Cinergy** also includeamounts related to non-registrants.

(2)                                  EITF02-3 will require that all gains and losses on energy trading derivatives bepresented on a net basis beginning January 1, 2003.  This will result in substantial reductions in reported *Operating Revenues*, *Fuel and purchased and exchanged power*expense, and *Gas purchased*expense.  However, *Operating Income* and *Net Income* will not be affected by thischange.  For further information on EITF02-3 see Note 1(q)(*i*).

(3)                                  SeeNote 15 for further explanation.

(4)                                  Uponimplementation of Statement 142, **Cinergy**recognized a non-cash impairment charge of $11 million, net of tax, forgoodwill related to certain international assets.  See Note 14 for further information.

 

183

----

 

**14. Effectsof a Change in Accounting Principle**

** **

**Cinergy** finalizedits transition goodwill impairment test, as required by Statement 142, in thefourth quarter of 2002 and recognized a non-cash impairment charge of $11million (net of tax) for goodwill related to certain of our internationalassets.  This amount is reflected in **Cinergy Corp.’s** Statements of Income as a *Cumulative effect of a change in accounting principle*.  While Statement 142 did not require theinitial transition impairment test to be completed until December 31, 2002, itdoes require any transition impairment charge to be reflected as of January 1,2002.  The condensed financial resultsbelow revise previously reported results of **CinergyCorp.** as filed in the Form 10-Q for the quarter ended March 31,2002, to reflect the impairment charge as of January 1, 2002.

 

|                                                   |   | **Year to  Date  March 31, 2002**  |   |
|--------------------------------------------------------|--------|------------------------------------|--------|
|                                                   |   | **Net Income**                     |   | **EPS(1)** |   |
|                                                   |   | **(in  millions, except for EPS)** |   |
|                                                   |   | **(unaudited)**                    |   |
| Reported results                                       |   | $                                  | 96     |   | $ | 0.58 |   |
| Cumulative  effect of a change in accounting principle |   | (11                                | )      | (0.06 | ) |
| Revised results                                        |   | $                                  | 85     |   | $ | 0.52 |   |

 

----

(1)                                  RepresentsEPS and EPS - assuming dilution.

 

**15.** **Monetization of Non-Core Investments**

** **

During 2002, **Cinergy** begantaking steps to monetize certain non-core investments, including renewable andinternational investments within the Energy Merchant business unit.   During the second half of the year, **Cinergy** either sold or initiated plans todispose of generation and electric and gas distribution operations in the CzechRepublic, Estonia, and South Africa.  **Cinergy** also sold investments, which wereaccounted for under the equity method, in renewable investments located inSpain and California.  In total, **Cinergy** disposed of approximately $125million of investments at a net loss of $7 million in 2002.  Included in this net loss were cumulativeforeign currency translation losses of approximately $4 million.

 

GAAP requires different accounting treatment for investment disposalsinvolving entities which are consolidated and entities which are accounted forunder the equity method.  Theconsolidated entities have been presented as *Discontinuedoperations*, *net of tax*in **Cinergy’s** accompanyingfinancial statements, and prior year financial statements have beenreclassified to account for these entities as such.  The disposal of the entities accounted for using the equitymethod are not allowed to be presented as discontinued operations.  A gain of approximately $17 million on thesale of these entities is included in *Miscellaneous-Net*in **Cinergy’s** Statementsof Income.

 

184

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The table below reflects the assets and liabilities of the investmentsaccounted for as discontinued operations as of December 31, 2002 and 2001, andthe results of operations and the loss on disposal for the years then ended.

 

|                                       |   | **December  31**   |       |
|--------------------------------------------|--------|--------------------|------------|
|                                       |   | **2002**           |       | **2001** |   |
|                                       |   | **(in  millions)** |       |
|                                       |   |               |       |   |   |
| **Revenues**(1)                            |   | **$**              | **30**     |   | $ | 38 |   |
|                                       |   |               |       |   |   |
| **Loss  on Discontinued Operations**       |   |               |       |   |   |
| Loss on  operations                        |   | **$**              | **1**      |   | $ | 17 |   |
| Loss on  disposal(2)                       |   | **24**             |       | — |   |
|                                       |   |               |       |   |   |
| **Total  Loss on Discontinued Operations** |   | **$**              | **25**     |   | $ | 17 |   |
|                                       |   |               |       |   |   |
| **Assets**                                 |   |               |       |   |   |
| Current assets                             |   | **$**              | **—** |   | $ | 8 |   |
| Property, plant,  and equipment-net        |   | **—**         |       | 45 |   |
| Other assets                               |   | **1**              |       | 9 |   |
|                                       |   |               |       |   |   |
| **Total  Assets**                          |   | **$**              | **1**      |   | $ | 62 |   |
|                                       |   |               |       |   |   |
| **Liabilities**                            |   |               |       |   |   |
| Current  liabilities                       |   | **$**              | **2**      |   | $ | 16 |   |
|                                       |   |               |       |   |   |
| **Total  Liabilities**                     |   | **$**              | **2**      |   | $ | 16 |   |

 

----

(1)                                  Presentedfor informational purposes only.  Allresults of operations are reported net in our Statements of Income.

(2)                                  Approximately$17 million of this amount represents a write-down to fair value, less cost tosell, on assets classified as held for sale. The remainder represents actual losses on completed sales.  Included in the loss on disposal arecumulative foreign currency translation losses of approximately $4 million.

 

The losses included in discontinued operations primarily pertain to twoinvestments.  In one case, the primarycustomer of a combined heat and power plant filed for bankruptcy resulting in asignificant reduction in future expected revenues from the investment.  In the second case, the retail market of agas distribution business did not develop as expected, and we have elected toexit the business rather than invest the additional capital which would berequired to reach a sustainable level of market penetration.

 

**16.****       Financial Information byBusiness Segment**

** **

We conduct operations through our subsidiaries and manage through thefollowing three business units:

 

•                  EnergyMerchant;

•                  RegulatedBusinesses; and

•                  PowerTechnology.

 

185

----

 

The following section describes the activities of our business units asof December 31, 2002.

 

Energy Merchant manages wholesale generation and energy marketing andtrading of energy commodities.  EnergyMerchant operates and maintains our regulated and non-regulated electricgenerating plants, including some of our jointly-owned plants.  Energy Merchant is also responsible for ourinternational operations and performs the following activities:

 

•                  energyrisk management;

•                  proprietaryarbitrage activities; and

•                  customizedenergy solutions.

 

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

 

Power Technology primarily manages the development, marketing, andsales of our non-regulated retail energy and energy-related businesses.  This is accomplished through varioussubsidiaries and joint ventures.  PowerTechnology also manages Cinergy Ventures, LLC (Ventures), **Cinergy’s** venture capital subsidiary.  Ventures invests in emerging energytechnologies that can benefit future **Cinergy**business development activities.

 

Following are the financial results by business unit.  Certain amounts for prior years have beenrestated to reflect segment restructuring, which includes the consolidation ofall of our international operations into Energy Merchant.  This restructuring became effective January1, 2002.

 

186

----

 

Financial results by business unit for the years ended December 31,2002, 2001, and 2000, are as indicated below:

 

**Business Units**

 
|                                                                  |   | **2002**                    |       |
|-----------------------------------------------------------------------|--------|-----------------------------|------------|
|                                                                  |   | **Cinergy  Business Units** |       |   |   |   |   |   |   |
|                                                                  |   | **Energy  Merchant**        |       | **Regulated  Businesses** |   | **Power  Technology** |   | **Total** |   | **All  Other(1)** |   | **Reconciling  Eliminations(2)** |   | **Consolidated** |   |
|                                                                  |   | **(in millions)**           |       |
| Operating  revenues -                                                 |   |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| External  customers(3)                                                |   | **$**                       | **9,283**  | ** ** | **$** | **2,640** | ** ** | **$** | **37** | ** ** | **$** | **11,960** | ** ** | **$** | **—** | ** ** | **$** | **—** | ** ** | **$** | **11,960** | ** ** |
| Intersegment  revenues(4)                                             |   | **160**                     | ** ** | **—** | ** ** | **—** | ** ** | **160** | ** ** | **—** | ** ** | **(160** | **)** | **—** | ** ** |
| Cost of sales -                                                       |   |                        | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |
| Fuel and  purchased and exchanged power                               |   | **4,054**                   | ** ** | **458** | ** ** | **—** | ** ** | **4,512** | ** ** | **—** | ** ** | **—** | ** ** | **4,512** | ** ** |
| Gas purchased                                                         |   | **4,436**                   | ** ** | **233** | ** ** | **—** | ** ** | **4,669** | ** ** | **—** | ** ** | **—** | ** ** | **4,669** | ** ** |
| Depreciation(5)                                                       |   | **158**                     | ** ** | **249** | ** ** | **7** | ** ** | **414** | ** ** | **—** | ** ** | **—** | ** ** | **414** | ** ** |
| Equity in  earnings (losses) of unconsolidated subsidiaries           |   | **20**                      | ** ** | **5** | ** ** | **(10** | **)** | **15** | ** ** | **—** | ** ** | **—** | ** ** | **15** | ** ** |
| Interest(6)                                                           |   | **103**                     | ** ** | **133** | ** ** | **14** | ** ** | **250** | ** ** | **—** | ** ** | **—** | ** ** | **250** | ** ** |
| Income taxes                                                          |   | **21**                      | **(7)**    | **151** | ** ** | **(15** | **)** | **157** | ** ** | **—** | ** ** | **—** | ** ** | **157** | ** ** |
| Discontinued  operations, net of tax(8)                               |   | **(25**                     | **)**      | **—** | ** ** | **—** | ** ** | **(25** | **)** | **—** | ** ** | **—** | ** ** | **(25** | **)** |
| Cumulative  effect of a change in accounting principle, net of tax(9) |   | **(11**                     | **)**      | **—** | ** ** | **—** | ** ** | **(11** | **)** | **—** | ** ** | **—** | ** ** | **(11** | **)** |
| Segment profit  (loss)(10)                                            |   | **126**                     | ** ** | **270** | ** ** | **(35** | **)** | **361** | ** ** | **—** | ** ** | **—** | ** ** | **361** | ** ** |
| Total segment  assets                                                 |   | **5,703**                   | ** ** | **7,284** | ** ** | **227** | ** ** | **13,214** | ** ** | **93** | ** ** | **—** | ** ** | **13,307** | ** ** |
| Investments in  unconsolidated subsidiaries                           |   | **337**                     | ** ** | **10** | ** ** | **70** | ** ** | **417** | ** ** | **—** | ** ** | **—** | ** ** | **417** | ** ** |
| Total  expenditures for long-lived assets                             |   | **188**                     | ** ** | **681** | ** ** | **1** | ** ** | **870** | ** ** | **—** | ** ** | **—** | ** ** | **870** | ** ** |
|                                                                       |        |                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

| (1)  | The All Other category represents miscellaneous  corporate items, which are not allocated to business units for purposes of  segment performance measurement.                                                             |
|------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2)  | The Reconciling Eliminations category eliminates the  intersegment revenues and expenses of Energy Merchant.                                                                                                              |
| (3)  | The decrease in 2002, as compared to 2001, is  primarily due to the decrease in the average price realized on wholesale  commodity transactions.                                                                          |
| (4)  | In connection with deregulation in Ohio, beginning  in 2001, certain revenues, which were previously recorded through  intersegment transfer pricing, are now directly recorded to the business  segment.                 |
| (5)  | The components of Depreciation include depreciation  of fixed assets and amortization of intangible assets.                                                                                                               |
| (6)  | Interest income is deemed immaterial.                                                                                                                                                                                     |
| (7)  | The decrease in 2002, as compared to 2001, in part  reflects the effect of tax credits associated with production of synthetic  fuel beginning in July 2002.                                                              |
| (8)  | For further information, see Note 15.                                                                                                                                                                                     |
| (9)  | Upon implementation of Statement 142, **Cinergy** recognized a non-cash impairment  charge of $11 million, net of tax, for goodwill related to certain  international assets.  See Note 14 for  further information. |
| (10) | Management utilizes Segment profit (loss), after  taxes, to evaluate segment performance.                                                                                                                                 |

 

187

----

 
|                                                        |   | **2001**                    |   |
|-------------------------------------------------------------|--------|-----------------------------|--------|
|                                                        |   | **Cinergy  Business Units** |   |   |   |   |   |   |   |
|                                                        |   | **Energy  Merchant**        |   | **Regulated  Businesses** |   | **Power  Technology** |   | **Total** |   | **All  Other(1)** |   | **Reconciling  Eliminations(2)** |   | **Consolidated** |   |
|                                                        |   | **(in  millions)**          |   |
| Operating  revenues -                                       |   |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |
| External  customers(3)                                      |   | $                           | 10,245 |   | $ | 2,703 |   | $ | 49 |   | $ | 12,997 |   | $ | — |   | $ | — |   | $ | 12,997 |   |
| Intersegment  revenues(4)                                   |   | 144                         |   | — |   | — |   | 144 |   | — |   | (144 | ) | — |   |
| Cost of sales -                                             |   |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Fuel and  purchased and exchanged power                     |   | 5,537                       |   | 469 |   | — |   | 6,006 |   | — |   | — |   | 6,006 |   |
| Gas purchased                                               |   | 4,035                       |   | 397 |   | — |   | 4,432 |   | — |   | — |   | 4,432 |   |
| Depreciation(5)                                             |   | 135                         |   | 236 |   | 3 |   | 374 |   | — |   | — |   | 374 |   |
| Equity in  earnings (losses) of unconsolidated subsidiaries |   | 9                           |   | — |   | (8 | ) | 1 |   | — |   | — |   | 1 |   |
| Interest(6)                                                 |   | 110                         |   | 142 |   | 14 |   | 266 |   | — |   | — |   | 266 |   |
| Income taxes                                                |   | 96                          |   | 169 |   | (9 | ) | 256 |   | — |   | — |   | 256 |   |
| Discontinued  operations, net of tax(7)                     |   | (17                         | )      | — |   | — |   | (17 | ) | — |   | — |   | (17 | ) |
| Segment profit  (loss)(8)                                   |   | 195                         |   | 266 |   | (19 | ) | 442 |   | — |   | — |   | 442 |   |
| Total segment  assets                                       |   | 4,957                       |   | 7,084 |   | 213 |   | 12,254 |   | 46 |   | — |   | 12,300 |   |
| Investments in  unconsolidated subsidiaries                 |   | 256                         |   | — |   | 76 |   | 332 |   | — |   | — |   | 332 |   |
| Total  expenditures for long-lived assets                   |   | 764                         |   | 633 |   | — |   | 1,397 |   | — |   | — |   | 1,397 |   |
|                                                             |        |                             |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

(1)                                  TheAll Other category represents miscellaneous corporate items, which are notallocated to business units for purposes of segment performance measurement.

(2)                                  TheReconciling Eliminations category eliminates the intersegment revenues andexpenses of Energy Merchant.

(3)                                  Theincrease in 2001, as compared to 2000, is primarily due to the increase involumes and average price realized on wholesale commodity transactions.

(4)                                  Inconnection with deregulation in Ohio, beginning in 2001, certain revenues,which were previously recorded through intersegment transfer pricing, are nowdirectly recorded to the business segment.

(5)                                  Thecomponents of Depreciation include depreciation of fixed assets andamortization of intangible assets.

(6)                                  Interestincome is deemed immaterial.

(7)                                  Forfurther information, see Note 15.

(8)                                  Managementutilizes Segment profit (loss), after taxes, to evaluate segment performance.

 

188

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|                                                        |   | **2000**                    |   |
|-------------------------------------------------------------|--------|-----------------------------|--------|
|                                                        |   | **Cinergy  Business Units** |   |   |   |   |   |   |   |
|                                                        |   | **Energy  Merchant**        |   | **Regulated  Businesses** |   | **Power  Technology** |   | **Total** |   | **All  Other(1)** |   | **Reconciling  Eliminations(2)** |   | **Consolidated** |   |
|                                                        |   | **(in  millions)**          |   |
| Operating  revenues -                                       |   |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |
| External  customers                                         |   | $                           | 4,974  |   | $ | 3,347 |   | $ | 76 |   | $ | 8,397 |   | $ | — |   | $ | — |   | $ | 8,397 |   |
| Intersegment  revenues                                      |   | 1,021                       |   | — |   | — |   | 1,021 |   | — |   | (1,021 | ) | — |   |
| Cost of sales -                                             |   |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Fuel and purchased  and exchanged power                     |   | 2,725                       |   | 414 |   | — |   | 3,139 |   | — |   | — |   | 3,139 |   |
| Gas purchased                                               |   | 2,402                       |   | 267 |   | 6 |   | 2,675 |   | — |   | — |   | 2,675 |   |
| Depreciation(3)                                             |   | 119                         |   | 220 |   | 3 |   | 342 |   | — |   | — |   | 342 |   |
| Equity in  earnings (losses) of unconsolidated subsidiaries |   | 7                           |   | — |   | (1 | ) | 6 |   | — |   | — |   | 6 |   |
| Interest(4)                                                 |   | 82                          |   | 133 |   | 9 |   | 224 |   | — |   | — |   | 224 |   |
| Income taxes                                                |   | 93                          |   | 166 |   | (7 | ) | 252 |   | — |   | — |   | 252 |   |
| Discontinued  operations, net of tax(5)                     |   | (1                          | )      | — |   | — |   | (1 | ) | — |   | — |   | (1 | ) |
| Segment profit  (loss)(6)                                   |   | 157                         |   | 255 |   | (13 | ) | 399 |   | — |   | — |   | 399 |   |
| Total segment  assets                                       |   | 5,995                       |   | 6,116 |   | 177 |   | 12,288 |   | 42 |   | — |   | 12,330 |   |
| Investments in  unconsolidated subsidiaries                 |   | 488                         |   | — |   | 52 |   | 540 |   | — |   | — |   | 540 |   |
| Total  expenditures for long-lived assets                   |   | 138                         |   | 397 |   | — |   | 535 |   | 3 |   | — |   | 538 |   |
|                                                             |        |                             |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

(1)                                  TheAll Other category represents miscellaneous corporate items, which are notallocated to business units for purposes of segment performance measurement.

(2)                                  TheReconciling Eliminations category eliminates the intersegment revenues andexpenses of Energy Merchant.

(3)                                  Thecomponents of Depreciation include depreciation of fixed assets andamortization of intangible assets.

(4)                                  Interestincome is deemed immaterial.

(5)                                  Forfurther information, see Note 15.

(6)                                  Managementutilizes Segment profit (loss), after taxes, to evaluate segment performance.

 

189

----

 

**Productsand Services**

*(inmillions)*

* *
|     |   | **Revenues** |      |
|----------|--------|--------------|-----------|
|     |   | **Utility**  |      | **Energy  Marketing and Trading** |   |   |   |   |   |
| **Year** |   | **Electric** |      | **Gas** |   | **Total** |   | **Electric** |   | **Gas** |   | **Total** |   | **Other** |   | **Consolidated** |   |
| **2002** |   | **$**        | **2,197** | ** ** | **$** | **436** | ** ** | **$** | **2,633** | ** ** | **$** | **4,715** | ** ** | **$** | **4,481** | ** ** | **$** | **9,196** | ** ** | **$** | **131** | ** ** | **$** | **11,960** | ** ** |
| 2001     |   | 2,101        |      | 595 |   | 2,696 |   | 6,154 |   | 4,068 |   | 10,222 |   | 79 |   | 12,997 |   |
| 2000     |   | 2,851        |      | 497 |   | 3,348 |   | 2,508 |   | 2,445 |   | 4,953 |   | 96 |   | 8,397 |   |
|          |        |              |           |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**Geographic Areas**

**Revenues**

*(in millions)*

 

| **Year** |   | **Domestic** |       | **International** |   | **Consolidated** |       |
|----------|--------|--------------|------------|-------------------|--------|------------------|------------|
| **2002** |   | **$**        | **11,846** | ** **        | **$**  | **114**          | ** ** | **$** | **11,960** | ** ** |
| 2001     |   | 12,860       |       | 137               |   | 12,997           |       |
| 2000     |   | 8,337        |       | 60                |   | 8,397            |       |
|          |        |              |            |                   |        |                  |            |  |  |  |

 

**Long-LivedAssets**

*(inmillions)*

 

| **Year** |   | **Domestic** |       | **International** |   | **Consolidated** |       |
|----------|--------|--------------|------------|-------------------|--------|------------------|------------|
| **2002** |   | **$**        | **10,276** | ** **        | **$**  | **393**          | ** ** | **$** | **10,669** | ** ** |
| 2001     |   | 9,682        |       | 428               |   | 10,110           |       |
| 2000     |   | 8,267        |       | 290               |   | 8,557            |       |
|          |        |              |            |                   |        |                  |            |  |  |  |

 

190

----

 

**17. EarningsPer Common Share**

** **

A reconciliation of EPS to EPS - assuming dilution is presented below:

 
|                                                                                                  |   | **Income**                                    |        | **Shares** |        | **EPS**    |       |
|-------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------|-------------|------------|-------------|------------|------------|
|                                                                                                  |   | **(in  thousands, except per share amounts)** |        |
| **Year  ended December 31, 2002**                                                                     |   |                                          |        |       |        |       |       |
| **EPS:**                                                                                              |   |                                          |        |       |        |       |       |
| **Income  before discontinued operations and cumulative effect of a change in  accounting principle** |   | **$**                                         | **396,903** | ** ** |        |       | **$**      | **2.37** | ** ** |
| **Discontinued  operations, net of tax**                                                              |   | **(25,428**                                   | **)**       |       |        | **(0.15**  | **)**      |
| **Cumulative  effect of a change in accounting principle, net of tax**                                |   | **(10,899**                                   | **)**       |       | ** **  | **(0.06**  | **)**      |
| **Net  income**                                                                                       |   | **$**                                         | **360,576** | ** ** | **167,047** | ** ** | **$**      | **2.16** | ** ** |
|                                                                                                  |   |                                          | ** **  |       | ** **  |       | ** ** |
| **Effect  of dilutive securities:**                                                                   |   |                                          | ** **  |       | ** **  |       | ** ** |
| **Common  stock options**                                                                             |   |                                          | ** **  | **899**    | ** **  |       | ** ** |
| **Employee  Stock Purchase and Savings Plan**                                                         |   |                                          | ** **  | **3**      | ** **  |       | ** ** |
| **Directors’  compensation plans**                                                               |   |                                          | ** **  | **169**    | ** **  |       | ** ** |
| **Contingently  issuable common stock**                                                               |   |                                          | ** **  | **934**    | ** **  |       | ** ** |
|                                                                                                  |   |                                          | ** **  |       | ** **  |       | ** ** |
| **EPS  - assuming dilution:**                                                                         |   |                                          | ** **  |       | ** **  |       | ** ** |
| **Net  income plus assumed conversions**                                                              |   | **$**                                         | **360,576** | ** ** | **169,052** | ** ** | **$**      | **2.13** | ** ** |
|                                                                                                  |   |                                          |        |       |        |       |       |
| Year ended  December 31, 2001                                                                         |   |                                          |        |       |        |       |       |
| EPS:                                                                                                  |   |                                          |        |       |        |       |       |
| Income before  discontinued operations and cumulative effect of a change in accounting  principle     |   | $                                             | 458,826     |       |        |       | $          | 2.88 |   |
| Discontinued  operations, net of tax                                                                  |   | (16,547                                       | )           |       |        | (0.10      | )          |
| Net income                                                                                            |   | $                                             | 442,279     |       | 159,110     |       | $          | 2.78 |   |
|                                                                                                  |   |                                          |        |       |        |       |       |
| Effect of  dilutive securities:                                                                       |   |                                          |        |       |        |       |       |
| Common stock  options                                                                                 |   |                                          |        | 975        |        |       |       |
| Directors’  compensation plans                                                                   |   |                                          |        | 152        |        |       |       |
| Contingently  issuable common stock                                                                   |   |                                          |        | 810        |        |       |       |
|                                                                                                  |   |                                          |        |       |        |       |       |
| EPS - assuming  dilution:                                                                             |   |                                          |        |       |        |       |       |
| Net income plus  assumed conversions                                                                  |   | $                                             | 442,279     |       | 161,047     |       | $          | 2.75 |   |
|                                                                                                  |   |                                          |        |       |        |       |       |
| Year ended  December 31, 2000                                                                         |   |                                          |        |       |        |       |       |
| EPS:                                                                                                  |   |                                          |        |       |        |       |       |
| Income before  discontinued operations and cumulative effect of a change in accounting  principle     |   | $                                             | 400,535     |       |        |       | $          | 2.52 |   |
| Discontinued  operations, net of tax                                                                  |   | (1,069                                        | )           |       |        | (0.01      | )          |
| Net income                                                                                            |   | $                                             | 399,466     |       | 158,938     |       | $          | 2.51 |   |
|                                                                                                  |   |                                          |        |       |        |       |       |
| Effect of  dilutive securities:                                                                       |   |                                          |        |       |        |       |       |
| Common stock  options                                                                                 |   |                                          |        | 491        |        |       |       |
| Directors’  compensation plans                                                                   |   |                                          |        | 177        |        |       |       |
| Contingently  issuable common stock                                                                   |   |                                          |        | 262        |        |       |       |
|                                                                                                  |   |                                          |        |       |        |       |       |
| EPS - assuming  dilution:                                                                             |   |                                          |        |       |        |       |       |
| Net income plus  assumed conversions                                                                  |   | $                                             | 399,466     |       | 159,868     |       | $          | 2.50 |   |

 

191

----

 

Options to purchase shares of common stock are excluded from thecalculation of EPS - assuming dilution when the exercise prices of theseoptions are greater than the average market price of the common shares duringthe period.  For the years 2002, 2001,and 2000, approximately 3 million, 2.1 million, and 1.9 million shares,respectively, were excluded from the EPS - assuming dilution calculation.

 

Also excluded from the EPS - assuming dilution calculation for theyears ended December 31, 2002 and 2001, are up to 10.8 million shares issuablepursuant to the stock purchase contracts associated with the preferred trustsecurities issued by **Cinergy Corp.**in December 2001.  These stock purchasecontracts would impact EPS - assuming dilution only to the extent that **Cinergy’s** average stock price were toexceed $34.40 per share, which is the maximum price payable by the holders ofthe stock purchase contracts, during any period for which earnings per shareare presented.  As discussed in Note2(e), the number of shares issued pursuant to the stock purchase contracts iscontingent upon the market price of **CinergyCorp.** stock in February 2005 and could range between 9.2 and 10.8million shares.

 

**18. OhioDeregulation**

** **

On July 6, 1999, Ohio Governor Robert Taft signed Amended SubstituteSenate Bill No. 3 (Electric Restructuring Bill), beginning the transition toelectric deregulation and customer choice for the state of Ohio.  The Electric Restructuring Bill created acompetitive electric retail service market effective January 1, 2001.  The legislation provided for a marketdevelopment period that began January 1, 2001, and ends no later than December31, 2005.

 

On May 8, 2000, **CG&E**reached a stipulated agreement with the PUCO staff and various other interestedparties with respect to its proposal to implement electric customer choice inOhio effective January 1, 2001.  OnAugust 31, 2000, the PUCO approved **CG&E’s**stipulation agreement.  The majorfeatures of the agreement include:

 

•                  Residentialcustomer rates are frozen through December 31, 2005;

•                  Residentialcustomers received a five-percent reduction in the generation portion of theirelectric rates, effective January 1, 2001;

•                  **CG&E**will provide $4 million from 2001to 2005 in support of energy efficiency and weatherization services for lowincome customers;

•                  **CG&E** will provide shopping credits toswitching customers;

•                  Thecreation of a RTC designed to recover **CG&E’s**regulatory assets and other transition costs over a ten-year period;

•                  Authorityfor **CG&E** to transfer itsgeneration assets to one or more, non-regulated affiliates to provideflexibility to manage its generation asset portfolio in a manner that enhancesopportunities in a competitive marketplace;

•                  Authorityfor **CG&E** to apply the proceedsof transition cost recovery to costs incurred during the transition period, includingimplementation costs and purchased power costs that may be incurred by **CG&E** to maintain an operating reservemargin sufficient to provide reliable service to its customers;

 

192

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•                  Authorityfor **CG&E** to adjust theamortization of its regulatory assets and other transition costs to reflect theeffects of any shopping incentives provided to customers; and

•                  **CG&E** will provide standard offerdefault supplier service (i.e., **CG&E**will be the supplier of last resort, so that no customer will be without anelectric supplier).

 

Subsequent to the PUCO’s approval of **CG&E’s**stipulation agreement, two parties filed applications for rehearing with thePUCO.  In October 2000, the PUCO deniedthese applications.  One of the partiesappealed to the Ohio Supreme Court in the fourth quarter of 2000 and **CG&E** subsequently intervened in thatcase.  In April 2002, the Ohio SupremeCourt affirmed the PUCO’s stipulated agreement with **CG&E** with respect to implementing electric customerchoice.  The Ohio Supreme Court rulingleaves **CG&E’s** transition planentirely intact.

 

Under **CG&E’s**transition plan, retail customers continue to receive transportation servicesfrom **CG&E**, but may purchaseelectricity from another supplier. Retail customers that purchase electricity from another supplier receiveshopping credits from **CG&E**.  The shopping credits generally reflect thecosts of electric generation included in **CG&E’s**frozen rates.  However, shopping creditsfor the first 20 percent of electricity usage in each customer class to switchsuppliers are higher than **CG&E’s**electric generation costs in order to stimulate the development of thecompetitive retail electric service market.

 

**CG&E**recoversits regulatory assets and other transition costs through a RTC paid by allretail customers.  As the RTC iscollected from customers, **CG&E**amortizes the deferred balance of regulatory assets and other transitioncosts.  A portion of the RTC collectedfrom customers is recognized currently as a return on the deferred balance ofregulatory assets and other transition costs and as reimbursement for thedifference in the shopping credits provided to customers and the wholesalerevenues from switched generation.  Theability of **CG&E** to recover itsregulatory assets and other transition costs is dependent on several factors,including, but not limited to, the level of **CG&E’s**electric sales, prices in the wholesale power markets, and the amount ofcustomers switching to other electric suppliers.

 

On January 10, 2003, **CG&E**filed an application with the PUCO for approval of a methodology to establishhow market-based rates for non-residential customers will be determined whenthe market development period ends.  Inthe filing, **CG&E** seeks toestablish a market-based standard service offer rate for non-residentialcustomers that do not switch suppliers and a process for establishing thecompetitively-bid generation service option required by the ElectricRestructuring Bill.  As of December 31,2002, more than 20 percent of the load in each of **CG&E’s** non-residential customer classes has switched toother electric suppliers.  Under itstransition plan, **CG&E** may endthe market development period for those classes of customers once 20 percentswitching has been achieved; however, PUCO approval of the standard serviceoffer rate and competitive bidding process is required before the marketdevelopment period can be ended.  **CG&E** is not requesting to end themarket development period for non-residential customers at this time.  **CG&E**is unable to predict the outcome of this proceeding.

 

In its transition plan, **CG&E**proposed to transfer its generating stations and their related assets andobligations to an Exempt Wholesale Generator (EWG) affiliate, subject toreceipt of FERC, SEC, and applicable third-party approvals and consents.

** **

193

----

 

To facilitate this transfer, the generation assets of **CG&E**, as of August 2000, were releasedfrom the first mortgage indenture lien allowing them to move unencumbered tothe EWG affiliate.  Generation assetsadded after August 2000 remain subject to the lien of **CG&E’s** first mortgage bond indentureand would require release at some future date prior to being transferred.  A FERC order, that was effective April 2002,allowed **Cinergy** to jointlydispatch the regulated generating assets of **PSI**in conjunction with the deregulated generating assets of **CG&E**. FERC has also authorized the transfer of the **CG&E** generating assets to a non-regulated affiliate.  However, **Cinergy**has determined that it can realize the benefits of the new joint dispatchagreement without transferring **CG&E’s**generation assets to an EWG affiliate, and therefore **Cinergy** does not plan to transfer **CG&E’s** generation assets to a non-regulated affiliate inthe foreseeable future.

 

194

----

 

**19. ComprehensiveIncome**

** **

The elements of *Comprehensive income*and their related tax effects for the years ended December 31, 2002, 2001, and2000 are as follows:

 
|                                                |   | **Comprehensive  Income** |        |
|-----------------------------------------------------|--------|---------------------------|-------------|
|                                                |   | **2002**                  |        | **2001** |   | **2000** |   |
|                                                |   | **Before-tax  Amount**    |        | **Tax****(Expense)  Benefit** |   | **Net-of-Tax  Amount** |   | **Before-tax  Amount** |   | **Tax  (Expense)  Benefit** |   | **Net-of-Tax  Amount** |   | **Before-tax  Amount** |   | **Tax  (Expense)  Benefit** |   | **Net-of-Tax  Amount** |   |
|                                                |   |                      |        |   |   |   |   | **(dollars in  thousands)** |   |   |   |   |   |   |   |
| **Cinergy**(1)                                      |   |                      |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income                                          |   | **$**                     | **518,840** | ** ** | **$** | **(158,264** | **)** | **$** | **360,576** | ** ** | $ | 697,785 |   | $ | (255,506 | ) | $ | 442,279 |   | $ | 651,023 |   | $ | (251,557 | ) | $ | 399,466 |   |
|                                                |   |                      | ** **  |   | ** ** |   | ** ** |   |   |   |   |   |   |   |   |   |   |   |   |
| Other comprehensive income (loss)                   |   |                      | ** **  |   | ** ** |   | ** ** |   |   |   |   |   |   |   |   |   |   |   |   |
| Foreign currency translation adjustment             |   | **35,574**                | ** **  | **(14,034** | **)** | **21,540** | ** ** | 4,996 |   | (3,355 | ) | 1,641 |   | 721 |   | 1,353 |   | 2,074 |   |
| Reclassification adjustments                        |   | **4,377**                 | ** **  | **—** | ** ** | **4,377** | ** ** | — |   | — |   | — |   | — |   | — |   | — |   |
| Total foreign currency translation adjustment       |   | **39,951**                | ** **  | **(14,034** | **)** | **25,917** | ** ** | 4,996 |   | (3,355 | ) | 1,641 |   | 721 |   | 1,353 |   | 2,074 |   |
| Minimum pension liability adjustment                |   | **(23,031**               | **)**       | **9,268** | ** ** | **(13,763** | **)** | (2,636 | ) | 1,081 |   | (1,555 | ) | (1,852 | ) | 753 |   | (1,099 | ) |
| Unrealized gain (loss) on investment trusts         |   | **(8,637**                | **)**       | **3,360** | ** ** | **(5,277** | **)** | (1,345 | ) | 504 |   | (841 | ) | (2,778 | ) | 649 |   | (2,129 | ) |
| Cumulative effect of change in accounting principle |   | **—**                | ** **  | **—** | ** ** | **—** | ** ** | (4,026 | ) | 1,526 |   | (2,500 | ) | — |   | — |   | — |   |
| Cash flow hedges                                    |   | **(32,663**               | **)**       | **12,915** | ** ** | **(19,748** | **)** | (4,477 | ) | 1,698 |   | (2,779 | ) | — |   | — |   | — |   |
| Total other comprehensive income (loss)             |   | **(24,380**               | **)**       | **11,509** | ** ** | **(12,871** | **)** | (7,488 | ) | 1,454 |   | (6,034 | ) | (3,909 | ) | 2,755 |   | (1,154 | ) |
|                                                |   |                      | ** **  |   | ** ** |   | ** ** |   |   |   |   |   |   |   |   |   |   |   |   |
| Total comprehensive income                          |   | **$**                     | **494,460** | ** ** | **$** | **(146,755** | **)** | **$** | **347,705** | ** ** | $ | 690,297 |   | $ | (254,052 | ) | $ | 436,245 |   | $ | 647,114 |   | $ | (248,802 | ) | $ | 398,312 |   |
|                                                |   |                      | ** **  |   | ** ** |   | ** ** |   |   |   |   |   |   |   |   |   |   |   |   |
| **CG&E**                                        |   |                      | ** **  |   | ** ** |   | ** ** |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income                                          |   | **$**                     | **419,037** | ** ** | **$** | **(155,341** | **)** | **$** | **263,696** | ** ** | $ | 513,181 |   | $ | (186,527 | ) | $ | 326,654 |   | $ | 426,218 |   | $ | (159,398 | ) | $ | 266,820 |   |
|                                                |   |                      | ** **  |   | ** ** |   | ** ** |   |   |   |   |   |   |   |   |   |   |   |   |
| Other comprehensive income (loss)                   |   |                      | ** **  |   | ** ** |   | ** ** |   |   |   |   |   |   |   |   |   |   |   |   |
| Minimum pension liability adjustment                |   | **(1,423**                | **)**       | **551** | ** ** | **(872** | **)** | 106 |   | 28 |   | 134 |   | (43 | ) | 15 |   | (28 | ) |
| Unrealized gain (loss) on investment trusts         |   | **(745**                  | **)**       | **283** | ** ** | **(462** | **)** | 743 |   | (282 | ) | 461 |   | — |   | — |   | — |   |
| Cumulative effect of change in accounting principle |   | **—**                | ** **  | **—** | ** ** | **—** | ** ** | (4,026 | ) | 1,526 |   | (2,500 | ) | — |   | — |   | — |   |
| Cash flow hedges                                    |   | **(30,960**               | **)**       | **12,226** | ** ** | **(18,734** | **)** | (4,477 | ) | 1,698 |   | (2,779 | ) | — |   | — |   | — |   |
| Total other comprehensive income (loss)             |   | **(33,128**               | **)**       | **13,060** | ** ** | **(20,068** | **)** | (7,654 | ) | 2,970 |   | (4,684 | ) | (43 | ) | 15 |   | (28 | ) |
|                                                |   |                      | ** **  |   | ** ** |   | ** ** |   |   |   |   |   |   |   |   |   |   |   |   |
| Total comprehensive income                          |   | **$**                     | **385,909** | ** ** | **$** | **(142,281** | **)** | **$** | **243,628** | ** ** | $ | 505,527 |   | $ | (183,557 | ) | $ | 321,970 |   | $ | 426,175 |   | $ | (159,383 | ) | $ | 266,792 |   |
|                                                |   |                      |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **PSI**                                             |   |                      |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income                                          |   | **$**                     | **328,958** | ** ** | **$** | **(114,709** | **)** | **$** | **214,249** | ** ** | $ | 268,419 |   | $ | (106,086 | ) | $ | 162,333 |   | $ | 223,945 |   | $ | (88,547 | ) | $ | 135,398 |   |
|                                                |   |                      | ** **  |   | ** ** |   | ** ** |   |   |   |   |   |   |   |   |   |   |   |   |
| Other comprehensive income (loss)                   |   |                      | ** **  |   | ** ** |   | ** ** |   |   |   |   |   |   |   |   |   |   |   |   |
| Minimum pension liability adjustment                |   | **(3,534**                | **)**       | **1,396** | ** ** | **(2,138** | **)** | (76 | ) | 27 |   | (49 | ) | (76 | ) | 29 |   | (47 | ) |
| Unrealized gain (loss) on investment trusts         |   | **(7,179**                | **)**       | **2,793** | ** ** | **(4,386** | **)** | (1,537 | ) | 511 |   | (1,026 | ) | (2,419 | ) | 555 |   | (1,864 | ) |
| Total other comprehensive income (loss)             |   | **(10,713**               | **)**       | **4,189** | ** ** | **(6,524** | **)** | (1,613 | ) | 538 |   | (1,075 | ) | (2,495 | ) | 584 |   | (1,911 | ) |
|                                                |   |                      | ** **  |   | ** ** |   | ** ** |   |   |   |   |   |   |   |   |   |   |   |   |
| Total comprehensive income                          |   | **$**                     | **318,245** | ** ** | **$** | **(110,520** | **)** | **$** | **207,725** | ** ** | $ | 266,806 |   | $ | (105,548 | ) | $ | 161,258 |   | $ | 221,450 |   | $ | (87,963 | ) | $ | 133,487 |   |

 

----

(1)                                  Theresults of **Cinergy** also includeamounts related to non-registrants. Individual amounts for **ULH&P**are immaterial.

 

195

----

 

The after-tax components of *Accumulatedother comprehensive income (loss)* as of December 31, 2002, 2001, and2000 are as follows:

 
|                                                 |   | **Accumulated  Other Comprehensive Income (Loss) Classification** |       |
|------------------------------------------------------|--------|-------------------------------------------------------------------|------------|
|                                                 |   | **Foreign  Currency  Translation  Adjustment**                    |       | **Minimum  Pension  Liability  Adjustment** |   | **Unrealized  Gain (Loss)  on Investment  Trusts** |   | **Cash Flow  Hedges** |   | **Total  Other  Comprehensive  Income (Loss)** |   |
|                                                 |   | **(dollars in thousands)**                                        |       |
|                                                 |   |                                                              |       |   |   |   |   |   |   |   |   |
| **Cinergy**(1)                                       |   |                                                              |       |   |   |   |   |   |   |   |   |
|                                                 |   |                                                              |       |   |   |   |   |   |   |   |   |
| Balance at  December 31, 1999                        |   | $                                                                 | (8,146     | ) | $ | (3,681 | ) | $ | 2,086 |   | $ | — |   | $ | (9,741 | ) |
| Current-period  change                               |   | 2,074                                                             |       | (1,099 | ) | (2,129 | ) | — |   | (1,154 | ) |
|                                                 |   |                                                              |       |   |   |   |   |   |   |   |   |
| Balance at  December 31, 2000                        |   | $                                                                 | (6,072     | ) | $ | (4,780 | ) | $ | (43 | ) | $ | — |   | $ | (10,895 | ) |
| Cumulative  effect of change in accounting principle |   | —                                                            |       | — |   | — |   | (2,500 | ) | (2,500 | ) |
| Current-period  change                               |   | 1,641                                                             |       | (1,555 | ) | (841 | ) | (2,779 | ) | (3,534 | ) |
|                                                 |   |                                                              |       |   |   |   |   |   |   |   |   |
| Balance at  December 31, 2001                        |   | $                                                                 | (4,431     | ) | $ | (6,335 | ) | $ | (884 | ) | $ | (5,279 | ) | $ | (16,929 | ) |
| **Current-period  change**                           |   | **25,917**                                                        | ** ** | **(13,763** | **)** | **(5,277** | **)** | **(19,748** | **)** | **(12,871** | **)** |
|                                                 |   |                                                              | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |
| **Balance  at December 31, 2002**                    |   | **$**                                                             | **21,486** | ** ** | **$** | **(20,098** | **)** | **$** | **(6,161** | **)** | **$** | **(25,027** | **)** | **$** | **(29,800** | **)** |
|                                                 |   |                                                              |       |   |   |   |   |   |   |   |   |
| **CG&E**                                         |   |                                                              |       |   |   |   |   |   |   |   |   |
|                                                 |   |                                                              |       |   |   |   |   |   |   |   |   |
| Balance at  December 31, 1999                        |   | $                                                                 | —     |   | $ | (966 | ) | $ | — |   | $ | — |   | $ | (966 | ) |
| Current-period  change                               |   | —                                                            |       | (28 | ) | — |   | — |   | (28 | ) |
|                                                 |   |                                                              |       |   |   |   |   |   |   |   |   |
| Balance at  December 31, 2000                        |   | $                                                                 | —     |   | $ | (994 | ) | $ | — |   | $ | — |   | $ | (994 | ) |
| Cumulative  effect of change in accounting principle |   | —                                                            |       | — |   | — |   | (2,500 | ) | (2,500 | ) |
| Current-period  change                               |   | —                                                            |       | 134 |   | 461 |   | (2,779 | ) | (2,184 | ) |
|                                                 |   |                                                              |       |   |   |   |   |   |   |   |   |
| Balance at  December 31, 2001                        |   | $                                                                 | —     |   | $ | (860 | ) | $ | 461 |   | $ | (5,279 | ) | $ | (5,678 | ) |
| **Current-period  change**                           |   | **—**                                                        | ** ** | **(872** | **)** | **(462** | **)** | **(18,734** | **)** | **(20,068** | **)** |
|                                                 |   |                                                              | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |
| **Balance  at December 31, 2002**                    |   | **$**                                                             | **—** | ** ** | **$** | **(1,732** | **)** | **$** | **(1** | **)** | **$** | **(24,013** | **)** | **$** | **(25,746** | **)** |
|                                                 |   |                                                              |       |   |   |   |   |   |   |   |   |
| **PSI**                                              |   |                                                              |       |   |   |   |   |   |   |   |   |
|                                                 |   |                                                              |       |   |   |   |   |   |   |   |   |
| Balance at  December 31, 1999                        |   | $                                                                 | —     |   | $ | (658 | ) | $ | 2,049 |   | $ | — |   | $ | 1,391 |   |
| Current-period  change                               |   | —                                                            |       | (47 | ) | (1,864 | ) | — |   | (1,911 | ) |
|                                                 |   |                                                              |       |   |   |   |   |   |   |   |   |
| Balance at  December 31, 2000                        |   | $                                                                 | —     |   | $ | (705 | ) | $ | 185 |   | $ | — |   | $ | (520 | ) |
| Current-period  change                               |   | —                                                            |       | (49 | ) | (1,026 | ) | — |   | (1,075 | ) |
|                                                 |   |                                                              |       |   |   |   |   |   |   |   |   |
| Balance at  December 31, 2001                        |   | $                                                                 | —     |   | $ | (754 | ) | $ | (841 | ) | $ | — |   | $ | (1,595 | ) |
| **Current-period  change**                           |   | **—**                                                        | ** ** | **(2,138** | **)** | **(4,386** | **)** | **—** | ** ** | **(6,524** | **)** |
|                                                 |   |                                                              | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |
| **Balance  at December 31, 2002**                    |   | **$**                                                             | **—** | ** ** | **$** | **(2,892** | **)** | **$** | **(5,227** | **)** | **$** | **—** | ** ** | **$** | **(8,119** | **)** |

 

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(1)                                  Theresults of **Cinergy** also includeamounts related to non-registrants. Individual amounts for **ULH&P**are immaterial.

 

196

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**20. SubsequentEvents**

 

**(a)****                                  *Sale ofCommon Stock***

 

On January 15, 2003, **Cinergy Corp.**filed a registration statement with respect to the issuance of common stock,preferred stock, and other securities with an aggregate amount of $750million.  On February 5, 2003, **Cinergy** sold 5.7 million shares of commonstock of **Cinergy Corp.** with netproceeds of approximately $175 million under this registration statement.  The net proceeds from the transaction willbe used to reduce short-term debt of **CinergyCorp.** and for other general corporate purposes.

 

**(b)*****                                  Transfer of Generating Assets***

 

On February 4, 2003, the FERC issued an order under Section 203 of theFederal Power Act authorizing **PSI’s**proposed acquisition of the Henry County, Indiana, and Butler County, Ohio,gas-fired peaking power plants from two non-regulated affiliates.  This action was the final regulatoryapproval needed for the transfer, which occurred on February 5, 2003.  In December 2002, the IURC approved asettlement agreement among **PSI**,the Indiana Office of the Utility Consumer Counselor, and the IURC TestimonialStaff authorizing **PSI’s** purchaseof the plants.

 

197

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| **ITEM 9.** | **CHANGES  IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE** |
|-------------|-------------------------------------------------------------------------------------------|

## ** **

Disclosure with respect to this Item, for each of the registrants, hasbeen previously provided on the Form 8-K dated April 30, 2002 and as amended onMay 15, 2002.

 

198

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# **PART III**

# ** **

## **ITEM10.  DIRECTORS AND EXECUTIVE OFFICERS OFTHE**REGISTRANTS

## ** **

### **BOARD OF DIRECTORS**

### ** **

Information regarding **Cinergy Corp.’s**directors is incorporated by reference from its definitive Proxy Statement forthe 2003 Annual Meeting of Shareholders.

 

The directors of The Cincinnati Gas & Electric Company (**CG&E**) at January 31, 2003, are asfollows:

 

•                  **R. Foster Duncan** - Mr. Duncan, age 48, isExecutive Vice President and Chief Financial Officer of **CG&E**, a position he has held sinceFebruary 2001.  He has served asdirector of **CG&E** since April2001.  His current term as directorexpires April 21, 2003.

 

•                  **James E. Rogers** - Mr. Rogers, age 55, is Chairmanof the Board and Chief Executive Officer of **CG&E**.  He has served as a director of **CG&E** since 1994.  His current term as director expires April21, 2003.

 

•                  **James L. Turner** - Mr. Turner, age 43, isVice President of **CG&E**, aposition he has held since July 2000. He served as a director of **CG&E**from February 15, 1999 to April 30, 2001, at which time Mr. William J. Grealiswas elected as successor-director to Mr. Turner.  Mr. Turner was re-elected, effective October 1, 2001, assuccessor-director to Mr. Grealis.  Mr.Turner’s current term as director expires April 21, 2003.

 

Additional information on each of the directors of **CG&E** is presented in the following“Executive Officers” section.

 

Information regarding PSI Energy, Inc.’s (**PSI**) directors is incorporated by reference from **PSI’s** 2003 Information Statement.

 

### **EXECUTIVE OFFICERS**

### ** **

The names of the executive officers of each registrant and thepositions they hold, held, or have been elected to (as of January 31, 2003),their ages (as of December 31, 2002), and their business experience during thepast five years is included in the chart below.

 
|              |   |    |   | **Positions and Length of Service**                                                                                                                                                              |   |
|-------------------|--------|---------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| **Name**          |   | **Age** |   | **Cinergy Corp.**                                                                                                                                                                                |   | **CG&E** |   | **PSI** |   |
| Wendy L. Aumiller |   | 50      |   | **Treasurer**6/02 - present**Acting Treasurer**10/01 - 6/02**Assistant Treasurer**10/00 - 10/01**General Manager, Generation Financial  Planning**6/00 - 10/00**Assistant Treasurer**7/96 - 6/00 |   | **Treasurer**6/02 - present**Acting Treasurer**10/01 - 6/02**Assistant Treasurer**10/00 - 10/01  7/96 - 6/00 |   | **Treasurer**6/02 - present**Acting Treasurer**10/01 - 6/02**Assistant Treasurer**10/00 - 10/01  7/96 - 6/00 |   |

 

199

----

 
|                 |   |    |   | **Positions and Length of Service**                                                                                                                                                                                                                                                                                                                                                                                                                   |   |
|----------------------|--------|---------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| **Name**             |   | **Age** |   | **Cinergy Corp.**                                                                                                                                                                                                                                                                                                                                                                                                                                     |   | **CG&E** |   | **PSI** |   |
| John Bryant(1)       |   | 56      |   | **Vice President**1/98 - present**President, International Business Unit**  7/00 - 2/01                                                                                                                                                                                                                                                                                                                                                               |   |   |   |   |   |
| Michael J. Cyrus(2)  |   | 47      |   | **Executive Vice President**  2/01 - present**Chief Executive Officer, Energy Merchant  Business Unit**  2/01 - present**President, Energy Commodities Business Unit**  3/99 - 2/01**Vice President**  4/98 - 2/01**Chief Operating Officer, Energy Commodities  Business Unit**  11/98 - 3/99                                                                                                                                                        |   | **Executive Vice****President**  2/01 - present**Vice President**  4/99 - 2/01 |   | **Executive Vice President**  2/01 - present**Vice President**  4/99 - 2/01 |   |
| R. Foster Duncan(3)  |   | 48      |   | **Executive Vice President and Chief  Financial Officer**  2/01 - present                                                                                                                                                                                                                                                                                                                                                                             |   | **Executive Vice President and Chief  Financial Officer**  2/01 - present |   | **Executive Vice President and Chief  Financial Officer**  2/01 - present |   |
| Douglas F. Esamann   |   | 45      |   | **Vice President and Chief Financial  Officer, Energy Merchant Business Unit**  2/01 - 10/01**Vice President and Chief Financial Officer,  Energy Commodities Business Unit**  3/99 - 2/01**General Manager, Business Development,  Energy Commodities Business Unit**  3/98 - 3/99**Finance Manager, Energy Commodities  Business Unit**  5/96 - 3/98                                                                                                |   |   |   | **President**  10/01 - present |   |
| Gregory C. Ficke     |   | 50      |   | **Vice President and Chief  Information Officer, Regulated Businesses Business Unit**  2/01 - 10/01**Vice President and Chief Information  Officer, Energy Delivery Business Unit**  7/00 - 2/01**Vice President, Operations Services, Energy  Delivery Business Unit**  4/99 - 7/00**Vice President, Gas Operations, Energy  Delivery Business Unit**  12/98 - 4/99**General Manager, Gas Operations, Energy  Delivery Business Unit**  8/96 - 12/98 |   | **President**  10/01 - present |   |   |   |
| Bennett L. Gaines(4) |   | 49      |   | **Vice President and Chief Technology  Officer**  1/03 - present                                                                                                                                                                                                                                                                                                                                                                                      |   |   |   |   |   |

 

200

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|                        |   |    |   | **Positions and Length of Service**                                                                                                                                                                                                                                       |   |
|-----------------------------|--------|---------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| **Name**                    |   | **Age** |   | **Cinergy Corp.**                                                                                                                                                                                                                                                         |   | **CG&E** |   | **PSI** |   |
| William J. Grealis(5)       |   | 57      |   | **Executive Vice President**  7/00 - present**Chief Executive Officer, Regulated  Businesses Business Unit**  2/01 - 10/01**Chief of Staff**  7/00 - 2/01**Vice President, Corporate Services, and  Chief Strategic Officer**  8/98 - 7/00**Vice President**  1/95 - 8/98 |   | **Executive Vice President**  7/00 - present**Chief of Staff**  7/00 - 2/01**Vice President, Corporate Services, and  Chief Strategic Officer**  8/98 - 7/00**Vice President**  4/98 - 8/98**President**  1/95 - 3/98 |   | **Executive Vice President**  7/00 - present**Chief of Staff**  7/00 - 2/01**Vice President, Corporate Services, and  Chief Strategic Officer**  8/98 - 7/00**Vice President**  4/98 - 8/98 |   |
| J. Joseph Hale, Jr.(6)      |   | 53      |   | **Vice President**  12/96 - present                                                                                                                                                                                                                                       |   | **Vice President**  10/01 - present**President**  7/00 - 10/01**Vice President**  8/98 - 7/00**General Manager,****Marketing Operations**  1/95 - 8/98 |   | **Vice President**  10/01 - present**Vice President**  2/00 - 7/00**Interim President**  6/99 - 2/00**Vice President**  8/98 - 6/99 |   |
| M. Stephen Harkness(7)      |   | 54      |   | **Vice President**  12/96 - present                                                                                                                                                                                                                                       |   |   |   |   |   |
| Julia S. Janson****         |   | 38      |   | **Secretary**  7/00 - present**Senior Counsel**  7/98 - present**Counsel**  5/96 - 7/98                                                                                                                                                                                   |   | **Secretary**  1/03 - present**Assistant Secretary**  7/00 - 1/03**Senior Counsel**  7/98 - present**Counsel**  5/96 - 7/98 |   | **Secretary**  7/00 - present**Senior Counsel**  7/98 - present**Counsel**  5/96 - 7/98 |   |
| Marc E. Manly(8)            |   | 50      |   | **Executive Vice President and Chief  Legal Officer**  11/02 - present**Assistant Secretary**  1/03 - present                                                                                                                                                             |   | **Executive Vice President and Chief  Legal Officer**  11/02 - present |   | **Executive Vice President and Chief  Legal Officer**  11/02 - present**Assistant Secretary**  1/03 - present |   |
| Theodore R. Murphy II(9)    |   | 45      |   | **Senior Vice President and Chief  Risk Officer**  8/02 - present                                                                                                                                                                                                         |   | **Senior Vice President and Chief  Risk Officer**  8/02 - present |   | **Senior Vice President and Chief  Risk Officer**  8/02 - present |   |
| Frederick J. Newton III(10) |   | 47      |   | **Executive Vice President and Chief  Administrative Officer**  5/02 - present                                                                                                                                                                                            |   | **Executive Vice President and Chief  Administrative Officer**  5/02 - present |   | **Executive Vice President and Chief  Administrative Officer**  5/02 - present |   |
| Ronald R. Reising(11)       |   | 42      |   | **Vice President**  6/02 - present                                                                                                                                                                                                                                        |   | **Vice President**  6/02 - present |   | **Vice President**  6/02 - present |   |
| Bernard F. Roberts          |   | 50      |   | **Vice President and Comptroller**  3/99 - present**Vice President and Chief Financial Officer,  Energy Commodities Business Unit**  7/96 - 3/99                                                                                                                          |   | **Vice President and Comptroller**  3/99 - present |   | **Vice President and Comptroller**  3/99 - present |   |
| James E. Rogers             |   | 55      |   | **Chairman of the Board**  12/00 - present**President and Chief Executive Officer**  12/95 - present**Vice Chairman**  12/95 - 12/00                                                                                                                                      |   | **Chairman of the Board**  12/00 - present**Chief Executive Officer**  12/95 - present**Vice Chairman**  12/95 - 12/00 |   | **Chairman of the Board**  12/00 - present**Chief Executive Officer**  12/95 - present**Vice Chairman**  12/95 - 12/00 |   |

 

201

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|                    |   |    |   | **Positions and Length of Service**                                                                                                                                                                                                                                                                                      |   |
|-------------------------|--------|---------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| **Name**                |   | **Age** |   | **Cinergy Corp.**                                                                                                                                                                                                                                                                                                        |   | **CG&E** |   | **PSI** |   |
| James L. Turner(12)     |   | 43      |   | **Executive Vice President**  10/01 - present**Chief Executive Officer**,**Regulated Businesses Business Unit**  12/01 - present**President, Regulated Businesses Business  Unit**  2/01 - 12/01**President, Energy Delivery Business Unit**  7/00 - 2/01**Vice President**  4/99 - 12/01**Senior Counsel**  6/95 - 3/97 |   | **Vice President**  7/00 - present**President**  2/99 - 7/00 |   | **Vice President**  7/00 - present |   |
| Timothy J. Verhagen(13) |   | 56      |   | **Vice President**  1/01 - present                                                                                                                                                                                                                                                                                       |   |   |   |   |   |

 

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|   | None of the officers are related in any manner.  Our executive officers hold the offices  set opposite their names until the next annual meeting of the Board of  Directors and until their successors have been elected and qualified.                                                                                                                                                                                                                                                                                                                                                                                                               |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| (1)    | Mr. Bryant also serves as the President of Cinergy  Global Resources, Inc. (Global Resources) and Cinergy Global Power, Inc., and  as the Managing Director of Cinergy Global Power Services Limited, **Cinergy’s** (which includes **Cinergy Corp.** and all of our regulated  and non-regulated subsidiaries) international project development subsidiary  from 1997 to present.  Previously, he  served as the Executive Generation Director of Midlands Electricity plc (Midlands;  a non-affiliate of **Cinergy**) from  1996 to 1997, and Generation Director of Midlands from 1992 to 1996.                                              |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| (2)    | Prior to joining **Cinergy**,  Mr. Cyrus was Senior Vice President of Trading and Operations with Electric  Clearinghouse, Inc. (a non-affiliate of **Cinergy**),  the power subsidiary of Natural Gas Clearinghouse (NGC; a non-affiliate of **Cinergy**) in Houston, Texas, a position he  had held since 1997.  Prior to that,  Mr. Cyrus was President of NGC Canada and Executive Vice President of Novagas  Clearinghouse, Ltd.  Previously, Mr.  Cyrus held various executive positions involving energy trading, marketing,  and risk management with NGC since 1993.                                                                    |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| (3)    | Prior to joining **Cinergy**,  Mr. Duncan was Executive Vice President and Chief Financial Officer of  LG&E Energy Corp. (LG&E) (a non-affiliate of **Cinergy**) in Louisville, Kentucky since  December 1998.  Prior to that, he was  Executive Vice President of Planning and Corporate Development at LG&E  from January 1998 to December 1998.   Prior to joining LG&E, in January 1998, he was Vice President and  Treasurer of Freeport-McMoRan, Inc. and Freeport-McMoRan Copper & Gold  (non-affiliates of **Cinergy**),  global natural resource companies headquartered in New Orleans, Louisiana  since May 1994. |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| (4)    | Prior to joining **Cinergy**,  Mr. Gaines was Managing Director, Business Services, at Powergen plc. for the  United Kingdom operations since 2001.   Prior to that, he was Corporate Director, Supply Chain and Operating  Service at LG&E in Louisville, Kentucky from 2000 to 2001.  Prior to joining LG&E, Mr. Gaines was  Corporate Director, Strategic Sourcing and eCommerce at Electronic Data  Systems Corporation from 1998 to 2000 in Dallas, Texas.  Prior to that, from 1994-1998, he worked  for McKesson Corporation as Vice President of Customer Operations in Dallas,  Texas.****                                 |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| (5)    | Mr. Grealis served as President of Cinergy  Investments, Inc. from 1995 to March 1999.   Mr. Grealis also served as President of the former Energy Services  Business Unit from 1996 to May 1997.                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| (6)    | Since 1992, Mr. Hale has served as President of  Cinergy Foundation, Inc., a **Cinergy**  affiliate that is organized and operated exclusively for charitable purposes.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| (7)    | Mr. Harkness also serves as Chief Operating and  Chief Financial Officer of the Energy Merchant Business Unit.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| (8)    | Prior to joining **Cinergy**,  Mr. Manly was Managing Director, Law and Governmental Affairs, General  Counsel and Corporate Secretary of NewPower Holdings, Inc. (a non-affiliate  of **Cinergy**) from April 2000 to  August 2002.  Prior to that, he was  Vice President, Chief Counsel for AT&T Consumer Services Group (a  non-affiliate of **Cinergy**) from  January 1995 to April 2000.  On June  11, 2002, NewPower Holdings, Inc. and its affiliates, TNPC Holdings, Inc. and  the NewPower Company, filed a petition for relief under Chapter 11 of The  United States Bankruptcy Code.                                           |

 

202

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| (9)    | Prior to joining **Cinergy**,  Mr. Murphy was Vice President and Chief Risk Officer of Enron Europe, Ltd. (a  non-affiliate of **Cinergy**) from  January 2001 to July 2002.  Prior to  that, he was Vice President of Market Risk of Enron Corporation (a  non-affiliate of **Cinergy**) from  March 1997 to December 2000.                                                                                                                                                                                                                                                                                                                                                                                         |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| (10)   | Prior to joining **Cinergy**,  Mr. Newton was Senior Vice President, Chief Administrative Officer of  LG&E (a non-affiliate of **Cinergy**)  from January 1999 to May 2002.  Prior  to that, he was Senior Vice President, Human Resources and Administration of  LG&E from May 1998 to January 1999.   Prior to joining LG&E, he was Senior Vice President, Human  Resources of Venator Group Inc.’s (a non-affiliate of **Cinergy**) Champs Sports Division from  August 1997 to April 1998.                                                                                                                                                                                                 |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| (11)   | Prior to joining **Cinergy**,  Mr. Reising was Chief Financial Officer of Focal Communications Corporation  (a non-affiliate of **Cinergy**)  from February 2001 to January 2002.   Prior to that, he was Chief Financial Officer of Derivon (a  non-affiliate of **Cinergy**) from  May 2000 to February 2001.  Prior to  that, he was Chief Financial Officer of Bell Canada (a non-affiliate of **Cinergy**) from May 1999 to May 2000.  Prior to that, he was Chief Financial  Officer of Matav (a non-affiliate of **Cinergy**)  from January 1997 to May 1999.  On  December 19, 2002, Focal Communications filed a petition for relief under  Chapter 11 of The United States Bankruptcy Code. |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| (12)   | In March 1997, Mr. Turner was appointed Vice  President of Cinergy Services, Inc., (Services) having responsibility for the  coordination of transition issues across all corporate subsidiaries in the  move for full customer choice.   Beginning in April 1998 until January 2000, Mr. Turner had full  responsibility for **Cinergy’s**  Government and Regulatory Affairs Department.  Mr. Turner served as Vice President of Customer Services from  January 2000 until July 2000.                                                                                                                                                                                                                   |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| (13)   | Prior to joining **Cinergy**,  Mr. Verhagen served as Senior Vice President, Human Resources and  Administration of United Dominion Industries Ltd. (United Dominion; a  non-affiliate of **Cinergy**), a  diversified manufacturer of industrial test equipment in Charlotte, North  Carolina, from 1998 to 2000.  From  1993 to 1998 he served as Vice President, Human Resources of United Dominion.                                                                                                                                                                                                                                                                                                              |

## ** **

203

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## **ITEM11.  EXECUTIVE COMPENSATION**

## ** **

Information in response to this item for **Cinergy Corp.** and **CG&E**is incorporated by reference from **CinergyCorp.’s** definitive Proxy Statement for the 2003 Annual Meeting ofthe Shareholders.

 

All **CG&E** directorscurrently are employees of **Cinergy Corp.**or **CG&E**, and receive nocompensation for their services as directors.

 

Information in response to this item for **PSI** is incorporated by reference from **PSI’s** 2003 Information Statement.

 

## **ITEM12.  SECURITY OWNERSHIP OF CERTAINBENEFICIAL**OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERMATTERS

## ** **

Information in response to this item for **Cinergy Corp.** is incorporated by reference from its definitiveProxy Statement for the 2003 Annual Meeting of Shareholders.

 

**Cinergy Corp.** ownsall outstanding shares of common stock of **CG&E**,**CG&E’s** only votingsecurity.  Pursuant to Section 13(d) ofthe Securities Exchange Act of 1934 (Exchange Act), a beneficial owner of asecurity is any person who directly or indirectly has or shares voting orinvestment power over such security.  Noperson or group is known by the management of **CG&E**to be the beneficial owner of more than 5 percent of any series of **CG&E’s** class of cumulative preferredstock as of December 31, 2002.

 

**CG&E’s**directors and executive officers did not beneficially own shares of any seriesof the class of **CG&E’s**cumulative preferred stock as of January 31, 2003.  The beneficial ownership of **CinergyCorp.** common stock by each director and named executive officer of **CG&E** as of January 31, 2003, is setforth in the following table:

 

| **Name of  Beneficial Owner**                                 |   | **Amount and Nature of  Beneficial Ownership(1)** |   | **Percent of  Class** |   |
|---------------------------------------------------------------|--------|---------------------------------------------------|--------|-----------------------|--------|
|                                                          |   |                                              |   |                  |   |
| Michael J. Cyrus                                              |   | 296,419 shares                                    |   |                  | *      |
| R. Foster Duncan                                              |   | 84,993 shares                                     |   |                  | *      |
| William J. Grealis                                            |   | 381,143 shares                                    |   |                  | *      |
| James E. Rogers                                               |   | 1,572,308 shares                                  |   |                  | *      |
| James L. Turner                                               |   | 64,795 shares                                     |   |                  | *      |
| All directors and executive officers as a group (15  persons) |   | 2,621,204 shares                                  |   | 1.55                  | %      |

 

----

*                                         Lessthan 1%

(1)                                  Includesshares which there is a right to acquire within 60 days pursuant to theexercise of stock options in the following amounts:  Mr. Cyrus - 191,100; Mr. Duncan - 80,000; Mr. Grealis - 226,731;Mr. Rogers - 1,170,135;  Mr. Turner -47,300; and all directors and executive officers as a group - 1,856,784.

 

Information in response to this item for **PSI** is incorporated by reference from its 2003 InformationStatement.

 

204

----

 

The following table reflects **Cinergy’s**equity compensation plan information as of December 31, 2002:

 

**EquityCompensation Plan Information**

 
| **Plan  Category**                                              |   | **Number of  securities to  be issued upon exercise  of outstanding options,  warrants and rights  (a)** |   | **Weighted-average  exercise price of  outstanding options,  warrants and rights  (b)** |   | **Number of  securities  remaining available for  future issuance under  equity compensation  plans (excluding  securities reflected in  column (a))  (c)** |      |
|-----------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------|
|                                                            |   |                                                                                                     |   |                                                                                    |   |                                                                                                                                                        |      |
| **Equity  compensation plans approved by security holders**     |   |                                                                                                     |   |                                                                                    |   |                                                                                                                                                        |      |
| Cinergy Corp.  1996 Long-Term Incentive Plan                    |   | 7,417,726                                                                                                |   | $                                                                                       | 29.13  |                                                                                                                                                        | 5,685,385 |   |
| Cinergy Corp.  Retirement Plan for Directors                    |   | —                                                                                                   |   | N/A                                                                                     |   | 175,000                                                                                                                                                     |      |
| Cinergy Corp.  Directors’ Equity Compensation Plan         |   | —                                                                                                   |   | N/A                                                                                     |   | 75,000                                                                                                                                                      |      |
| Cinergy Corp.  Directors’ Deferred Compensation Plan       |   | —                                                                                                   |   | N/A                                                                                     |   | 200,000                                                                                                                                                     |      |
| Cinergy Corp.  Stock Option Plan                                |   | 1,443,534                                                                                                |   | $                                                                                       | 28.75  |                                                                                                                                                        | 1,318,500 |   |
| Cinergy Corp.  Performance Shares Plan                          |   | —                                                                                                   |   | N/A                                                                                     |   | 736,751                                                                                                                                                     |      |
|                                                            |   |                                                                                                     |   |                                                                                    |   |                                                                                                                                                        |      |
| **Equity  compensation plans not approved by security holders** |   |                                                                                                     |   |                                                                                    |   |                                                                                                                                                        |      |
| Cinergy Corp.  Employee Stock Purchase Savings Plan             |   | 218,170                                                                                                  |   | $                                                                                       | 32.78  |                                                                                                                                                        | 1,651,420 |   |
| Cinergy Corp. UK  Sharesave Scheme                              |   | 6,012                                                                                                    |   | 24.66                                                                                   |   | 59,989                                                                                                                                                      |      |
| Cinergy Corp.  401(k) Excess Plan                               |   | N/A                                                                                                      |   | N/A                                                                                     |   | 52,825                                                                                                                                                      |      |
| Director,  Officer and Key Employee Stock Purchase Program      |   | N/A                                                                                                      |   | N/A                                                                                     |   | —                                                                                                                                                      |      |
| Cinergy Corp.  2001 Long-Term Incentive Compensation Sub-Scheme |   | 1,250                                                                                                    |   | $                                                                                       | 33.61  |                                                                                                                                                        | 6,998,750 |   |

 

The following information describes the equity compensation plans thathave not been approved by shareholders.

 

#### **Cinergy Corp.Employee Stock Purchase and Savings Plan**

#### ** **

The **Cinergy Corp.** EmployeeStock Purchase and Savings Plan allows essentially all full-time, regularemployees to purchase shares of common stock pursuant to a stock optionfeature.  Under the Employee StockPurchase and Savings Plan, after-tax funds are withheld from a participant’scompensation during a 26-month offering period and are deposited in aninterest-bearing account.  At the end ofthe offering period, participants may apply amounts deposited in the account,plus interest, toward the purchase of shares of common stock.  The purchase price is equal to 95 percent ofthe fair market value of a share of common stock on the first date of theoffering period.  Any funds not appliedtoward the purchase of shares are returned to the participant.  A participant may elect to terminateparticipation in the plan at any time. Participation also will terminate if the participant’s employmentceases.  Upon termination ofparticipation, all funds, including interest, are returned to the participantwithout penalty.  The sixth (current)offering period began May 1, 2001, and ends June 30, 2003.  The purchase price for all shares under thisoffering is $32.78.

 

205

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**UK Sharesave Scheme**

 

The UK Sharesave Scheme allows essentially all full-time, regular UKemployees working a minimum of 25 hours per week to purchase shares of commonstock pursuant to a stock option feature. Under the UK Sharesave Scheme, after-taxfunds are withheld from a participant’s compensation during a 36-month or60-month offering period, at the election of the participants, and aredeposited in an account. At the end of the offering period, participants mayapply amounts deposited in the account toward the purchase of shares of commonstock. The purchase price cannot be less than 80 percent of the average marketprice at date of grant or shortly prior to the grant. Any funds not appliedtoward the purchase of shares are returned to the participant. A participantmay elect to terminate participation in the plan at any time. Participationalso will terminate if the participant’s employment ceases. Upon termination ofparticipation, all funds are returned to the participant without penaltyalthough, in certain specified circumstances, options may be exercised early ona pro-rata basis.

 

#### **Cinergy Corp.401(k) Excess Plan**

#### ** **

The Cinergy Corp. 401(k) Excess Plan provides a select group of keysenior management employees with the opportunity to defer on a pre-tax basis aportion of their annual base salary in excess of the amount that can bedeferred pursuant to current law under **CinergyCorp.’s** qualified 401(k) plan. The plan also provides for certain Company contributions.  Amounts contributed to the plan are creditedto a bookkeeping account established for each participant.  Each such account is credited with earnings,gains and losses based on the performance of investment funds selected by theparticipants in a manner similar to **CinergyCorp.’s** qualified 401(k) plan. One available investment fund credits amounts to participant accountsbased on the performance of **Cinergy Corp.**common stock.  A participant’s accountis generally distributed following his or her termination of employment in a singlelump sum or in annual installments over a period of up to 10 years.

 

#### **Director,Officer and Key Employee Stock Purchase Program**

#### ** **

In December 1999, **Cinergy Corp.**adopted the Director, Officer, and Key Employee Stock Purchase Program (StockPurchase Program).  The purpose of theStock Purchase Program is to facilitate the purchase and ownership of **Cinergy Corp.’s** common stock by itsdirectors, officers, and key employees, thereby further aligning theirinterests with those of its shareholders. In February 2000, **Cinergy Corp.**purchased approximately 1.6 million shares of common stock on behalf of theparticipants at an average price of $24.82 per share.  Participants had the option of financing the purchases through afive-year credit facility arranged by **CinergyCorp.** with a bank.  Eachparticipant is obligated to repay the bank any loan principal, interest, andprepayment fees, and each has assigned his or her dividend rights on thepurchased shares to the bank to be applied to interest payments as due on theloan.  Cinergy Services, Inc., and inpart, **Cinergy Corp.**, haveguaranteed repayment to the bank of 100 percent of each participant’s loanobligations and the associated interest, and each participant has agreed toindemnify the guarantor for any payments made by it under the guaranty on theparticipant’s behalf.  A participant’sobligations to the bank are unsecured and no restrictions are placed on theparticipant’s ability to sell, pledge, or otherwise encumber or dispose of hisor her purchased shares.

 

#### **Cinergy Corp.2001 Long-Term Incentive Compensation Sub-Scheme**

#### ** **

The Cinergy Corp. 2001 Long-Term Incentive Compensation Sub-Scheme wasadopted in 2001.  The purpose of thisplan was to allow certain United Kingdom (UK) employees to receive similar benefitsas provided under the Cinergy Corp. 1996 Long-Term Incentive Compensation Planwhile taking into consideration the unique issues of the UK taxation laws.  Under this plan, the eligible employees maybe granted incentive and non-qualified stock options.  These stock options are granted to participants with an optionprice equal to or greater than the fair market value on the grant date, andgenerally with a vesting period of either three or five years.  The vesting period begins on the grant dateand all options expire within 10 years from that date.

 

206

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## **ITEM13.  CERTAIN RELATIONSHIPS AND RELATEDTRANSACTIONS**

## ** **

Information in response to this item for **Cinergy Corp.** and **CG&E**is incorporated by reference from **CinergyCorp.’s** definitive Proxy Statement for the 2003 Annual Meeting ofShareholders.

 

Information in response to this item for **PSI** is incorporated by reference from **PSI’s** 2003 Information Statement.

 

## **ITEM14.  CONTROLS AND PROCEDURES**

## ** **

Disclosurecontrols and procedures are our controls and other procedures that are designedto ensure that information required to be disclosed by us in the reports thatwe file or submit under the Exchange Act is recorded, processed, summarized,and reported, within the time periods specified in the SEC’s rules andforms.  Disclosure controls andprocedures include, without limitation, controls and procedures designed toensure that information required to be disclosed by us in the reports that wefile under the Exchange Act is accumulated and communicated to our management,including our chief executive officer and chief financial officer, asappropriate to allow timely decisions regarding required disclosure.

 

Under thesupervision, and with the participation of our management, including our chiefexecutive officer and chief financial officer, we have evaluated theeffectiveness of the design and operation of our disclosure controls andprocedures within 90 days of the filing date of this annual report, and, based uponthis evaluation, our chief executive officer and chief financial officer haveconcluded that these controls and procedures are adequate to ensure thatinformation requiring disclosure is communicated to management in a timelymanner and reported within the timeframe specified by the SEC’s rules andforms.

 

## **There were nosignificant changes in our internal controls or in other factors that couldsignificantly affect our internal controls subsequent to the date of our mostrecent evaluation.**

## ** **

## **207**

## ****

## ** **

## **PART IV**

## ** **

## **ITEM 15.**  EXHIBITS, FINANCIAL STATEMENTSCHEDULES, ANDREPORTS ON FORM 8-K

## ** **

### **FINANCIAL STATEMENTS AND SCHEDULES**

### ** **

Refer to the page captioned “Index to Financial Statements andFinancial Statement Schedules” for an index of the financial statements andfinancial statement schedules included in this report.

 

### **REPORTS ON FORM 8-K**

### ** **

None

 

### **EXHIBITS**

### ** **

The documents listed below are being filed or have previously beenfiled on behalf of **Cinergy Corp.**, **CG&E**, **PSI**,and The Union Light, Heat and Power Company (**ULH&P**)and are incorporated herein by reference from the documents indicated and madea part hereof.  Exhibits not identifiedas previously filed are filed herewith:

 
| **Exhibit  Designation**                                             |   | **Registrant(s)(1)**   |   | **Nature of Exhibit**                                                                                                                                                                      |   | **Previously Filed as  Exhibit to:**                                             |
|----------------------------------------------------------------------|--------|------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------|
| **Articles  of Incorporation /By-laws**                              |   |                   |   |                                                                                                                                                                                       |   |                                                                             |
| 3-a                                                                  |   | **Cinergy Corp.**      |   | Certificate of Incorporation of **Cinergy Corp.**, a Delaware corporation, as  amended May 10, 2001.                                                                                       |   | **Cinergy Corp.**March  31, 2001, Form 10-Q                                      |
| 3-b                                                                  |   | **Cinergy Corp.**      |   | By-Laws of **Cinergy  Corp.**, as amended on May 2, 2002.                                                                                                                                  |   | **Cinergy Corp.**March  31, 2002, Form 10-Q                                      |
| 3-c                                                                  |   | **CG&E**           |   | Amended Articles of Incorporation of **CG&E** effective October 23, 1996.                                                                                                              |   | **CG&E**  September 30, 1996, Form 10-Q                                      |
| 3-d                                                                  |   | **CG&E**           |   | Regulations of **CG&E**,  as amended, April 25, 1996.                                                                                                                                  |   | **CG&E** March  31, 1996,   Form 10-Q                                        |
| 3-e                                                                  |   | **PSI**                |   | Amended Articles of Consolidation of **PSI**, as amended April 20, 1995.                                                                                                                   |   | **PSI** June 30,  1995,   Form 10-Q                                              |
| 3-f                                                                  |   | **PSI**                |   | Amendment to Article D of the Amended Articles of  Consolidation of **PSI**, effective  July 10, 1997.                                                                                     |   | **Cinergy Corp.**  1997   Form 10-K                                              |
| 3-g                                                                  |   | **PSI**                |   | By-Laws of **PSI**,  as amended to December 17, 1996.                                                                                                                                      |   | **PSI** March 31,  1997,   Form 10-Q                                             |
| 3-h                                                                  |   | **ULH&P**          |   | Restated Articles of Incorporation made effective  May 7, 1976.                                                                                                                            |   | **ULH&P** Form  8-K, May 1976                                                |
| 3-i                                                                  |   | **ULH&P**          |   | By-Laws of **ULH&P**,  as amended on May 26, 1999.                                                                                                                                     |   |                                                                             |
| 3-j                                                                  |   | **ULH&P**          |   | Amendment to Restated Articles of Incorporation of **ULH&P** (Article Third) and Amendment  to the By-Laws of **ULH&P**  (Article 1), both effective July 24, 1997.                |   | **Cinergy Corp.**  1997 Form 10-K                                                |
| **Instruments  defining the  rights of  holders, incl.  Indentures** |   |                   |   |                                                                                                                                                                                       |   |                                                                             |
| 4-a                                                                  |   | **Cinergy Corp.  PSI** |   | Original Indenture (First Mortgage Bonds) dated  September 1, 1939, between **PSI**  and The First National Bank of Chicago, as Trustee, and LaSalle National  Bank, as Successor Trustee. |   | Exhibit A-Part 3 in File No. 70-258 Supplemental  Indenture dated March 30, 1984 |

 

208

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| **Exhibit  Designation** |   | **Registrant(s)(1)**        |   | **Nature of Exhibit**                                                                                                             |   | **Previously Filed as  Exhibit to:**                       |
|--------------------------|--------|-----------------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------|
| 4-b                      |   | **Cinergy Corp.  PSI**      |   | Twenty-fifth Supplemental Indenture between **PSI** and The First National Bank of  Chicago dated September 1, 1978.              |   | File No. 2-62543                                           |
| 4-c                      |   | **Cinergy Corp.  PSI**      |   | Thirty-fifth Supplemental Indenture between **PSI** and The First National Bank of  Chicago dated March 30, 1984.                 |   | **PSI** 1984 Form  10-K                                    |
| 4-d                      |   | **Cinergy Corp.  PSI**      |   | Forty-second Supplemental Indenture between **PSI** and LaSalle National Bank dated  August 1, 1988.                              |   | **PSI** 1988 Form  10-K                                    |
| 4-e                      |   | **Cinergy Corp.  PSI**      |   | Forty-fourth Supplemental Indenture between **PSI** and LaSalle National Bank dated March  15, 1990.                              |   | **PSI** 1990 Form  10-K                                    |
| 4-f                      |   | **Cinergy Corp.  PSI**      |   | Forty-fifth Supplemental Indenture between **PSI** and LaSalle National Bank dated March  15, 1990.                               |   | **PSI** 1990 Form  10-K                                    |
| 4-g                      |   | **Cinergy Corp.  PSI**      |   | Forty-sixth Supplemental Indenture between **PSI** and LaSalle National Bank dated June  1, 1990.                                 |   | **PSI** 1991 Form  10-K                                    |
| 4-h                      |   | **Cinergy Corp.  PSI**      |   | Forty-seventh Supplemental Indenture between **PSI** and LaSalle National Bank dated July  15, 1991.                              |   | **PSI** 1991 Form  10-K                                    |
| 4-i                      |   | **Cinergy Corp.  PSI**      |   | Forty-eighth Supplemental Indenture between **PSI** and LaSalle National Bank dated July  15, 1992.                               |   | **PSI** 1992 Form  10-K                                    |
| 4-j                      |   | **Cinergy Corp.  PSI**      |   | Forty-ninth Supplemental Indenture between **PSI** and LaSalle National Bank dated  February 15, 1993.                            |   | **PSI** 1992 Form  10-K                                    |
| 4-k                      |   | **Cinergy Corp.  PSI**      |   | Fiftieth Supplemental Indenture between **PSI** and LaSalle National Bank dated  February 15, 1993.                               |   | **PSI** 1992 Form  10-K                                    |
| 4-l                      |   | **Cinergy Corp.  PSI**      |   | Fifty-first Supplemental Indenture between **PSI** and LaSalle National Bank dated  February 1, 1994.                             |   | **PSI** 1993 Form  10-K                                    |
| 4-m                      |   | **Cinergy Corp.  PSI**      |   | Fifty-second Supplemental Indenture between **PSI** and LaSalle National Bank, as  Trustee, dated as of April 30, 1999.           |   | **PSI** March 31,  1999, Form  10-Q                        |
| 4-n                      |   | **Cinergy Corp.  PSI**      |   | Fifty-third Supplemental Indenture between **PSI** and LaSalle National Bank dated June  15, 2001.                                |   | **Cinergy Corp.**  June 30, 2001, Form 10-Q                |
| 4-o                      |   | **Cinergy Corp.  PSI**      |   | Indenture (Secured Medium-term Notes, Series A),  dated July 15, 1991, between **PSI**  and LaSalle National Bank, as Trustee.    |   | **PSI** Form 10-K/A,  Amendment No. 2, dated July 15, 1993 |
| 4-p                      |   | **Cinergy Corp.  PSI**      |   | Indenture (Secured Medium-term Notes, Series B),  dated July 15, 1992, between **PSI**  and LaSalle National Bank, as Trustee.    |   | **PSI** Form 10-K/A,  Amendment No. 2, dated July 15, 1993 |
| 4-q                      |   | **Cinergy Corp.  PSI**      |   | Loan Agreement between **PSI** and the City of Princeton, Indiana dated as of November  7, 1996.                                  |   | **PSI** September 30,  1996, Form 10-Q                     |
| 4-r                      |   | **Cinergy Corp.  PSI**      |   | Loan Agreement between **PSI** and the City of Princeton, Indiana dated as of February  1, 1997.                                  |   | **Cinergy Corp.**  1996 Form  10-K                         |
| 4-s                      |   | **Cinergy Corp.  PSI**      |   | Indenture dated November 15, 1996, between **PSI** and The Fifth Third Bank, as Trustee.                                          |   | **Cinergy Corp.**  1996 Form  10-K                         |
| 4-t                      |   | **Cinergy Corp.  PSI**      |   | First Supplemental Indenture dated November 15,  1996, between **PSI** and The Fifth  Third Bank, as Trustee.                     |   | **Cinergy Corp.**  1996 Form  10-K                         |
| 4-u                      |   | **Cinergy Corp.  PSI**      |   | Third Supplemental Indenture dated as of March 15,  1998, between **PSI** and The Fifth  Third Bank, as Trustee.                  |   | **Cinergy Corp.**  1997 Form  10-K                         |
| 4-v                      |   | **Cinergy Corp.  PSI**      |   | Fourth Supplemental Indenture dated as of August 5,  1998, between **PSI** and The Fifth  Third Bank, as Trustee.                 |   | **PSI** June 30,  1998, Form 10-Q                          |
| 4-w                      |   | **Cinergy Corp.  PSI**      |   | Fifth Supplemental Indenture dated as of December  15, 1998, between **PSI** and The  Fifth Third Bank, as Trustee.               |   | **PSI** 1998 Form  10-K                                    |
| 4-x                      |   | **Cinergy Corp.  PSI**      |   | Sixth Supplemental Indenture dated as of April 30,  1999, between **PSI** and Fifth  Third Bank, as Trustee.                      |   | **PSI** March 31,  1999, Form  10-Q                        |
| 4-y                      |   | **Cinergy Corp.  PSI**      |   | Seventh Supplemental Indenture dated as of October  20, 1999, between **PSI** and Fifth  Third Bank, as Trustee.                  |   | **PSI** September 30,  1999, Form 10-Q                     |
| 4-z                      |   | **Cinergy Corp.  PSI**      |   | Unsecured Promissory Note dated October 14, 1998,  between **PSI** and the Rural  Utilities Service.                              |   | **PSI** 1998 Form  10-K                                    |
| 4-aa                     |   | **Cinergy Corp.  PSI**      |   | Loan Agreement between **PSI** and the Indiana Development Finance Authority dated as  of July 15, 1998.                          |   | **PSI** June 30,  1998, Form 10-Q                          |
| 4-bb                     |   | **Cinergy Corp.  PSI**      |   | Loan Agreement between **PSI** and the Indiana Development Finance Authority dated as  of May 1, 2000.                            |   | **PSI** June 30,  2000, Form 10-Q                          |
| 4-cc                     |   | **Cinergy Corp.  CG&E** |   | Original Indenture (First Mortgage Bonds) between **CG&E** and The Bank of New York (as  Trustee) dated as of August 1, 1936. |   | **CG&E**  Registration Statement No. 2-2374            |
| 4-dd                     |   | **Cinergy Corp.  CG&E** |   | Fourteenth Supplemental Indenture between **CG&E** and The Bank of New York dated  as of November 2, 1972.                    |   | **CG&E**  Registration Statement No. 2-60961           |
| 4-ee                     |   | **Cinergy Corp.  CG&E** |   | Thirty-third Supplemental Indenture between **CG&E** and The Bank of New York dated  as of September 1, 1992.                 |   | **CG&E**  Registration Statement No. 33-53578          |
| 4-ff                     |   | **Cinergy Corp.  CG&E** |   | Thirty-fourth Supplemental Indenture between **CG&E** and The Bank of New York dated  as of October 1, 1993.                  |   | **CG&E**  September 30, 1993, Form 10-Q                |

 

209

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| **Exhibit  Designation** |   | **Registrant(s)(1)**                   |   | **Nature of Exhibit**                                                                                                        |   | **Previously Filed as  Exhibit to:**              |
|--------------------------|--------|----------------------------------------|--------|------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------|
| 4-gg                     |   | **Cinergy Corp.  CG&E**            |   | Thirty-fifth Supplemental Indenture between **CG&E** and The Bank of New York dated  as of January 1, 1994.              |   | **CG&E** Registration  Statement No. 33-52335 |
| 4-hh                     |   | **Cinergy Corp.  CG&E**            |   | Thirty-sixth Supplemental Indenture between **CG&E** and The Bank of New York dated  as of February 15, 1994.            |   | **CG&E**  Registration Statement No. 33-52335 |
| 4-ii                     |   | **Cinergy Corp.  CG&E**            |   | Thirty-seventh Supplemental Indenture between **CG&E** and The Bank of New York dated  as of October 14, 1996.           |   | **Cinergy Corp.**  1996 Form  10-K                |
| 4-jj                     |   | **Cinergy Corp.  CG&E**            |   | Thirty-eighth Supplemental Indenture between **CG&E** and The Bank of New York dated  as of February 1, 2001.            |   | **Cinergy Corp.**March  31, 2001, Form 10-Q       |
| 4-kk                     |   | **Cinergy Corp.  CG&E**            |   | Loan Agreement between **CG&E** and the County of Boone, Kentucky dated as of  February 1, 1985.                         |   | **CG&E** 1984  Form 10-K                      |
| 4-ll                     |   | **Cinergy Corp.  CG&E**            |   | Repayment Agreement between **CG&E** and The Dayton Power and Light  Company dated as of December 23, 1992.              |   | **CG&E** 1992  Form 10-K                      |
| 4-mm                     |   | **Cinergy Corp.  CG&E**            |   | Loan Agreement between **CG&E** and the County of Boone, Kentucky dated as of  January 1, 1994.                          |   | **CG&E** 1993  Form 10-K                      |
| 4-nn                     |   | **Cinergy Corp.  CG&E**            |   | Loan Agreement between **CG&E** and the State of Ohio Air Quality Development  Authority dated as of December 1, 1985.   |   | **CG&E** 1985  Form 10-K                      |
| 4-oo                     |   | **Cinergy Corp.  CG&E**            |   | Loan Agreement between **CG&E** and the State of Ohio Air Quality Development  Authority dated as of September 13, 1995. |   | **CG&E**  September 30, 1995, Form 10-Q       |
| 4-pp                     |   | **Cinergy Corp.  CG&E**            |   | Loan Agreement between **CG&E** and the State of Ohio Water Development Authority  dated as of January 1, 1994.          |   | **CG&E** 1993  Form 10-K                      |
| 4-qq                     |   | **Cinergy Corp.  CG&E**            |   | Loan Agreement between **CG&E** and the State of Ohio Air Quality Development  Authority dated as of January 1, 1994.    |   | **CG&E** 1993  Form 10-K                      |
| 4-rr                     |   | **CG&E**                           |   | Loan Agreement between **CG&E** and the State of Ohio Air Quality Development  Authority dated August 1, 2001.           |   | **Cinergy Corp.**  September 30, 2001, Form 10-Q  |
| 4-ss                     |   | **Cinergy Corp.  CG&E**            |   | Original Indenture (Unsecured Debt Securities)  between **CG&E** and The Fifth  Third Bank dated as of May 15, 1995.     |   | **CG&E** Form 8-A  dated July 24, 1995        |
| 4-tt                     |   | **Cinergy Corp.  CG&E**            |   | First Supplemental Indenture between **CG&E** and The Fifth Third Bank dated  as of June 1, 1995.                        |   | **CG&E** June 30,  1995, Form 10-Q            |
| 4-uu                     |   | **Cinergy Corp.  CG&E**            |   | Second Supplemental Indenture between **CG&E** and The Fifth Third Bank dated  as of June 30, 1995.                      |   | **CG&E**Form 8-A  dated July 24, 1995         |
| 4-vv                     |   | **Cinergy Corp.  CG&E**            |   | Third Supplemental Indenture between **CG&E** and The Fifth Third Bank dated  as of October 9, 1997.                     |   | **CG&E**  September 30, 1997, Form 10-Q       |
| 4-ww                     |   | **Cinergy Corp.  CG&E**            |   | Fourth Supplemental Indenture between **CG&E** and The Fifth Third Bank dated  as of April 1, 1998.                      |   | **CG&E** March  31, 1998, Form 10-Q           |
| 4-xx                     |   | **Cinergy Corp.  CG&E**            |   | Fifth Supplemental Indenture between **CG&E** and The Fifth Third Bank dated  as of June 9, 1998.                        |   | **CG&E** June 30,  1998, Form 10-Q            |
| 4-yy                     |   | **Cinergy Corp.  CG&E  ULH&P** |   | Original Indenture (First Mortgage Bonds) between **ULH&P** and The Bank of New York dated  as of February 1, 1949.      |   | **ULH&P**  Registration Statement No. 2-7793  |
| 4-zz                     |   | **Cinergy Corp.  CG&E  ULH&P** |   | Fifth Supplemental Indenture between **ULH&P** and The Bank of New York dated  as of January 1, 1967.                    |   | **CG&E**  Registration Statement No. 2-60961  |
| 4-aaa                    |   | **Cinergy Corp.  CG&E  ULH&P** |   | Thirteenth Supplemental Indenture between **ULH&P**and The Bank of New York dated  as of August 1, 1992.                 |   | **ULH&P**1992  Form 10-K                      |
| 4-bbb                    |   | **Cinergy Corp.  CG&E  ULH&P** |   | Original Indenture (Unsecured Debt Securities)  between **ULH&P** and The Fifth  Third Bank dated as of July 1, 1995.    |   | **ULH&P** June  30, 1995, Form 10-Q           |
| 4-ccc                    |   | **Cinergy Corp.  CG&E  ULH&P** |   | First Supplemental Indenture between **ULH&P** and The Fifth Third Bank dated  as of July 15, 1995.                      |   | **ULH&P** June  30, 1995, Form 10-Q           |
| 4-ddd                    |   | **Cinergy Corp.  CG&E  ULH&P** |   | Second Supplemental Indenture between **ULH&P** and The Fifth Third Bank dated  as of April 30, 1998.                    |   | **ULH&P** March  31, 1998, Form 10-Q          |
| 4-eee                    |   | **Cinergy Corp.  CG&E  ULH&P** |   | Third Supplemental Indenture between **ULH&P** and The Fifth Third Bank dated  as of December 8, 1998.                   |   | **ULH&P**1998  Form 10-K                      |
| 4-fff                    |   | **Cinergy Corp.  CG&E  ULH&P** |   | Fourth Supplemental Indenture between **ULH&P** and The Fifth Third Bank, as  Trustee, dated as of September 17, 1999.   |   | **ULH&P**  September 30, 1999, Form 10-Q      |
| 4-ggg                    |   | **Cinergy Corp.**                      |   | Base Indenture dated as of October 15, 1998, between  Global Resources and The Fifth Third Bank, as Trustee.                 |   | **Cinergy Corp.**  September 30, 1998, Form 10-Q  |

 

210

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| **Exhibit  Designation** |   | **Registrant(s)(1)**             |   | **Nature of Exhibit**                                                                                                                                                                                               |   | **Previously Filed as  Exhibit to:**                                         |
|--------------------------|--------|----------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------|
| 4-hhh                    |   | **Cinergy Corp.**                |   | First Supplemental Indenture dated as of October 15,  1998, between Global Resources and The Fifth Third Bank, as Trustee.                                                                                          |   | **Cinergy Corp.**  September 30, 1998, Form 10-Q                             |
| 4-iii                    |   | **Cinergy Corp.**                |   | Indenture dated as of December 16, 1998, between **Cinergy Corp.** and The Fifth Third Bank.                                                                                                                        |   | **Cinergy Corp.**  1998 Form  10-K                                           |
| 4-jjj                    |   | **Cinergy Corp.**                |   | Indenture between **Cinergy  Corp.** and The Fifth Third Bank, as Trustee, dated as of April 15,  1999.                                                                                                             |   | **Cinergy Corp.**  March 31, 1999, Form 10-Q                                 |
| 4-kkk                    |   | **Cinergy Corp.**                |   | Indenture between **Cinergy  Corp.** and The Fifth Third Bank, as Trustee, dated September 12,  2001.                                                                                                               |   | **Cinergy Corp.**  September 30, 2001, Form 10-Q                             |
| 4-lll                    |   | **Cinergy Corp.**                |   | First Supplemental Indenture between **Cinergy Corp.** and The Fifth Third Bank,  as Trustee, dated September 12, 2001.                                                                                             |   | **Cinergy Corp.**  September 30, 2001, Form 10-Q                             |
| 4-mmm                    |   | **Cinergy Corp.**                |   | Second Supplemental Indenture, dated December 18,  2001, between **Cinergy Corp.** and  The Fifth Third Bank, as Trustee.                                                                                           |   | **Cinergy Corp.**Form  8-K, December 19, 2001                                |
| 4-nnn                    |   | **Cinergy Corp.**                |   | Rights Agreement between **Cinergy Corp.** and The Fifth Third Bank, as Rights Agent,  dated October 16, 2000.                                                                                                      |   | **Cinergy Corp.**  Registration Statement on Form 8-A dated October 16, 2000 |
| 4-ooo                    |   | **Cinergy Corp.**                |   | Purchase Contract Agreement, dated December 18,  2001, between **Cinergy Corp.** and  The Bank of New York, as Purchase Contract Agent.                                                                             |   | **Cinergy Corp.**Form  8-K, December 19, 2001                                |
| 4-ppp                    |   | **Cinergy Corp.**                |   | Pledge Agreement, dated December 18, 2001, among **Cinergy Corp.**, JP Morgan Chase Bank, as  Collateral Agent, Custodial Agent and Securities Intermediary, and The Bank  of New York, as Purchase Contract Agent. |   | **Cinergy Corp.**Form  8-K, December 19, 2001                                |
| 4-qqq                    |   | **Cinergy Corp.  CG&E**      |   | Thirty-ninth Supplemental Indenture dated as of  September 1, 2002, between **CG&E**  and The Bank of New York, as Trustee.                                                                                     |   | **Cinergy Corp.**September  30, 2002, Form 10-Q                              |
| 4-rrr                    |   | **Cinergy Corp.  PSI**           |   | Fifty-fourth Supplemental Indenture dated as of  September 1, 2002, between **PSI**  and LaSalle Bank National Association, as Trustee.                                                                             |   | **Cinergy Corp.**September  30, 2002, Form 10-Q                              |
| 4-sss                    |   | **Cinergy Corp.  CG&E**      |   | Sixth Supplemental Indenture between **CG&E** and Fifth Third Bank dated as of  September 15, 2002.                                                                                                             |   | **Cinergy Corp.**September  30, 2002, Form 10-Q                              |
| 4-ttt                    |   | **Cinergy Corp.  PSI**           |   | Loan Agreement between **PSI** and the Indiana Development Finance Authority dated as  of September 1, 2002.                                                                                                        |   | **Cinergy Corp.**September  30, 2002, Form 10-Q                              |
| 4-uuu                    |   | **Cinergy Corp. PSI**            |   | Loan Agreement between **PSI** and the Indiana Development Finance Authority dated as  of September 1, 2002.                                                                                                        |   | **Cinergy Corp.**September  30, 2002, Form 10-Q                              |
| 4-vvv                    |   | **Cinergy Corp. CG&E**       |   | Loan Agreement between **CG&E** and the Ohio Air Quality Development Authority  dated as of September 1, 2002.                                                                                                  |   | **Cinergy Corp.**September  30, 2002, Form 10-Q                              |
| 4-www                    |   | **Cinergy Corp.**                |   | First Amendment to Rights Agreement, dated August  28, 2002, effective September 16, 2002, between **Cinergy Corp.** and The Fifth Third Bank, as Rights Agent.                                                     |   | **Cinergy Corp.**  Form   8-A/A, Amendment No. 1, filed September 16, 2002   |
| **Material  contracts**  |   |                             |   |                                                                                                                                                                                                                |   |                                                                         |
| 10-a                     |   | **Cinergy Corp. CG&E   PSI** |   | Amended and Restated Employment Agreement dated  October 24, 1994, among **CG&E**,  **Cinergy Corp.**, PSI Resources,  Inc., and **PSI**, and Jackson H.  Randolph.                                             |   | **Cinergy Corp.**  1994 Form  10-K                                           |
| 10-b                     |   | **Cinergy Corp. CG&E   PSI** |   | Amended and Restated Employment Agreement dated  December 30, 1999, among Services, **CG&E**,  and **PSI**, and James E. Rogers.                                                                                |   | **Cinergy Corp.**  1999 Form  10-K                                           |
| 10-c                     |   | **Cinergy Corp. CG&E   PSI** |   | Amended and Restated Employment Agreement dated  October 11, 2002, among **Cinergy Corp.**,  Services, **CG&E**, and **PSI**, and William J. Grealis.                                                           |   |                                                                         |
| 10-d                     |   | **Cinergy Corp. CG&E   PSI** |   | Amended and Restated Employment Agreement dated  October 1, 2002, among **Cinergy Corp.**,  Services, **CG&E**, and **PSI**, and Donald B. Ingle, Jr.                                                           |   |                                                                         |
| 10-e                     |   | **Cinergy Corp.  CG&E  PSI** |   | Amended and Restated Employment Agreement dated  September 12, 2002, among **Cinergy Corp.**,  Services, **CG&E**, and **PSI**, and Michael J. Cyrus.                                                           |   |                                                                         |
| 10-f                     |   | **Cinergy Corp.  CG&E  PSI** |   | Amended and Restated Employment Agreement dated  September 24, 2002, among **Cinergy Corp.**,  Services, **CG&E**, and **PSI**, and James L. Turner.                                                            |   |                                                                         |
| 10-g                     |   | **Cinergy Corp.  CG&E  PSI** |   | Amended and Restated Employment Agreement dated  January 1, 2002, among **Cinergy Corp.**,  Services, **CG&E**, and **PSI**, and R. Foster Duncan.                                                              |   |                                                                         |
| 10-h                     |   | **Cinergy Corp.  CG&E**      |   | Employment Agreement dated May 15, 2001, among **Cinergy Corp.** and **CG&E**, and J. Joseph Hale, Jr.                                                                                                          |   | **Cinergy Corp.**  June 30, 2001, Form 10-Q                                  |

 

211

----

 
| **Exhibit  Designation** |   | **Registrant(s)(1)**             |   | **Nature of Exhibit**                                                                                                                                                                                                                                                                                                                          |   | **Previously Filed as  Exhibit to:**                                                |
|--------------------------|--------|----------------------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------|
| 10-i                     |   | **Cinergy Corp.**                |   | Employment Agreement dated May 15, 2001, between **Cinergy Corp.** and M. Stephen Harkness.                                                                                                                                                                                                                                                    |   | **Cinergy Corp.**  June 30, 2001, Form 10-Q                                         |
| 10-j                     |   | **Cinergy Corp.  CG&E  PSI** |   | Employment Agreement dated May 15, 2001, among **Cinergy Corp.**, **CG&E**, and **PSI**,  and Bernard F. Roberts.                                                                                                                                                                                                                          |   | **Cinergy Corp.**  June 30, 2001, Form 10-Q                                         |
| 10-k                     |   | **Cinergy Corp.**                |   | Amended and Restated Separation and Retirement  Agreement and Waiver and Release of Liability dated February 15, 2002,  between **Cinergy Corp.**, and Larry  E. Thomas.                                                                                                                                                                       |   | **Cinergy Corp.**  2001 Form  10-K                                                  |
| 10-l                     |   | **Cinergy Corp.**                |   | Separation and Retirement Agreement and Waiver and  Release of Liability dated October 8, 2002 between **Cinergy Corp.** and Donald B. Ingle, Jr.                                                                                                                                                                                              |   |                                                                                |
| 10-m                     |   | **Cinergy Corp.  PSI**           |   | Deferred Compensation Agreement, effective as of  January 1, 1992, between **PSI** and  James E. Rogers.                                                                                                                                                                                                                                       |   | **PSI** Form 10-K/A,  Amendment No. 1, dated April 29, 1993                         |
| 10-n                     |   | **Cinergy Corp.  PSI**           |   | Split Dollar Life Insurance Agreement, effective as  of January 1, 1992, between **PSI**  and James E. Rogers.                                                                                                                                                                                                                                 |   | **PSI** Form 10-K/A,  Amendment No. 1, dated April 29, 1993                         |
| 10-o                     |   | **Cinergy Corp.  PSI**           |   | First Amendment to Split Dollar Life Insurance  Agreement between **PSI** and James  E. Rogers dated December 11, 1992.                                                                                                                                                                                                                        |   | **PSI** Form 10-K/A,  Amendment No. 1, dated April 29, 1993                         |
| 10-p                     |   | **Cinergy Corp.  CG&E**      |   | Deferred Compensation Agreement between **CG&E** and Jackson H. Randolph dated  January 1, 1992.                                                                                                                                                                                                                                           |   | **CG&E** 1992  Form 10-K                                                        |
| 10-q                     |   | **Cinergy Corp.  CG&E**      |   | Split Dollar Insurance Agreement, effective as of  May 1, 1993, between **CG&E**  and Jackson H. Randolph.                                                                                                                                                                                                                                 |   | **Cinergy Corp.**  1994 Form  10-K                                                  |
| 10-r                     |   | **Cinergy Corp.  CG&E**      |   | Amended and Restated Supplemental Retirement Income  Agreement between **CG&E** and  Jackson H. Randolph dated January 1, 1995.                                                                                                                                                                                                            |   | **Cinergy Corp.**  1995 Form  10-K                                                  |
| 10-s                     |   | **Cinergy Corp.  CG&E**      |   | Amended and Restated Supplemental Executive  Retirement Income Agreement between **CG&E**and certain executive officers.                                                                                                                                                                                                                   |   | **Cinergy Corp.**  1997 Form  10-K                                                  |
| 10-t                     |   | **Cinergy Corp.**                |   | **Cinergy Corp.**  Supplemental Executive Retirement Plan amended and restated effective January  1, 1999, adopted October 15, 1998.                                                                                                                                                                                                           |   | **Cinergy Corp.**  1999 Form  10-K                                                  |
| 10-u                     |   | **Cinergy Corp.**                |   | 1997 Amendments to Various Compensation and Benefit  Plans of **Cinergy Corp.**, adopted  January 30, 1997.                                                                                                                                                                                                                                    |   | **Cinergy Corp.**  1997 Form  10-K                                                  |
| 10-v                     |   | **Cinergy Corp.**                |   | **Cinergy Corp.**  Stock Option Plan, adopted October 18, 1994, effective October 24, 1994.                                                                                                                                                                                                                                                    |   | **Cinergy Corp.**  Form S-8, filed October 19, 1994                                 |
| 10-w                     |   | **Cinergy Corp.**                |   | Amendment to **Cinergy  Corp.** Stock Option Plan, amended October 22, 1996, effective  November 1, 1996.                                                                                                                                                                                                                                      |   | **Cinergy Corp.**  September 30, 1996, Form 10-Q                                    |
| 10-x                     |   | **Cinergy Corp.**                |   | Amended and Restated Cinergy Corp. Annual Incentive  Plan, effective January 25, 2002.                                                                                                                                                                                                                                                         |   | **Cinergy Corp.**  2001 Form  10-K                                                  |
| 10-y                     |   | **Cinergy Corp.**                |   | **Cinergy Corp.**  Employee Stock Purchase and Savings Plan, adopted October 18, 1994, effective  October 24, 1994.                                                                                                                                                                                                                            |   | **Cinergy Corp.**  Form S-8, filed October 19, 1994                                 |
| 10-z                     |   | **Cinergy Corp.**                |   | Amendment to **Cinergy  Corp.** Employee Stock Purchase and Savings Plan, adopted April 26,  1996, effective January 1, 1996.                                                                                                                                                                                                                  |   | **Cinergy Corp.**  June 30, 1996, Form 10-Q                                         |
| 10-aa                    |   | **Cinergy Corp.**                |   | Amendment to **Cinergy  Corp.** Employee Stock Purchase and Savings Plan, adopted October  22, 1996, effective November 1, 1996.                                                                                                                                                                                                               |   | **Cinergy Corp.**  September 30, 1996, Form 10-Q                                    |
| 10-bb                    |   | **Cinergy Corp.**                |   | **Cinergy Corp.****UK** Sharesave Scheme, adopted and  effective December 16, 1999.                                                                                                                                                                                                                                                            |   | **Cinergy Corp.**  1999 Form  10-K                                                  |
| 10-cc                    |   | **Cinergy Corp.**                |   | **Cinergy Corp.**  Directors’ Deferred Compensation Plan, adopted October 18, 1994, effective  October 24, 1994.                                                                                                                                                                                                                          |   | **Cinergy Corp.**  Form S-8, filed October 19, 1994                                 |
| 10-dd                    |   | **Cinergy Corp.**                |   | Amendment to **Cinergy  Corp.** Directors’ Deferred Compensation Plan, adopted October 22,  1996.                                                                                                                                                                                                                                         |   | **Cinergy Corp.**  September 30, 1996, Form 10-Q                                    |
| 10-ee                    |   | **Cinergy Corp.**                |   | **Cinergy Corp.**  Retirement Plan for Directors, amended and restated effective January 1,  1999, adopted October 15, 1998.                                                                                                                                                                                                                   |   | **Cinergy Corp.**  Schedule 14A Definitive Proxy Statement filed March 12, 1999     |
| 10-ff                    |   | **Cinergy Corp.**                |   | **Cinergy Corp.**  Directors’ Equity Compensation Plan adopted October 15, 1998, effective  January 1, 1999.                                                                                                                                                                                                                              |   | **Cinergy Corp.**  Schedule 14A****Definitive Proxy  Statement filed March 12, 1999 |
| 10-gg                    |   | **Cinergy Corp.**                |   | **Cinergy Corp.**  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. |   | **Cinergy Corp.**  1994 Form  10-K                                                  |
| 10-hh                    |   | **Cinergy Corp.**                |   | Amended and Restated **Cinergy Corp.** 1996 Long-term Incentive Compensation Plan,  effective January 25, 2002.                                                                                                                                                                                                                                |   | **Cinergy Corp.**  2001 Form  10-K                                                  |

 

212

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| **Exhibit  Designation**              |   | **Registrant(s)(1)**                        |   | **Nature of Exhibit**                                                                                                                                                   |   | **Previously Filed as  Exhibit to:**                |
|---------------------------------------|--------|---------------------------------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------|
| 10-ii                                 |   | **Cinergy Corp.**                           |   | **Cinergy Corp.**  401(k) Excess Plan, effective January 1, 1997, adopted December 17, 1996.                                                                            |   | **Cinergy Corp.**  1996 Form  10-K                  |
| 10-jj                                 |   | **Cinergy Corp.**                           |   | Amendment to **Cinergy  Corp.** 401(k) Excess Plan, adopted January 24, 2002, effective  January 1, 2002.                                                               |   | **Cinergy Corp.**  Form S-8, filed January 31, 2002 |
| 10-kk                                 |   | **Cinergy Corp.**                           |   | Amendment to**Cinergy Corp.** 401(k) Excess Plan, adopted December 18, 2002,  effective January 1, 2003.                                                                |   |                                                |
| 10-ll                                 |   | **Cinergy Corp.**                           |   | **Cinergy Corp.**  Nonqualified Deferred Incentive Compensation Plan, effective January 1, 1997,  adopted December 17, 1996.                                            |   | **Cinergy Corp.**  1996 Form  10-K                  |
| 10-mm                                 |   | **Cinergy Corp.**                           |   | Amendment to **Cinergy  Corp.** Nonqualified Deferred Incentive Compensation Plan, adopted  December 18, 2002, effective January 1, 2002.                               |   |                                                |
| 10-nn                                 |   | **Cinergy Corp.**                           |   | **Cinergy Corp.**  Director, Officer and Key Employee Stock Purchase Program, effective January  7, 2000, adopted December 10, 1999.                                    |   | **Cinergy Corp.**  1999 Form  10-K                  |
| 10-oo                                 |   | **Cinergy Corp.**                           |   | **Cinergy Corp.**  Non-Union Employees’ Pension Plan adopted December 18, 2002, amended and  restated effective January 1, 2003.                                   |   |                                                |
| 10-pp                                 |   | **Cinergy Corp.**                           |   | **Cinergy Corp.**  Non-Union Employees’ Severance Opportunity Plan as amended and restated  effective June 1, 2001, adopted May 30, 2001.                          |   | **Cinergy Corp.**  June 30, 2001, Form 10-Q         |
| 10-qq                                 |   | **Cinergy Corp.**                           |   | Amendment to the Amended and Restated Separation and  Retirement Agreement and Waiver and Release of Liability, between **Cinergy Corp.** and Larry E. Thomas.          |   | **Cinergy Corp.**  March 31, 2002, Form 10-Q        |
| 10-rr                                 |   | **Cinergy Corp.**                           |   | Second Amendment to the Amended and Restated  Separation and Retirement Agreement and Waiver and Release of Liability,  between **Cinergy Corp.** and Larry  E. Thomas. |   | **Cinergy Corp.**  June 30, 2002, Form 10-Q         |
| 10-ss                                 |   | **Cinergy Corp.**                           |   | Amended and Restated **Cinergy Corp.** Non-Union Employees’ 401(k) Plan, adopted  December 18, 2002, effective January 1, 2003.                                    |   |                                                |
| **Subsidiaries  of the registrant**   |   |                                        |   |                                                                                                                                                                    |   |                                                |
| 21                                    |   | **Cinergy Corp.  CG&E  PSI**            |   | Subsidiaries of **Cinergy  Corp.**, **CG&E**, and **PSI**                                                                                                           |   |                                                |
| **Consent  of  experts and  counsel** |   |                                        |   |                                                                                                                                                                    |   |                                                |
| 23                                    |   | **Cinergy Corp.  CG&E  PSI  ULH&P** |   | Independent Auditors' Consent                                                                                                                                           |   |                                                |
| **Power  of  attorney**               |   |                                        |   |                                                                                                                                                                    |   |                                                |
| 24                                    |   | **Cinergy Corp.  CG&E  PSI  ULH&P** |   | Power of Attorney                                                                                                                                                       |   |                                                |

 

----

| (1)    | Regulation S-K 229.10(d) requires Registrants to  identify the physical location, by SEC file number reference, of all  documents that are incorporated by reference and have been on file with the  SEC for more than five years.  The SEC  file number references for **Cinergy**  and its subsidiaries, which are registrants are provided below: |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | **Cinergy Corp.** in  file number 1-11377                                                                                                                                                                                                                                                                                                                 |
|   | **CG&E** in file  number 1-1232                                                                                                                                                                                                                                                                                                                       |
|   | **PSI** in file  number 1-3543                                                                                                                                                                                                                                                                                                                            |
|   | **ULH&P** in file  number 2-7793                                                                                                                                                                                                                                                                                                                      |
|   |                                                                                                                                                                                                                                                                                                                                                      |
|   | Each registrant hereby undertakes to furnish to the  SEC upon request a copy of any long-term debt instrument not listed above.                                                                                                                                                                                                                           |

 

213

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**CINERGY CORP. AND SUBSIDIARIES**

SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

FOR THE THREE YEARS ENDED DECEMBER 31, 2002

*(inthousands)*

 
| **Col. A**                                                  |   | **Col. B**                           |       | **Col. C**                      |   | **Col. D**                                           |       | **Col. E**                       |      |
|-------------------------------------------------------------|--------|--------------------------------------|------------|---------------------------------|--------|------------------------------------------------------|------------|----------------------------------|-----------|
| **Description**                                             |   | **Balance at  Beginning  of Period** |       | **Additions**                   |   | **Deductions**                                       |       | **Balance at  Close of  Period** |      |
|                                                        |   | **Charged to  Expenses**             |       | **Charged  to Other  Accounts** |   | **For  Purposes  for Which  Reserves  Were Created** |       | **Other**                        |      |   |
|                                                        |   |                                 |       |                            |   |                                                 |       |                             |      |   |   |   |   |
| **Accumulated  Provisions Deducted from Applicable Assets** |   |                                 |       |                            |   |                                                 |       |                             |      |   |   |   |   |
|                                                        |   |                                 |       |                            |   |                                                 |       |                             |      |   |   |   |   |
| Allowance for  Doubtful Accounts                            |   |                                 |       |                            |   |                                                 |       |                             |      |   |   |   |   |
|                                                        |   |                                 |       |                            |   |                                                 |       |                             |      |   |   |   |   |
| **2002**                                                    |   | **$**                                | **34,110** | ** **                      | **$**  | **7,883**                                            | ** ** | **$**                            | **9,270** | ** ** | **$** | **34,867** | ** ** | **$** | **22** | ** ** | **$** | **16,374** | ** ** |
|                                                        |   |                                 |       |                            |   |                                                 |       |                             |      |   |   |   |   |
| 2001                                                        |   | $                                    | 29,951     |                            | $      | 39,693                                               |       | $                                | 5,254     |   | $ | 40,788 |   | $ | — |   | $ | 34,110 |   |
|                                                        |   |                                 |       |                            |   |                                                 |       |                             |      |   |   |   |   |
| 2000                                                        |   | $                                    | 26,811     |                            | $      | 22,746                                               |       | $                                | 4,486     |   | $ | 24,092 |   | $ | — |   | $ | 29,951 |   |

 

214

----

 

**THECINCINNATI GAS****& ELECTRIC COMPANY AND SUBSIDIARIES**

SCHEDULEII - VALUATION AND QUALIFYING ACCOUNTS

FORTHE THREE YEARS ENDED DECEMBER 31, 2002

*(inthousands)*

 
| **Col. A**                                                  |   | **Col. B**                           |       | **Col. C**                      |   | **Col. D**                                          |       | **Col. E**                       |      |
|-------------------------------------------------------------|--------|--------------------------------------|------------|---------------------------------|--------|-----------------------------------------------------|------------|----------------------------------|-----------|
| **Description**                                             |   | **Balance at  Beginning  of Period** |       | **Additions**                   |   | **Deductions**                                      |       | **Balance at  Close of  Period** |      |
|                                                        |   | **Charged to  Expenses**             |       | **Charged  to Other  Accounts** |   | **For Purposes  for Which  Reserves  Were Created** |       | **Other**                        |      |   |
|                                                        |   |                                 |       |                            |   |                                                |       |                             |      |   |   |   |   |
| **Accumulated  Provisions Deducted from Applicable Assets** |   |                                 |       |                            |   |                                                |       |                             |      |   |   |   |   |
|                                                        |   |                                 |       |                            |   |                                                |       |                             |      |   |   |   |   |
| Allowance for  Doubtful Accounts                            |   |                                 |       |                            |   |                                                |       |                             |      |   |   |   |   |
|                                                        |   |                                 |       |                            |   |                                                |       |                             |      |   |   |   |   |
| **2002**                                                    |   | **$**                                | **25,874** | ** **                      | **$**  | **2,029**                                           | ** ** | **$**                            | **6,096** | ** ** | **$** | **28,057** | ** ** | **$** | **—** | ** ** | **$** | **5,942** | ** ** |
|                                                        |   |                                 |       |                            |   |                                                |       |                             |      |   |   |   |   |
| 2001                                                        |   | $                                    | 19,044     |                            | $      | 30,166                                              |       | $                                | 4,089     |   | $ | 27,425 |   | $ | — |   | $ | 25,874 |   |
|                                                        |   |                                 |       |                            |   |                                                |       |                             |      |   |   |   |   |
| 2000                                                        |   | $                                    | 16,740     |                            | $      | 14,056                                              |       | $                                | 4,486     |   | $ | 16,238 |   | $ | — |   | $ | 19,044 |   |

 

215

----

 

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

SCHEDULEII - VALUATION AND QUALIFYING ACCOUNTS

FORTHE THREE YEARS ENDED DECEMBER 31, 2002

*(inthousands)*

 
| **Col. A**                                                  |   | **Col. B**                           |      | **Col. C**                      |   | **Col. D**                                           |       | **Col. E**                       |      |
|-------------------------------------------------------------|--------|--------------------------------------|-----------|---------------------------------|--------|------------------------------------------------------|------------|----------------------------------|-----------|
| **Description**                                             |   | **Balance at  Beginning  of Period** |      | **Additions**                   |   | **Deductions**                                       |       | **Balance at  Close of  Period** |      |
|                                                        |   | **Charged to  Expenses**             |      | **Charged  to Other  Accounts** |   | **For  Purposes  for Which  Reserves  Were Created** |       | **Other**                        |      |   |
|                                                        |   |                                 |      |                            |   |                                                 |       |                             |      |   |   |   |   |
| **Accumulated  Provisions Deducted from Applicable Assets** |   |                                 |      |                            |   |                                                 |       |                             |      |   |   |   |   |
|                                                        |   |                                 |      |                            |   |                                                 |       |                             |      |   |   |   |   |
| Allowance for  Doubtful Accounts                            |   |                                 |      |                            |   |                                                 |       |                             |      |   |   |   |   |
|                                                        |   |                                 |      |                            |   |                                                 |       |                             |      |   |   |   |   |
| **2002**                                                    |   | **$**                                | **6,773** | ** **                      | **$**  | **2,310**                                            | ** ** | **$**                            | **3,174** | ** ** | **$** | **6,579** | ** ** | **$** | **22** | ** ** | **$** | **5,656** | ** ** |
|                                                        |   |                                 |      |                            |   |                                                 |       |                             |      |   |   |   |   |
| 2001                                                        |   | $                                    | 9,317     |                            | $      | 8,339                                                |       | $                                | 1,165     |   | $ | 12,048 |   | $ | — |   | $ | 6,773 |   |
|                                                        |   |                                 |      |                            |   |                                                 |       |                             |      |   |   |   |   |
| 2000                                                        |   | $                                    | 9,934     |                            | $      | 7,088                                                |       | $                                | —    |   | $ | 7,705 |   | $ | — |   | $ | 9,317 |   |

 

216

----

 

**THE UNION****LIGHT, HEAT AND POWER COMPANY**

SCHEDULEII -VALUATION AND QUALIFYING ACCOUNTS

FORTHE THREE YEARS ENDED DECEMBER 31, 2002

*(inthousands)*

 
| **Col. A**                                                  |   | **Col. B**                           |      | **Col. C**                      |   | **Col. D**                                           |       | **Col. E**                       |      |
|-------------------------------------------------------------|--------|--------------------------------------|-----------|---------------------------------|--------|------------------------------------------------------|------------|----------------------------------|-----------|
| **Description**                                             |   | **Balance at  Beginning  of Period** |      | **Additions**                   |   | **Deductions**                                       |       | **Balance at  Close of  Period** |      |
|                                                        |   | **Charged to  Expenses**             |      | **Charged  to Other  Accounts** |   | **For  Purposes  for Which  Reserves  Were Created** |       | **Other**                        |      |   |
|                                                        |   |                                 |      |                            |   |                                                 |       |                             |      |   |   |   |   |
| **Accumulated  Provisions Deducted from Applicable Assets** |   |                                 |      |                            |   |                                                 |       |                             |      |   |   |   |   |
|                                                        |   |                                 |      |                            |   |                                                 |       |                             |      |   |   |   |   |
| Allowance for  Doubtful Accounts                            |   |                                 |      |                            |   |                                                 |       |                             |      |   |   |   |   |
|                                                        |   |                                 |      |                            |   |                                                 |       |                             |      |   |   |   |   |
| **2002**                                                    |   | **$**                                | **1,196** | ** **                      | **$**  | **392**                                              | ** ** | **$**                            | **2,383** | ** ** | **$** | **3,887** | ** ** | **$** | **—** | ** ** | **$** | **84** | ** ** |
|                                                        |   |                                 |      |                            |   |                                                 |       |                             |      |   |   |   |   |
| 2001                                                        |   | $                                    | 1,492     |                            | $      | 3,050                                                |       | $                                | 4         |   | $ | 3,350 |   | $ | — |   | $ | 1,196 |   |
|                                                        |   |                                 |      |                            |   |                                                 |       |                             |      |   |   |   |   |
| 2000                                                        |   | $                                    | 1,513     |                            | $      | 2,555                                                |       | $                                | 746       |   | $ | 3,322 |   | $ | — |   | $ | 1,492 |   |

 

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## **SIGNATURES**

## ** **

Pursuant to the requirements of Section 13 or 15(d) of the SecuritiesExchange Act of 1934, Cinergy Corp., The Cincinnati Gas & Electric Company,PSI Energy, Inc., and The Union Light, Heat and Power Company each duly hascaused this report to be signed on its behalf by the undersigned, thereunto dulyauthorized.

 

CINERGYCORP.THE CINCINNATI GAS & ELECTRIC COMPANYPSI ENERGY, INC.THE UNION LIGHT, HEAT AND POWER COMPANYRegistrants

 
| Date:   February 27, 2003 |   |                |                    |
|--------------------------------|--------|---------------------|-------------------------|
|                           |   |                |                    |
|                           | By     | /s/ James E. Rogers |                    |
|                           |   |                | James E. Rogers         |   |
|                           |   |                | Chief Executive Officer |   |

 

218

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Pursuant to the requirements of the Exchange Act, this report has beensigned by the following persons on behalf of the indicated registrants and inthe capacities and on the dates indicated:

 
| **Signature**                                    |                   | **Title**                                              |   | **Date**                           |
|--------------------------------------------------|------------------------|--------------------------------------------------------|--------|------------------------------------|
|                                             |                   |                                                   |   |                               |
| **Cinergy Corp.**                                |                   |                                                   |   |                               |
| Phillip R. Cox*                                  |                   | Director of Cinergy Corp.                              |   |                               |
| George C.  Juilfs*                               |                   | Director of Cinergy Corp.                              |   |                               |
| Thomas E. Petry*                                 |                   | Director of Cinergy Corp.                              |   |                               |
| Mary L.  Schapiro*                               |                   | Director of Cinergy Corp.                              |   |                               |
| John J. Schiff,  Jr.*                            |                   | Director of Cinergy Corp.                              |   |                               |
| Philip R. Sharp*                                 |                   | Director of Cinergy Corp.                              |   |                               |
| Dudley S. Taft*                                  |                   | Director of Cinergy Corp.                              |   |                               |
|                                             |                   |                                                   |   |                               |
| **Cinergy Corp. and PSI**                        |                   |                                                   |   |                               |
| Michael G.  Browning*                            |                   | Director of Cinergy Corp.                              |   |                               |
|                                             |                   |                                                   |   |                               |
| **CG&E and ULH&P**                       |                   |                                                   |   |                               |
| James L. Turner*                                 |                   | Vice President and Director of  CG&E and ULH&P |   |                               |
|                                             |                   |                                                   |   |                               |
| **PSI**                                          |                   |                                                   |   |                               |
| Douglas F.  Esamann*                             |                   | Director of PSI                                        |   |                               |
|                                             |                   |                                                   |   |                               |
| **Cinergy Corp., CG&E, PSI, and  ULH&P** |                   |                                                   |   |                               |
|                                             |                   |                                                   |   |                               |
|                                             | /s/ James E. Rogers    |                                                   |   | Chairman, Chief Executive Officer, |   | February 27, 2003 |
|                                             |                   | James E. Rogers                                        |   |                               | and Director of Cinergy Corp.,  CG&E, PSI, and ULH&P  (Principal Executive Officer) |   |   |
|                                             |                   |                                                   |   |                               |   |
|                                             | /s/ R. Foster Duncan   |                                                   |   | Executive Vice President and Chief |   | February 27, 2003 |
|                                             |                   | R. Foster Duncan                                       |   |                               | Financial Officer of Cinergy Corp.,  CG&E, PSI, and ULH&P and  Director of CG&E and ULH&P  (Principal Financial Officer) |   |   |
|                                             |                   |                                                   |   |                               |   |
|                                             | /s/ Bernard F. Roberts |                                                   |   | Vice President and Comptroller of  |   | February 27, 2003 |
|                                             |                   | Bernard F. Roberts                                     |   |                               | Cinergy Corp., CG&E, PSI, and  ULH&P (Principal Accounting Officer) |   |   |

 

219

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*                 The undersigned,by signing his name hereto, does hereby execute this Form 10-K on behalf of theofficers and directors of the registrant indicated above by asterisks, pursuantto powers of attorney duly executed by such officers and directors andincorporated by reference as an exhibit to this Form 10-K.

 

 
|   | /s/ James E.  Rogers               |   |
|--------|------------------------------------|--------|
|   | James E. Rogers*Attorney-In-Fact*  |
|   | February 27, 2003                  |   |
|   |                               |   |
|   | /s/ R. Foster Duncan               |   |
|   | R. Foster Duncan*Attorney-In-Fact* |   |
|   | February 27, 2003                  |   |

 

220

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I, James E. Rogers, certify that:

 

1. I have reviewed this annual report on Form 10-K of Cinergy Corp.,The Cincinnati Gas & Electric Company, PSI Energy, Inc., and The UnionLight, Heat and Power Company;

 

2. Based on my knowledge, this annual report does not contain anyuntrue statement of a material fact or omit to state a material fact necessaryto make the statements made, in light of the circumstances under which suchstatements were made, not misleading with respect to the period covered by thisannual report;

 

3. Based on my knowledge, the financial statements, and other financialinformation included in this annual report, fairly present in all materialrespects the financial condition, results of operations and cash flows of theregistrants as of, and for, the periods presented in this annual report;

 

4. The registrants’ other certifying officers and I are responsible forestablishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-14 and 15d-14) for the registrants and have:

 

a)       designed such disclosure controls and procedures to ensure thatmaterial information relating to the registrants, including their consolidatedsubsidiaries, is made known to us by others within those entities, particularlyduring the period in which this annual report is being prepared;

 

b)      evaluated the effectiveness of the registrants’ disclosure controls andprocedures as of a date within 90 days prior to the filing date of this annualreport (the “Evaluation Date”); and

 

c)       presented in this annual report our conclusions about the effectivenessof the disclosure controls and procedures based on our evaluation as of theEvaluation Date;

 

5. The registrants’ other certifying officers and I have disclosed,based on our most recent evaluation, to the registrants’ auditors and the auditcommittee of the registrants’ board of directors (or persons performing theequivalent functions):

 

a)       all significant deficiencies in the design or operation of internal controlswhich could adversely affect the registrants’ ability to record, process,summarize and report financial data and have identified for the registrants’auditors any material weaknesses in internal controls; and

 

b)      any fraud, whether or not material, that involves management or otheremployees who have a significant role in the registrants’ internal controls;and

 

6. The registrants’ other certifying officers and I have indicated inthis annual report whether there were significant changes in internal controlsor in other factors that could significantly affect internal controlssubsequent to the date of our most recent evaluation, including any correctiveactions with regard to significant deficiencies and material weaknesses.

 

 
| Date: February 27, 2003   |
|---------------------------|
|                      |
|                      |
| /s/  James E. Rogers |   |
| Chief Executive Officer   |

 

221

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I, R. Foster Duncan, certify that:

 

1. I have reviewed this annual report on Form 10-K of Cinergy Corp.,The Cincinnati Gas & Electric Company, PSI Energy, Inc., and The UnionLight, Heat and Power Company;

 

2. Based on my knowledge, this annual report does not contain anyuntrue statement of a material fact or omit to state a material fact necessaryto make the statements made, in light of the circumstances under which suchstatements were made, not misleading with respect to the period covered by thisannual report;

 

3. Based on my knowledge, the financial statements, and other financialinformation included in this annual report, fairly present in all materialrespects the financial condition, results of operations and cash flows of theregistrants as of, and for, the periods presented in this annual report;

 

4. The registrants’ other certifying officers and I are responsible forestablishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-14 and 15d-14) for the registrants and have:

 

a)       designed such disclosure controls and procedures to ensure thatmaterial information relating to the registrants, including their consolidatedsubsidiaries, is made known to us by others within those entities, particularlyduring the period in which this annual report is being prepared;

 

b)      evaluated the effectiveness of the registrants’ disclosure controls andprocedures as of a date within 90 days prior to the filing date of this annualreport (the “Evaluation Date”); and

 

c)       presented in this annual report our conclusions about the effectivenessof the disclosure controls and procedures based on our evaluation as of theEvaluation Date;

 

5. The registrants’ other certifying officers and I have disclosed,based on our most recent evaluation, to the registrants’ auditors and the auditcommittee of the registrants’ board of directors (or persons performing theequivalent functions):

 

a)       all significant deficiencies in the design or operation of internalcontrols which could adversely affect the registrants’ ability to record,process, summarize and report financial data and have identified for theregistrants’ auditors any material weaknesses in internal controls; and

 

b)      any fraud, whether or not material, that involves management or otheremployees who have a significant role in the registrants’ internal controls;and

 

6. The registrants’ other certifying officers and I have indicated inthis annual report whether there were significant changes in internal controlsor in other factors that could significantly affect internal controlssubsequent to the date of our most recent evaluation, including any correctiveactions with regard to significant deficiencies and material weaknesses.

 

 
| Date: February 27, 2003 |
|-------------------------|
|                    |
|                    |
| /s/ R. Foster Duncan    |   |
| Chief Financial Officer |

 

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