** **

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

** **

**FORM 10-K**

**(Mark One)**

**ý**   ANNUAL REPORTPURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934

** **

**For thefiscal year ended****December 31, 2004**

** **

**or**

** **

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

 

**For thetransition 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**                                |
|                             |   |                                                                                                                                      |   |                                          |
|                             |   |                                                                                                                                      |   |                                          |
|                             |   |                                                                                                                                      |   |                                          |

 

**Eachof the following classes or series of securities registered pursuant to Section12(b) of the Act is registered on the New York Stock Exchange:**

 

| **Registrant**                                |   | **Title  of each class**   | ** ** |
|-----------------------------------------------|--------|----------------------------|------------|
| ** **                                    |   |                       |       |   |   |
| **Cinergy Corp.**                             |   | Common Stock               |       |   |   |
| ** **                                    |   |                       |       |   |   |
| **The Cincinnati Gas & Electric Company** |   | Cumulative Preferred Stock |       | 4 | % |
| ** **                                    |   |                       |       |   |   |
| **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                       |       |   |   |
| ** **                                    |   |                       |       |   |   |

 

 

----

 

Securities registered pursuant to Section12(g) of the Act:  None

----

Indicate by check mark whether eachregistrant (1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (orfor such shorter period that such registrant was required to file suchreports), and (2) has been subject to such filing requirements for the past 90days.Yes ý    No o

----

Indicate by check mark if disclosure ofdelinquent filers pursuant to Item 405 of Regulation S-K is not containedherein, and will not be contained, to the best of registrants’ knowledge, indefinitive proxy or information statements incorporated by reference in PartIII of this Form 10-K or any amendment to this Form 10-K.  o

----

Requirements pursuant to Item 405 ofRegulation S-K are not applicable for **TheUnion Light, Heat and Power Company**.

 

**The UnionLight, Heat and Power Company** meets the conditions set forthin General Instruction I (1)(a) and (b) of Form 10-K and is therefore filingthis Form 10-K with the reduced disclosure format specified in GeneralInstruction I (2) of Form 10-K.

----

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

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

----

As of June 30, 2004, the aggregate marketvalue of the common equity of **Cinergy Corp.**held by non-affiliates (shareholders who are not directors or executiveofficers) was $6.8 billion.  All of thecommon stock of **The Cincinnati Gas &Electric Company** and **PSI Energy,Inc.** is owned by **Cinergy Corp.**,and all of the common stock of **The UnionLight, Heat and Power Company** is owned by **The Cincinnati Gas & Electric Company**.  As of January 31, 2005, each registrant hadthe following shares of common stock outstanding:

 
| **Registrant**                                | ** ** | **Description**                                 | ** ** | **Shares**  | ** ** |
|-----------------------------------------------|------------|-------------------------------------------------|------------|-------------|------------|
|                                          |       |                                            |       |        |       |
| **Cinergy Corp.**                             |       | Par value $.01 per share                        |       | 191,404,406 |       |
| ** **                                    |       |                                            |       |        |       |
| **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     |       |
| ** **                                    |       |                                            |       |        |       |

** **

**2**

----

** **

**DOCUMENTS INCORPORATED BY REFERENCE**

 

Portions of the Proxy Statement of **Cinergy Corp.** and the Information Statementof **PSI Energy, Inc.** to be filedwith the Securities and Exchange Commission in 2005 are incorporated byreference into Part III of this report.

 

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

 

3

----

 

| **TABLE OF CONTENTS** |
|-----------------------|
| ** **            | ** ** | ** ** |
| **Item  Number**      | ** ** | ** ** |
|                  |   |   |
|                  | **Cautionary Statements Regarding  Forward-Looking Information** | ** ** |
|                  |   |   |
|                  | **PART I** | ** ** |
| **1**                 | **Business** | ** ** |
| ** **            | Website Access to Reports |   |
| ** **            | Organization |   |
| ** **            | Business Segments |   |
| ** **            | Employees |   |
| ** **            | Environmental Matters |   |
| ** **            | Future Expectations/Trends |   |
| **2**                 | **Properties** | ** ** |
| ** **            | Commercial  Business Unit |   |
| ** **            | Regulated Business  Unit |   |
| ** **            | Peak Load |   |
| **3**                 | **Legal Proceedings** | ** ** |
| ** **            | Clean Air Act Lawsuit |   |
| ** **            | Carbon Dioxide Lawsuit |   |
| ** **            | Selective  Catalytic Reduction Units at Gibson Generating Station |   |
| ** **            | Zimmer  Generating Station |   |
| ** **            | Manufactured Gas  Plant Sites |   |
| ** **            | Asbestos Claim Litigation |   |
| **4**                 | **Submission  of Matters to a Vote of Security Holders** | ** ** |
| ** **            |   |   |
| ** **            | **PART II** | ** ** |
| **5**                 | **Market  for Registrant’s Common Equity, Related Stockholder Matters and Issuer  Purchases of Equity Securities** | ** ** |
| **6**                 | **Selected Financial  Data** | ** ** |
| **7**                 | **Management’s  Discussion and Analysis of Financial Condition and Results of Operations** |   |
| ** **            | Executive Summary |   |
| ** **            | 2004 Results of  Operations - Cinergy |   |
| ** **            | 2004 Results of Operations -  CG&E |   |
| ** **            | 2004 Results of  Operations - PSI |   |
| ** **            | 2004 Results of Operations -  ULH&P |   |
| ** **            | 2003 Results of  Operations - Cinergy |   |
| ** **            | 2003 Results of Operations -  CG&E |   |
| ** **            | 2003 Results of  Operations - PSI |   |
| ** **            | Liquidity and Capital  Resources |   |
| ** **            | Future Expectations/Trends |   |
| ** **            | Market Risk Sensitive  Instruments |   |
| ** **            | Accounting Matters |   |
| **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** | ** ** |
| **9A**                | **Controls and  Procedures** | ** ** |
| **9B**                | **Other Information** | ** ** |
| ** **            |   |   |
| ** **            | **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**                | **Principal  Accountant Fees and Services** | ** ** |
| ** **            |   |   |
| ** **            |   |   |
| ** **            | **PART IV** | ** ** |
| **15**                | **Exhibits  and Financial Statement Schedules** | ** ** |
| ** **            | Financial  Statements and Schedules |   |
|                  | Exhibits |   |
|                  | Financial Statement  Schedules |   |
| ** **            | **Signatures** | ** ** |

 

4

----

 

**CAUTIONARYSTATEMENTS**

 

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

 

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

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

 

Forward-looking statements involve risks anduncertainties that may cause actual results to be materially different from theresults predicted.  Factors that couldcause actual results to differ materially from those indicated in anyforward-looking statement include, but are not limited to:

 

•                  Factorsaffecting operations, such as:

(1)          unanticipated weatherconditions;

(2)          unscheduled generationoutages;

(3)          unusual maintenance orrepairs;

(4)          unanticipated changes incosts;

(5)          environmental incidents;and

(6)          electric transmission orgas pipeline system constraints.

 

•                  Legislativeand regulatory initiatives and legal developments.

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

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

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

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

•                  Availability of, or cost of, capital.

•                  Employee workforce factors.

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

•                  Costs and effects of legal andadministrative proceedings, settlements, investigations, and claims.

We undertake no obligation to update theinformation contained herein.

 

5

----

## ** **

## **BUSINESS**

## **PART I**

## **ITEM 1.  BUSINESS**

### **WEBSITE ACCESS TOREPORTS**

We make our annual report on Form 10-K,quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments tothose reports, filed or furnished pursuant to section 13(a) or 15(d) of theSecurities Exchange Act of 1934 available free of charge on or through our internetwebsite, www.cinergy.com, as soon as reasonably practicable after weelectronically file such material with, or furnish it to, the Securities andExchange Commission (SEC).

 

### **ORGANIZATION**

**CinergyCorp.**, a Delaware corporation organized in 1993, owns all outstanding commonstock of The Cincinnati Gas & Electric Company (**CG&E**) and PSI Energy, Inc. (**PSI**), both of which are public utilities.  As a result of this ownership, we areconsidered a utility holding company. Because we are a holding company with material utility subsidiariesoperating in multiple states, we are registered with and are subject toregulation by the SEC under the Public Utility Holding Company Act of 1935, asamended.  Our other principal subsidiariesare Cinergy Services, Inc. (Services) and Cinergy Investments, Inc.(Investments).

 

**CG&E**, an Ohiocorporation organized in 1837, is a combination electric and gas public utilitycompany that provides service in the southwestern portion of Ohio and, throughThe Union Light, Heat and Power Company (**ULH&P**),in nearby areas of Kentucky.  **CG&E** is responsible for the majority ofour power marketing and trading activity. **CG&E’s** principalsubsidiary, **ULH&P**, a Kentuckycorporation organized in 1901, provides electric and gas service in northernKentucky.

 

**CG&E** is in a marketdevelopment period for residential customers and in the competitive retailelectric market for non-residential customers, transitioning to deregulation ofelectric generation and a competitive retail electric service market in thestate of Ohio.  Applicable legislationgoverning the transition period provides for a market development (frozen rate)period that began January 1, 2001, ended December 31, 2004 for non-residentialcustomers and is scheduled to end December 31, 2005 for residentialcustomers.  At the end of these marketdevelopment periods, **CG&E** willnot implement market rates, but rather a rate stabilization plan (RSP) approvedby the Public Utilities Commission of Ohio (PUCO) that covers the period afterthe market development period through 2008. The RSP, among other things, increases rates for environmental costs andcapacity reserves and provides for a fuel and emission allowance trackerthrough 2008.  See “Electric Industry” in“Item 7. Management’s Discussion and Analysis of Financial Condition andResults of Operations (MD&A)” for the various filings that led to the PUCO’sapproval of **CG&E’s** RSP, further details ofthe plan, and a discussion of key elements of Ohio deregulation.

 

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

 

6

----

 

The following table presents furtherinformation related to the operations of our domestic utility companies, **CG&E**, **PSI**, and **ULH&P** (our utility 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

•   Electric commodity  marketing and trading operations |       | Cincinnati, OH   Middletown, OH   Covington, KY   Florence, KY   Newport, KY                                |       | 2,064,000                         |       |
|                          |
|                          |
|                          |       |                                                                                                                                                                                                                                                |       |                                                                                                        |       |                              |       |
| **PSI**                       |       | •   Generation, transmission,  distribution, and sale of electricity                                                                                                                                                                 |       | Bloomington, IN   Carmel, IN   Columbus, IN   Kokomo, IN   Lafayette, IN   New Albany, IN   Terre Haute, IN |       | 2,283,000                         |       |
|                          |       |                                                                                                                                                                                                                                                |       |                                                                                                        |       |                              |       |
| **ULH&P****(1)**          |       | •   Transmission,  distribution, and sale of electricity

 

•   Sale and transportation of  natural gas                                                                                                         |       | Covington, KY   Florence, KY   Newport, KY                                                                  |       | 345,000                           |       |
|                          |

 

----

(1)   See “Generation— Fuel Supply and Emission Allowances” under the “Regulated” section forfurther discussion of the possible transfer of generation assets.

 

Services is a service company that providesour subsidiaries with a variety of centralized administrative, management, andsupport services.  Investments holds mostof our non-regulated, energy-related businesses and investments, includingnatural gas marketing and trading operations (which are primarily conductedthrough Cinergy Marketing and Trading, LP (Marketing & Trading), one of itssubsidiaries).

 

### **BUSINESS SEGMENTS**

We conduct operations through oursubsidiaries and manage our businesses through the following three reportablesegments:

 

•                  Commercial Business Unit(Commercial);

•                  Regulated Business Unit(Regulated); and

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

 

The following section describes theactivities of our business segments as of December 31, 2004.

 

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

 

#### **Commercial**

Commercial manages our wholesale generationand energy marketing and trading activities. Commercial’s wholesale generation consists of **CG&E’s**electric generation in Ohio due to Ohio’s transition to deregulation ofelectric generation and a competitive retail service market.  See “Electric Industry” in “Item 7. MD&A”for further detail of key elements of Ohio deregulation.  Commercial also performs energy riskmanagement activities, provides 

 

7

----

 

customized energy solutions and isresponsible for all of our international operations.  See the “Market Risk Sensitive Instruments”section of “Item 7. MD&A” for information on risks associated with theseactivities.

 

Detail of Commercial’s operations can befound in the following sections:

 

•                  Generation— Fuel Supply and Emission Allowances — Describes Commercial’s generationcapacity, sources of fuel, and its various cost recovery mechanisms;

•                  TradingOperations and Risk Management — Describes Commercial’s energy marketingand trading activities in the United States and Canada;

•                  Competition— Describes the key competitors to Commercial’s various business operations;

•                  EnergyServices — Describes Commercial’s operations consulting services and itsoperation of a synthetic fuel production facility;

•                  International— Describes Commercial’s operations outside of the United States; and

•                  RevenueData and Customer Base — Describes the primary revenue generators for thevarious business operations of Commercial.

 

##### ***Generation— Fuel Supply and Emission Allowances***

As of December 31, 2004, the total winterelectric capacity (including our portion of the total capacity for thejointly-owned plants) of Commercial’s domestic generating plants was 6,276megawatts (MW).  Approximately 67 percentof this generation portfolio is coal-fired. See “Item 2.  Properties” forfurther discussion of the generating facilities.

 

Each year**CG&E** purchases over 10 million tons of coal to generateelectricity, primarily from mines located in Indiana, West Virginia, Ohio,Kentucky, Pennsylvania, Illinois, and Colorado.  The price of coal hasincreased dramatically in 2004 as compared to 2003.  Contributing to the rise in the price of coalare (1) increases in demand for electricity, (2) environmental regulation, and(3) decreases in the number of suppliers of coal from prior years.  To help mitigate the price fluctuation ofcoal, **Cinergy** has a general practice toprocure a substantial portion of coal through fixed-price contracts of varyinglength.  We hold fixed-price contracts that will source a substantialportion of our expected 2005 coal requirements.  We evaluate theappropriate amount of contract coal and length of contracts based on marketconditions, including pricing trends, volatility and supplier reliability.  See “Contractual Cash Obligations” in “Item7. MD&A” for further detail on **CG&E’s**totalcommitment under fixed-price coal contracts.

 

Commercial has naturalgas-fired peaking plants that have a capacity of 1,766 MW.  The fuel for these units is primarilyobtained through the natural gas spot market as it is difficult to forecast thenatural gas requirements for these plants. For further information on the risk of purchasing natural gas, see the “MarketRisk Sensitive Instruments” section of “Item 7. MD&A”.

 

A joint operating agreement, effective inApril 2002, allows **Cinergy** tojointly dispatch the regulated generating assets of **PSI** in conjunction with the deregulated generating assets of **CG&E. **Underthis agreement, transfers of power between **PSI**and **CG&E** are generally pricedat market rates.

 

Commercial monitors alternative sources ofcoal and natural gas to assure a continuing availability of economical fuelsupplies.  As such, it will maintain itspractice of purchasing a portion of coal and natural gas requirements on theopen market and will continue to investigate least-cost coal options to complywith new and existing environmental requirements.  **Cinergy**and  **CG&E**believe that they can continue to obtain enough coal and natural gas to meetfuture needs.  However, futureenvironmental requirements may significantly impact the availability and priceof these fuels.

 

At times, Commercial purchases power to meetthe energy needs of its customers. Factors that could cause Commercialto purchase power for its customers include generating plant outages, extremeweather conditions, summer reliability, growth, and price.  We believe we can obtain enough purchasedpower to meet future needs.  However,during periods of excessive demand, the price and availability of thesepurchases may be significantly impacted.

 

8

----

 

Commercial emits sulfur dioxide (SO2)and nitrogen oxides (NOX) in the generation of electricity andmaintains emission allowances to offset their emissions in order to comply withNOX and SO2 emission reduction requirements.  In 2004, the market prices of SO2allowances rose more than 200 percent from 2003.  **Cinergy**iscontinually evaluating market conditions and managing our overall coststructure through the addition of pollution control equipment, whereeconomically feasible, and the use of emission allowance markets to help manageour emissions costs.

 

Under **CG&E’s**newRSP, retail fuel and emission allowance costs will be recovered through a costtracking mechanism that recovers costs that exceed the amount originallyincluded in the rates frozen in **CG&E’s**earliertransition plan.  **CG&E**will****recover retail fuel and emission allowance costs consumedin serving retail load and collect a Provider of Last Resort charge fromnon-residential customers from 2005 through 2008 and from residential customersfrom 2006 through 2008.  See “ElectricIndustry” in “Item 7. MD&A” for further detail of **CG&E’s**RSP.

 

##### ***TradingOperations and Risk Management***

Commercial’s energy marketing and trading activitiesprincipally consist of Marketing & Trading’s natural gas marketing andtrading operations and **CG&E’s**power marketing and trading operations. In April 2002, **CG&E** and**PSI** executed a new joint operatingagreement whereby new power marketing and trading contracts since April 2002are originated on behalf of **CG&E**only.  Historically, such contracts wereexecuted on behalf of **CG&E** and**PSI** jointly.

 

Our domestic operations market and tradeover-the-counter (an informal market where the buying/selling of commoditiesoccurs) contracts for the purchase and sale of electricity (primarily in themidwest region of the United States), natural gas, and other energy-relatedproducts, including coal and emission allowances.  Our natural gas domestic operations provideservices that manage storage, transportation, gathering, and processingactivities.  In addition, our domesticoperations also market and trade natural gas and other energy-related productson the New York Mercantile Exchange.

 

Marketing & Trading’s natural gasmarketing and trading operations also extend to Canada where natural gasmarketing and management services are provided to producers and industrialcustomers.  Our Canadian operations alsomarket and trade over-the-counter contracts.

 

See the “Market Risk Sensitive Instruments”section of “Item 7. MD&A” for information on risks associated with theseactivities.

 

***Competition***

 

Commercial competes for wholesale contractsfor the purchase and sale of electricity and natural gas.  Commercial’s main competitors include publicutilities, power and natural gas marketers and traders, and independent powerproducers.

 

##### ***EnergyServices***

Commercial, through Cinergy Solutions HoldingCompany, Inc., is an on-site energy solutions and utility servicesprovider.  We provide utility systemsconstruction, operation and maintenance of utility facilities, energyefficiencies and conservation consulting services, as well as cogeneration.  Cogeneration is thesimultaneous production of two or more forms of useable energy from a singlefuel source.

 

Commercial, through Cinergy Capital &Trading, Inc., owns a coal-based synthetic fuel production facility whichconverts coal feedstock into synthetic fuel for sale to a third party.  As of December 31, 2004, **Cinergy**hasproduced and sold approximately 7.8 million tons of synthetic fuel at thisfacility.  The synthetic fuel produced atthis facility qualifies for tax credits (through 2007) in accordance with theInternal Revenue Code Section 29 if certain requirements are satisfied.  The three key requirements are that (a) thesynthetic fuel differs significantly in chemical composition from the coal usedto produce such synthetic fuel, (b) the fuel produced is sold to an unrelatedentity 

 

9

----

 

and (c) the fuel was produced from a facilitythat was placed in service before July 1, 1998. For further information on the tax credit qualifications see Note 11(c)(*iv*) of the “Notes to Financial Statements” in “Item 8.Financial Statements and Supplementary Data”.

 

##### ***International***

As of December 31, 2004, we had ownershipinterests in (1) generation assets located in three countries capable ofproducing approximately 150 MW of electricity and 700 MW equivalents of steam;and (2) approximately 1,200 miles of gas and electric transmission anddistribution systems through jointly-owned investments in two countries,through which we serve approximately 8,500 transmission and distributioncustomers.  These assets serve retail andwholesale customers by providing utility services including generation ofelectricity and heat as well as the distribution of gas and electriccommodities.

 

##### ***RevenueData and Customer Base***

Commercial primarily recognizes revenues fromgeneration provided to customers in **CG&E’s**service territory who have not switched to an alternative generation supplierunder Ohio’s electric deregulation market. Because rates are frozen during the market development period in Ohio,the majority of these revenues are under a fixed-price tariff.  Under the Ohio customer choice program, **CG&E’s** retail customers may choosetheir electric supplier.  The percentageof customers switching to other electric suppliers and the related volume bycustomer class was as follows:

 

 
| ** **               | ** ** | ** **            | ** ** | ** **                  | ** ** | **MW Hours For the**                 | ** ** | **Switching** | ** ** |
|--------------------------|------------|-----------------------|------------|-----------------------------|------------|--------------------------------------|------------|---------------|------------|
| ** **               | ** ** | **MW at December 31** | ** ** | **Years Ended December 31** | ** ** | **Percentage at December 31****(1)** | ** ** |
| **Revenue Class**        | ** ** | **2004**              | ** ** | **2003**                    | ** ** | **2004**                             | ** ** | **2003**      | ** ** | **2004** | ** ** | **2003** | ** ** |
|                     |       |                  |       |                        |       |                                 |       |          |       |   |   |   |   |
| Residential              |       | **75**                |       | 92                          |       | **334,224**                          |       | 283,477       | ** ** | **4.07** | **%** | 5.17 | % |
| Commercial               |       | **339**               |       | 374                         |       | **1,722,822**                        |       | 1,654,061     | ** ** | **19.17** | **%** | 21.55 | % |
| Industrial               |       | **226**               |       | 295                         |       | **1,376,210**                        |       | 1,591,345     | ** ** | **17.89** | **%** | 23.60 | % |
| Other Public Authorities |       | **89**                |       | 91                          |       | **284,214**                          |       | 265,039       | ** ** | **19.09** | **%** | 19.95 | % |
| Total                    |       | **729**               |       | 852                         |       | **3,717,470**                        |       | 3,793,922     |       |   |   |   |   |

 

----

(1)   The residential switching percentage is based on annual energyconsumption and the non-residential switching percentages are based on averagemonthly peak demand.

 

Customer switching reduces retail revenues bythe generation component of rates and shopping incentives.  **CG&E**still collects transmission and distribution revenues from the delivery ofelectricity to switched customers (see Regulated section for furtherinformation).  During the marketdevelopment period, the reduction in revenues due to customer switching ismitigated by wholesale power sales from the freed-up generation capacity.  For further discussion on Ohio deregulationand the recently approved RSP see “Electric Industry” in “Item 7. MD&A”.

 

Commercial’s operating revenue is also derivedby providing electricity at wholesale and trading electricity primarily in themidwest region of the United States.  Inaddition, Commercial provides and trades natural gas primarily to wholesalecustomers across the United States.  Themajority of these customers are public utilities, power and natural gasmarketers and traders, and independent power producers.

 

Energy services operating revenues arederived primarily by providing steam, electricity, and operation andmaintenance services to large industrial customers.  

 

No single Commercial customer provides morethan 10 percent of total operating revenues.

 

#### **Regulated**

Regulated consists of **PSI’s** regulated generation and transmissionand distribution operations, and **CG&E**and its subsidiaries’ regulated electric and gas transmission and distributionsystems.  Regulated plans, constructs,operates, and maintains **Cinergy’s**transmission and distribution systems and delivers gas and electric energy toconsumers.  Regulated also earns revenuesfrom wholesale customers primarily by these customers transmitting electricpower 

 

10

----

 

through **Cinergy’s**transmission system.  These businessesare subject to cost of service rate making where rates to be charged to customersare based on prudently incurred costs over a test period plus a reasonable rateof return.  Regulated operatedapproximately 48,000 circuit miles (the total length in miles of separatecircuits) of electric lines to provide regulated transmission and distributionservice to approximately 1.5 million customers as of December 31, 2004.  Regulated operated approximately 9,226 milesof gas mains (gas distribution lines that serve as a common source of supplyfor more than one service line) and service lines to provide domestic regulatedtransmission and distribution services to approximately 500,000 customers as ofDecember 31, 2004.  See “Item 2.  Properties” for a further discussion of thetransmission and distribution systems owned by our utility operating companies.

 

Detail of Regulated’s operations can be foundin the following sections:

 

•                  Generation- Fuel Supply and Emission Allowances — Describes Regulated’s generationcapacity, sources of fuel, and its various cost recovery mechanisms;

•                  Transmissionand Distribution — Describes Regulated’s agreements with the regionalutilities and regional transmission organization (RTO) that coordinate theplanning and operation of generation and transmission facilities and theassociated cost recovery mechanisms;

•                  GasSupply — Describes Regulated’s responsibility to purchase and delivernatural gas to native load (the totalrequirements of a wholesale utility’s franchised retail market) customersand the mechanisms used to fulfill their responsibility; and

•                  RevenueData and Customer Base — Describes the primary revenue generators for thevarious business operations of Regulated.

 

##### ***Generation- Fuel Supply and Emission Allowances***

As of December 31, 2004, the total winterelectric capacity (including our portion of the total capacity for thejointly-owned plants) of Regulated’s generating plants was 7,055 MW.  Approximately 78 percent of this generationportfolio is coal-fired.  See “Item2.  Properties” for a further discussionof the generating facilities.

 

Each year **PSI**purchases over 15 million tons of coal to generate electricity,primarily from mines located in Indiana, Pennsylvania, and Illinois.  Theprice of coal has increased dramatically in 2004 as compared to 2003.  The primary driving forces behind theincrease in coal prices are (1) increases in demand for electricity, (2)environmental regulation, and (3) decreases in the number of suppliers of coalfrom prior years.  To help mitigate theprice fluctuation of coal, **Cinergy** has ageneral practice to procure a substantial portion of coal through fixed-pricecontracts of varying length.  We hold fixed-price contracts that willsource a substantial portion of our expected 2005 coal requirements.  Weevaluate the appropriate amount of contract coal and length of contracts basedon market conditions, including pricing trends, volatility and supplierreliability.  See “Contractual CashObligations” in “Item 7. MD&A” for further detail on **PSI’s**totalcommitment under fixed-price coal contracts.

 

Regulated has naturalgas-fired peaking plants that have a capacity of 1,263 MW.  The fuel for these units is primarilyobtained through the natural gas spot market as it is difficult to forecast thenatural gas requirements for these plants. For further information on the risk of purchasing natural gas see the “MarketRisk Sensitive Instruments” section of “Item 7. MD&A”.

 

A joint operating agreement, effective inApril 2002, allows **Cinergy** tojointly dispatch the regulated generating assets of **PSI** in conjunction with the deregulated generating assets of **CG&E. **Underthis agreement, transfers of power between **PSI**and **CG&E** are generally pricedat market rates.

 

At times, Regulated purchases power to meetthe energy needs of its customers. Factors that could cause Regulated to purchase power for its customersinclude generating plant outages, extreme weather conditions, summerreliability, growth, and price.  Webelieve we can obtain enough purchased power to meet future needs.  However, during periods of excessive demand,the price and availability of these purchases may be significantly impacted.

 

**ULH&P** purchasesenergy from **CG&E** pursuant to acontract effective January 1, 2002, which was approved by the Federal EnergyRegulatory Commission (FERC) and the Kentucky Public Service Commission(KPSC).  This five-year agreement is anegotiated fixed-rate contract with **CG&E**.

 

11

----

 

The KPSC has conditionally approved along-term electric supply plan for **ULH&P**that will replace the current contract with **CG&E**as previously discussed.  Under this newplan, **CG&E** will transferownership of approximately 1,100 MW of electric generating capacity to **ULH&P**. The capacity is currently part of **CG&E’s**generating assets used to service **ULH&P**under a multi-year wholesale power supply contract as previouslydiscussed.  **ULH&P**is currentlyseeking approval of the transaction from the SEC, wherein the Ohio Consumers Counselhas intervened in opposition, and the FERC. The transfer, which will be paid for at net book value, will notaffect current electric rates for **ULH&P’s**customers, as power will be provided under the same terms as under the currentwholesale power contract with **CG&E**through December 31, 2006. Assuming receipt of regulatory approvals, we wouldanticipate the transfer to take place in the second quarter of 2005.

 

**Cinergy** is studyingthe feasibility of constructing a commercial integrated coal gasificationcombined cycle (IGCC) generating station to help meet increased demand over thenext decade.  **PSI**would own all or part of the facility and operate it.  **Cinergy** willpartner with Bechtel Corporation and General Electric Company to complete thisstudy.  An IGCC plant turns coal to gas,removing most of the SO2 and other emissions before the gas is usedto fuel a combustion turbine generator. The technology uses less water and has fewer emissions than aconventional coal-fired plant with currently required pollution controlequipment.  Another benefit is thepotential to remove mercury and carbon dioxide (CO2) upstream of thecombustion process at a lower cost than conventional plants.  If a decision is reached to move forward withconstructing such a plant, **PSI**would seekapproval from the Indiana Utility Regulatory Commission (IURC) to beginconstruction.  If approved, we wouldanticipate the IURC’s subsequent approval to include the assets in **PSI’s**rate base.

 

Regulated monitors alternative sources ofcoal and natural gas to assure a continuing availability of economical fuelsupplies.  As such, it will maintain itspractice of purchasing a portion of coal and natural gas requirements on theopen market and will continue to investigate least-cost coal options to complywith new and existing environmental requirements.  **Cinergy**and  **PSI**believe that they can continue to obtain enough coal and natural gas to meetfuture needs.  However, futureenvironmental requirements may significantly impact the availability and priceof these fuels.

 

**PSI**recovers retail and aportion of its wholesale fuel costs from customers on a dollar-for-dollar basisthrough a cost tracking recovery mechanism (commonly referred to as a fueladjustment clause). In addition to thefuel adjustment clause, **PSI**utilizes a purchased power tracking mechanism approved by the IURC for therecovery of costs related to certain specified purchases of power necessary tomeet native load peak demand requirements to the extent such costs are notrecovered through the existing fuel adjustment clause.

 

Regulated emits SO2 and NOXin the generation of electricity and maintains emission allowances to offsettheir emissions in order to comply with NOX and SO2emission reduction requirements.  In2004, the market prices of SO2 allowances rose more than 200 percentfrom 2003.  **PSI**utilizes a cost tracking mechanism as approved by the IURC allowing it torecover substantially all of its emission allowance costs from itscustomers.  **Cinergy**is continually evaluating market conditions andmanaging our overall cost structure through the addition of pollution controlequipment, where economically feasible, and the use of emission allowancemarkets to help manage our emissions costs.

 

##### ***Transmissionand Distribution***

**Cinergy** (through ourutility operating companies) and other non-affiliated utilities in a nine-stateregion are parties to the East Central Area Reliability Coordination (ECAR)Agreement.  Through the ECAR Agreement,ECAR supports the planning and operation of generation and transmissionfacilities, which provides for reliability of regional bulk power supply.

 

**Cinergy** (through ourutility operating companies) is also a member of the Midwest IndependentTransmission System Operator, Inc. (Midwest ISO), a RTO established in 1998 asa non-profit organization which maintains functional control over the combinedtransmission systems of its members.

 

The Midwest ISO is the provider fortransmission service requested on the transmission facilities under itstariff.  It is responsible for thereliable operation of those transmission facilities and the regional planningof new 

 

12

----

 

transmission facilities.  The Midwest ISO also will administer energymarkets utilizing Locational Marginal Pricing (i.e., the energy price for thenext MW may vary throughout the Midwest ISO market based on transmissioncongestion and energy losses) as the methodology for relieving congestion onthe transmission facilities under its functional control.  ECAR will maintain the responsibility forestablishing the level of operating reserves for those utilities participatingin the ECAR Agreement and the operation of the Automatic Reserve Sharing systemupon the Midwest ISO’s implementation of its Energy Markets Tariff.  See “Electric Industry” in “Item 7. MD&A”for further detail regarding the Midwest ISO energy markets.

 

*Transmission andDistribution Cost Recovery*

Transmission cost recovery mechanisms will beestablished under **CG&E’**s newRSP to, among other things, permit **CG&E** torecover Midwest ISO charges.  **CG&E**also plans to file a distribution rate case torecover certain distribution costs with rates to become effective January 1,2006 and has deferred certain costs in 2004 and will defer costs in 2005pursuant to its RSP.  See “ElectricIndustry” in “Item 7. MD&A” for further detail of **CG&E’s**RSP.

 

**PSI** has receivedIURC approval for the recovery of Midwest ISO costs and is currently seekingIURC approval that would further define the mechanisms for recovery of suchcosts.

 

13

----

 

***Transmission System Interconnections***

The following map illustrates theinterconnections between our electric systems and other electric systems.

 

 

14

----

##### ***GasSupply***

Regulated is responsible for the purchase andthe subsequent delivery of natural gas to native load customers.  Regulated’s natural gas procurement strategyis to buy firm natural gas supplies (natural gas intended to be available atall times) and firm interstate pipeline transportation capacity during thewinter season (November through March) and during the non-heating season (Aprilthrough October) through a combination of firm supply and transportationcapacity along with spot supply and interruptible transportation capacity.  This strategy allows Regulated to assurereliable natural gas supply for its high priority (non-curtailable) firmcustomers during peak winter conditions and provides Regulated the flexibilityto reduce its contract commitments if firm customers choose alternate gassuppliers under Regulated’s customer choice/gas transportation programs.  In 2004, firm supply purchase commitmentagreements provided approximately 63 percent of the natural gas supply, withthe remaining gas purchased on the spot market. These firm supply agreements feature two levels of gas supply,specifically (1) base load, which is a continuous supply to meet normal demandrequirements, and (2) swing load, which is gas available on a daily basis toaccommodate changes in demand due primarily to changing weather conditions.

 

Regulated manages natural gasprocurement-price volatility mitigation programs for **CG&E** and **ULH&P**.  These programs pre-arrange between 20-75percent of winter heating season base load gas requirements and up to 50percent of summer season base load requirements.  **CG&E**and **ULH&P** use primarilyfixed-price forward contracts and contracts with a ceiling and floor on theprice.  As of December 31, 2004, **CG&E** and **ULH&P**, combined, had hedged approximately 60 percent oftheir winter 2004/2005 base load requirements. See the “Gas Industry” section of “Item 7. MD&A” for furtherinformation.

 

Interstate pipelines either (1) transport gaspurchased directly to the distribution systems or (2) inject gas purchased intopipeline storage facilities for future withdrawal and delivery.  The majority of the gas supply comes from theGulf of Mexico coastal areas of Texas and Louisiana.

 

##### ***RevenueData and Customer Base***

Regulated’s generation revenue is derivedfrom the fulfillment of its native load requirements.  The percent of retail operating revenuesderived from full service electricity and gas sales and transportation for eachof the three years ended December 31 were as follows:

 
| ** **                     | ** ** | **Operating Revenues** | ** ** |
|--------------------------------|------------|------------------------|------------|
| **Registrant**                 | ** ** | **2004**               | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                     | ** ** | **Electric**           | ** ** | **Gas** | ** ** | **Electric** | ** ** | **Gas** | ** ** | **Electric** | ** ** | **Gas** | ** ** |
|                           |       |                   |       |   |   |   |   |   |   |   |   |   |   |
| **Cinergy**                    | ** ** | **76**                 | **%**      | **24** | **%** | 76 | % | 24 | % | 81 | % | 19 | % |
| **CG&E** and  subsidiaries |       | **45**                 | ** ** | **55** | ** ** | 46 |   | 54 |   | 56 |   | 44 |   |
| **PSI**                        |       | **100**                | ** ** | **—** | ** ** | 100 |   | — |   | 100 |   | — |   |
| **ULH&P**                  |       | **65**                 | ** ** | **35** | ** ** | 67 |   | 33 |   | 74 |   | 26 |   |

 

Electric and gas sales are seasonal.  Electricity usage in our service territorypeaks during the summer and gas usage peaks during the winter.  Air conditioning increases electricity demandand heating increases electricity and gas demand.

 

The service territory of **CG&E** and its utility subsidiaries,including **ULH&P**, is heavilypopulated and is characterized by a stable residential customer base and adiverse mix of industrial customers.  Theterritory served by **PSI** iscomposed of residential, agricultural, and widely diversified industrialcustomers.  No single retail customerprovides more than 10 percent of total operating revenues (electric or gas) forRegulated.

 

#### **Power Technology and Infrastructure**

Power Technology and Infrastructure primarilymanages Cinergy Ventures, LLC (Ventures), **Cinergy’s**venture capital subsidiary.  Venturesidentifies, invests in, and integrates new energy technologies into **Cinergy’s** existing businesses, focusedprimarily on operational efficiencies and clean energy technologies.  In addition, Power 

 

15

----

 

Technology and Infrastructure manages ourinvestments in other energy infrastructure and telecommunication serviceproviders.

 

In March 2004, **Cinergy**announced that it would begin offering broadband over power line (BPL) servicesin the Cincinnati, Ohio area.  BPLutilizes the low and medium voltage distribution lines of **Cinergy**totransmit high speed data and other digital information to and from the internetvia home electrical outlets and can be used for monitoring utilityinfrastructure.  These services are beingoffered through joint ventures created by Ventures and Current CommunicationsGroup LLC, marketing to **Cinergy** serviceterritory and municipal and co-op utilities throughout the United States.  Ventures has invested approximately $18million to date.

 

#### **EMPLOYEES**   

We have collective bargaining agreements withthe International Brotherhood of Electrical Workers (IBEW), the UnitedSteelworkers of America (USWA), the Utility Workers Union of America (UWUA),and various international union organizations.

 

The following table indicates the number ofemployees by classification at January 31, 2005:

 
| **Classification**          | ** ** | **CG&E(4)** | ** ** | **PSI** | ** ** | **ULH&P** | ** ** | **Cinergy(5)** | ** ** |
|-----------------------------|------------|-----------------|------------|---------|------------|---------------|------------|----------------|------------|
|                        |       |            |       |    |       |          |       |           |       |
| IBEW(1)                     |       | 1,018           |       | 1,218   |       | 60            |       | 2,546          |       |
| USWA(2)                     |       | 280             |       | —  |       | 79            |       | 398            |       |
| UWUA(3)                     |       | 387             |       | —  |       | 58            |       | 768            |       |
| Various Union Organizations |       | —          |       | —  |       | —        |       | 355            |       |
| Non-Bargaining              |       | 198             |       | 354     |       | 19            |       | 3,775          |       |
|                        |       | 1,883           |       | 1,572   |       | 216           |       | 7,842          |       |

 

----

(1)   IBEW #1347 contract will expire on April 1,2006, IBEW #1393 contract will expire on May 1, 2005, and IBEW #352 contractexpired on February 5, 2005 and was replaced with a new contract set to expireon February 5, 2008.

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

(3)   Contract will expire on March 31, 2005.

(4)   **CG&E** andsubsidiaries excluding **ULH&P**.

(5)   Includes 3,154 Services’ employees whoprovide services to our operating utilities and other non-regulated companies.

 

### **ENVIRONMENTAL MATTERS**

**Cinergy** is currentlyaffected by several different issues which involve compliance with federal andstate regulations regarding the protection of the environment including, butnot limited to, reductions in mercury, NOX, and SO2emissions.  **Cinergy**is able to recover certain costs of this environmental compliance equipmentthrough various trackers set up with **Cinergy’s**respective state regulatory agencies. See the “Environmental Issues” section in “Item 7. MD&A” for adiscussion of these environmental issues and the estimated capitalexpenditures.

 

### **FUTUREEXPECTATIONS/TRENDS**

See the informationappearing under the same caption in “Item 7. MD&A” for the followingdiscussions:

 

•                  RegulatoryOutlook and Significant Rate Developments;

•                  FERC andMidwest ISO;

•                  Gas Industry;and

•                  Other Matters.

 

16

----

** **

**PROPERTIES**

** **

## **ITEM 2.  PROPERTIES**

### **COMMERCIAL BUSINESSUNIT (COMMERCIAL)**

#### **Electric**

##### ***DomesticPower Generation***

Commercial’s domestic power generatingstations’ total winter electric capacity, reflected in megawatts (MW), as ofDecember 31, 2004, are shown in the table that follows.  Commercial’s electric generating plants areprimarily located in Ohio and Kentucky and are wholly-owned or jointly-ownedfacilities.

 
| ** **                                               | ** ** | ** **   | ** ** | ** ** | ** ** | **Natural** | ** ** | ** ** | ** ** | ** ** | ** ** |
|----------------------------------------------------------|------------|--------------|------------|------------|------------|-------------|------------|------------|------------|------------|------------|
| ** **                                               | ** ** | ** **   | ** ** | **Coal**   | ** ** | **Gas**     | ** ** | **Oil**    | ** ** | **Total**  | ** ** |
| **Commercial(1)**                                        | ** ** | **Stations** | ** ** | **MW**     | ** ** | **MW**      | ** ** | **MW**     | ** ** | **MW**     | ** ** |
|                                                     |       |         |       |       |       |        |       |       |       |       |       |
| The Cincinnati Gas & Electric Company **(CG&E)** |       | 9            |       | 4,186      |       | 736         |       | 324        |       | 5,246      |       |
| Cinergy Investments, Inc. (Investments)(2)               |       | 2            |       | —     |       | 1,030       |       | —     |       | 1,030      |       |
|                                                     |       |         |       |       |       |        |       |       |       |       |       |
| **Total**                                                |       | 11           |       | 4,186      |       | 1,766       |       | 324        |       | 6,276      |       |

 

----

(1)   This table includes only our portion of thetotal capacity for the jointly-owned plants.

(2)   Represents natural gas peaking plants locatedin Tennessee and Mississippi, owned by Investments, that sell electricity onthe wholesale market.

 

During 2004, Commercial’s electric generatingplants, including those that we own but do not operate, performed reliably, asevidenced by our annual capacity factor of 68 percent and a utilization factorof 83 percent (excluding natural gas and fuel oil peaking stations) and an****equivalent availability factor of 84percent.  A capacity factor is apercentage that indicates how much of a power plant’s capacity is used overtime.  A utilization factor is apercentage that indicates how much of a power plant’s capacity is used whilebeing available.  An equivalentavailability factor is a percentage that indicates how much of a unit isavailable to generate compared to its potential maximum generation.

 

17

----

 

Belowis a geographical map showing the locations of Commercial’s generation plants.

 

 

| **Legend** | ** ** |
|------------|------------|
| **Number** | ** ** | **Generation Plant** | ** ** | **Fuel Type** | ** ** | **MW Capacity** | ** ** |
|       |       |   |   |   |   |   |   |
| 1          |       | Dick’s Creek |   | Gas |   | 172 |   |
| 2          |       | Woodsdale |   | Gas |   | 564 |   |
| 3          |       | Miami Fort |   | Coal/Oil |   | 962 |   |
| 4          |       | East Bend |   | Coal |   | 414 |   |
| 5          |       | Beckjord |   | Coal/Oil |   | 1,107 |   |
| 6          |       | Wm. Zimmer |   | Coal |   | 604 |   |
| 7          |       | J.M. Stuart |   | Coal |   | 913 |   |
| 8          |       | Killen |   | Coal |   | 198 |   |
| 9          |       | Conesville |   | Coal |   | 312 |   |
| 10         |       | Brownsville |   | Gas |   | 480 |   |
|       |       | Caledonia(1) |   | Gas |   | 550 |   |
|       |       |   |   | Total |   | 6,276 |   |

 

----

(1)   Commercial’s generation plant not included inthe map is located in Caledonia, Mississippi.

 

##### ***Cogeneration***

As of December 31, 2004, **Cinergy**had ownership interests in and/or operated 27 domestic cogeneration facilitiescapable of producing 5,357 MW of electricity, 4,303 MW equivalents of steam and236 MW equivalents of chilled water. Cogeneration is the simultaneous production of two or more forms ofuseable energy from a single fuel source. During 2005, **Cinergy**anticipates completion of an expansion at one of our existing cogenerationfacilities, which is expected to provide an additional 70 MW equivalents ofsteam and 42 MW equivalents of chilled water.

 

18

----

 

##### ***SyntheticFuel***

Cinergy Capital & Trading, Inc. owns acoal-based synthetic fuel production facility, which converts coal intosynthetic fuel for sale to a third party. See “Synthetic Fuel Production” in “Item 7. MD&A” for additionalinformation regarding this business initiative.

 

#### **International**

As of December 31, 2004, we had ownershipinterests in (1) generation assets located in three countries capable ofproducing approximately 150 MW of electricity and 700 MW equivalents of steam;and (2) approximately 1,200 miles of gas and electric transmission anddistribution systems through jointly-owned investments in two countries,through which we serve approximately 8,500 transmission and distributioncustomers.  These assets serve retail andwholesale customers by providing utility services including generation ofelectricity and heat as well as the distribution of gas and electriccommodities.

 

### **REGULATED BUSINESSUNIT (REGULATED)**

#### **Electric**

##### ***DomesticPower Generation***

Regulated’s domestic power generating stations’total winter electric capacity, reflected in MW, as of December 31, 2004,are shown in the table that follows.  Theelectric generating plants are located in Indiana and Ohio and are wholly-ownedor jointly-owned facilities.

 
| ** **       | ** ** | ** **   | ** ** | ** ** | ** ** | **Natural** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|------------------|------------|--------------|------------|------------|------------|-------------|------------|------------|------------|------------|------------|------------|------------|
| ** **       | ** ** | ** **   | ** ** | **Coal**   | ** ** | **Gas**     | ** ** | **Oil**    | ** ** | **Hydro**  | ** ** | **Total**  | ** ** |
| **Regulated(1)** | ** ** | **Stations** | ** ** | **MW**     | ** ** | **MW**      | ** ** | **MW**     | ** ** | **MW**     | ** ** | **MW**     | ** ** |
|             |       |         |       |       |       |        |       |       |       |       |       |       |       |
| **PSI**          |       | 11           |       | 5,488      |       | 1,263       |       | 259        |       | 45         |       | 7,055      |       |

 

----

(1)   This table includes only our portion of thetotal capacity for the jointly-owned plants.

 

During 2004, Regulated’s electric generatingplants, including those that we own but do not operate, performed reliably, asevidenced by our annual capacity factor of 74 percent and a utilization factorof 85 percent (excluding natural gas and fuel oil peaking stations) and an****equivalent availability factor of 89percent.  A capacity factor is a percentagethat indicates how much of a power plant’s capacity is used over time.  A utilization factor is a percentage thatindicates how much of a power plant’s capacity is used while being available.  An equivalent availability factor is apercentage that indicates how much of a unit is available to generate comparedto its potential maximum generation.

 

19

----

 

Below is a geographical mapshowing the locations of Regulated’s generation plants.

 

 

| **Legend** | ** ** |
|------------|------------|
| **Number** | ** ** | **Generation Plant** | ** ** | **Fuel Type** | ** ** | **MW Capacity** | ** ** |
|       |       |   |   |   |   |   |   |
| 1          |       | Cayuga |   | Coal/Gas/Oil |   | 1,135 |   |
| 2          |       | Wabash River |   | Coal/Oil |   | 966 |   |
| 3          |       | Edwardsport |   | Coal/Oil |   | 160 |   |
| 4          |       | Gibson |   | Coal |   | 2,844 |   |
| 5          |       | Miami Wabash |   | Oil |   | 104 |   |
| 6          |       | Noblesville |   | Gas |   | 310 |   |
| 7          |       | Henry County |   | Gas |   | 129 |   |
| 8          |       | Connersville |   | Oil |   | 98 |   |
| 9          |       | Gallagher |   | Coal |   | 560 |   |
| 10         |       | Markland |   | Hydro |   | 45 |   |
| 11         |       | Madison |   | Gas |   | 704 |   |
|       |       |   |   | Total |   | 7,055 |   |

 

20

----

 

##### ***Transmissionand Distribution***

Relevant information for our utilityoperating companies’ electric transmission and distribution systems located inOhio, Kentucky, and Indiana is as follows:

 
| ** **                                              | ** ** | **Electric**         | ** ** | **Electric**         | ** ** | **Substation**            | ** ** |
|---------------------------------------------------------|------------|----------------------|------------|----------------------|------------|---------------------------|------------|
| ** **                                              | ** ** | **Transmission**     | ** ** | **Distribution**     | ** ** | **Combined**              | ** ** |
| **Registrant**                                          | ** ** | **Systems**          | ** ** | **Systems**          | ** ** | **Capacity**              | ** ** |
| ** **                                              | ** ** | **(circuit  miles)** | ** ** | **(circuit  miles)** | ** ** | **(kilovolt-amperes)(1)** | ** ** |
|                                                    |       |                 |       |                 |       |                      |       |
| **CG&E** and subsidiaries                           |       |                 |       |                 |       |                      |       |
| **CG&E**                                            |       | 1,561                |       | 16,743               |       | 21,121,288                |       |
| The Union Light, Heat and Power Company **(ULH&P)** |       | 106                  |       | 2,883                |       | 1,419,878                 |       |
| Other subsidiaries                                      |       | 40                   |       | —               |       | —                    |       |
| **Total CG&E****and subsidiaries**                  |       | 1,707                |       | 19,626               |       | 22,541,166                |       |
| PSI Energy, Inc. **(PSI)**                              |       | 5,354                |       | 20,917               |       | 30,569,289                |       |
|                                                    |       |                 |       |                 |       |                      |       |
| **Total**                                               |       | 7,061                |       | 40,543               |       | 53,110,455                |       |

 

----

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

 

At the end of 2004, our utility operatingcompanies’ electric systems were interconnected with 14 other utilities.  Our electric transmission and distributionsystems are designed and constructed to further the goal of providing reliableservice to our customers.  Every effortis made to ensure that sufficient facilities are in service to meet this goalwithout installing facilities beyond what is required to operate reliably andwithin the designed parameters.  Throughour ongoing review of these systems, enhancements are developed and constructedto meet our planning, loading, and reliability guidelines.  This process allows us to prudently invest incapacity additions only when and where they are required.  The Midwest Independent Transmission SystemOperator, Inc. (Midwest ISO) holds functional control of Regulated’stransmission systems.

 

#### **Gas**

As of December 31, 2004, the natural gastransmission and distribution systems of **Cinergy**and **CG&E** and its subsidiarieshad approximately 9,226 miles of mains and service lines located insouthwestern Ohio and northern Kentucky. **Cinergy** and **CG&E** and its subsidiaries also jointlyown three underground caverns with a total storage capacity of approximately 23million gallons of liquid propane (of which 18.7 million gallons belongs to **CG&E**, including 7.5 million gallonsbelonging to **ULH&P**).  As of December 31, 2004, **Cinergy** had 16.6 million gallons of liquidpropane in storage (of which 14.4 million gallons belongs to **CG&E**, including 5.8 million gallonsbelonging to **ULH&P**).  This liquid propane is used in the threepropane/air peak shaving plants located in Ohio and Kentucky.  Propane/air peak shaving plants store propaneand, when needed, vaporize the propane and mix with natural gas to supplementthe natural gas supply during peak demand periods and emergencies.

 

### **PEAK LOAD**

In July 2004, we experienced peak loads forthe year of 10,911 MW, 4,998 MW,****and6,000 MW for**Cinergy**, **CG&E**, and **PSI**, respectively.  **Cinergy** and **CG&E** setrecord peak loads of 11,305 MW and 5,311 MW in August 2002, respectively, while**PSI**set a record peak load of 6,088 MWin July 2002.

 

21

----

 

**LEGAL PROCEEDINGS**

 

## **ITEM 3.  LEGALPROCEEDINGS**

### **CLEAN AIR ACT (CAA)LAWSUIT**

InNovember 1999, and through subsequent amendments, the United States brought alawsuit in the United States Federal District Court for the Southern Districtof Indiana (District Court) against **Cinergy**,**CG&E**, and **PSI** alleging various violations of theCAA.  Specifically, the lawsuit allegesthat we violated the CAA by not obtaining Prevention of SignificantDeterioration (PSD), Non-Attainment New Source Review (NSR), and Ohio andIndiana State Implementation Plans (SIP) permits for various projects at ourowned and co-owned generating stations. Additionally, the suit claims that we violated an Administrative ConsentOrder entered into in 1998 between the Environmental Protection Agency (EPA)and **Cinergy** relating to allegedviolations of Ohio’s SIP provisions governing particulate matter at Unit 1 at **CG&E’s** W.C. Beckjord Generating Station(Beckjord Station).  The suit seeks (1)injunctive relief to require installation of pollution control technology onvarious generating units at **CG&E’s**Beckjord Station and Miami Fort Station, and **PSI’s**Cayuga Generating Station, Gallagher Generating Station, Wabash RiverGenerating Station, and Gibson Generating Station (Gibson Station), and (2)civil penalties in amounts of up to $27,500 per day for each violation.  In addition, three northeast states and twoenvironmental groups have intervened in the case.  The case is currently in discovery, and theDistrict Court has set the case for trial by jury commencing in February 2006.

 

InMarch 2000, the United States also filed in the District Court an amendedcomplaint in a separate lawsuit alleging violations of the CAA relating to PSD,NSR, and Ohio SIP requirements regarding various generating stations, includinga generating station operated by Columbus Southern Power Company (CSP) andjointly-owned by CSP, The Dayton Power and Light Company (DP&L), and **CG&E**. The EPA is seeking injunctive relief and civil penalties of up to$27,500 per day for each violation.  Thissuit is being defended by CSP.  In April2001, the District Court in that case ruled that the Government and theintervening plaintiff environmental groups cannot seek monetary damages foralleged violations that occurred prior to November 3, 1994; however, they areentitled to seek injunctive relief for such alleged violations.  Neither party appealed that decision.

 

Inaddition, **Cinergy** and **CG&E** have been informed by DP&Lthat in June 2000, the EPA issued a Notice of Violation (NOV) to DP&L foralleged violations of PSD, NSR, and Ohio SIP requirements at a generatingstation operated by DP&L and jointly-owned by **CG&E**.  The NOVindicated the EPA may (1) issue an order requiring compliance with therequirements of the Ohio SIP, or (2) bring a civil action seeking injunctiverelief and civil penalties of up to $27,500 per day for each violation.  In September 2004, Marilyn Wall and theSierra Club brought a lawsuit against **Cinergy**,DP&L and CSP for alleged violations of the CAA at this same generatingstation.

 

Weare unable to predict whether resolution of these matters would have a materialeffect on our financial position or results of operations.  We intend to vigorously defend against theseallegations.

 

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

In July 2004, the states of Connecticut, NewYork, California, Iowa, New Jersey, Rhode Island, Vermont, Wisconsin, and theCity of New York brought a lawsuit in the United States District Court for theSouthern District of New York against **Cinergy**, American Electric Power Company,Inc., American Electric Power Service Corporation, The Southern Company, TennesseeValley Authority, and Xcel Energy Inc. That same day, a similar lawsuit was filed in the United States DistrictCourt for the Southern District of New York against the same companies by OpenSpace Institute, Inc., Open Space Conservancy, Inc., and The Audubon Society ofNew Hampshire.  These lawsuits allegethat the defendants’ emissions of CO2 from the combustion of fossilfuels at electric generating facilities contribute to global warming and amountto a public nuisance.  The complaintsalso allege that the defendants could generate the same amount of electricitywhile emitting significantly less CO2.  Plaintiffs are seeking an injunctionrequiring each defendant to cap its CO2 emissions and then reducethem by a specified percentage each year for at least a decade.  **Cinergy**intends to defend these lawsuits vigorously in court and filed motions todismiss with the other defendants in September 2004.  We are not able to predict whether resolutionof these matters would have a material effect on our financial position orresults of operations.

 

22

----

 

### **SELECTIVE CATALYTICREDUCTION UNITS (SCR) AT GIBSON GENERATING STATION**

In May 2004, SCRs and other pollution controlequipment became operational at Units 4 and 5 of **PSI’s** Gibson Station in accordance with compliance deadlinesunder the NOX SIP Call.  InJune and July 2004, Gibson Station temporarily shut down the equipment on theseunits due to a concern over an acid aerosol mist haze (plume) sometimesoccurring in areas near the plant. Portions of the plume from those units’ stacks appeared to break apartand descend to ground level at certain times under certain weatherconditions.  As a result, and, workingwith the City of Mt. Carmel, Illinois, Illinois EPA, Indiana Department ofEnvironmental Management (IDEM), EPA, and the State of Illinois, we developed aprotocol regarding the use of the SCRs while we explored alternatives toaddress this issue.  After the protocolwas finalized, the Illinois Attorney General brought an action in Wabash CountyCircuit Court against **PSI** seeking apreliminary injunction to enforce the protocol. In August 2004, the court granted that preliminary injunction.  **PSI** isappealing that decision to the Fifth District Appellate Court, but we cannotpredict the ultimate outcome of that appeal or of the underlying action by theIllinois Attorney General.

 

We will seek recovery of any related capitalas well as increased emission allowance expenditures through the regulatoryprocess.  We do not believe costs related to resolving this matterwill have a material impact on our financial position or results of operations.

 

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

In November 2004, a citizen of the Village ofMoscow, Ohio, the town adjacent to **CG&E’s**Zimmer Station, brought a purported class action in the United States DistrictCourt for the Southern District of Ohio seeking monetary damages and injunctiverelief against **CG&E** for alleged violations ofthe CAA, the Ohio SIP, Ohio laws against nuisance and common lawnuisance.  **CG&E** filed a motion to dismissthe lawsuit on primarily procedural grounds and we intend to defend againstthese claims vigorously.  At this time, we cannot predict whether theoutcome of this matter will have a material impact on our financial position orresult of operations.

 

### **MANUFACTURED GASPLANT (MGP) SITES**

Coal tar residues, related hydrocarbons, andvarious metals have been found in at least 22 sites that **PSI** or its predecessors previously ownedand sold in a series of transactions with Northern Indiana Public ServiceCompany (NIPSCO) and Indiana Gas Company, Inc. (IGC).  The 22 sites are in the process of beingstudied and will be remediated, if necessary. In 1998 NIPSCO, IGC, and **PSI**entered into Site Participation and Cost Sharing Agreements to allocateliability and responsibilities between them. The IDEM oversees investigation and cleanup of all of these sites.  Thus far, **PSI**has primary responsibility for investigating, monitoring and, if necessary,remediating nine of these sites.  InDecember 2003, **PSI** entered into avoluntary remediation plan with the state of Indiana, providing a formalframework for the investigation and cleanup of the sites.

 

In April 1998, **PSI** filed suit in Hendricks County in the state of Indianaagainst its general liability insurance carriers.  **PSI**sought a declaratory judgment to obligate its insurance carriers to (1) defendMGP claims against **PSI** andcompensate **PSI** for its costs ofinvestigating, preventing, mitigating, and remediating damage to property andpaying claims related to MGP sites; or (2) pay **PSI’s** cost of defense. The trial court issued a variety of rulings with respect to the claimsand defenses in the litigation.  **PSI**appealed certain adverse rulings to theIndiana Court of Appeals and the appellate court remanded the case to the trialcourt.  **PSI**settled its claims with all but one of the insurance carriers in January 2005 priorto commencement of the trial.  Withrespect to the lone insurance carrier, a jury returned a verdict against **PSI** in February 2005. **PSI** is considering whether to appealthis decision.  At the present time, **PSI**cannot predict the outcome of this litigation if it wereto appeal the decision.

 

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

 

**CG&E** and **ULH&P** have performed site assessmentson certain of their sites where we believe MGP activities have occurred at somepoint in the past and have found no imminent risk to the environment.  At the present time, 

 

23

----

 

**CG&E** and **ULH&P** cannot predict whetherinvestigation and/or remediation will be required in the future at any of thesesites.

 

### **ASBESTOS CLAIMLITIGATION**

**CG&E** and **PSI** have been named as defendants orco-defendants in lawsuits related to asbestos at their electric generatingstations.  Currently, there areapproximately 100 pending lawsuits.  Inthese lawsuits, plaintiffs claim to have been exposed to asbestos-containingproducts in the course of their work at the **CG&E**and **PSI** generating stations.  The plaintiffs further claim that as theproperty owner of the generating stations,**CG&E** and **PSI** shouldbe held liable for their injuries and illnesses based on an alleged duty towarn and protect them from any asbestos exposure.  A majority of the lawsuits to date have beenbrought against **PSI**.  The impact on **CG&E’s** and **PSI’s**financial position or results of operations of these cases to date has not beenmaterial.

 

Of these lawsuits, one case filed against **PSI** has been tried to verdict.  The jury returned a verdict against **PSI** in the amount of approximately $500,000on a negligence claim and a verdict for **PSI**on punitive damages.  **PSI** received an adverse ruling in itsinitial appeal of the negligence claim verdict, but the Indiana Supreme Courtaccepted the transfer of the case and heard oral argument in June 2004.  In addition, **PSI** has settled a number of other lawsuits for amounts, whichneither individually nor in the aggregate, are material to **PSI’s** financial position or results ofoperations.

 

At this time, **CG&E** and **PSI**arenot able to predict the ultimate outcome of these lawsuits or the impact on **CG&E’s** and **PSI’s** financial position or results of operations.

 

Wecurrently, and from time to time, are involved in lawsuits, claims, andcomplaints incidental to the conduct of our business.  In the opinion of management, no suchproceeding is likely to have a material adverse effect on us.

 

SeeNote 11 of the “Notes to Financial Statements” in “Item 8. Financial Statementsand Supplementary Data” for further information regarding our commitments andcontingencies.

 

24

----

 

**SUBMISSION OF MATTERS TO AVOTE OF SECURITY HOLDERS**

 

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

No matters were submitted to a vote ofsecurity holders of **Cinergy**, TheCincinnati Gas & Electric Company, or PSI****Energy, Inc. duringthe fourth quarter of 2004.

 

25

----

 

**MARKET FOR REGISTRANT’S COMMONEQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES**

 

## **PART II**

## **ITEM 5.  MARKET FOR REGISTRANT’S COMMON EQUITY,RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES**

**CinergyCorp.’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**    | ** ** |
|--------------------|------------|-----------|------------|------------|------------|
| **2004**           |       |      |       |       |       |
| **First Quarter**  | ** ** | **$**     | **41.10**  | ** ** | **$**      | **37.17** | ** ** |
| **Second Quarter** | ** ** | **41.04** | ** ** | **34.92**  | ** ** |
| **Third Quarter**  | ** ** | **40.75** | ** ** | **36.95**  | ** ** |
| **Fourth Quarter** | ** ** | **42.63** | ** ** | **38.08**  | ** ** |
|               |       |      |       |       |       |
| 2003               |       |      |       |       |       |
| First Quarter      |       | $         | 35.87      |       | $          | 29.77 |   |
| Second Quarter     |       | 38.75     |       | 33.25      |       |
| Third Quarter      |       | 36.99     |       | 33.14      |       |
| Fourth Quarter     |       | 38.86     |       | 35.19      |       |

 

**Cinergy Corp.** holds all outstanding common stock of The CincinnatiGas & Electric Company **(CG&E)** andPSI Energy, Inc. **(PSI)**, and **CG&E**holds all of the common stock of The Union Light, Heat and Power Company **(ULH&P)**. Therefore, no public trading market exists for the common stock of **CG&E**, **PSI**, and **ULH&P**.

 

As of January 31, 2005, **Cinergy Corp.**had 45,628 shareholders of record.

 

**Cinergy Corp.** declared dividends on its common stock of $.47 and$.46 per share for each quarter of 2004 and 2003, respectively.  The quarterly dividends paid to **Cinergy Corp.** by **CG&E** and **PSI**, and to **CG&E** by **ULH&P** for the past two years were as follows:

 

| **Registrant** | ** ** | **Quarter** | ** ** | **2004**           | ** ** | **2003** | ** ** |
|----------------|------------|-------------|------------|--------------------|------------|----------|------------|
| ** **     | ** ** | ** **  | ** ** | **(in thousands)** | ** ** |
| * *       | * *   | * *    | * *   | * *           | * *   | * * | * *   |
| **CG&E**   |       | First       |       | **$**              | **54,926** |     | $          | 47,082 |   |
|           |       | Second      |       | **55,612**         |       | 63,100   |       |
|           |       | Third       |       | **57,971**         |       | 56,473   |       |
|           |       | Fourth      |       | **67,249**         |       | 61,208   |       |
|           |       |        |       | ** **         |       |     |       |
| **PSI**        |       | First       |       | **$**              | **28,957** |     | $          | 30,503 |   |
|           |       | Second      |       | **28,913**         |       | 17,837   |       |
|           |       | Third       |       | **26,839**         |       | 24,984   |       |
|           |       | Fourth      |       | **17,879**         |       | 20,626   |       |
|           |       |        |       | ** **         |       |     |       |
| **ULH&P**  |       | First       |       | **$**              | **—** |     | $          | — |   |
|           |       | Second      |       | **—**         |       | 6,305    |       |
|           |       | Third       |       | **—**         |       | —   |       |
|           |       | Fourth      |       | **14,600**         |       | —   |       |

 

On January 14, 2005, the Board of Directorsof **Cinergy Corp.** declareddividends on its common stock of $.48 per share, payable February 15, 2005, toshareholders of record at the close of business on February 1, 2005.

 

See “Dividend Restrictions” in “Item 7.Management’s Discussion and Analysis of Financial Condition and Results ofOperations” for a brief description of the registrants’ common stock dividendrestrictions.

 

26

----

 

The number of shares (or units) provided inthe table below represent shares exchanged in connection with employee optionexercises and shares purchased by the plan trustee on behalf of the 401(k)Excess Plan.

 
| **Period**                    | ** ** | **(a) Total Number of Shares (or Units) Purchased** | ** ** | **(b) Average Price Paid per Share (or Unit)** | ** ** | **(c) Total Number of Shares (or Units) Purchased as Part of Publicly  Announced Plans or Programs** | ** ** | **(d) Maximum Number (or Approximate Dollar Value) of Shares (or Units)  that May Yet Be Purchased Under the Plans or Programs** | ** ** |
|-------------------------------|------------|-----------------------------------------------------|------------|------------------------------------------------|------------|------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------|------------|
|                          |       |                                                |       |                                           |       |                                                                                                 |       |                                                                                                                             |       |
| October 1 — October 31   |       | 4,580                                               |       | $                                              | 39.67      |                                                                                                 | N/A        |                                                                                                                             | N/A        |   |
| November 1 — November 30 |       | 2,288                                               |       | $                                              | 39.45      |                                                                                                 | N/A        |                                                                                                                             | N/A        |   |
| December 1 — December 31 |       | —                                              |       | $                                              | —     |                                                                                                 | N/A        |                                                                                                                             | N/A        |   |

 

27

----

 

**SELECTEDFINANCIAL DATA**

 

## **ITEM 6.  SELECTEDFINANCIAL DATA**

| ** **                                                                                       | ** ** | **2004**                                    | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|
| ** **                                                                                       | ** ** | **(in millions, except per share amounts)** | ** ** |
| * *                                                                                         | * *   | *** ***                                | * *   | * * | * *   | * * | * *   | * * | * *   | * * | * *   |
| **Cinergy(1)**                                                                                   |       | ** **                                  |       |     |       |     |       |     |       |     |       |
| **Results of Operations:**                                                                       |       | ** **                                  |       |     |       |     |       |     |       |     |       |
| Operating revenues                                                                               |       | **$**                                       | **4,688**  |     | $          | 4,416    |       | $        | 4,059      |     | $          | 3,950 |   | $ | 3,752 |   |
| Income before discontinued operations and cumulative effect of  changes in accounting principles |       | **401**                                     |       | 435      |       | 397      |       | 457      |       | 400      |       |
| Discontinued operations, net of tax(2)                                                           |       | **—**                                  |       | 9        |       | (25      | )          | (15      | )          | (1       | )          |
| Cumulative  effect of changes in accounting principles, net of tax(3)                            |       | **—**                                  |       | 26       |       | (11      | )          | —   |       | —   |       |
| Net income                                                                                       |       | **401**                                     |       | 470      |       | 361      |       | 442      |       | 399      |       |
|                                                                                             |       | ** **                                  |       |     |       |     |       |     |       |     |       |
| **Per Share Data:**                                                                              |       | ** **                                  |       |     |       |     |       |     |       |     |       |
| Earnings per common share (EPS) - basic:                                                         |       | ** **                                  |       |     |       |     |       |     |       |     |       |
| Income before discontinued operations and cumulative effect of  changes in accounting principles |       | **2.22**                                    |       | 2.46     |       | 2.37     |       | 2.87     |       | 2.52     |       |
| Discontinued operations, net of tax(2)                                                           |       | **—**                                  |       | 0.05     |       | (0.15    | )          | (0.09    | )          | (0.01    | )          |
| Cumulative effect of changes in accounting principles, net of tax(3)                             |       | **—**                                  |       | 0.15     |       | (0.06    | )          | —   |       | —   |       |
| Net income                                                                                       |       | **2.22**                                    |       | 2.66     |       | 2.16     |       | 2.78     |       | 2.51     |       |
| EPS - diluted:                                                                                   |       | ** **                                  |       |     |       |     |       |     |       |     |       |
| Income before discontinued operations and cumulative effect of  changes in accounting principles |       | **2.18**                                    |       | 2.43     |       | 2.34     |       | 2.84     |       | 2.51     |       |
| Discontinued operations, net of tax(2)                                                           |       | **—**                                  |       | 0.05     |       | (0.15    | )          | (0.09    | )          | (0.01    | )          |
| Cumulative effect of changes in accounting principles, net of tax(3)                             |       | **—**                                  |       | 0.15     |       | (0.06    | )          | —   |       | —   |       |
| Net income                                                                                       |       | **2.18**                                    |       | 2.63     |       | 2.13     |       | 2.75     |       | 2.50     |       |
| Cash dividends declared per share                                                                |       | **1.88**                                    |       | 1.84     |       | 1.80     |       | 1.80     |       | 1.80     |       |
|                                                                                             |       | ** **                                  |       |     |       |     |       |     |       |     |       |
| **Balance Sheet Data (at end of period):**                                                       |       | ** **                                  |       |     |       |     |       |     |       |     |       |
| Total assets from continuing operations                                                          |       | **14,982**                                  |       | 14,114   |       | 13,685   |       | 12,558   |       | 12,604   |       |
| Total assets from discontinued operations                                                        |       | **—**                                  |       | 5        |       | 147      |       | 234      |       | 197      |       |
|                                                                                             |       | **14,982**                                  |       | 14,119   |       | 13,832   |       | 12,792   |       | 12,801   |       |
| Long-term debt (including amounts due within one year)                                           |       | **4,448**                                   |       | 4,971    |       | 4,188    |       | 3,656    |       | 2,868    |       |
|                                                                                             |       | ** **                                  |       |     |       |     |       |     |       |     |       |
| The Cincinnati Gas & Electric Company **(CG&E)**                                         |       | ** **                                  |       |     |       |     |       |     |       |     |       |
| **Results of Operations:**                                                                       |       | ** **                                  |       |     |       |     |       |     |       |     |       |
| Operating revenues                                                                               |       | **$**                                       | **2,511**  |     | $          | 2,382    |       | $        | 2,137      |     | $          | 2,247 |   | $ | 2,101 |   |
| Income before cumulative effect of changes in accounting principles                              |       | **257**                                     |       | 300      |       | 264      |       | 327      |       | 267      |       |
| Cumulative effect of changes in accounting principles, net of tax(4)                             |       | **—**                                  |       | 31       |       | —   |       | —   |       | —   |       |
| Net income                                                                                       |       | **257**                                     |       | 331      |       | 264      |       | 327      |       | 267      |       |
|                                                                                             |       | ** **                                  |       |     |       |     |       |     |       |     |       |
| **Balance Sheet Data (at end of period):**                                                       |       | ** **                                  |       |     |       |     |       |     |       |     |       |
| Total assets                                                                                     |       | **6,232**                                   |       | 5,809    |       | 5,751    |       | 5,559    |       | 6,182    |       |
| Long-term debt (including amounts due within one year)                                           |       | **1,594**                                   |       | 1,569    |       | 1,690    |       | 1,205    |       | 1,206    |       |
|                                                                                             |       | ** **                                  |       |     |       |     |       |     |       |     |       |
| PSI Energy, Inc. **(PSI)**                                                                       |       | ** **                                  |       |     |       |     |       |     |       |     |       |
| **Results of Operations:**                                                                       |       | ** **                                  |       |     |       |     |       |     |       |     |       |
| Operating revenues                                                                               |       | **$**                                       | **1,754**  |     | $          | 1,603    |       | $        | 1,611      |     | $          | 1,574 |   | $ | 1,512 |   |
| Income before cumulative effect of a change in accounting principle                              |       | **165**                                     |       | 134      |       | 214      |       | 162      |       | 135      |       |
| Cumulative effect of a change in accounting principle, net of tax(5)                             |       | **—**                                  |       | (1       | )          | —   |       | —   |       | —   |       |
| Net income                                                                                       |       | **165**                                     |       | 133      |       | 214      |       | 162      |       | 135      |       |
|                                                                                             |       | ** **                                  |       |     |       |     |       |     |       |     |       |
| **Balance Sheet Data (at end of period):**                                                       |       | ** **                                  |       |     |       |     |       |     |       |     |       |
| Total assets                                                                                     |       | **5,450**                                   |       | 5,140    |       | 4,539    |       | 4,864    |       | 4,906    |       |
| Long-term debt (including amounts due within one year)                                           |       | **1,874**                                   |       | 1,720    |       | 1,372    |       | 1,348    |       | 1,113    |       |

 

----

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

(2)   See Note 14 of the “Notes to FinancialStatements” in “Item 8. Financial Statements and Supplementary Data” forfurther explanation.

(3)   In 2003, **Cinergy**recognized a gain/(loss) on cumulative effect of changes in accountingprinciples of $39 million (net of tax) and $(13) million (net of tax) as aresult of the reversal of accrued cost of removal for non-regulated generatingassets and the change in accounting of certain energy related contracts fromfair value to accrual.  In 2002, **Cinergy** recognized a cumulative effect of a change inaccounting principle of $(11) million (net of tax) as a result of an impairmentcharge for goodwill related to certain of our international assets.

(4)   In 2003, **CG&E**recognized a gain/(loss) on cumulative effect of changes in accountingprinciples of $39 million (net of tax) and $(8) million (net of tax) as aresult of the reversal of accrued cost of removal for non-regulated generatingassets and the change in accounting of certain energy related contracts fromfair value to accrual.

(5)   In 2003, **PSI** recognizeda loss on cumulative effect of a change in accounting principle of $(1) million(net of tax) as a result of a change in accounting of certain energy relatedcontracts from fair value to accrual.

 

28

----

**MD&A - EXECUTIVE SUMMARY**

 

## **ITEM 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS**

Inthis report, **Cinergy** (whichincludes **Cinergy Corp.** and all ofits regulated and non-regulated subsidiaries) is, at times, referred to in thefirst person as “we”, “our”, or “us”.

 

The following discussion should be read inconjunction with the accompanying financial statements and related notesincluded elsewhere in this report.  Wehave reclassified certain prior-year amounts in the financial statements of **Cinergy**, The Cincinnati Gas & Electric Company (**CG&E**), PSI Energy, Inc. (**PSI**),and The Union Light, Heat and Power Company (**ULH&P**)to conform to current presentation.  Thefollowing discussions of results are not necessarily indicative of the resultsto be expected in any future period.

 

### **EXECUTIVE SUMMARY**

In Management’s Discussion and Analysis ofFinancial Condition and Results of Operations (MD&A), we explain ourgeneral operating environment, as well as our results of operations, liquidity,capital resources, future expectations/trends, market risk sensitiveinstruments, and accounting matters. Specifically, we discuss the following:

 

•                 factorsaffecting current and future operations;

•                 why resultschanged from period to period;

•                 potentialsources of cash for future capital expenditures; and

•                 how these itemsaffect our overall financial condition.

 

#### **Financial Highlights**

Net income for **Cinergy** for the years ended December 31, 2004, and 2003 was asfollows:

 

| ** **   | ** **   | **Cinergy**       | ** **   |
|--------------|--------------|-------------------|--------------|
| ** **   | ** **   | **2004**          | ** **   | **2003** | ** ** | **Change** | ** ** | **% Change** | ** ** |
| *** *** | *** *** | **(in millions)** | *** *** |
| * *     | * *     | * *          | * *     | * * | * * | * * | * * | * * | * * |
| Net income   |         | **$**             | **401**      |   | $ | 470 |   | $ | (69 | ) | (15 | )% |
|              |              |                   |              |  |  |  |  |  |  |  |  |  |

 

The decrease in net income wasprimarily due to the following factors:

 

•                   Higher operating costs due, in part, toincreases in costs for employee labor and benefits, production maintenance, andthe implementation of a continuous improvement initiative;

•                   Lower margins from the sale of electricity inthe Commercial Business Unit (Commercial) primarily due to higher fuel andemission allowance costs;

•                   Impairment and disposal charges on certaininvestments primarily in the Power Technology and Infrastructure Services BusinessUnit (Power Technology and Infrastructure); and

•                   Net gains recognized in 2003 resulting fromthe implementation of certain accounting changes and the disposal ofdiscontinued operations.

 

These decreases were partially offset by:

 

•                   A higher price received per megawatt hour(MWh) resulting from the Indiana Utility Regulatory Commission’s (IURC)approval of **PSI’s** base retail electric rateincrease in May 2004;

•                   Growth in non-weather related demand forelectricity;

•                   An increase in gross margins on powermarketing, trading, and origination contracts; and

•                   A gain related to a Power Technology andInfrastructure investment.

 

For further information, see “2004 Results ofOperations — **Cinergy**”.

 

29

----

 

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

##### ***EnvironmentalChallenges***

**Cinergy** faces manyuncertainties with regard to future environmental legislation and the impact ofthis legislation on our generating assets and our decisions to construct newassets.  In two separate rulemakings, theEnvironmental Protection Agency (EPA) has proposed significant reductions insulfur dioxide (SO2), nitrogen oxides (NOX) and mercuryemissions from power plants, neither of which have been finalized.  Additionally, multi-emissions reductionslegislation could be passed in 2005 that may take the place of these proposedrulemakings.  In 2004, **Cinergy’s** utility operating companies began an environmentalconstruction program to reduce overall plant emissions that is estimated tocost approximately $1.8 billion over the next five years.  We believe that our construction programoptimally balances these uncertainties and provides a level of emissionreduction that will be required and/or economical to **Cinergy**under a variety of possible regulatory outcomes.  See “Environmental Issues” in “Liquidity andCapital Resources” for further information.

 

##### ***RegulatoryChallenges***

Ohio has enacted electric generationderegulation legislation.  **CG&E’s**residential customers are in a market developmentperiod through 2005, during which prices are fixed, while non-residentialcustomers are under a recently approved rate stabilization plan (RSP) that runsthrough December 31, 2008.  Residentialcustomers will be under the RSP beginning in 2006, also ending in 2008.  At this time, it is difficult to predict howthe regulatory environment will look after the rate stabilization periodends.  To date, deregulation in Ohio hasnot progressed as originally anticipated and the Ohio General Assembly mayconsider re-regulation laws as early as 2005. However, the possibility of deregulation or a hybrid of bothderegulation and regulation still exists. These regulatory uncertainties are particularly challenging as weattempt to address short-term and long-term generation capacity needs as wellas environmental requirements previously discussed.  See “Regulatory Outlook and Significant RateDevelopments” in “Future Expectations/Trends” for further discussion of theserisks and uncertainties.

 

##### ***MidwestIndependent Transmission System Operator, Inc. (Midwest ISO) Energy Markets***

The projected implementation date is April 1,2005 for the Midwest ISO to begin operating under the Energy Markets Tariff(sometimes referred to as a Locational Marginal Pricing (LMP) market or MISODay 2 market).  The implementation of anLMP market will introduce new scheduling requirements, new products for mitigatingtransmission congestion risks, and new pricing points for the purchase and saleof power.  **Cinergy**is in the process of preparing for the implementation and the Midwest ISO iscurrently conducting market trials and testing of the Energy Markets.  This is a significant undertaking by theMidwest ISO and its stakeholders and testing is not yet complete.  See “Midwest ISO Energy Markets” in “FutureExpectations/Trends” for further details regarding these new markets.

 

##### ***RisingCoal and Emission Allowance Prices***

The prices of coal and SO2 allowanceshave increased dramatically in 2004, as compared to 2003.  Contributing to the increases in coal and SO2prices have been (1) increases in demand for electricity, (2) environmentalregulation, and (3) decreases in the number of suppliers of coal from prioryears.  Since rates have been frozen fornon-residential customers through 2004 and residential customers through 2005,pursuant to Ohio deregulation, these increases in coal and emission allowanceprices could not be recovered through rates. The impact of these priceincreases on earnings is discussed in more detail in “Results of Operations”.  See “*Generation Portfolio Risks*”**in “Market Risk Sensitive Instruments” for information onhow we plan to mitigate these risks going forward.

 

30

----

 

**MD&A- 2004 RESULTS OF OPERATIONS - CINERGY**

 

### **2004 RESULTS OFOPERATIONS - CINERGY**

#### **Gross Margins**

Given the dynamics of our business, whichinclude regulatory revenues with directly offsetting expenses and commodity tradingoperations for which results are primarily reported on a net basis, we haveconcluded that a discussion of our results on a gross margin basis is mostappropriate.  Electric gross marginsrepresent electric operating revenues less the related direct costs of fuel,emission allowances, and purchased power. Gas gross margins represent gas operating revenues less the relateddirect cost of gas purchased.  Withineach of these areas, we will discuss the key drivers of our results.  Gross margins for **Cinergy**forthe Regulated Business Unit (Regulated) and Commercial for the years endedDecember 31, 2004, and 2003 were as follows:

 
| ** **               | ** ** | **Cinergy**       | ** ** |
|--------------------------|------------|-------------------|------------|
| ** **               | ** ** | **Regulated**     | ** ** | **Commercial** | ** ** |
| ** **               | ** ** | **2004**          | ** ** | **2003** | ** ** | **Change** | ** ** | **%****Change** | ** ** | **2004** | ** ** | **2003** | ** ** | **Change** | ** ** | **%****Change** | ** ** |
| ** **               | ** ** | **(in millions)** | ** ** |
| * *                 | * *   | * *          | * *   | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * |
| Electric gross margin(1) | ** ** | **$**             | **1,656**  |   | $ | 1,469 |   | $ | 187 |   | 13 | % | **$** | **637** |   | $ | 714 |   | $ | (77 | ) | (11 | )% |
| Gas gross margin(2)      | ** ** | **263**           |       | 244 |   | 19 |   | 8 | ** ** | **92** |   | 88 |   | 4 |   | 5 |   |
| Total gross margin       | ** ** | **$**             | **1,919**  |   | $ | 1,713 |   | $ | 206 |   | 12 | ** ** | **$** | **729** |   | $ | 802 |   | $ | (73 | ) | (9 | ) |
|                     |       |              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |

----

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

(2)                                  Gas gross margin is calculated as *Gas operating revenues* less *Gaspurchased* expense from the Statements of**Income.

 

Cooling degree days and heating degree daysare metrics commonly used in the utility industry as a measure of the impactweather has on results of operations. Cooling degree days and heating degree days in **Cinergy’s** service territory for the yearsended December 31, 2004, and 2003 were as follows:

 

| ** **             | ** ** | **Cinergy** | ** ** |
|------------------------|------------|-------------|------------|
| ** **             | ** ** | **2004**    | ** ** | **2003** | ** ** | **Change** | ** ** | **% Change** | ** ** |
|                   |       |        |       |   |   |   |   |   |   |
| Cooling degree days(1) |       | **882**     |       | 831 |   | 51 |   | 6 | % |
| Heating degree days(2) |       | **5,006**   |       | 5,316 |   | (310 | ) | (6 | ) |
|                   |       |        |       |   |   |   |   |   |   |

----

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

(2)           Heating degree days are thedifferences between the average temperature for each day and 65 degrees,assuming the average temperature is less than 65 degrees.

 

The change in cooling degree days and heatingdegree days did not have a material effect on **Cinergy’s**gross margins for the year ended December 31, 2004, as compared to 2003.

 

##### ***RegulatedGross Margins***

The 13 percent increase in Regulated’selectric gross margins was primarily due to the following factors:

 

•                   An approximate $80 million increase resultingfrom a higher price received per MWh due to **PSI’s**base retail electric rate increase in May 2004; and

•                   An approximate $32 million increase due togrowth in non-weather related demand.

 

Theeight percent increase in Regulated’s gas gross margins was primarily due to anapproximate $16 million increase in tariff adjustments mainly associated withthe gas main replacement program. Partially offsetting this increase was an approximate $7 milliondecrease reflecting a decline in non-weather related demand.

 

31

----

 

##### ***Commercial***

*Gross Margins*

The 11 percent decrease in Commercial’selectric gross margins was primarily due to the following factors:

 

•                   An approximate $51 million increase in **CG&E’s** average price of fuel without a matching increasein the price of power charged to customers (the majority of which were underfixed price contracts); and

•                   An approximate $62 million increase inemission allowance costs, primarily due to increases in SO2 emission allowance market prices, without a matchingincrease in the price of power charged to customers.  The number of SO2 emission allowances usedalso increased in 2004.

 

Partially offsetting these decreases were:

 

•                   An approximate $24 million increase in grossmargins on power marketing, trading, and origination contracts attributable to highermargins on physical and financial trading, primarily related to regionalspreads between the mideast and midwest markets; and

•                   An approximate $15 million increase due togrowth in non-weather related demand.

 

Commercial’s gas gross margins under generallyaccepted accounting principles (GAAP) and Commercial’s adjusted gas grossmargins were relatively flat in 2004, as compared to 2003, although volatilityduring 2004 was significant due to timing differences in revenue recognitionbetween physical storage activities and the associated derivative contractsthat hedge the physical storage.  Weevaluate the results of our gas marketing and trading business on an economicbasis, which we term “adjusted gas gross margins”.

 

Our gas marketing and trading businessregularly hedges its price exposure of natural gas held in storage by sellingderivative contracts for winter month delivery. The majority of the gas held in storage is designated as being hedgedunder Statement of Financial Accounting Standards No. 133’s, *Accounting for Derivative Instruments and HedgingActivities* (Statement 133), fair value hedge accounting model, whichallows the gas to be accounted for at its fair value (based on spotprices).  Under GAAP, the derivativecontracts hedging the gas are accounted for at fair value (based on forwardwinter prices).  Conversely, theagreements with pipelines to store this natural gas until the winter periodsare not derivatives and are not adjusted for changes in fair value (seefootnote 1 in the table below).

 

For a more complete understanding of our gasmarketing and trading results, we have prepared the following table, whichreconciles the gas margins under GAAP, the impact of adjusting these marginsfor the fair value of pipeline agreements and certain gas held in storage, andthe resulting adjusted gas gross margins:

 

| ** **                                          | ** **   | **2004**          | ** **   | **2003** | ** ** | **Change** | ** ** |
|-----------------------------------------------------|--------------|-------------------|--------------|----------|------------|------------|------------|
| *** ***                                        | *** *** | **(in millions)** | *** *** |
| * *                                            | * *     | * *          | * *     | * * | * *   | * *   | * *   |
| Gas margins, as reported (GAAP)                     |         | **$**             | **92**       |     | $          | 88         |       | $ | 4 |   |
|                                                |         | ** **        |         |     |       |       |       |
| Fair value adjustments not recognized under GAAP(1) |         | **(7**            | **)**        | (5       | )          | (2         | )          |
|                                                |         | ** **        |         |     |       |       |       |
| Adjusted gas gross margins                          |         | **$**             | **85**       |     | $          | 83         |       | $ | 2 |   |

----

(1)                                          Relates to fair value of storageagreements.  The value of a storageagreement is the ability to store and optimize gas between periods of lowerprices (typically summer) and periods of higher prices (typically winter).  A large component of the fair value istherefore the differences between winter prices and spot prices.  As this spread gets wider, the value of astorage agreement increases.

 

32

----

 

*Other Operating Revenuesand Costs of Fuel Resold*

The 41 percent increase in *Other Operating Revenues* was primarily due to the followingfactors:

 

•                   An approximate $67 million increase inCommercial’s revenues from coal origination resulting from increases in coalprices and the number of coal origination contracts.  Coal origination includes contractstructuring and marketing of physical coal; and

•                   An approximate $28 million increase inCommercial’s revenues from the sale of synthetic fuel.

 

*Costs of fuel resold* includesCommercial’s costs of coal origination activities and the production ofsynthetic fuel.  These costs haveincreased in 2004, which is consistent with the increases in the associatedrevenues as previously discussed.

 

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

 

#### **Other Operating Expenses**

| ** **                    | ** **   | **Cinergy**       | ** **   |
|-------------------------------|--------------|-------------------|--------------|
| ** **                    | ** **   | **2004**          | ** **   | **2003** | ** ** | **Change** | ** ** | **%****Change** | ** ** |
| *** ***                  | *** *** | **(in millions)** | *** *** |
| * *                      | * *     | * *          | * *     | * * | * * | * * | * * | * * | * * |
| Operation and maintenance     | ** **   | **$**             | **1,282**    |   | $ | 1,119 |   | $ | 163 |   | 15 | % |
| Depreciation                  |         | **460**           |         | 399 |   | 61 |   | 15 |   |
| Taxes other than income taxes |         | **254**           |         | 250 |   | 4 |   | 2 |   |
| Total                         |         | **$**             | **1,996**    |   | $ | 1,768 |   | $ | 228 |   | 13 |   |

 

##### ***Operationand Maintenance***

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

 

•                   Costs primarily associated with employeelabor and benefits increased approximately $50 million.  Labor and benefit costs increased approximatelysix percent;

•                   Maintenance expenses, primarily productionrelated, were higher by approximately $26 million;

•                   An approximate $20 million of costs incurredin 2004 related to a continuous improvement initiative;

•                   Higher transmission costs of approximately$15 million.  This increase was due, inpart, to refunds received in 2003, which offset a portion of the costs for thatyear; and

•                   An approximate $14 million increase inoperation expenses for non-regulated service subsidiaries that startedoperations, or became fully consolidated, after the second quarter of 2003.

 

These increases were partially offset by:

 

•                   The recognition of approximately $14 millionof costs associated with voluntary early retirement programs and employeeseverance programs in 2003; and

•                   An approximate $12 million for costs incurredin 2003 associated with the bankruptcy of Enron Corp.

 

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

The 15 percent increase in *Depreciation* expense was primarily due to the followingfactors:

 

•                   An approximate $36 million increase due tothe addition of depreciable plant, primarily for pollution control equipment,and the accelerated gas main replacement program; and

•                   An approximate $27 million increase resultingfrom a) higher depreciation rates, as a result of changes in useful lives ofproduction assets and an increased rate for cost of removal and b) recovery ofdeferred depreciation costs, both of which were approved in **PSI’s** latest retail rate case.

 

33

----

 

These increases were partially offset by approximately$15 million due to longer estimated useful lives of **CG&E’s**generation assets resulting from a depreciation study completed during thethird quarter of 2003.

 

#### **Equity in Earnings of Unconsolidated Subsidiaries**

The increase in *Equity inEarnings of Unconsolidated Subsidiaries* was primarily due to a gainof approximately $21 million relating to the sale of most of the assets by acompany in which Power Technology and Infrastructure holds an investment.  See Note 15(b) of the “Notes to Financial Statements”in “Item 8. Financial Statements and Supplementary Data” for furtherinformation.

 

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

The decrease in *MiscellaneousIncome (Expense) — Net* was primarily due to the recognition ofapproximately $56 million in impairment and disposal charges in 2004 primarilyassociated with certain investments in the Power Technology and Infrastructureportfolio.  The values of theseinvestments reflect our estimates and judgments about the future performance ofthese investments, for which actual results may differ.  A substantial portion of these charges relateto a company, in which **Cinergy**holds anon-controlling interest that sold its major assets in 2004.  This company is involved in the developmentand sale of outage management software.

 

This decrease was partially offset byinterest income of approximately $9 million on the notes receivable of twosubsidiaries consolidated in the third quarter of 2003.

 

#### **Interest Expense**

The two percent increase in *Interest Expense* was primarily due to the following factors:

 

•                   An approximate $12 million increase due to **Cinergy’s** recognition of a note payable to a trust; and

•                   An approximate $9 million increase related toadditional debt recorded in accordance with the consolidation of two new entities.

 

The note payable and additional debt wereboth recorded in July 2003 resulting from the adoption of Financial AccountingStandards Board Interpretation No. 46, *Consolidation of VariableInterest Entities* (Interpretation 46).

 

These increases were partially offset by:

 

•                   A decline in average long-term debt; and

•                   Charges recorded during 2003 associated with **CG&E’s** refinancing of certain debt.

 

#### **Preferred Dividend Requirement of Subsidiary Trust**

The decrease in *Preferred Dividend Requirement of Subsidiary Trust* was a resultof the implementation of Interpretation 46. Effective July 1, 2003, the preferred trust securities and the relateddividends are no longer reported in **Cinergy’s**financial statements.  However, interestexpense is still being incurred on a note payable to this trust as previouslydiscussed.  See Note 1(q)(*i*) of the “Notes to Financial Statements”in “Item 8. Financial Statements and Supplementary Data” for further details.

 

#### **Income Taxes**

**Cinergy’s**2004 effectivetax rate was approximately 21 percent, a decrease of four percent from 2003,resulting from a greater amount of tax credits associated with the productionand sale of synthetic fuel and the successful resolution of certain taxmatters.

 

34

----

 

#### **Discontinued Operations**

During 2003, **Cinergy** completed the disposal of its gas distributionoperation in South Africa, sold its remaining wind assets in the United States,and substantially sold or liquidated the assets of its energy trading operationin the Czech Republic.  Pursuant toStatement of Financial Accounting Standards No. 144, *Accounting for the Impairment or Disposal of Long-lived Assets*(Statement 144), these investments have been classified as discontinuedoperations in our financial statements. See Note 14 of the “Notes to Financial Statements” in “Item 8. FinancialStatements and Supplementary Data” for additional information.

 

#### **Cumulative Effect of Changes in AccountingPrinciples**

In 2003, **Cinergy**recognized a *Cumulative effect ofchanges in accounting principles, net of tax* gain of approximately$26 million.  The cumulative effect ofchanges in accounting principles was a result of the adoption of Statement ofFinancial Accounting Standards No. 143, *Accounting for AssetRetirement Obligations* (Statement 143) and the rescission ofEmerging Issues Task Force (EITF) Issue 98-10, *Accountingfor Contracts Involved in Energy Trading and Risk Management Activities*(EITF 98-10).  See Note 1(q)(*iv*) of the “Notes to Financial Statements” in “Item 8.Financial Statements and Supplementary Data” for further information.

 

35

----

 

**MD&A - 2004 RESULTS OF OPERATIONS – CG&E**

 

### **2004 RESULTS OFOPERATIONS** - CG&E

#### **Summary of Results**

Net income for **CG&E** for the years ended December 31, 2004, and 2003 wereas follows:

 

| ** **   | ** **   | **CG&E**and subsidiaries | ** **   |
|--------------|--------------|------------------------------|--------------|
| ** **   | ** **   | **2004**                     | ** **   | **2003** | ** ** | **Change** | ** ** | **% Change** | ** ** |
| *** *** | *** *** | **(in millions)**            | *** *** |
| * *     | * *     | * *                     | * *     | * * | * * | * * | * * | * * | * * |
| Net income   |         | **$**                        | **257**      |   | $ | 331 |   | $ | (74 | ) | (22 | )% |
|              |              |                              |              |  |  |  |  |  |  |  |  |  |

 

The decrease in net income was primarily dueto the following factors:

 

•                   Higher operating costs due, in part, toincreases in costs for employee labor and benefits;

•                   Lower margins from the sale of electricityprimarily due to higher fuel and emission allowance costs; and

•                   A net gain recognized in 2003 resulting fromthe implementation of certain accounting changes.

 

These decreases were partially offset by:

 

•                   Growth in non-weather related demand forelectricity; and

•                   An increase in gross margins on powermarketing, trading, and origination contracts.

 

#### **Gross Margins**

Gross margins for **CG&E**for the years ended December 31, 2004, and 2003 were as follows:

 

| ** **               | ** **   | **CG&E**and subsidiaries | ** **   |
|--------------------------|--------------|------------------------------|--------------|
| ** **               | ** **   | **2004**                     | ** **   | **2003** | ** ** | **Change** | ** ** | **%****Change** | ** ** |
| *** ***             | *** *** | **(in millions)**            | *** *** |
| * *                 | * *     | * *                     | * *     | * * | * * | * * | * * | * * | * * |
| Electric gross margin(1) |         | **$**                        | **1,168**    |   | $ | 1,195 |   | $ | (27 | ) | (2 | )% |
| Gas gross margin(2)      |         | **263**                      |         | 245 |   | 18 |   | 7 |   |
|                          |              |                              |              |  |  |  |  |  |  |  |  |  |

----

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

(2)                                  Gas gross margin is calculated as *Gas operating revenues* less *Gaspurchased* expense from the Statements of Income.

 

Cooling degree days and heating degree daysin **CG&E’s** service territoryfor the years ended December 31, 2004, and 2003 were as follows:

 

| ** **             | ** ** | **CG&E**and subsidiaries | ** ** |
|------------------------|------------|------------------------------|------------|
| ** **             | ** ** | **2004**                     | ** ** | **2003** | ** ** | **Change** | ** ** | **% Change** | ** ** |
|                   |       |                         |       |   |   |   |   |   |   |
| Cooling degree days(1) |       | **876**                      |       | 812 |   | 64 |   | 8 | % |
| Heating degree days(2) |       | **4,881**                    |       | 5,119 |   | (238 | ) | (5 | ) |

----

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

(2)                                  Heating degree days are the differencesbetween the average temperature for each day and 65 degrees, assuming theaverage temperature is less than 65 degrees.

 

The change in cooling degree days and heatingdegree days did not have a material effect on **CG&E’s**gross margins for the period.

 

36

----

 

##### ***ElectricGross Margins***

The two percent decrease in **CG&E’s** electric gross margins was primarily due to thefollowing factors:

 

•                   An approximate $51 million increase in theaverage price of fuel without a matching increase in the price of power chargedto customers (the majority of which were under fixed price contracts); and

•                   An approximate $32 million increase inemission allowance costs, primarily due to an increase in SO2 emission allowance market prices, without a matchingincrease in the price of power charged to customers.

 

These decreases were partially offset by:

 

•                   An approximate $31 million increase inmargins from retail customers due to growth in non-weather related demand; and

•                   An approximate $29 million increase in grossmargins on power marketing, trading, and origination contracts attributable tohigher margins on physical and financial trading, primarily related to regionalspreads between the mideast and midwest markets.

 

##### ***GasGross Margins***

Theseven percent increase in **CG&E’s** gasgross margins was primarily due to an approximate $16 million increase intariff adjustments mainly associated with the gas main replacement program.  Partially offsetting this increase was anapproximate $7 million decrease reflecting a decline in non-weather relateddemand.

 

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

The increase in *OtherOperating Revenues* was due to an approximate $67 million increase inrevenues from coal origination resulting from increases in coal prices and thenumber of coal origination contracts.

 

*Costs of fuel resold* represents thecosts of coal origination activities. These costs have increased in 2004, which is consistent with theincrease in the associated revenues as previously discussed.

 

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

 

#### **Other Operating Expenses**

| ** **                    | ** **   | **CG&E**and subsidiaries | ** **   |
|-------------------------------|--------------|------------------------------|--------------|
| ** **                    | ** **   | **2004**                     | ** **   | **2003** | ** ** | **Change** | ** ** | **% Change** | ** ** |
| *** ***                  | *** *** | **(in millions)**            | *** *** |
| * *                      | * *     | * *                     | * *     | * * | * * | * * | * * | * * | * * |
| Operation and maintenance     |         | **$**                        | **594**      |   | $ | 500 |   | $ | 94 |   | 19 | % |
| Depreciation                  |         | **179**                      |         | 187 |   | (8 | ) | (4 | ) |
| Taxes other than income taxes |         | **198**                      |         | 200 |   | (2 | ) | (1 | ) |
| Total                         |         | **$**                        | **971**      |   | $ | 887 |   | $ | 84 |   | 9 |   |

 

##### ***Operationand Maintenance***

The 19 percent increase in *Operation and maintenance* expense was primarily due to thefollowing factors:

 

•                   Costs primarily associated with employeelabor and benefits increased approximately $28 million;

•                   Maintenance expenses, primarily productionand distribution related, were higher by approximately $21 million;

•                   An approximate $9 million of costs incurredin 2004 related to a continuous improvement initiative; and

 

37

----

 

•                   Higher transmission costs of approximately $9million.  This increase was due, in part,to refunds received in 2003, which offset a portion of the costs for that year.

 

Partially offsetting these increases was therecognition of approximately $4 million of costs associated with voluntaryearly retirement programs and employee severance programs in 2003.

 

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

The four percent decrease in *Depreciation* expense was primarily due to longer estimateduseful lives of **CG&E’s** generation assetsresulting from a depreciation study completed during the third quarter of 2003,which resulted in a decrease of approximately $15 million.  This decrease was partially offset by anapproximate $8 million increase due to the addition of depreciable plantprimarily for pollution control equipment and the accelerated gas mainreplacement program.

 

#### **Miscellaneous Income - Net**

The 47 percent decrease in *Miscellaneous Income — Net* was primarily due to thefollowing factors:

 

•                   A final reconciliation recorded in 2003between **CG&E** and **PSI**due to a previous demutualization of a medical insurance carrier used by bothcompanies; and

•                   A decline in the allowance for equity fundsused during construction resulting from certain assets being placed intoservice and a decrease in the equity rate applied.

 

#### **Interest Expense**

The 21 percent decrease in *Interest Expense* was primarily due to the following factors:

 

•                   A decline in average long-term debt; and

•                   Charges recorded during 2003 associated withthe refinancing of certain debt.

 

#### **Cumulative Effect of Changes in AccountingPrinciples**

In 2003, **CG&E**recognized a *Cumulative effect ofchanges in accounting principles, net of tax* gain of approximately$31 million as a result of the adoption of Statement 143 and the rescission ofEITF 98-10.  See Note 1(q)(*iv*) of the “Notes to Financial Statements”in “Item 8. Financial Statements and Supplementary Data” for furtherinformation.

 

38

----

 

**MD&A- 2004 RESULTS OF OPERATIONS – PSI**

 

### **2004 RESULTS OFOPERATIONS - PSI**

#### **Summary of Results**

Net income for **PSI** for the years ended December 31, 2004, and 2003 were asfollows:

 

| ** **   | ** **   | **PSI**           | ** **   |
|--------------|--------------|-------------------|--------------|
| ** **   | ** **   | **2004**          | ** **   | **2003** | ** ** | **Change** | ** ** | **% Change** | ** ** |
| *** *** | *** *** | **(in millions)** | *** *** |
| * *     | * *     | * *          | * *     | * * | * * | * * | * * | * * | * * |
| Net income   |         | **$**             | **165**      |   | $ | 133 |   | $ | 32 |   | 24 | % |
|              |              |                   |              |  |  |  |  |  |  |  |  |  |

 

The increase in net income was primarily dueto the following factors:

 

•                   The impact of the **PSI**base retail electric rate increase in May 2004; and

•                   Growth in non-weather related demand.

 

These increases were partially offset byhigher operating costs due, in part, to increases in costs for employee laborand benefits.

 

#### **Electric Gross Margins**

Gross margins for **PSI**forthe years ended December 31, 2004, and 2003 were as follows:

 

| ** **               | ** **   | **PSI**           | ** **   |
|--------------------------|--------------|-------------------|--------------|
| ** **               | ** **   | **2004**          | ** **   | **2003** | ** ** | **Change** | ** ** | **%****Change** | ** ** |
| *** ***             | *** *** | **(in millions)** | *** *** |
| * *                 | * *     | * *          | * *     | * * | * * | * * | * * | * * | * * |
| Electric gross margin(1) |         | **$**             | **1,103**    |   | $ | 973 |   | $ | 130 |   | 13 | % |
|                          |              |                   |              |  |  |  |  |  |  |  |  |  |

----

(1)           Electric grossmargin is calculated as *Electric operatingrevenues* less *Fuel, emission allowances,and purchased power* expense from the Statements of Income.

 

Cooling degree days and heating degree daysin **PSI’s** service territory for theyears ended December 31, 2004, and 2003 were as follows:

 

| ** **             | ** ** | **PSI**   | ** ** |
|------------------------|------------|-----------|------------|
| ** **             | ** ** | **2004**  | ** ** | **2003** | ** ** | **Change** | ** ** | **% Change** | ** ** |
|                   |       |      |       |   |   |   |   |   |   |
| Cooling degree days(1) |       | **887**   |       | 850 |   | 37 |   | 4 | % |
| Heating degree days(2) |       | **5,128** |       | 5,512 |   | (384 | ) | (7 | ) |

----

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

(2)                                  Heating degreedays are the differences between the average temperature for each day and 65degrees, assuming the average temperature is less than 65 degrees.

 

39

----

 

The change in degree days did not have amaterial effect on electric gross margins for the period.  The 13 percent increase in **PSI’s** electric gross margins was primarily due to thefollowing factors:

 

•                   An approximate $80 million increase resultingfrom a higher price received per MWh due to **PSI’s**base retail electric rate increase in May 2004; and

•                   An approximate $16 million increase due togrowth in non-weather related demand.

 

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

 

#### **Other Operating Expenses**

| ** **                    | ** **   | **PSI**           | ** **   |
|-------------------------------|--------------|-------------------|--------------|
| ** **                    | ** **   | **2004**          | ** **   | **2003** | ** ** | **Change** | ** ** | **% Change** | ** ** |
| *** ***                  | *** *** | **(in millions)** | *** *** |
| * *                      | * *     | * *          | * *     | * * | * * | * * | * * | * * | * * |
| Operation and maintenance     |         | **$**             | **475**      |   | $ | 449 |   | $ | 26 |   | 6 | % |
| Depreciation                  |         | **222**           |         | 164 |   | 58 |   | 35 |   |
| Taxes other than income taxes |         | **47**            |         | 46 |   | 1 |   | 2 |   |
| Total                         |         | **$**             | **744**      |   | $ | 659 |   | $ | 85 |   | 13 |   |

 

##### ***Operationand Maintenance***

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

 

•                   Costs primarily associated with employeelabor and benefits increased approximately $14 million;

•                   An approximate $8 million of costs incurredin 2004 related to a continuous improvement initiative;

•                   An increase in production related maintenanceexpense of approximately $7 million; and

•                   Higher transmission costs of approximately $6million.  This increase was due, in part,to refunds received in 2003, which offset a portion of the costs for that year.

 

Partially offsetting these increases was therecognition of approximately $4 million of costs associated with voluntaryearly retirement programs and employee severance programs in 2003.

 

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

The 35 percent increase in *Depreciation* expense was primarily due to the followingfactors:

 

•                   An approximate $27 million increase due tothe addition of depreciable plant primarily for pollution control equipment;and

•                   An approximate $27 million increase resultingfrom a) higher depreciation rates, as a result of changes in useful lives ofproduction assets and an increased rate for cost of removal and b) recovery ofdeferred depreciation costs, both of which were approved in **PSI’s** latest retail rate case.

 

#### **Interest Expense**

The seven percent increase in *Interest Expense* was primarily due to an increase in theeffective interest rate on short-term debt and an increase in the averageamount of short-term debt outstanding.

 

 

40

----

 

**MD&A - 2004 RESULTS OF OPERATIONS – ULH&P**

 

### **2004 RESULTS OFOPERATIONS** - ULH&P

The Results of Operations discussion for **ULH&P** is presented only for the yearended December 31, 2004, in accordance with General Instruction I(2)(a).

 

Electric and gas gross margins and net incomefor **ULH&P** for the years endedDecember 31, 2004 and 2003, were as follows:

 

| ** **               | ** **   | **ULH&P**     | ** **   |
|--------------------------|--------------|-------------------|--------------|
| ** **               | ** **   | **2004**          | ** **   | **2003** | ** ** | **Change** | ** ** | **% Change** | ** ** |
| *** ***             | *** *** | **(in millions)** | *** *** |
| * *                 | * *     | * *          | * *     | * * | * * | * * | * * | * * | * * |
| Electric gross margin(1) |         | **$**             | **68**       |   | $ | 68 |   | $ | — |   | — | % |
| Gas gross margin(2)      |         | **45**            |         | 40 |   | 5 |   | 13 |   |
| Net income               |         | **19**            |         | 19 |   | — |   | — |   |
|                          |              |                   |              |  |  |  |  |  |  |  |  |  |

----

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

(2)                                  Gas grossmargin is calculated as *Gas operating revenues*less *Gas purchased* expense from theStatements of Income.

 

Electric gross margins for **ULH&P** remained flat as growth in non-weather relateddemand was offset by the cost of increased electricity purchases to meet thatdemand.  The 13 percent increase in gasgross margins was due, in part, to an approximate $3 million increase in ratetariff adjustments associated with the gas main replacement program and thedemand-side management program, which encourages efficient customer gas usage.

 

Net income remained flat as an approximate $2million increase in operating costs, primarily related to increasedtransmission and distribution expenses, was partially offset by an approximate$1 million reduction in property taxes during 2004.

 

41

----

 

**MD&A- 2003 RESULTS OF OPERATIONS - CINERGY**

 

### **2003 RESULTS OFOPERATIONS - CINERGY**

#### **Summary of Results**

Net income for **Cinergy** for the years ended December 31, 2003, and 2002 was asfollows:

 

| ** **   | ** **   | **Cinergy**       | ** **   |
|--------------|--------------|-------------------|--------------|
| ** **   | ** **   | **2003**          | ** **   | **2002** | ** ** | **Change** | ** ** | **% Change** | ** ** |
| *** *** | *** *** | **(in millions)** | *** *** |
| * *     | * *     | * *          | * *     | * * | * * | * * | * * | * * | * * |
| Net income   |         | $                 | 470          |   | $ | 361 |   | $ | 109 |   | 30 | % |
|              |              |                   |              |  |  |  |  |  |  |  |  |  |

 

**Cinergy’s** increase in net income was primarily due to the followingfactors:

 

•                   Increases in gas gross margins as a result ofan increase in base rates for Ohio customers, colder weather and increasedvolatility in gas prices in the first quarter of 2003, as compared to 2002, andan increase in natural gas sold from storage;

•                   Lower operating costs primarily resultingfrom the recognition of higher costs in 2002 associated with employee severanceprograms;

•                   Lower property taxes, primarily resultingfrom the change in property value assessment in the state of Indiana in 2003;

•                   The 2002 write-off of certain investments;

•                   A net gain recognized in 2003 resulting fromthe implementation of certain accounting changes;

•                   Gains realized in 2003 and losses incurred in2002 from the disposal of discontinued operations; and

•                   Lower income taxes resulting primarily fromtax credits associated with the production of synthetic fuel, which began inJuly 2002.

 

These increases were partially offset by:

 

•                   A decrease in electric gross marginsprimarily due to milder weather in 2003; and

•                   A decline in electric gross marginsassociated with **Cinergy’s** natural gas peakingassets.

 

#### **Gross Margins**

Given the dynamics of our business, whichinclude regulatory revenues with directly offsetting expenses and commoditytrading operations for which results are primarily reported on a net basis, wehave concluded that a discussion of our results on a gross margin basis is mostappropriate.  Electric gross marginsrepresent electric operating revenues less the related direct costs of fuel,emission allowances, and purchased power. Gas gross margins represent gas operating revenues less the relateddirect cost of gas purchased.  Withineach of these areas, we will discuss the key drivers of our results.  Gross margins for **Cinergy**forRegulated and Commercial****for the yearsended December 31, 2003, and 2002 were as follows:

 

| ** **               | ** **   | **Cinergy**       | ** **   |
|--------------------------|--------------|-------------------|--------------|
| ** **               | ** **   | **Regulated**     | ** **   | **Commercial** | ** ** |
| ** **               | ** **   | **2003**          | ** **   | **2002** | ** ** | **Change** | ** ** | **%****Change** | ** ** | **2003** | ** ** | **2002** | ** ** | **Change** | ** ** | **%****Change** | ** ** |
| *** ***             | *** *** | **(in millions)** | *** *** |
| * *                 | * *     | * *          | * *     | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * |
| Electric gross margin(1) |         | $                 | 1,469        |   | $ | 1,571 |   | $ | (102 | ) | (6 | )% | $ | 714 |   | $ | 735 |   | $ | (21 | ) | (3 | )% |
| Gas gross margin(2)      |         | 244               |         | 203 |   | 41 |   | 20 |   | 88 |   | 77 |   | 11 |   | 14 |   |
| Total gross margin       |         | $                 | 1,713        |   | $ | 1,774 |   | $ | (61 | ) | (3 | ) | $ | 802 |   | $ | 812 |   | $ | (10 | ) | 1 |   |
|                          |              |                   |              |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

----

(1)                                  Electric grossmargin is calculated as *Electric operatingrevenues*less *Fuel, emission allowances,and purchased power* expense from the Statements of Income.

(2)                                  Gas grossmargin is calculated as *Gas operating revenues*less *Gas purchased* expense from theStatements of Income.

 

42

----

 

Cooling degree days and heating degree daysare metrics commonly used in the utility industry as a measure of the impactweather has on results of operations. Cooling degree days and heating degree days in **Cinergy’s** service territory for the yearsended December 31, 2003, and 2002 were as follows:

 

| ** **             | ** ** | **Cinergy** | ** ** |
|------------------------|------------|-------------|------------|
| ** **             | ** ** | **2003**    | ** ** | **2002** | ** ** | **Change** | ** ** | **% Change** | ** ** |
|                   |       |        |       |   |   |   |   |   |   |
| Cooling degree days(1) |       | 831         |       | 1,357 |   | (526 | ) | (39 | )% |
| Heating degree days(2) |       | 5,316       |       | 5,093 |   | 223 |   | 4 |   |

----

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

(2)                                  Heating degree days are the differences between the average temperaturefor each day and 65 degrees, assuming the average temperature is less than 65degrees.

 

##### ***RegulatedGross Margins***

The six percent decrease in Regulated’selectric gross margins was primarily due to a decline in retail electricmargins mainly resulting from milder weather in 2003, compared to 2002.  As noted in the table, cooling degree dayswere down 39 percent in **Cinergy’s**serviceterritory.  Partially offsetting thisdecrease was an increase in rate tariff adjustments associated with certainconstruction programs at **PSI**.

 

The 20 percentincrease in Regulated’s gas gross margins was primarily due to the followingfactors:

 

•                   An increase in base rates, as approved by thePublic Utilities Commission of Ohio (PUCO) in May 2002, and tariff adjustmentsassociated with the gas main replacement program and Ohio excise taxes; and

•                   The colder weather in the first quarter of2003, compared to 2002, which resulted in a greater amount of thousand cubicfeet (mcf) delivered to customers.

 

##### ***Commercial***

*Gross Margins*

The three percent decrease in Commercial’selectric gross margins was primarily due to a decline in margins associatedwith Commercial’s****natural gas peaking assets in 2003,as compared to 2002.  Partiallyoffsetting this decrease were higher margins from physical and financialtrading primarily in and around the midwest.

 

The 14 percentincrease in Commercial’s gas gross margins was primarily due to thefollowing factors:

 

•                   An increase in the volatility of natural gasprices in the first quarter of 2003, as compared to the same period in 2002;and

•                   An increase in natural gas sold out ofstorage in 2003.  Cinergy Marketing &Trading, LP (Marketing & Trading) began engaging in significant storageactivities at the end of the second quarter of 2002.

** **

*Other Operating Revenuesand Costs of Fuel Resold*

The 22 percent increase in *Other Operating Revenues* was primarily due to an increase inCommercial’s revenues from the sale of synthetic fuel, which began in July2002.  This increase was partially offsetby a decline in Commercial’s revenues from coal origination.

 

*Costs of fuel resold* includesCommercial’s costs of coal origination activities and the production ofsynthetic fuel.  In 2003, the costs ofproducing synthetic fuel increased and the costs of coal origination activitiesdecreased, both of which are consistent with the changes in the associatedrevenues as previously discussed.

 

43

----

 

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

 

#### **Other Operating Expenses**

| ** **                    | ** **   | **Cinergy**       | ** **   |
|-------------------------------|--------------|-------------------|--------------|
| ** **                    | ** **   | **2003**          | ** **   | **2002** | ** ** | **Change** | ** ** | **%****Change** | ** ** |
| *** ***                  | *** *** | **(in millions)** | *** *** |
| * *                      | * *     | * *          | * *     | * * | * * | * * | * * | * * | * * |
| Operation and maintenance     |         | $                 | 1,119        |   | $ | 1,202 |   | $ | (83 | ) | (7 | )% |
| Depreciation                  |         | 399               |         | 404 |   | (5 | ) | (1 | ) |
| Taxes other than income taxes |         | 250               |         | 263 |   | (13 | ) | (5 | ) |
| Total                         |         | $                 | 1,768        |   | $ | 1,869 |   | $ | (101 | ) | (5 | ) |
|                               |              |                   |              |  |  |  |  |  |  |  |  |  |  |  |  |

 

##### ***Operationand Maintenance***

The seven percentdecrease in *Operation and maintenance* expense wasprimarily due to the following factors:

 

•                   The recognition of higher costs associatedwith employee severance programs in 2002;

•                   Decreased transmission costs, largely theresult of changes in the Midwest ISO operations; and

•                   A decrease in employee incentive costs.

 

These decreases were partially offset by:

 

•                   The charges associated with our resolution ofclaims with respect to the bankruptcy of Enron Corp.; and

•                   An increase in maintenance expense for ourgenerating units and overhead lines.

 

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

The one percentdecrease in *Depreciation* expense wasprimarily due to the following factors:

 

•                   An increase in estimated useful lives of **CG&E’s** generation assets resulting from a depreciationstudy completed during the third quarter of 2003; and

•                   **CG&E’s** discontinuance of accruingcosts of removal for generating assets (which was previously included as partof *Depreciation*expense) as a result of theadoption of Statement 143.  See Note 1(j)of the “Notes to Financial Statements” in “Item 8. Financial Statements andSupplementary Data” for further details. Prior periods were not restated for the adoption of Statement 143.

 

Partially offsetting these decreases was theaddition of depreciable plant primarily including pollution control equipment,accelerated gas main replacement program assets, and equipment associated withthe production of synthetic fuel.

 

##### ***TaxesOther Than Income Taxes***

The five percentdecrease in *Taxes other than income taxes* expense wasprimarily due to lower property taxes, which were partially offset by increasedexcise taxes.  This decrease wasprimarily a result of a change in property value assessments in the state ofIndiana in 2003.

 

44

----

 

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

The increase in *Miscellaneous Income (Expense) - Net* was primarilydue to the following factors:

 

•                   2002 write-offs of certain equipment andtechnology investments and costs accrued related to the termination of acontract for the construction of combustion turbines; and

•                   Interest income on the notes receivable oftwo newly consolidated subsidiaries in 2003. See Note 1(q)(*i*) of the “Notesto Financial Statements” in “Item 8. Financial Statements and SupplementaryData” for further details.

 

Partially offsetting these increases were netgains realized in 2002 from the sale of equity investments in certain renewableenergy projects.

 

#### **Interest Expense**

The 11 percentincrease in *Interest**Expense* was primarily due to the followingfactors:

 

•                   An increase in average long-term debtoutstanding during the year ended December 31, 2003;

•                   Charges during 2003 associated with there-financing of certain debt; and

•                   Additional debt recorded in July 2003 withthe consolidation of two new entities and the recognition of a note payable toa trust resulting from the adoption of Interpretation 46.  See Note 1(q)(*i*)of the “Notes to Financial Statements” in “Item 8. Financial Statements andSupplementary Data”.

 

These****increaseswere partially offset by a decrease in short-term interest rates.

 

#### **Preferred Dividend Requirement of Subsidiary Trust**

The 50 percentdecrease in *Preferred Dividend Requirementof Subsidiary Trust* was a result of theimplementation of Interpretation 46. Effective July 1, 2003, the preferred trust securities and the relateddividends are no longer reported in **Cinergy’s**financial statements.  However, interestexpense is still being incurred on a note payable to this trust as previouslydiscussed.  See Note 1(q)(*i*) of the “Notes to Financial Statements”in “Item 8. Financial Statements and Supplementary Data” for further details.

 

#### **Income Taxes**

The decrease in the effective income tax ratewas primarily due to tax credits associated with the production and sale ofsynthetic fuel, which began in July 2002. **Cinergy’s** effective taxrate for 2003 was approximately 25 percent.

 

#### **Discontinued Operations**

In 2002,**Cinergy** sold and/or classified as held for sale, several non-coreinvestments, including renewable and international investments.  During 2003, **Cinergy** completed the disposal of its gas distributionoperation in South Africa, sold its remaining wind assets in the United States,and substantially sold or liquidated the assets of its energy trading operationin the Czech Republic.  Pursuant toStatement 144, these investments have been classified as discontinued operationsin our financial statements.  See Note 14of the “Notes to Financial Statements” in “Item 8. Financial Statements andSupplementary Data” for additional information.

 

The increase in discontinued operations in2003 as compared to 2002 was due to the recognition of losses on disposal offoreign investments in 2002 and the recognition of gains on disposal in 2003.

 

#### **Cumulative Effect of Changes in AccountingPrinciples**

In 2003, **Cinergy**recognized a *Cumulative effect ofchanges in accounting principles, net of tax* gain of approximately$26 million.  The cumulative effect ofchanges in accounting principles was a result of the adoption of Statement 143and the rescission of EITF 98-10.

 

45

----

 

In2002, **Cinergy**recognized a*Cumulative effect of a change in accountingprinciple, net of tax* loss of approximately $11 million as a resultof implementation of Statement of Financial Accounting Standards No. 142, *Goodwill and Other Intangible Assets*.  See Note 1(q)(*iv*) of the “Notes to Financial Statements” in “Item 8.Financial Statements and Supplementary Data” for further information.

 

46

----

 

 

**MD&A - 2003 RESULTS OFOPERATIONS – CG&E**

 

**2003 RESULTS OF OPERATIONS****-CG&E**

 

#### **Summary of Results**

Net income for **CG&E** for the years ended December 31, 2003, and 2002 wereas follows:

 

| ** **   | ** **   | **CG&E**and subsidiaries | ** **   |
|--------------|--------------|------------------------------|--------------|
| ** **   | ** **   | **2003**                     | ** **   | **2002** | ** ** | **Change** | ** ** | **% Change** | ** ** |
| *** *** | *** *** | **(in millions)**            | *** *** |
| * *     | * *     | * *                     | * *     | * * | * * | * * | * * | * * | * * |
| Net income   |         | $                            | 331          |   | $ | 264 |   | $ | 67 |   | 25 | % |
|              |              |                              |              |  |  |  |  |  |  |  |  |  |

 

**CG&E’s** increase innet income was primarily due to the following factors:

 

•                   Increases in gas gross margins due to anincrease in base rates, as approved by the PUCO in May 2002, and colder weatherin the first quarter of 2003 as compared to 2002;

•                   Lower operating costs primarily resultingfrom the recognition of higher costs in 2002 associated with employee severanceprograms; and

•                   A net gain recognized in 2003 resulting fromthe implementation of certain accounting changes.

 

Offsetting these increases was a decrease inelectric gross margins primarily due to milder weather in 2003, as compared to2002.

 

#### **Gross Margins**

Gross margins for **CG&E**for the years ended December 31, 2003, and 2002 were as follows:

 

| ** **               | ** **   | **CG&E**and subsidiaries | ** **   |
|--------------------------|--------------|------------------------------|--------------|
| ** **               | ** **   | **2003**                     | ** **   | **2002** | ** ** | **Change** | ** ** | **%****Change** | ** ** |
| *** ***             | *** *** | **(in millions)**            | *** *** |
| * *                 | * *     | * *                     | * *     | * * | * * | * * | * * | * * | * * |
| Electric gross margin(1) |         | $                            | 1,195        |   | $ | 1,205 |   | $ | (10 | ) | (1 | )% |
| Gas gross margin(2)      |         | 245                          |         | 205 |   | 40 |   | 20 |   |
|                          |              |                              |              |  |  |  |  |  |  |  |  |  |

----

(1)                                  Electric grossmargin is calculated as *Electric operatingrevenues*less *Fuel, emission allowances,and purchased power* expense from the Statements of Income.

(2)                                  Gas grossmargin is calculated as *Gas operating revenues*less *Gas purchased* expense from theStatements of Income.

 

Cooling degree days and heating degree daysin **CG&E’s** service territoryfor the years ended December 31, 2003, and 2002 were as follows:

 

| ** **             | ** ** | **CG&E**and subsidiaries | ** ** |
|------------------------|------------|------------------------------|------------|
| ** **             | ** ** | **2003**                     | ** ** | **2002** | ** ** | **Change** | ** ** | **% Change** | ** ** |
|                   |       |                         |       |   |   |   |   |   |   |
| Cooling degree days(1) |       | 812                          |       | 1,353 |   | (541 | ) | (40 | )% |
| Heating degree days(2) |       | 5,119                        |       | 4,926 |   | 193 |   | 4 |   |

----

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

(2)                                  Heating degreedays are the differences between the average temperature for each day and 65degrees, assuming the average temperature is less than 65 degrees.

 

47

----

 

##### ***ElectricGross Margins***

The one percentdecrease in **CG&E’s** electric grossmargins was primarily due to a decline in retail electric margins mainlyresulting from milder weather in 2003 as compared to 2002.  As noted in the table, cooling degree dayswere down 40 percent in **CG&E’s**serviceterritory.  Higher margins from physicaland financial trading partially offset this decrease.

 

##### ***GasGross Margins***

The 20 percent increase in **CG&E’s** gas gross margins was primarilydue to the following factors:

 

•                   An increase in base rates, as approved by thePUCO in May 2002, and tariff adjustments associated with the gas mainreplacement program and Ohio excise taxes; and

•                   The colder weather in the first quarter of2003, compared to 2002, which resulted in a greater amount of mcf delivered tocustomers.

 

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

The 23 percent decrease in *Other Operating Revenues* was due to a decrease in revenuesfrom coal origination.

 

*Costs of fuel resold* represents thecosts of coal origination activities. These costs decreased in 2003, which is consistent with the decline inthe associated revenues as previously discussed.

 

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

 

#### **Other Operating Expenses**

| ** **                    | ** **   | **CG&E**and subsidiaries | ** **   |
|-------------------------------|--------------|------------------------------|--------------|
| ** **                    | ** **   | **2003**                     | ** **   | **2002** | ** ** | **Change** | ** ** | **% Change** | ** ** |
| *** ***                  | *** *** | **(in millions)**            | *** *** |
| * *                      | * *     | * *                     | * *     | * * | * * | * * | * * | * * | * * |
| Operation and maintenance     |         | $                            | 500          |   | $ | 531 |   | $ | (31 | ) | (6 | )% |
| Depreciation                  |         | 187                          |         | 197 |   | (10 | ) | (5 | ) |
| Taxes other than income taxes |         | 200                          |         | 198 |   | 2 |   | 1 |   |
| Total                         |         | $                            | 887          |   | $ | 926 |   | $ | (39 | ) | (4 | ) |

 

##### ***Operationand Maintenance***

The six percentdecrease in *Operation and maintenance* expense wasprimarily due to the following factors:

 

•                   Decreased transmission costs largely theresult of changes in the Midwest ISO operations;

•                   The recognition of higher costs associatedwith employee severance programs in 2002; and

•                   A decrease in employee incentive costs.

 

These decreases werepartially offset by an increase in maintenance expense for our generating unitsand overhead lines.

 

48

----

 

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

The five percentdecrease in *Depreciation* expense wasprimarily due to the following factors:

 

•                   An increase in the estimated useful lives of **CG&E’s** generation assets resulting from a depreciationstudy completed during the third quarter of 2003; and

•                   The discontinuance of accruing costs ofremoval for generating assets (which was previously included as part of *Depreciation* expense) as a result of the adoption ofStatement 143.  See Note 1(j) of the “Notesto Financial Statements” in “Item 8. Financial Statements and SupplementaryData” for further details.  Prior periodswere not restated for the adoption of Statement 143.

 

#### **Miscellaneous Income - Net**

The increase in *Miscellaneous Income - Net* was due, inpart, to a final reconciliation with **PSI** of aprevious demutualization of a medical insurance carrier used by both companieswhich was recorded in 2003.

 

#### **Interest Expense**

The 20 percentincrease in *Interest**Expense* was primarily due to the followingfactors:

 

•                   An increase in average long-term debtoutstanding; and

•                   Charges during 2003 associated with there-financing of certain debt.

 

#### **Cumulative Effect of Changes in AccountingPrinciples**

In 2003, **CG&E**recognized a *Cumulative effect ofchanges in accounting principles, net of tax* gain of approximately$31 million as a result of the adoption of Statement 143 and the rescission ofEITF 98-10.  See Note 1(q)(*iv*) of the “Notes to Financial Statements”in “Item 8. Financial Statements and Supplementary Data” for furtherinformation.

 

49

----

 

**MD&A- 2003 RESULTS OF OPERATIONS – PSI**

 

### **2003 RESULTS OFOPERATIONS - PSI**

#### **Summary of Results**

Net income for **PSI** for the years ended December 31, 2003, and 2002 was asfollows:

 

| ** **   | ** **   | **PSI**           | ** **   |
|--------------|--------------|-------------------|--------------|
| ** **   | ** **   | **2003**          | ** **   | **2002** | ** ** | **Change** | ** ** | **% Change** | ** ** |
| *** *** | *** *** | **(in millions)** | *** *** |
| * *     | * *     | * *          | * *     | * * | * * | * * | * * | * * | * * |
| Net income   |         | $                 | 133          |   | $ | 214 |   | $ | (81 | ) | (38 | )% |
|              |              |                   |              |  |  |  |  |  |  |  |  |  |

 

**PSI’s** decrease innet income was primarily attributable to decreases in electric gross marginsdue to milder weather in 2003, as compared to 2002. This decrease was partiallyoffset by the following factors:

 

•                   The recognition of higher operating costs in2002 associated with employee severance programs; and

•                   Lower property taxes, primarily resultingfrom the change in property value assessment in the state of Indiana in 2003.

 

#### **Electric Gross Margins**

Gross margins for **PSI**forthe years ended December 31, 2003, and 2002 were as follows:

 

| ** **               | ** **   | **PSI**           | ** **   |
|--------------------------|--------------|-------------------|--------------|
| ** **               | ** **   | **2003**          | ** **   | **2002** | ** ** | **Change** | ** ** | **%****Change** | ** ** |
| *** ***             | *** *** | **(in millions)** | *** *** |
| * *                 | * *     | * *          | * *     | * * | * * | * * | * * | * * | * * |
| Electric gross margin(1) |         | $                 | 973          |   | $ | 1,064 |   | $ | (91 | ) | (9 | )% |
|                          |              |                   |              |  |  |  |  |  |  |  |  |  |

----

(1)                                  Electric grossmargin is calculated as *Electric operatingrevenues*less *Fuel, emission allowances,and purchased power* expense from the Statements of Income.

 

Cooling degree days and heating degree daysin **PSI’s** service territory for theyears ended December 31, 2003, and 2002 were as follows:

 

| ** **             | ** ** | **PSI**  | ** ** |
|------------------------|------------|----------|------------|
| ** **             | ** ** | **2003** | ** ** | **2002** | ** ** | **Change** | ** ** | **% Change** | ** ** |
|                   |       |     |       |   |   |   |   |   |   |
| Cooling degree days(1) |       | 850      |       | 1,360 |   | (510 | ) | (38 | )% |
| Heating degree days(2) |       | 5,512    |       | 5,260 |   | 252 |   | 5 |   |

----

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

(2)                                  Heating degreedays are the differences between the average temperature for each day and 65degrees, assuming the average temperature is less than 65 degrees.

 

The nine percentdecrease in **PSI’s** electric grossmargins was primarily due to a decline in retail electric margins resultingfrom milder weather in 2003, compared to 2002. As noted in the table, cooling degree days were down 38 percent in **PSI’s**service territory. An increase in rate tariff adjustments associated with certainconstruction programs partially offset these decreases.

 

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

 

50

----

 

#### **Other Operating Expenses**

| ** **                    | ** **   | **PSI**           | ** **   |
|-------------------------------|--------------|-------------------|--------------|
| ** **                    | ** **   | **2003**          | ** **   | **2002** | ** ** | **Change** | ** ** | **% Change** | ** ** |
| *** ***                  | *** *** | **(in millions)** | *** *** |
| * *                      | * *     | * *          | * *     | * * | * * | * * | * * | * * | * * |
| Operation and maintenance     |         | $                 | 449          |   | $ | 470 |   | $ | (21 | ) | (4 | )% |
| Depreciation                  |         | 164               |         | 155 |   | 9 |   | 6 |   |
| Taxes other than income taxes |         | 46                |         | 57 |   | (11 | ) | (19 | ) |
| Total                         |         | $                 | 659          |   | $ | 682 |   | $ | (23 | ) | (3 | ) |

 

##### ***Operationand Maintenance***

The four percentdecrease in *Operation and maintenance* expense wasprimarily due to the following factors:

 

•                   Recognition of higher costs associated withemployee severance programs in 2002;

•                   Decreased transmission costs, largely theresult of changes in the Midwest ISO operations; and

•                   A decrease in employee incentive costs.

 

These decreases werepartially offset by an increase in maintenance expense for our generating unitsand overhead lines.

 

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

The six percentincrease in *Depreciation* expense wasprimarily due to the following factors:

 

•                   The addition of depreciable plant resultingfrom **PSI’s** December 2002 purchase of twogas-fired peaking plants from non-regulated affiliates.  See Note 19 of the “Notes to FinancialStatements” in “Item 8. Financial Statements and Supplementary Data” for moreinformation; and

•                   The addition of other depreciable plantprimarily reflecting pollution control equipment and the repowering ofNoblesville Station.

 

##### ***TaxesOther Than Income Taxes***

The 19 percentdecrease in *Taxes other than income taxes* expense wasprimarily due to lower property taxes, which were partially offset by increasedexcise taxes.  This decrease wasprimarily a result of a change in property value assessments in the state ofIndiana in 2003.

 

#### **Miscellaneous Income - Net**

The 69 percentdecrease in *Miscellaneous Income - Net* was primarilya result of a final reconciliation with **CG&E** of aprevious demutualization of a medical insurance carrier used by both companieswhich was recorded in 2003.

 

#### **Interest Expense**

The 16 percentincrease in *Interest**Expense* was primarily a result of anincrease in average long-term debt outstanding during the year ended December31, 2003.  This****increase waspartially offset by a decrease in short-term interest rates.

 

#### **Income Taxes**

The increase in the effective income tax ratewas primarily due to an increase in the Indiana state income tax rate.

 

51

----

 

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

 

### **LIQUIDITY AND CAPITALRESOURCES**

#### **Historical Cash Flow Analysis From ContinuingOperations**

##### ***OperatingActivities from Continuing Operations***

For the years ended December 31, 2004, 2003,and 2002, our cash flows from operating activities from continuing operationswere as follows:

 

| **Net  Cash Provided by Operating Activities from Continuing Operations** | ** **   |
|---------------------------------------------------------------------------|--------------|
| ** **                                                                | ** **   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                | ** **   | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| *** ***                                                              | *** *** | **(in thousands)** | *** *** |
| * *                                                                  | * *     | * * | * * | * * | * * | * * | * * |
| **Cinergy(1)**                                                            |         | **$** | **833,004** |   | $ | 945,673 |   | $ | 955,802 |   |
| **CG&E** and  subsidiaries                                            |         | **445,621** |   | 557,761 |   | 653,029 |   |
| **PSI**                                                                   |         | **483,463** |   | 246,735 |   | 499,047 |   |
| **ULH&P**                                                             |         | **45,381** |   | 33,061 |   | 60,707 |   |
|                                                                           |              |  |  |  |  |  |  |  |  |  |  |

----

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

 

The tariff-based gross margins of our utilityoperating companies continue to be the principal source of cash from operatingactivities.  The diversified retailcustomer mix of residential, commercial, and industrial classes and a commoditymix of gas and electric services provide a reasonably predictable gross cashflow.

 

For the year ended December 31, 2004, **Cinergy’s** and **CG&E’s**decrease in net cash provided by operating activities was primarily due tounfavorable working capital fluctuations, including the build up of fuel andemission allowances inventory.  **PSI’s** increase was due to an increase in earnings (afteradjusting for non-cash items) and a difference in the timing of payables andincome tax payments.  **ULH&P’s** increase in net cash provided by operatingactivities was attributable to favorable working capital fluctuations.

 

For the year ended December 31, 2003, **CG&E’s**,**PSI’s**,****and**ULH&P’s**net cash provided by operatingactivities decreased, as compared to 2002. **CG&E’s** decrease wasprimarily due to unfavorable working capital fluctuations.  **PSI’s**decrease was largely due to a decrease in earnings (after adjusting fornon-cash items) and a decrease in receivables sold under the receivables salefacility.  A significant portion of **ULH&P’s** decrease was due to unfavorableworking capital fluctuations and an increase in deferred costs under the gascost recovery mechanism.  **Cinergy’s** net cash provided by operatingactivities in 2003 was comparable to 2002, comprised of the decreases at **CG&E**and **PSI** discussedabove offset by improved operating cash flows at our non-regulatedsubsidiaries.

 

##### ***FinancingActivities from Continuing Operations***

For the years ended December 31, 2004, 2003,and 2002, our cash flows from financing activities from continuing operationswere as follows:

**NetCash Provided by (Used in) Financing Activities from Continuing Operations**

** **

| ** **                     | ** **   | **2004**           | ** **   | **2003** | ** ** | **2002** | ** ** |
|--------------------------------|--------------|--------------------|--------------|----------|------------|----------|------------|
| *** ***                   | *** *** | **(in thousands)** | *** *** |
| * *                       | * *     | * *           | * *     | * * | * *   | * * | * *   |
| **Cinergy(1)**                 |         | **$**              | **(233,881** | **)**    | $          | (245,128 | )          | $ | 42,689 |   |
| **CG&E** and  subsidiaries |         | **(172,782**       | **)**        | (263,296 | )          | (293,445 | )          |
| **PSI**                        |         | **(164,141**       | **)**        | 90,070   |       | (43,817  | )          |
| **ULH&P**                  |         | **(9,226**         | **)**        | 4,852    |       | (22,026  | )          |
|                                |              |                    |              |          |            |          |            |  |  |  |

----

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

 

For the year ended December 31, 2004, **CG&E’s** decrease in net cash used in financing activitieswas primarily due to a decrease in redemptions of long-term debt.  **PSI’s** increasein net cash used in financing activities was attributable to the repayment ofshort-term debt in 2004 and capital contributions from **CinergyCorp.** that were made in 2003. **ULH&P’s** increase in net cash usedin financing activities was due to an increase in dividends on commonstock.  **Cinergy’s**net cash used in financing activities in 2004 was comparable to 2003.

 

52

----

 

For the year ended December 31, 2003, **Cinergy’s** net cash used in financingactivities increased, as compared to 2002, primarily due to increases inredemptions of long-term debt.  **CG&E’s** net cash used in financingactivities decreased during 2003, as compared to 2002, primarily due to a netincrease in short-term debt financing.  **PSI’s** and **ULH&P’s**net cash provided by financing activities increased during 2003, as compared to2002.  **PSI’s**increase was primarily due to capital contributions from **Cinergy Corp.**  **ULH&P’s**increase was primarily attributable to increases in short-term debt.

 

##### ***InvestingActivities from Continuing Operations***

For the years ended December 31, 2004, 2003,and 2002, our cash flows used in investing activities from continuingoperations were as follows:

 

**NetCash Used in Investing Activities from Continuing Operations**

** **

| ** **                     | ** **   | **2004**           | ** **   | **2003** | ** ** | **2002** | ** ** |
|--------------------------------|--------------|--------------------|--------------|----------|------------|----------|------------|
| *** ***                   | *** *** | **(in thousands)** | *** *** |
| * *                       | * *     | * *           | * *     | * * | * *   | * * | * *   |
| **Cinergy(1)**                 |         | **$**              | **(603,702** | **)**    | $          | (731,537 | )          | $ | (885,636 | ) |
| **CG&E** and  subsidiaries |         | **(284,527**       | **)**        | (323,959 | )          | (323,322 | )          |
| **PSI**                        |         | **(315,093**       | **)**        | (332,247 | )          | (454,810 | )          |
| **ULH&P**                  |         | **(33,857**        | **)**        | (39,940  | )          | (38,854  | )          |
|                                |              |                    |              |          |            |          |            |  |  |  |

----

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

 

For the year ended December 31, 2004, **Cinergy’s** decrease in net cash used in investing activitieswas primarily due to decreases in capital expenditures related to energy-relatedinvestments.  **CG&E’s**decrease in net cash used in investing activities was primarily due to adecrease in capital expenditures for ongoing environmental compliance programsand normal construction activity.  **PSI’s** and **ULH&P’s** netcash used in investing activities in 2004 was comparable to 2003.

 

For the year ended December 31, 2003, **Cinergy’s** net cash used in investingactivities decreased, as compared to 2002, primarily due to decreases incapital expenditures related to environmental compliance programs and otherenergy-related investments.  **Cinergy** also purchased a synthetic fuelproduction facility during 2002.  **PSI’s** decrease was primarily due todecreases in capital expenditures for ongoing environmental compliance programsand other construction projects.  **CG&E’s**and **ULH&P’s** net cash used in 2003 investing activities wascomparable to 2002.

 

#### **Capital Requirements**

##### ***EnvironmentalIssues***

*Proposed Environmental ProtectionAgency Regulations*

 

In December 2003,the United States EPA proposed the Clean Air Interstate Rule (CAIR), formerlythe Interstate Air Quality Rule, which would require states to revise theirState Implementation Plans (SIP) to address alleged contributions to downwindnon-attainment with the revised National Ambient Air Quality Standards forozone and fine particulate matter.  Theproposed rule would establish a two-phase, regional cap and trade program for SO2 and NOX, affecting approximately 30 states,including Ohio, Indiana, and Kentucky, and would require SO2 and NOXemissions to be cut approximately 70 percent and 65 percent, respectively, by2015.  The EPA also issued draftregulations regarding required reductions in mercury emissions from coal-firedpower plants (Clean Air Mercury Rule). The draft regulations include two possible alternatives to achieveemissions reductions:  a mercury cap andtrade program or source specific reductions achieved through a command andcontrol approach.  The cap and tradeapproach would provide a longer compliance horizon and provide more flexiblecompliance options for coal-fired generators, including the purchase ofallowances in lieu of further capital expenditures with respect to theseinvestments.  This approach would requirea reduction of approximately 30 percent by 2010 and 70 percent by 2018.  The source specific reduction approach wouldrequire a reduction of approximately 30 percent by 2008.  The EPA is expected to issue final rules onCAIR and the Clean Air Mercury Rule by March 2005.

 

Over the 2005-2009time period, estimated capital costs associated with reducing mercury, SO2,and NOX in compliance with the currently proposed CAIR and Clean AirMercury Rule are not expected to exceed approximately 

 

53

----

 

$1.72 billion ifthe EPA approves the mercury cap and trade approach and approximately $2.15billion if the EPA approves the source specific reduction approach without acap and trade program.  These estimatesinclude estimated costs to comply at plants that we own but do not operate and couldchange when taking into consideration compliance plans of co-owners oroperators involved.  Moreover, as marketconditions change, additional compliance options may become available and ourplans will be adjusted accordingly. Approximately 60 percent of these estimated environmental costs would beincurred at **PSI’s** coal-firedplants, for which recovery would be pursued in accordance with regulatorystatutes governing environmental cost recovery. **CG&E** would receive partial recoveryof depreciation and financing costs related to environmental complianceprojects for 2005-2008 through its recently approved RSP.  See Note 11(b)(*iii*) of the “Notes to FinancialStatements” in “Item 8. Financial Statements and Supplementary Data” for moredetails.

 

In June 2004, theEPA made final state non-attainment area designations to implement the revisedozone standard.  In January 2005, the EPAmade final state non-attainment area designations to implement the new fineparticulate standard.  Several countiesin which we operate have been designated as being in non-attainment with thenew ozone standard and/or fine particulate standard.  States with counties that are designated asbeing in non-attainment with the new ozone and/or fine particulate standardsare required to develop a plan of compliance. Although the EPA has attempted to structure the CAIR to resolvepurported utility contributions to ozone and fine particulate non-attainment,at this time, **Cinergy** cannotpredict the effect of current or future non-attainment designations on itsfinancial position or results of operations.

 

In May 2004, theEPA issued proposed revisions to its regional haze rules and implementingguidelines in response to a 2002 judicial ruling overturning key provisions ofthe original program.  The regionalhaze program is aimed at reducing certain emissions impacting visibility innational parks and wilderness areas.  TheEPA is currently considering whether SO2 and NOXreductions under the CAIR regulation will also satisfy the reduction requirementsunder the regional haze rule.  However,the regional haze rule, when finalized, could potentially require significantadditional SO2 and NOX reductions necessitating theinstallation of pollution controls for certain generating units at **Cinergy’s** power plants.  In light of the EPA’s ongoing rulemakingefforts and the fact that the states have yet to announce how they willimplement the final rule, at this time it is not possible to predict whetherthe regional haze rule will have a material effect on our financial position orresults of operations.

 

*ClearSkies Legislation*

 

President Bush has proposed environmental legislation that wouldcombine a series of Clean Air Act (CAA) requirements, including the recentlyproposed regulations for mercury and particulate matter for coal-fired powerplants with a legislative solution that includes trading and specific emissionsreductions and timelines to meet those reductions.  The President’s “Clear Skies Initiative”would seek an overall 70 percent reduction in emissions from power plants overa phased-in reduction schedule beginning in 2010 and continuing through2018.  When the Clear Skies Initiativewas stalled in Congress, the EPA proposed the CAIR regulations to accomplishClear Skies’ goals within the existing framework of the CAA.  Clear Skies has been reintroduced in theSenate and could be considered in Committee over the next several weeks.  However, at this time, we cannot predictwhether this or any multi-emissions bill will achieve approval.

 

*Energy Bill*

The United States House of Representatives(House) passed the Energy Policy Act in April 2003.  The legislation, as passed in the House,included the repeal of the Public Utility Holding Company Act of 1935, as amended(PUHCA), as well as tax incentives for gas and electric distribution lines, andcombined heat and power and renewable energy projects.  The United States Senate (Senate) Energy andNatural Resources Committee passed its version of comprehensive energylegislation in April 2003.  A conferenceagreement which merged both the House and Senate versions passed in the Housein October 2003, but failed to pass in the Senate.  The legislation will be introduced againduring the 109th Congress, however, it is anticipated that several changes willbe made.  At this time, it is notpossible to predict whether a final energy bill will pass in 2005.

 

54

----

 

*Environmental Lawsuits*

We are currently involved in the followinglawsuits which are discussed in more detail in Note 11(a) of the “Notes toFinancial Statements” in “Item 8. Financial Statements and Supplementary Data”.  An unfavorable outcome of any of theselawsuits could have a material impact on our liquidity and capital resources.

 

•                   CAA Lawsuit

•                   Carbon Dioxide (CO2) Lawsuit

•                   Selective Catalytic Reduction Units at GibsonGenerating Station

•                   Zimmer Generating Station Lawsuit

•                   Manufactured Gas Plant Sites

•                   Asbestos Claims Litigation

 

##### ***Capitaland Investment Expenditures***

Actual construction and other committedexpenditures for 2004 and forecasted construction and other committedexpenditures for 2005 and for the five-year period 2005-2009 (in nominaldollars) are presented in the table below:

 

**Capitaland Investment Expenditures**

** **

| ** **                     | ** **   | **Actual**        | ** **   | **Forecasted** | ** ** |
|--------------------------------|--------------|-------------------|--------------|----------------|------------|
| ** **                     | ** **   | **2004**          | ** **   | **2005**       | ** ** | **2005-2009** | ** ** |
| *** ***                   | *** *** | **(in millions)** | *** *** |
| * *                       | * *     | * *          | * *     | * *       | * *   | * * | * * |
| **Cinergy(1)**                 |         | **$**             | **701**      |           | $          | 1,115 |   | $ | 5,430 |   |
| **CG&E** and  subsidiaries |         | **300**           |         | 430            |       | 2,345 |   |
| **PSI**                        |         | **340**           |         | 620            |       | 2,645 |   |
| **ULH&P**                  |         | **34**            |         | 80             |       | 335 |   |
|                                |              |                   |              |                |            |  |  |  |  |  |

----

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

 

In 2004, we spent $203 million for NOXand other environmental compliance projects. Forecasted expenditures for environmental compliance projects (innominal dollars) are approximately $465 million for 2005 and $1.8 billion forthe 2005-2009 period.  The vast majorityof this forecast includes our entire estimate of costs to comply with draftregulations requiring reductions in mercury, NOX, and SO2emissions, assuming a cap and trade approach to mercury emissions.  Approximately 60 percent of these estimatedenvironmental costs would be incurred at **PSI’s** regulatedcoal-fired plants.  See “EnvironmentalIssues” for further discussion.

 

55

----

 

##### ***ContractualCash Obligations***

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

** **
| ** **                                   | ** **   | **Payments Due**  | ** **   |
|----------------------------------------------|--------------|-------------------|--------------|
| ** **                                   | ** **   | ** **        | ** **   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **There-** | ** ** | ** ** | ** ** |
| **Contractual  Cash Obligations**            | ** **   | **2005**          | ** **   | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **after** | ** ** | **Total** | ** ** |
| *** ***                                 | *** *** | **(in millions)** | *** *** |
| * *                                     | * *     | * *          | * *     | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * |
| **Cinergy(1)**                               |         |              |         |   |   |   |   |   |   |   |   |   |   |   |   |
| Capital leases                               |         | $                 | 7            |   | $ | 7 |   | $ | 7 |   | $ | 10 |   | $ | 10 |   | $ | 24 |   | $ | 65 |   |
| Operating leases                             |         | 43                |         | 36 |   | 28 |   | 18 |   | 14 |   | 27 |   | 166 |   |
| Long-term debt(2)                            |         | 220               | (3)(4)       | 355 |   | 726 |   | 551 |   | 270 |   | 2,376 |   | 4,498 |   |
| Fuel purchase contracts(5)                   |         | 879               |         | 495 |   | 420 |   | 49 |   | — |   | — |   | 1,843 |   |
| Other commodity purchase contracts(6)        |         | 28                |         | 7 |   | 3 |   | 1 |   | — |   | — |   | 39 |   |
| **Total Cinergy**                            |         | $                 | 1,177        |   | $ | 900 |   | $ | 1,184 |   | $ | 629 |   | $ | 294 |   | $ | 2,427 |   | $ | 6,611 |   |
|                                         |         |              |         |   |   |   |   |   |   |   |   |   |   |   |   |
| **CG&E** and  subsidiaries               |         |              |         |   |   |   |   |   |   |   |   |   |   |   |   |
| Capital leases                               |         | $                 | 4            |   | $ | 4 |   | $ | 4 |   | $ | 6 |   | $ | 6 |   | $ | 16 |   | $ | 40 |   |
| Operating leases                             |         | 10                |         | 8 |   | 7 |   | 5 |   | 4 |   | 6 |   | 40 |   |
| Long-term debt(2)                            |         | 150               | (4)          | — |   | 100 |   | 120 |   | 20 |   | 1,240 |   | 1,630 |   |
| Fuel purchase contracts(5)                   |         | 413               |         | 202 |   | 161 |   | — |   | — |   | — |   | 776 |   |
| Other commodity purchase contracts(6)        |         | 5                 |         | 1 |   | — |   | 1 |   | — |   | — |   | 7 |   |
| **Total CG&E** **and subsidiaries** |         | $                 | 582          |   | $ | 215 |   | $ | 272 |   | $ | 132 |   | $ | 30 |   | $ | 1,262 |   | $ | 2,493 |   |
|                                         |         |              |         |   |   |   |   |   |   |   |   |   |   |   |   |
| **PSI**                                      |         |              |         |   |   |   |   |   |   |   |   |   |   |   |   |
| Capital leases                               |         | $                 | 3            |   | $ | 3 |   | $ | 3 |   | $ | 4 |   | $ | 4 |   | $ | 8 |   | $ | 25 |   |
| Operating leases                             |         | 11                |         | 10 |   | 9 |   | 7 |   | 6 |   | 13 |   | 56 |   |
| Long-term debt(2)                            |         | 50                | (3)          | 326 |   | 266 |   | 43 |   | 223 |   | 976 |   | 1,884 |   |
| Fuel purchase contracts(5)                   |         | 466               |         | 293 |   | 259 |   | 49 |   | — |   | — |   | 1,067 |   |
| **Total PSI**                                |         | $                 | 530          |   | $ | 632 |   | $ | 537 |   | $ | 103 |   | $ | 233 |   | $ | 997 |   | $ | 3,032 |   |
|                                         |         |              |         |   |   |   |   |   |   |   |   |   |   |   |   |
| **ULH&P**                                |         |              |         |   |   |   |   |   |   |   |   |   |   |   |   |
| Capital leases                               |         | $                 | 1            |   | $ | 1 |   | $ | 1 |   | $ | 1 |   | $ | 2 |   | $ | 3 |   | $ | 9 |   |
| Long-term debt(2)                            |         | —            |         | — |   | — |   | 20 |   | 20 |   | 55 |   | 95 |   |
| **Total ULH&P**                          |         | $                 | 1            |   | $ | 1 |   | $ | 1 |   | $ | 21 |   | $ | 22 |   | $ | 58 |   | $ | 104 |   |
|                                              |              |                   |              |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

----

(1)                                  Includes amounts related tonon-registrants.

(2)                                  Amounts do not include interest payments.See the Consolidated Statements of Capitalization in “Item 8. FinancialStatements and Supplementary Data” for disclosure of interest rates forinterest payments.

(3)                                  Includes **PSI’s**6.50% Debentures due August 1, 2026, reflected as maturing in 2005, as theinterest rate is due to reset on August 1, 2005. If the interest rate does notreset, the bonds are subject to mandatory redemption by **PSI.**

(4)                                  **CG&E’s** 6.90%Debentures due June 1, 2025, are putable to **CG&E**at the option of the holders on June 1, 2005. However, based upon currentmarket conditions, we believe it is unlikely that the debentures will be put to**CG&E** on this date.

(5)                                  We have significantly more coal undercontract; however, these contracts contain price re-opener provisionseffectively making them variable contracts after certain dates. Contract coalafter the price re-opener date is therefore excluded from this table.

(6)                                  Includes long-term contracts accountedfor on an accrual basis. See the Fair Value of Contracts maturity table in“Market Risk Sensitive Instruments” for disclosure of energy trading contractsthat are accounted for at fair value.

 

56

----

 

##### ***Pensionand Other Postretirement Benefits***

**Cinergy** maintainsqualified defined benefit pension plans covering substantially all UnitedStates employees meeting certain minimum age and service requirements.  Plan assets consist of investments in equityand debt securities.  Funding for thequalified defined benefit pension plans is based on actuarially determinedcontributions, the maximum of which is generally the amount deductible for taxpurposes and the minimum being that required by the Employee Retirement IncomeSecurity Act of 1974, as amended (ERISA).  Although mitigated by strong performance in2003 and 2004, ongoing retiree payments and the decline in market value of theinvestment portfolio in 2002 reduced the assets held in trust to satisfy planobligations.  Additionally, continuinglow long-term interest rates have increased the liability for fundingpurposes.  As a result of these events,our near term funding targets have increased substantially.  **Cinergy**has adopted a five-year plan to reduce, or eliminate, the unfunded pensionobligation initially measured as of January 1, 2003.  This unfunded obligation will be recalculatedas of January 1 of each year in the five-year plan.  Because this unfunded obligation is the differencebetween the liability determined actuarially on an ERISA basis and the marketvalue of plan assets as of January 1, 2003, the liability determined by thiscalculation is different than the pension liability calculated for accountingpurposes reported on **Cinergy’s**Balance Sheets.

 

**Cinergy’s** minimumrequired contribution in calendar year 2004 was $16 million, as compared to $11million in calendar year 2003.  Actualcontributions during calendar year 2004 and 2003 totaled $117 million and $74million, reflecting additional discretionary contributions of $101 million and$63 million, respectfully, under the aforementioned five-year plan.  Due to the significant 2004 and 2003 calendaryear contributions, **Cinergy’s**minimum required contributions in calendar year 2005 are expected to bezero.  Should **Cinergy** continue funding under the five-year plan,discretionary contributions are expected to be $72 million in 2005.  **Cinergy**may consider making discretionary contributions in 2006 and future periods;however, at this time, we are unable to determine the amount of thosecontributions.  Estimated contributionsfluctuate based on changes in market performance of plan assets and actuarialassumptions.  Absent the occurrence ofinterim events that could materially impact these targets, we will update ourexpected target contributions annually as the actuarial funding valuations arecompleted and make decisions about future contributions at that time.

 

**Cinergy** sponsorsnon-qualified pension plans that cover officers, certain key employees, andnon-employee directors.  **Cinergy’s** payments for these non-qualifiedpension plans are expected to be approximately $9 million in 2005.

 

We provide certain health care and lifeinsurance benefits to retired United States employees and their eligibledependents.  **Cinergy’s** payments for these postretirement benefits in 2005are expected to be approximately $25 million. See Note 9 of the “Notes to Financial Statements” in “Item 8. FinancialStatements and Supplementary Data” for additional information about our pensionand other postretirement benefit plans.

 

##### ***OtherInvesting Activities***

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

 

•                   Exempt Wholesale Generators (EWG) and ForeignUtility Companies (FUCO)

 

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

 

57

----

 

A FUCO is a company allof whose utility assets and operations are located outside the United Statesand which are used for the generation, transmission, or distribution ofelectric energy for sale at retail or wholesale, or the distribution of gas atretail.  A FUCO may not derive any income,directly or indirectly, from the generation, transmission, or distribution ofelectric energy for sale or the distribution of gas at retail within the UnitedStates.  An entity claiming status as aFUCO must provide notification thereof to the SEC under the PUHCA.

 

**Cinergy**has been granted SEC authority under the PUHCA to invest (including by way ofguarantees) an aggregate amount in EWGs and FUCOs equal to the sum of (1) ouraverage consolidated retained earnings from time to time plus (2) $2 billionthrough June 30, 2005.  As of December31, 2004, we had invested or committed to invest approximately $0.8 billion inEWGs and FUCOs, leaving available investment capacity under the order ofapproximately $2.8 billion.  In February2005, **Cinergy** filed an application with theSEC under the PUHCA requesting an extension of this authority through December31, 2008.  At this time, we are unable topredict whether the SEC will approve this request.

 

•                   Qualifying Facilities and Energy-RelatedNon-utility Entities

 

SEC regulations under thePUHCA permit **Cinergy** and other registeredholding companies to invest and/or guarantee an amount equal to 15 percent ofconsolidated capitalization (consolidated capitalization is the sum of *Notes payable and other short-term obligations, Long-term debt*(includingamounts due within one year), *Cumulative Preferred Stockof Subsidiaries*, and total *Common Stock Equity*)in domestic qualifying cogeneration and small power production plants(qualifying facilities) and certain other domestic energy-related non-utilityentities.  At December 31, 2004, we hadinvested and/or guaranteed approximately $1.1 billion of the $1.4 billionavailable.  In August 2004, **Cinergy** filed an application with the SEC requestingauthority under the PUHCA to increase its investment and/or guarantee authorityby $2 billion above the current authorized amount.  At this time, we are unable to predictwhether the SEC will approve this request.

 

•                   Energy-Related Assets

 

**Cinergy** hasbeen granted SEC authority under the PUHCA to invest up to $1 billion innon-utility Energy-Related Assets within the United States, Canada, andMexico.  Energy-Related Assets includenatural gas exploration, development, production, gathering, processing,storage and transportation facilities and equipment, liquid oil reserves andstorage facilities, and associated assets, facilities and equipment, but wouldexclude any assets, facilities, or equipment that would cause the owner oroperator thereof to be deemed a public utility company.  As of December 31, 2004, we did not have anyinvestments in these Energy-Related Assets.

 

•                   Infrastructure Services Companies

 

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

 

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

•                    Installationand maintenance of natural gas pipelines, water and sewer pipelines, andunderground and overhead telecommunications networks; and

•                    Installationand servicing of meter reading devices and related communications networks,including fiber optic cable.

 

At December 31, 2004, wehad invested approximately $30 million in Infrastructure Servicescompanies.  In February 2005, **Cinergy** filed an application with the SEC under PUHCArequesting authority to invest up to $100 million in Infrastructure Servicescompanies through December 31,

 

58

----

 

2008, which is a $400million reduction in **Cinergy’s**current authority.  At this time, we areunable to predict whether the SEC will approve this request.

 

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

We are subject to an SEC order under thePUHCA, which limits the amounts **Cinergy Corp.**can have outstanding under guarantees at any one time to $2 billion.  As of December 31, 2004, we had approximately$877 million outstanding under the guarantees issued, of which approximately 96percent represents guarantees of obligations reflected on **Cinergy’s** Balance Sheets.  The amount outstanding represents **Cinergy Corp.’s** guarantees of liabilitiesand commitments of its consolidated subsidiaries, unconsolidated subsidiaries,and joint ventures.  In February 2005, **Cinergy** filed an application with the SEC under the PUHCArequesting authority to have an aggregate amount of guarantees outstanding atany point in time not to exceed $3 billion. At this time, we are unable to predict whether the SEC will approve thisrequest.

 

See Note 11(c)(*v*) of the “Notes to Financial Statements” in “Item 8.Financial Statements and Supplementary Data” for a discussion of guarantees inaccordance with Financial Accounting Standards Board Interpretation No. 45, *Guarantor’s Accounting and Disclosure Requirementsfor Guarantees, Including Indirect Guarantees of Indebtedness of Others*(Interpretation 45).  Interpretation 45requires disclosure of maximum potential liabilities for guarantees issued onbehalf of unconsolidated subsidiaries and joint ventures and underindemnification clauses in various contracts. The Interpretation 45 disclosure differs from the PUHCA restrictions inthat it requires a calculation of maximum potential liability, rather thanactual amounts outstanding; it excludes guarantees issued on behalf of consolidatedsubsidiaries; and it includes potential liabilities under indemnificationclauses.

 

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

**Cinergy**has certaincontracts in place, primarily with trading counterparties, that require theissuance of collateral in the event our debt ratings are downgraded belowinvestment grade.  Based upon ourDecember 31, 2004 trading portfolio, if such an event were to occur, **Cinergy** would be required to issue up toapproximately $310 million in collateral related to its gas and power tradingoperations, of which $69 million is related to **CG&E**.

 

#### **Capital Resources**

**Cinergy**, **CG&E**, **PSI**, and **ULH&P** meet their current and future capital requirementsthrough a combination of funding sources including, but not limited to,internally generated cash flows, tax-exempt bond issuances, capital lease andoperating lease structures, the securitization of certain asset classes,short-term bank borrowings, issuance of commercial paper, and issuances oflong-term debt and equity.  Fundingdecisions are based on market conditions, market access, relative pricinginformation, borrowing duration and current versus forecasted cash needs.  **Cinergy**, **CG&E**, **PSI**, and **ULH&P** are committed to maintaining balance sheet health,responsibly managing capitalization, and maintaining adequate creditratings.  **Cinergy**,**CG&E**, **PSI**,and **ULH&P** believe that they haveadequate financial resources to meet their future needs.

 

##### ***Saleof Accounts Receivable***

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

 

59

----

 

##### ***NotesPayable and Other Short-term Obligations***

We are required to secure authority to issueshort-term debt from the SEC under the PUHCA and from the PUCO.  The SEC under the PUHCA regulates the issuanceof short-term debt by **Cinergy Corp.**,**PSI**, and **ULH&P**. The PUCO has regulatory jurisdiction over the issuance of short-termdebt by **CG&E**.

 

| ** **                   | ** **   | **Short-term Regulatory Authority  December 31, 2004** | ** **   |
|------------------------------|--------------|--------------------------------------------------------|--------------|
| *** ***                 | *** *** | **(in millions)**                                      | *** *** |
| *** ***                 | *** *** | *** ***                                           | *** *** | *** *** | *** *** |
| ** **                   | ** **   | **Authority**                                          | ** **   | **Outstanding** | ** ** |
|                         |         |                                                   |         |   |   |
| **Cinergy Corp.**            |         | $                                                      | 5,000        | (1) | $ | 676 |   |
| **CG&E**and subsidiaries |         | 665                                                    | (2)          | 180 |   |
| **PSI**                      |         | 600                                                    |         | 131 |   |
| **ULH&P**                |         | 65                                                     | (2)          | 11 |   |
|                              |              |                                                        |              |  |  |  |  |

----

(1)           **CinergyCorp.**, under the PUHCA, was granted approval to increase totalcapitalization (excluding retained earnings and accumulated other comprehensiveincome (loss)), which may be any combination of debt and equity securities, by$5 billion.  Outside this requirement, **Cinergy Corp.** is not subject to specificregulatory debt authorizations.

(2)           In December 2004, **Cinergy** and **ULH&P** requested approval from the SEC for an increase in **ULH&P’s** authority from $65 million to$150 million to coincide with the completion of its pending transaction with **CG&E** in which **ULH&P** will acquire interests in threeof **CG&E’s** electric generatingstations.  At this time, we are unable topredict whether the SEC will approve this request.

 

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

 

60

----

 

**CinergyCorp.’s**short-term borrowing consists primarily of unsecuredrevolving lines of credit and the sale of commercial paper.  **CinergyCorp.’s** $2 billion revolving credit facilities and $1.5 billioncommercial paper program also support the short-term borrowing needs of **CG&E**, **PSI**,and **ULH&P**.  In addition, **Cinergy Corp.**, **CG&E**,and **PSI** maintain uncommitted linesof credit.  These facilities are not firmsources of capital but rather informal agreements to lend money, subject toavailability, with pricing determined at the time of advance.  The following is a summary of outstandingshort-term borrowings for **Cinergy**,**CG&E**, **PSI**, and **ULH&P**,including variable rate pollution control notes:

 
| ** **                   | ** **   | **Short-term Borrowings** | ** **   |
|------------------------------|--------------|---------------------------|--------------|
| ** **                   | ** **   | **December 31, 2004**     | ** **   |
| ** **                   | ** **   | ** **                | ** **   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                   | ** **   | ** **                | ** **   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Available** | ** ** |
| ** **                   | ** **   | ** **                | ** **   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Revolving** | ** ** |
| ** **                   | ** **   | **Established**           | ** **   | ** ** | ** ** | ** ** | ** ** | **Standby** | ** ** | **Lines of** | ** ** |
| ** **                   | ** **   | **Lines**                 | ** **   | **Outstanding** | ** ** | **Unused** | ** ** | **Liquidity(1)** | ** ** | **Credit** | ** ** |
| *** ***                 | *** *** | **(in millions)**         | *** *** |
| * *                     | * *     | * *                  | * *     | * * | * * | * * | * * | * * | * * | * * | * * |
| **Cinergy**                  |         |                      |         |   |   |   |   |   |   |   |   |
| **Cinergy Corp.**            |         |                      |         |   |   |   |   |   |   |   |   |
| Revolving lines(2)           |         | $                         | 2,000        |   | $ | — |   | $ | 2,000 |   | $ | 688 |   | $ | 1,312 |   |
| Uncommitted lines(3)         |         | 40                        |         | — |   | 40 |   |   |   |   |   |
| Commercial paper(4)          |         |                      |         | 676 |   |   |   |   |   |   |   |
|                         |         |                      |         |   |   |   |   |   |   |   |   |
| Utility operating companies  |         |                      |         |   |   |   |   |   |   |   |   |
| Uncommitted lines(3)         |         | 75                        |         | — |   | 75 |   |   |   |   |   |
| Pollution control notes      |         |                      |         | 248 |   |   |   |   |   |   |   |
|                         |         |                      |         |   |   |   |   |   |   |   |   |
| Non-regulated subsidiaries   |         |                      |         |   |   |   |   |   |   |   |   |
| Revolving lines(5)           |         | 158                       |         | 8 |   | 150 |   | — |   | 150 |   |
| Short-term debt              |         |                      |         | 2 |   |   |   |   |   |   |   |
| Pollution control notes      |         |                      |         | 25 |   |   |   |   |   |   |   |
|                         |         |                      |         |   |   |   |   |   |   |   |   |
| **Cinergy Total**            |         |                      |         | $ | 959 |   |   |   |   |   | $ | 1,462 |   |
|                         |         |                      |         |   |   |   |   |   |   |   |   |
| **CG&E**and subsidiaries |         |                      |         |   |   |   |   |   |   |   |   |
| Uncommitted lines(3)         |         | $                         | 15           |   | $ | — |   | $ | 15 |   |   |   |   |   |
| Pollution control notes      |         |                      |         | 112 |   |   |   |   |   |   |   |
| Money pool                   |         |                      |         | 180 |   |   |   |   |   |   |   |
|                         |         |                      |         |   |   |   |   |   |   |   |   |
| **CG&E Total**           |         |                      |         | $ | 292 |   |   |   |   |   |   |   |
|                         |         |                      |         |   |   |   |   |   |   |   |   |
| **PSI**                      |         |                      |         |   |   |   |   |   |   |   |   |
| Uncommitted lines(3)         |         | $                         | 60           |   | $ | — |   | $ | 60 |   |   |   |   |   |
| Pollution control notes      |         |                      |         | 136 |   |   |   |   |   |   |   |
| Money pool                   |         |                      |         | 130 |   |   |   |   |   |   |   |
|                         |         |                      |         |   |   |   |   |   |   |   |   |
| **PSI Total**                |         |                      |         | $ | 266 |   |   |   |   |   |   |   |
|                         |         |                      |         |   |   |   |   |   |   |   |   |
| **ULH&P**                |         |                      |         |   |   |   |   |   |   |   |   |
| Money pool                   |         |                      |         | $ | 11 |   |   |   |   |   |   |   |
|                         |         |                      |         |   |   |   |   |   |   |   |   |
| **ULH&P Total**          |         |                      |         | $ | 11 |   |   |   |   |   |   |   |
|                              |              |                           |              |  |  |  |  |  |  |  |  |  |  |  |  |  |

----

(1)                                  Standby liquidity is reserved against therevolving lines of credit to support the commercial paper program and outstandingletters of credit (currently $676 million and $12 million, respectively).

(2)                                  Consists of a three-year $1 billionfacility and a five-year $1 billion facility. The five-year facility contains $500 million sublimits each for **CG&E** and **PSI**.

(3)                                  These facilities are not guaranteedsources of capital and represent an informal agreement to lend money, subjectto availability, with pricing to be determined at the time of advance.

(4)                                  In September 2004, **Cinergy Corp.** increased its commercialpaper program limit from $800 million to $1.5 billion.  The commercial paper program is supported by **Cinergy Corp.’s** revolving lines of credit.

(5)                                  In December 2004, Cinergy Canada, Inc.successfully placed a $150 million three-year senior revolving credit facility.

 

61

----

 

At December 31, 2004, **Cinergy Corp.** had approximately $1.3billion remaining unused and available capacity relating to its $2 billionrevolving credit facilities.  Theserevolving credit facilities include the following:

 
| ** **                   | ** **   | ** **     | **Outstanding**   | ** **            |
|------------------------------|--------------|----------------|-------------------|-----------------------|
| **Credit Facility**          | ** **   | **Expiration** | ** **        | **Established Lines** | ** ** | **and Committed** | ** ** | **Unused and Available** | ** ** |
| *** ***                 | *** *** | *** ***   | **(in millions)** | *** ***          |
| * *                     | * *     | * *       | * *          | * *              | * * | * * | * * | * * | * * |
| Five-year senior revolving   |         | December  2009 |              |                  |   |   |   |   |   |
| Direct borrowing             |         |           |              | $                     |   |   | $ |  — |   | $ |   |   |
| Commercial paper support     |         |           |              |                  |   | — |   |   |   |
|                         |         |           |              |                  |   |   |   |   |   |
| Total five-year facility(1)  |         |           |              | 1,000                 |   | — |   | 1,000 |   |
|                         |         |           |              |                  |   |   |   |   |   |
| Three-year senior revolving  |         | April  2007    |              |                  |   |   |   |   |   |
| Direct borrowing             |         |           |              |                  |   | — |   |   |   |
| Commercial paper support     |         |           |              |                  |   | 676 |   |   |   |
| Letter of credit support     |         |           |              |                  |   | 12 |   |   |   |
|                         |         |           |              |                  |   |   |   |   |   |
| Total three-year facility(2) |         |           |              | 1,000                 |   | 688 |   | 312 |   |
|                         |         |           |              |                  |   |   |   |   |   |
| Total Credit Facilities      |         |           |              | $                     |  2,000 |   | $ |  688 |   | $ |  1,312 |   |

----

(1)                                  In April 2004, **Cinergy Corp.** successfully placed a $500 million 364-daysenior unsecured revolving credit facility. This facility replaced the $600 million 364-day senior unsecuredrevolving credit facility that expired in April 2004.  In December 2004, **Cinergy Corp.** successfully replaced the $500 million 364-dayfacility with a $1 billion five-year facility. **CG&E** and**PSI**each have $500 million borrowingsublimits on this facility.

(2)                                  In April 2004, **Cinergy Corp.** successfully placed a $1 billion three-yearsenior unsecured revolving credit facility. This facility replaced the $400 million three-year senior unsecuredrevolving credit facility that was set to expire in May 2004.

 

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

 

•      aconsolidated net worth of $2 billion; and

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

 

As part of **CG&E’s**$500 million sublimit under the $1 billion five-year credit facility, **CG&E** has covenanted to maintain:

 

•      aconsolidated net worth of $1 billion; and

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

 

As part of **PSI’s**$500 million sublimit under the $1 billion five-year credit facility, **PSI** has covenanted to maintain:

 

•      aconsolidated net worth of $900 million; and

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

 

A breach of these covenants could result inthe termination of the credit facilities and the acceleration of the relatedindebtedness.  In addition to breaches ofcovenants, certain other events that could result in the termination ofavailable credit and 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 subjectto dollar-based materiality thresholds.

 

As discussed in Note 1(q)(*i*) of the “Notes to Financial Statements” in “Item 8.Financial Statements and Supplementary Data”, long-term debt increased in thethird quarter of 2003 resulting from the adoption of Interpretation 46.  The debt which was recorded as a result ofthis new accounting pronouncement did not cause 

 

62

----

 

**CinergyCorp.** to be in breach of any covenants at the time of adoption.  As of December 31, 2004, **Cinergy**,**CG&E**, and **PSI**are in compliance with all of their debt covenants.

* *

*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, weekly, or monthly basis, they are reflected in *Notes payable and other short-term obligations*on the Balance Sheets of **Cinergy**, **CG&E**, and **PSI**.  At December 31,2004, **Cinergy**, **CG&E** and**PSI**had $273 million, $112 million and $136 million, respectively, outstanding invariable rate pollution control notes, classified as short-term debt.  **ULH&P**hadno outstanding short-term pollution control notes.  Any short-term pollution control noteborrowings outstanding do not reduce the unused and available short-term debtregulatory authority of **CG&E**, **PSI**, and **ULH&P**.  See Note 5 of the “Notes to FinancialStatements” in “Item 8. Financial Statements and Supplementary Data”.

 

*Commercial Paper*

**CinergyCorp.’s**commercial paper program is supported by **Cinergy Corp.’s** $2 billion revolving creditfacilities.  The commercial paper programsupports, in part, the short-term borrowing needs of **CG&E** and **PSI**and eliminates their need for separate commercial paper programs.  In September 2004, **CinergyCorp.** expanded its commercial paper program from $800 million to amaximum outstanding principal amount of $1.5 billion.  As of December 31, 2004, **Cinergy Corp.** had $676 million in commercial paper outstanding.

 

*Money Pool*

**CinergyCorp.**, Cinergy Services, Inc., and our utility operating companiesparticipate in a money pool arrangement to better manage cash and workingcapital requirements.  Under thisarrangement, those companies with surplus short-term funds provide short-termloans to affiliates (other than **Cinergy Corp.**)participating under this arrangement. This surplus cash may be from internal or external sources.  The amounts outstanding under this money poolarrangement 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**.

 

##### ***OperatingLeases***

We have entered into operating leaseagreements for various facilities and properties such as computer,communication and transportation equipment, and office space.  See Note 6(a) of the “Notes to FinancialStatements” in “Item 8. Financial Statements and Supplementary Data” foradditional information regarding operating leases.

 

##### ***CapitalLeases***

Our utilityoperating companies are able to enter into capital leases subject to theauthorization limitations of the applicable state utility commissions.  New financing authority is subject to theapproval of the respective commissions. The following table presents further information related to the capitallease authorizations of **CG&E**, **PSI**, and **ULH&P**at December 31, 2004.

 

| ** **                   | ** **   | **Capital Lease Authority   December 31, 2004** | ** **   |
|------------------------------|--------------|-------------------------------------------------|--------------|
| *** ***                 | *** *** | **(in millions)**                               | *** *** |
| *** ***                 | *** *** | *** ***                                    | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** |
| ** **                   | ** **   | **Authority**                                   | ** **   | **Outstanding** | ** ** | **Remaining** | ** ** | **Expiration Date** | ** ** |
| **CG&E**and subsidiaries |         | $                                               | 60           |   | $ | 9 |   | $ | 51 |   | 12/31/2005 |   |
| **PSI**                      |         | 100                                             |         | 4 |   | 96 |   | 12/31/2005 |   |
| **ULH&P**                |         | 25                                              |         | 2 |   | 23 |   | 12/31/2006 |   |
|                              |              |                                                 |              |  |  |  |  |  |  |  |  |  |

 

63

----

 

See Note 6(b) of the “Notes to FinancialStatements” in “Item 8. Financial Statements and Supplementary Data” foradditional information regarding capital leases.

 

##### ***Long-termDebt***

We are required to secure authority to issuelong-term debt from the SEC under the PUHCA and the state utility commissionsof Ohio, Kentucky, and Indiana.  The SECunder the PUHCA regulates the issuance of long-term debt by **Cinergy Corp.**  The respective state utility commissionsregulate the issuance of long-term debt by our utility operating companies.

 

A current summary of our long-term debtauthorizations at December 31, 2004, was as follows:

 

| ** **                                   | ** **   | **Authorized**    | ** **   | **Used** | ** ** | **Available** | ** ** |
|----------------------------------------------|--------------|-------------------|--------------|----------|------------|---------------|------------|
| *** ***                                 | *** *** | **(in millions)** | *** *** |
| * *                                     | * *     | * *          | * *     | * * | * *   | * *      | * *   |
| **Cinergy Corp.**                            |         |              |         |     |       |          |       |
| PUHCA total capitalization(1)(2)             |         | $                 | 5,000        |     | $          | 1,747         |       | $ | 3,253 |   |
|                                         |         |              |         |     |       |          |       |
| **CG&E**and subsidiaries(3)              |         |              |         |     |       |          |       |
| State Public Utility Commissions             |         | $                 | 575          |     | $          | —        |       | $ | 575 |   |
| State Public Utility Commission - Tax-Exempt |         | 250               |         | 94       |       | 156           |       |
|                                         |         |              |         |     |       |          |       |
| **PSI**                                      |         |              |         |     |       |          |       |
| State Public Utility Commission              |         | $                 | 500          |     | $          | —        |       | $ | 500 |   |
| State Public Utility Commission - Tax-Exempt |         | 250               |         | 209      |       | 41            |       |
|                                         |         |              |         |     |       |          |       |
| **ULH&P**                                |         |              |         |     |       |          |       |
| State Public Utility Commission(4)           |         | $                 | 75           |     | $          | —        |       | $ | 75 |   |

----

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

(2)                                  In February 2005, **Cinergy** filed an application with theSEC under the PUHCA to issue an additional $5 billion in any combination ofdebt and equity securities from time to time through December 31, 2008.  At this time, we are unable to predictwhether the SEC will approve this request.

(3)                                  Includes amounts for **ULH&P**.

(4)                                  In January 2005, **ULH&P** filed an application with theKentucky Public Service Commission (KPSC) seeking financing authority to issueand sell up to $500 million principal amount of secured and unsecureddebt; enter into inter-company promissory notes up to an aggregate principalamount of $200 million; and borrow up to a maximum of $200 million aggregateprincipal amount of tax-exempt debt through December 31, 2006.

 

**CinergyCorp.** has an effective shelf registration statement with the SEC relating tothe issuance of up to $750 million in any combination of common stock,preferred stock, stock purchase contracts or unsecured debt securities, ofwhich approximately $323 million remains available for issuance.  **CG&E**has an effective shelf registration statement with the SEC relating to theissuance of up to $800 million in any combination of unsecured debt securities,first mortgage bonds, or preferred stock, all of which remains available forissuance.  **PSI** has an effective shelf registration statement with the SECrelating to the issuance of up to $800 million in any combination of unsecureddebt securities, first mortgage bonds, or preferred stock, all of which remainsavailable for issuance.  **ULH&P** has an effective shelf registration statement withthe SEC for the issuance of up to $75 million in unsecured debt securities, $35million of which remains available for issuance.  **ULH&P** alsohas an effective shelf registration statement with the SEC relating to theissuance of up to $40 million in first mortgage bonds, of which $20 millionremains available for issuance.

 

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

**Cinergy** usesoff-balance sheet arrangements from time to time to facilitate financing ofvarious projects.  Off-balance sheetarrangements are often created for a single specified purpose, for example, tofacilitate securitization, leasing, hedging, research and development,reinsurance, or other transactions or arrangements.  The following describes our major off-balancesheet arrangements excluding the investments **Cinergy**holds in various unconsolidated subsidiaries which are accounted for under theequity method.  See Note 1(b)(*ii*) of the “Notes to 

 

64

----

 

Financial Statements” in “Item 8. FinancialStatements and Supplementary Data” for additional information on the accountingfor equity method investments.

 

*(i)   Guarantees*

**Cinergy** has enteredinto various contracts that are classified as guarantees under Interpretation45.  For further information, see Note11(c)(*v*) of the “Notes toFinancial Statements” in “Item 8. Financial Statements and Supplementary Data”.

 

*(ii)  RetainedInterest in Assets Transferred to an Unconsolidated Entity*

In February 2002, **CG&E**, **PSI**,and **ULH&P** replaced theirexisting agreement to sell certain of their accounts receivable and related collections.  **CinergyCorp.** formed Cinergy Receivables to purchase, on a revolving basis,nearly all of the retail accounts receivable and related collections of **CG&E**, **PSI**,and **ULH&P**.  **CinergyCorp.** does not consolidate Cinergy Receivables since it meets therequirements to be accounted for as a qualifying SPE.  **CG&E**,**PSI**, and **ULH&P** each retain an interest in thereceivables transferred to Cinergy Receivables. The transfer of receivables are accounted for as sales, pursuant toStatement of Financial Accounting Standards No. 140, *Accounting for Transfers and Servicing of Financial Assets andExtinguishments of Liabilities*. For a more detailed discussion of our sales of accounts receivable, seeNote 3(c) of the “Notes to Financial Statements” in “Item 8. FinancialStatements and Supplementary Data”.

 

*(iii) DerivativeInstruments that are Classified as Equity*

In 2001, **CinergyCorp.** issued approximately $316 million notional amounts of combinedsecurities, a component of which was stock purchase contracts.  These contracts obligated the holder topurchase common shares of **Cinergy Corp.**stock by February 2005.  Since the stockpurchase contracts were detachable and classified in equity, the change intheir fair value was not recorded in equity or earnings. In January andFebruary 2005, the stock purchase contracts were settled, resulting in theissuance of common stock that is recorded on **Cinergy’s**Balance Sheets as Common Stock Equity. For further information see Note 3(b) of the “Notes to FinancialStatements” in “Item 8. Financial Statements and Supplementary Data”.

 

*(iv) VariableInterest Entities (VIE)*

**Cinergy** holdsinterests in VIEs, consolidated and unconsolidated, as defined byInterpretation 46.  For furtherinformation, see Note 1(q)(*i*) andNote 3 of the “Notes to Financial Statements” in “Item 8. Financial Statementsand Supplementary Data”.

 

65

----

 

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

As of January 31, 2005, the major creditrating agencies rated our securities as follows:

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

----

(1)           Fitch Ratings (Fitch)

(2)           Moody’s Investors Service (Moody’s)

(3)           Standard & Poor’s RatingsServices (S&P)

 

Thehighest investment grade credit rating for Fitch is AAA, Moody’s is Aaal, andS&P is AAA.

Thelowest investment grade credit rating for Fitch is BBB-, Moody’s is Baa3, andS&P is BBB-.

 

A security rating is not a recommendation tobuy, sell, or hold securities.  Thesesecurities ratings may be revised or withdrawn at any time, and each ratingshould be evaluated independently of any other rating.

 

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

Under the SEC’s June 2000 Order, **Cinergy Corp.** is permitted to increase itstotal capitalization by $5 billion (as previously discussed).  The proceeds from any new issuances will beused for general corporate purposes.

 

**Cinergy Corp.** issuedapproximately 3.9 million shares in 2004 and approximately 4.6 million sharesin 2003 to satisfy its obligations under its various employee stock plans andthe **Cinergy Corp.** Direct StockPurchase and Dividend Reinvestment Plan.

 

In January 2003, **Cinergy Corp.** filed a shelf registration statement with theSEC with respect to the issuance of common stock, preferred stock, and othersecurities in an aggregate offering amount of $750 million.  In February 2003, **Cinergy** issued 5.7 million shares of common stock of **Cinergy Corp.** with net proceeds ofapproximately $175 million under this registration statement.  The net proceeds from this transaction wereused to reduce short-term debt of **Cinergy Corp.**and for other general corporate purposes. In December 2004, **Cinergy Corp.**issued 6.1 million shares of common stock with net proceeds of approximately$247 million, which were used to reduce short-term debt.

 

In May and Augustof 2003, **Cinergy Corp.** contributed$200 million in capital to **PSI** intwo separate $100 million capital contributions to support **PSI’s** current credit ratings.

 

In January and February 2005, **Cinergy Corp.** issued a total of 9.2 million shares of commonstock pursuant to certain stock purchase contracts that were issued as acomponent of combined securities in December 2001.  Net proceeds from the transaction ofapproximately $316 million were used to reduce short-term debt.  See 

 

66

----

 

Note 3(b) of the “Notes to FinancialStatements” in “Item 8. Financial Statements and Supplementary Data” forfurther discussion of the securities.

 

##### ***DividendRestrictions***

**CinergyCorp.’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.** dividends on their commonstock.  **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.

 

##### ***Other***

Where subject to rate regulations, ourutility operating companies have the ability to timely recover certain cashoutlays through various regulatory mechanisms.

 

As opportunities arise, we will continue tomonetize certain non-core investments, which would include our internationalassets and other technology investments.

 

67

----

** **

**MD&A - FUTUREEXPECTATIONS/TRENDS**

 

### **FUTUREEXPECTATIONS/TRENDS**

In the “Future Expectations/Trends” section,we discuss developments in the electric and gas industry and othermatters.  Each of these discussions willaddress the current status and potential future impact on our financialposition or results of operations.

 

### **ELECTRIC INDUSTRY**

#### **Regulatory Outlook and Significant Rate Developments**

Currently, regulatory and legislativeinitiatives shaping the transition to a competitive retail market are the responsibilitiesof the individual 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 asunbundling of the integrated services. Under the customer choice initiative in Ohio, we continue to transmitand distribute electricity; however, the customer can purchase electricity fromany certified supplier.  The followingsections further discuss the current status of deregulation legislation andother significant regulatory developments in the states of Ohio, Indiana, andKentucky, which encompass our utility service territories.

 

##### ***Ohio***

**CG&E** is in a marketdevelopment period for residential customers and in the competitive retailelectric market for non-residential customers, transitioning to deregulation ofelectric generation and a competitive retail electric service market in thestate of Ohio.  The market development(frozen rate) period began January 1, 2001, ended December 31, 2004 fornon-residential customers and is scheduled to end December 31, 2005 forresidential customers.

 

**CG&E** made multiplerate filings in 2003 with the PUCO seeking approval of **CG&E’s**methodology for establishing market-based rates for generation service at theend of the market development period and to recover investments made in thetransmission and distribution system. The PUCO requested in these proceedings that **CG&E** propose a RSP to mitigate the potential forsignificant rate increases when the market development period comes to anend.  In January 2004, **CG&E**filed its proposed RSP.  In May 2004, **CG&E**enteredinto a settlement agreement with many of the parties to these proceedingsrequesting that the PUCO approve a modified version of the RSP.  In September 2004, the PUCO issued an orderseeking to modify several key provisions of this settlement and as a result ofthese modifications, **CG&E**fileda petition for rehearing in October 2004. The PUCO approved a modified version of the plan in November 2004, themajor features of which are as follows:

 

•                  **Provider of Last Resort (POLR) Charge:**  **CG&E** willbegin to collect a POLR charge from non-residential customers effective January1, 2005, and from residential customers effective January 1, 2006.  The POLR charge includes several discretecharges, the most significant being an annually adjusted component (AAC)intended to provide cost recovery primarily for environmental complianceexpenditures; an infrastructure maintenance fund charge (IMF) intended to provide compensationto **CG&E** for committing its physicalcapacity to meet its POLR obligation; and********a system reliability tracker (SRT) intended toprovide cost recovery for capacity purchases, purchased power, reservecapacity, and related market costs for purchases to meet capacity needs.  We anticipate the collection of the AAC andIMF will result in an approximate $36 million increase in revenues in 2005 andan additional $50 million in 2006.  TheSRT will be billed based on dollar-for-dollar costs incurred.  A portion of these charges are avoidable bycertain customers who switch to an alternative generation supplier.  Therefore, these estimates are subject tochange, depending on the level of switching that occurs in future periods.  In 2007 and 2008, **CG&E**could seek additional increases in the AAC component of the POLR based on **CG&E’s** actual net costs for the specified expenditures.

•                  **Generation Rates and Fuel Recovery: **A new rate has been established for generation service afterthe market development period ends.  Inaddition, a fuel cost recovery mechanism will be established to recover costsfor fuel, emission allowances, and certain purchased power costs, that exceedthe amount originally included in the rates frozen in the **CG&E** transition plan.  These new rates will apply to 

 

68

----

 

                        non-residentialcustomers beginning January 1, 2005 and to residential customers beginningJanuary 1, 2006.

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

•                  **Transmission Cost Recovery: **Transmissioncost recovery mechanisms will be established beginning January 1, 2005 fornon-residential customers and January 1, 2006 for residential customers.  The transmission cost recovery mechanismswill permit **CG&E** to recover Midwest ISOcharges, all FERC approved transmission costs, and all congestion costsallocable to retail ratepayers that are provided service by **CG&E**.

•                  **Distribution Cost Recovery: CG&E** will have the ability to defer certain capital-relateddistribution costs from July 1, 2004 through December 31, 2005 with recoveryfrom non-residential customers to be provided through a rider beginning January1, 2006 through December 31, 2010.

 

**CG&E** had also filedan electric distribution base rate case for residential and non-residentialcustomers to be effective January 1, 2005. Under the terms of the RSP described previously, **CG&E** withdrew this base rate case and,in February 2005, **CG&E** fileda new distribution base rate case with rates to become effective January 1,2006.  The requested amount of theincrease is approximately $78 million.

 

The RSP provides for rate recovery throughDecember 31, 2008.  Although it isdifficult to predict, it is likely that any one of three scenarios could existafter the rate stabilization period ends in 2008:

 

•                  Thelegislation could be repealed or revised to establish a return to regulation ofelectric generation;

•                  Deregulationand a competitive retail electric service market with market-based rates forall customer classes; or

•                  Ahybrid of regulation and deregulation.

 

Although we cannot predict the regulatoryoutcome, we believe any of these scenarios could have a material impact on ourfinancial position and results of operations. However, we believe that a return to regulation of electric generationwould provide the least volatility in ongoing results, although likelyaccompanied by less opportunity for growth in earnings.

 

In December 2004, **CG&E**filed an application with the PUCO requesting recovery of future costs of additional generating facilities inOhio, for either construction of new electric generating facilities or thepurchase of existing assets currently owned by others.  **CG&E**would seek recovery of these costs over the lives of the assets.  These investments are needed to meet ongoingload growth by customers receiving generation service from **CG&E** and would enable the company toreliably meet its obligation as the provider of last resort for customersreturning to **CG&E** fromalternate suppliers.  To maintainflexibility in providing electric service at the lowest cost, **CG&E** is also seeking the authority topurchase existing capacity and power from other suppliers and to earn a returncommensurate with the risk from these agreements.

 

##### ***Indiana***

We are not aware of any current plans forelectric deregulation in Indiana.

 

In May 2004, the IURC issued an orderapproving **PSI’s**base retail electric rate case,and **PSI** implemented base retail electricrate changes to its tariffs.  Whencombined with revenue increases attributable to **PSI’s** environmental construction-work-in-progress trackingmechanism, the order results in an approximate $140 million increase in annualrevenues.  **PSI’s** original request for an approximate $180 million annualrevenue increase was reduced by approximately $20 million for a lower return onequity, approximately $15 million of assumed profits included in base ratesrelated to off-system sales (subject to future adjustment through a trackingmechanism and a 50/50 sharing agreement), and approximately $5 million ofadditional items.  The order authorizesfull recovery of all requested regulatory assets and an overall 7.3 percentreturn, including a 10.5 percent return on equity.  In addition, the IURC’s order provides **PSI** the continuation of a purchased powertracker and the establishment of new trackers for future NOXemission allowance costs and certain costs related to the Midwest ISO.  

 

**Cinergy** is studyingthe feasibility of constructing a commercial integrated coal gasification combinedcycle (IGCC) generating station to 

 

69

----

 

help meet increased demand over the nextdecade.  **PSI**would own all or part of the facility and operate it.  **Cinergy** willpartner with Bechtel Corporation and General Electric Company to complete thisstudy.  An IGCC plant turns coal to gas,removing most of the SO2 and other emissions before the gas is usedto fuel a combustion turbine generator. The technology uses less water and has fewer emissions than a conventionalcoal-fired plant with currently required pollution control equipment.  Another benefit is the potential to removemercury and CO2 upstream of the combustion process at a lower costthan conventional plants.  If a decisionis reached to move forward with constructing such a plant, **PSI**wouldseek approval from the IURC to begin construction.  If approved, we would anticipate the IURC’ssubsequent approval to include the assets in **PSI’s**ratebase.

 

In November 2004,******PSI**filed a compliance plan case with the IURCseeking approval of**PSI’s** plan forcomplying with pending SO2, NOX, and mercury emissionreduction requirements, including approval of cost recovery and an overall rateof return of eight percent related to certain projects.  **PSI** requestedapproval to recover the financing, depreciation, and operating and maintenancecosts, among others, related to approximately $1.08 billion in capital projectsdesigned to reduce emissions of SO2, NOX, and Mercury at **PSI’s** coal burning generating stations.  An evidentiary hearing is scheduled for April2005 and a final IURC Order is expected in the third quarter of 2005.

 

##### ***Kentucky***

We are not aware of any current plans forelectric deregulation in Kentucky.

 

The KPSC hasconditionally approved **ULH&P’s**planned acquisitionof **CG&E’s** 68.9 percentownership interest in the East Bend Generating Station, located in BooneCounty, Kentucky, the Woodsdale Generating Station, located in Butler County,Ohio, and one generating unit at the four-unit Miami Fort Station located inHamilton County, Ohio.  **ULH&P**is currently seeking approval of the transactionfrom the SEC, wherein the Ohio Consumers Counsel has intervened in opposition,and the FERC.  The transfer, which willbe paid for at net book value, will not affect current electric rates for **ULH&P’s** customers, as power will beprovided under the same terms as under the current wholesale power contractwith **CG&E** through December 31,2006.  Assuming receipt of regulatoryapprovals, we would anticipate the transfer to take place in the second quarterof 2005.   Once approved, **ULH&P**would be required to file a rate case with theKPSC to include these assets in rate base with rate increases to be effectiveJanuary 1, 2007.  Costs of fuel andemission allowances would be recovered through a fuel adjustment clausecurrently in existence in Kentucky, beginning January 1, 2007 when the assetsare in rate base.  Because the KPSC hasalready conditionally approved the transfer, we expect the regulatory processto result in a reasonable rate base valuation for these assets; however, atthis time we cannot predict whether we will receive approval of the transactionfrom the FERC and SEC.

 

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

##### ***MidwestISO Energy Markets***

The Midwest ISO is a regional transmissionorganization established in 1998 as a non-profit organization which maintainsfunctional control over the combined transmission systems of its members,including **Cinergy**.  In March 2004, the Midwest ISO filed with theFERC proposed changes to its existing transmission tariff to add terms andconditions to implement a centralized economic dispatch platform supported by aDay-Ahead and Real-Time Energy Market design, including Locational MarginalPricing and Financial Transmission Rights (Energy Markets Tariff). The MidwestISO is now in the final stages of market trials and testing of its EnergyMarkets Tariff.  The FERC has issuedorders that, among other things, conditionally approve the start-up of theEnergy Markets Tariff. The projected implementation date is April 1, 2005.  Requests for rehearing are pending beforeFERC, and FERC’s orders have also been appealed to a federal appeals court.

 

Specifically, the Energy Markets Tariffproposes to manage system reliability through the use of a market-basedcongestion management system.  Theproposal includes a centralized dispatch platform, the intent of which is todispatch the most economic resources to meet load requirements reliably andefficiently in the Midwest ISO region, which covers a large portion of 15midwestern states and one Canadian province. The Energy Markets Tariff uses Locational Marginal Pricing (i.e., theenergy price for the next MW may vary throughout the Midwest ISO market basedon transmission congestion and energy losses), and the allocation or auction ofFinancial Transmission Rights, which are instruments that hedge againstcongestion costs occurring in the Day-Ahead market.  The Energy Markets Tariff also includesmarket monitoring and mitigation measures as well as a resource adequacyproposal, that 

 

70

----

 

proposes both an interim solution forparticipants providing and having access to adequate generation resources aswell as a proposal to develop a long-term solution to resource adequacyconcerns.  The Midwest ISO will perform aday-ahead unit commitment and dispatch forecast for all resources in itsmarket.  The Midwest ISO will alsoperform the real time resource dispatch for resources under its control on afive minute basis.  The **Cinergy** utility operating companies will seek to recovercosts that they incur related to the Energy Markets Tariff.   This is a significant undertaking by theMidwest ISO and its stakeholders and testing is not yet complete. At this time,we cannot predict the outcome of these matters and whether they will have amaterial effect on our financial position or results of operations.

 

##### ***BlackoutReport***

In April 2004, the United States-Canada PowerSystem Outage Task Force issued its Final Report on the August 14, 2003Blackout in the United States and Canada. The report reviewed the causes of the Blackout and made 46recommendations intended to minimize the likelihood and scope of similar eventsin the future.  One of therecommendations is to make reliability standards mandatory and enforceable withpenalties for noncompliance.  In thepast, compliance with North American Electric Reliability Council’s reliabilitystandards and guidelines has largely been voluntary.  At this time, we do not believe therecommendations of the Final Report, if implemented, will have a materialimpact on our financial position or results of operations.

 

##### ***FERC’sMarket Screen Orders***

In April 2004, the FERC issued an orderestablishing a new, interim set of market power screens for use in evaluating salesof wholesale power at market-based rates. In July 2004, the FERC issued an order generally affirming thatorder.  In April 2004, the FERC alsocommenced a rulemaking to evaluate whether its overall test for market-basedrates should be continued, and to determine a permanent market power test toreplace the interim test.  Thatrulemaking process remains pending. Under FERC’s interim generation market power analysis, as a member ofthe Midwest ISO, **Cinergy** could consider the MidwestISO geographic market for purposes of FERC’s market power analysis once theMidwest ISO has a sufficient market structure and a single energy market.  **Cinergy** doesnot believe it has market power in generation. However, if **Cinergy** wereunable to establish that it does not have the ability to exercise market powerin generation, it could result in the loss of market-based rate authority incertain regions of the wholesale market and, assuming such loss of market-basedrate authority, would require **Cinergy** tocharge certain wholesale customers cost-based rates for wholesale sales ofelectricity.  In February, 2005, FERCissued final rules that may affect how and when circumstances have changed toan extent that requires FERC review of previously granted authorization to sellat existing market-based rates.  At thistime, we cannot predict the outcome of these matters and whether they will havea material effect on our financial position or results of operations.

 

#### **Global Climate Change**

Presently, GHG emissions,which principally consist of CO2, are not regulated, and whileseveral legislative proposals have been introduced in Congress to reduceutility GHG emissions, none have been passed. Nevertheless, we anticipate a mandatory program to reduce GHG emissionswill exist in the future.  We expect thatany regulation of GHGs will impose costs on **Cinergy. **Depending on the details, any GHGregulation could mean:

 

•                  Increased capital expenditures associated withinvestments to improve plant efficiency or install CO2 emission reduction technology (to theextent that such technology exists) or construction of alternatives to coalgeneration;

•                  Increased operating and maintenance expense;

•                  Our older, more expensive generating stations mayoperate fewer hours each year because the addition of CO2 costs could cause their generation to beless economic; and

•                  Increased expensesassociated with the purchase of CO2 emission allowances, should suchan emission allowances market be created.

 

We would plan to seek recovery of the costs associated with a GHGprogram in rate regulated states where cost recovery is permitted.

 

71

----

 

In September 2003, **Cinergy**announced a voluntary GHG management commitment to reduce its GHG emissionsduring the period from 2010 through 2012 by five percent below our 2000 level,maintaining those levels through 2012. This was also published in our December 2004 Air Issues Report toStakeholders.  **Cinergy** expects to spend $21 million between 2004 and 2010 onprojects to reduce or offset its GHG emissions. **Cinergy** is committed tosupporting the President’s voluntary initiative, addressing shareholderinterest in the issue, and building internal expertise in GHG management andGHG markets.  Our voluntary commitmentincludes the following:

 

•                  measuring and inventoryingcompany related sources of GHG emissions;

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

•                  funding research of moreefficient and alternative electric generating technologies;

•                  funding research to betterunderstand the causes and consequences of climate change;

•                  encouraging a globaldiscussion of the issues and how best to manage them; and

•                  participating in discussions to help shape the policydebate.

 

**Cinergy** is alsostudying the feasibility of constructing a commercial IGCC generatingstation.  The IGCC plant would beexpected to run more efficiently than traditionally constructed coal-firedgeneration and would thus contribute fewer CO2 tons per megawatt ofelectricity produced.  See the previoussection “Indiana” for more details on the plans to construct the IGCC facility.

 

### **GAS INDUSTRY**

#### **Significant RateDevelopments**

#### **ULH&P Gas Rate Case**

In the second quarter of 2001, **ULH&P** filed a retail gas rate case with the KPSC requesting, among otherthings, recovery of costs associated with an accelerated gas main replacementprogram of up to $112 million over ten years. The costs would be recovered through a tracking mechanism for an initialthree year period, with the possibility of renewal up to ten years.  The tracking mechanism allows **ULH&P** to recover depreciation costs and rate of return annually over the lifeof the deferred assets.  Through December 31,2004, **ULH&P** has recovered approximately $5.1 millionunder this tracking mechanism.  TheKentucky Attorney General has appealed to the Franklin Circuit Court the KPSC’sapproval of the tracking mechanism and the new tracking mechanism rates.  At the present time, **ULH&P** cannotpredict the timing or outcome of this litigation.

 

In February 2005, **ULH&P**filed a gas base rate case with the KPSC.******ULH&P** is requesting approval to continue the trackingmechanism in addition to its request for a $14 million increase in base rates,which is a seven percent increase in current retail gas rates.

 

#### **Gas Prices**

While natural gas pricesremained relatively high during the first three quarters of 2004, somemoderation in prices was seen in the latter half of the fourth quarter.  Price movement is usually driven by theeffects of weather conditions, availability of supply, and changes in demandand storage inventories.  Currently,neither **CG&E** nor **ULH&P** profit from changes in the costof natural gas since natural gas purchase costs are passed directly to thecustomer dollar-for-dollar under the gas cost recovery mechanism that ismandated under state law.

 

**ULH&P** utilizes aprice mitigation program designed to mitigate the effects of gas pricevolatility on customers, which the KPSC has approved through March 31,2005.  The program allows thepre-arranging of between 20-75 percent of winter heating season base load gasrequirements and up to 50 percent of summer season base load gasrequirements.  **CG&E** similarly mitigates its gas procurement costs,however, **CG&E’s** gas pricemitigation program has not been pre-approved by the PUCO but rather it issubject to PUCO review as part of the normal gas cost recovery process.

 

72

----

 

**CG&E**and **ULH&P**use primarily long-term fixedprice contracts and contracts with a ceiling and floor on the price.  These contracts employ the normal purchasesand sales scope exception, and do not involve hedges under Statement 133.

 

73

----

 

### **INFLATION**

We believe that the recent inflation rates donot materially impact our financial condition. However, under existing regulatory practice for all of **PSI**, **ULH&P**,and the non-generating portion of **CG&E**,only the historical 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.

 

### **OTHER MATTERS**

##### ***SyntheticFuel Production***

In July 2002, Cinergy Capital & Trading,Inc. acquired a coal-based synthetic fuel production facility.  The synthetic fuel produced at this facilityqualifies for tax credits (through 2007) in accordance with Internal RevenueCode (IRC) Section 29 if certain requirements are satisfied.  The three key requirements are that (a) thesynthetic fuel differs significantly in chemical composition from the coal usedto produce such synthetic fuel, (b) the fuel produced is sold to an unrelatedentity and (c) the fuel was produced from a facility that was placed in servicebefore July 1, 1998.  In addition to theexisting plant, we have recently exercised an option to buy an additionalsynthetic fuel plant.

 

During the third quarter of 2004, severalunrelated entities announced that the Internal Revenue Service (IRS) had orthreatened to challenge the placed in service dates of some of the entities’synthetic fuel plants.  A successful IRSchallenge could result in disallowance of all credits previously claimed forfuel produced by the subject plants.  **Cinergy’s** sale of synthetic fuel has generated approximately$219 million in tax credits through December 31, 2004, of which approximately$96 million were generated in 2004.

 

The IRS has not yet audited **Cinergy** for anytax year in which **Cinergy** hasclaimed Section 29 credits related to synthetic fuel.  However, it is reasonable to anticipate thatthe IRS will evaluate the placed in service date and other key requirements forclaiming the credit.  We anticipate thisaudit to begin in the spring of 2005.

 

**Cinergy** received aprivate letter ruling from the IRS in connection with the acquisition of thefacility that specifically addressed the significant chemical changerequirement.  Additionally, although notaddressed in the letter ruling, we believe that our facility’s in service datemeets the Section 29 requirements.

 

IRC Section 29 also provides for a phase-outof the credit based on the price of crude oil. The phase-out is based on a prescribed calculation and definition ofcrude oil prices.  We do not expect anyimpact on our ability to utilize Section 29 credits in 2004.  Future increases in crude oil prices abovethe price stipulated by the IRS could negatively impact our ability to utilizecredits in subsequent years.

 

##### ***WorkforceIssues***

### **Between 2005 and 2013, 44 percent of our workforcewill be eligible for retirement.  Theloss of these employees could have a negative impact on**Cinergy’s overall operations. Cinergy is preparingfor this loss that (a) understanding our current employeeprofile (demographics), (b) identifying critical positions (considered core to our business and that havelicensing or lengthy apprenticeship requirements associated with them), and (c)preparing an action plan. The action plan involves long-term staffing plans including such things asdetailed recruitment plans, the utilization of co-ops and interns,identification of key employees, and strong succession planning.  We will also use senior and phased retirementprograms that allow new employees to train and consult with experiencedhighly-skilled employees post- and pre-retirement.  In addition, we are exploring ways ofaccelerating and enhancing our training programs through collaboration witharea educational institutions and other third-party providers.

74

----

 

**MD&A - MARKET RISK SENSITIVEINSTRUMENTS**

 

### **MARKET RISK SENSITIVEINSTRUMENTS**

#### **Energy Commodities Sensitivity**

The transactions associated with Commercial’senergy marketing and trading activities and substantial investment ingeneration assets give rise to various risks, including price risk.  Price risk represents the potential risk ofloss from adverse changes in the market price of electricity or other energycommodities.  As Commercial continues todevelop its energy marketing and trading business, its exposure to movements inthe price of electricity and other energy commodities may become greater.  As a result, we may be subject to increasedfuture earnings volatility.

 

Commercial’s energy marketing and tradingactivities principally consist of Marketing & Trading’s natural gasmarketing and trading operations and **CG&E’s**power marketing and trading operations.

 

Our domestic operations market and tradeover-the-counter (an informal market where the buying/selling of commoditiesoccurs) contracts for the purchase and sale of electricity (primarily in themidwest region of the United States), natural gas, and other energy-relatedproducts, including coal and emission allowances.  Our natural gas domestic operations provideservices that manage storage, transportation, gathering and processing activities.  In addition, our domestic operations alsomarket and trade natural gas and other energy-related products on the New YorkMercantile Exchange.

 

Marketing & Trading’s natural gasmarketing and trading operations also extend to Canada where natural gasmarketing and management services are provided to producers and industrialcustomers.  Our Canadian operations alsomarket and trade over-the-counter contracts.

 

Many of these energy commodity contractscommit us to purchase or sell electricity, natural gas, and otherenergy-related products at fixed prices in the future.  The majority of the contracts in the naturalgas and other energy-related product portfolios are financially settledcontracts (i.e., there is no physical delivery related with these items).  In addition, Commercial also markets andtrades over-the-counter option contracts. The use of these types of commodity instruments is designed to allowCommercial to:

 

•                  manage and economicallyhedge contractual commitments;

•                  reduce exposure relative tothe volatility of cash market prices;

•                  take advantage of selectedarbitrage opportunities; and

•                  originate customizedtransactions with municipalities and end-use customers.

 

Commercial structures andmodifies its net position to capture the following:

 

•                  expected changes in futuredemand;

•                  seasonal market pricingcharacteristics;

•                  overall market sentiment;and

•                  price relationships betweendifferent time periods and trading regions.

 

At times, a net open position is created oris allowed to continue when Commercial believes future changes in prices andmarket conditions may possibly result in profitable positions.  Position imbalances can also occur due to thebasic lack of liquidity in the wholesale power market.  The existence of net open positions canpotentially result in an adverse impact on our financial condition or resultsof operations.  This potential adverseimpact could be realized if the market price of electric power does not reactin the manner or direction expected.  **Cinergy’s** Risk Management Control Policycontains limits associated with the overall size of net open positions for eachtrading operation.

 

*Trading Portfolio Risks*

Commercial measures the market risk inherentin the trading portfolio employing value at risk (VaR) analysis and othermethodologies, which utilize forward price curves in electric power and naturalgas markets to quantify estimates of the magnitude and probability of futurevalue changes related to open contract positions.  VaR is a 

 

75

----

 

statistical measure used to quantify thepotential change in fair value of the trading portfolio over a particularperiod of time, with a specified likelihood of occurrence, due to marketmovement.  Commercial, through some ofour non-regulated subsidiaries, markets physical natural gas and electricityand trades derivative commodity instruments which are usually settled in cashincluding: forwards, futures, swaps, and options.

 

Any proprietary trading transaction, whethersettled physically or financially, is included in the VaR calculation.

 

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

 

The VaR for **Cinergy’s**trading portfolio is presented in the table below:

 
| **VaR  Associated with Energy Trading Contracts**                    | ** **   |
|----------------------------------------------------------------------|--------------|
| ** **                                                           | ** **   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                           | ** **   | **2004** | ** ** | **2003** | ** ** |
| ** **                                                           | ** **   | **Trading VaR** | ** ** | **Percentage of Operating Income** | ** ** | **Trading VaR** | ** ** | **Percentage of Operating Income** | ** ** |
| *** ***                                                         | *** *** | **(dollars in millions)** | *** *** |
| * *                                                             | * *     | * * | * * | * * | * * | * * | * * | * * | * * |
| 95% confidence level, one-day holding period, one-tailed December 31 |         | **$** | **1.9** | ** ** | **0.3** | **%** | $ | 0.6 |   | 0.1 | % |
| Average for the twelve months ended December 31                      |         | **2.4** | ** ** | **0.3** | ** ** | 1.3 |   | 0.2 |   |
| High for the twelve months ended December 31                         |         | **5.8** | ** ** | **0.8** | ** ** | 3.8 |   | 0.5 |   |
| Low for the twelve months ended December 31                          |         | **0.7** | ** ** | **0.1** | ** ** | 0.4 |   | 0.1 |   |
|                                                                      |              |  |  |  |  |  |  |  |  |  |  |

 

76

----

 

*Changes in Fair Value*

The changes in fair value of the energy riskmanagement assets and liabilities for **Cinergy**and **CG&E** for the years endedDecember 31, 2004 and 2003 are presented in the table below.  In April 2002, **CG&E**and **PSI** executed a new joint operatingagreement whereby we chose to originate all new power marketing and tradingcontracts since April 2002 on behalf of **CG&E**only.  Historically, such contracts wereexecuted on behalf of **PSI** and **CG&E** jointly.  **PSI’s** remaining contracts, entered into prior to the newjoint operating agreement, are not material. Therefore, we have not presented **PSI** separatelyin the fair value tables below.

 
| ** **                                                                                | ** ** | **Change in Fair Value** | ** ** |
|-------------------------------------------------------------------------------------------|------------|--------------------------|------------|
| ** **                                                                                | ** ** | **2004**                 | ** ** | **2003** | ** ** |
| ** **                                                                                | ** ** | **Cinergy(1)**           | ** ** | **CG&E** | ** ** | **Cinergy(1)** | ** ** | **CG&E** | ** ** |
|                                                                                      |       | **(in millions)**        |       |
| Fair value of contracts outstanding at the beginning of period                            |       | $                        | **41**     | ** ** | **$** | **20** | ** ** | $ | 75 |   | $ | 42 |   |
|                                                                                      |       | ** **               | ** ** | ** ** | ** ** |   |   |   |   |
| Changes in fair value attributable to changes in valuation techniques  and assumptions(2) |       | **(5**                   | **)**      | **(4** | **)** | 1 |   | 1 |   |
|                                                                                      |       | ** **               | ** ** | ** ** | ** ** |   |   |   |   |
| Other changes in fair value(3)                                                            |       | **185**                  | ** ** | **70** | ** ** | 127 |   | 53 |   |
|                                                                                      |       | ** **               | ** ** | ** ** | ** ** |   |   |   |   |
| Option premiums paid/(received)                                                           |       | **5**                    | ** ** | **6** | ** ** | (3 | ) | 2 |   |
|                                                                                      |       | ** **               | ** ** | ** ** | ** ** |   |   |   |   |
| Accounting Changes(4)                                                                     |       | ** **               | ** ** | ** ** | ** ** |   |   |   |   |
|                                                                                      |       | ** **               | ** ** | ** ** | ** ** |   |   |   |   |
| Consolidation of previously unconsolidated entities                                       |       | **—**               | ** ** | **—** | ** ** | 7 |   | — |   |
|                                                                                      |       | ** **               | ** ** | ** ** | ** ** |   |   |   |   |
| Cumulative effect of changes in accounting principles                                     |       | **—**               | ** ** | **—** | ** ** | (20 | ) | (13 | ) |
|                                                                                      |       | ** **               | ** ** | ** ** | ** ** |   |   |   |   |
| Contracts settled                                                                         |       | **(144**                 | **)**      | **(56** | **)** | (146 | ) | (65 | ) |
|                                                                                      |       | ** **               | ** ** | ** ** | ** ** |   |   |   |   |
| Fair value of contracts outstanding at end of period                                      |       | $                        | **82**     | ** ** | **$** | **36** | ** ** | $ | 41 |   | $ | 20 |   |

----

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

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

(3)          Represents changes in fairvalue recognized in income, primarily attributable to fluctuations in price.This amount includes both realized and unrealized gains on energy tradingcontracts.

(4)          See Note 1(q)(*i*) and Note 1(q)(*iv*) of the“Notes to Financial Statements” in “Item 8. Financial Statements andSupplementary Data” for further information.

 

The following are the balances at December31, 2004 and 2003 of our energy risk management assets and liabilities:

 
| ** **                                       | ** **   | **2004**          | ** **   | **2003**     | ** ** |
|--------------------------------------------------|--------------|-------------------|--------------|--------------|------------|
| ** **                                       | ** **   | **Cinergy(1)**    | ** **   | **CG&E** | ** ** | **Cinergy(1)** | ** ** | **CG&E** | ** ** |
| *** ***                                     | *** *** | **(in millions)** | *** *** |
| * *                                         | * *     | * *          | * *     | * *     | * *   | * * | * * | * * | * * |
| Energy risk management assets - current          |         | **$**             | **381**      | ** **   | **$**      | **149** | ** ** | $ | 305 |   | $ | 73 |   |
| Energy risk management assets - non-current      |         | **139**           | ** **   | **47**       | ** ** | 97 |   | 37 |   |
|                                             |         | ** **        | ** **   | ** **   | ** ** |   |   |   |   |
| Energy risk management liabilities - current     |         | **(311**          | **)**        | **(120**     | **)**      | (296 | ) | (78 | ) |
| Energy risk management liabilities - non-current |         | **(127**          | **)**        | **(40**      | **)**      | (65 | ) | (12 | ) |
|                                             |         | ** **        | ** **   | ** **   | ** ** |   |   |   |   |
|                                             |         | **$**             | **82**       |         | **$**      | **36** | ** ** | $ | 41 | ** ** | $ | 20 |   |

----

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

 

77

----

 

The following table presents the expectedmaturity of the energy risk management assets and liabilities as of December31, 2004 for **Cinergy** and **CG&E**:

 
| ** **                                            | ** **   | **Fair Value of Contracts at December 31, 2004** | ** **   |
|-------------------------------------------------------|--------------|--------------------------------------------------|--------------|
| ** **                                            | ** **   | **Maturing**                                     | ** **   | ** ** | ** ** |
| **Source of Fair Value(1)**                           | ** **   | **2005**                                         | ** **   | **2006-2007** | ** ** | **2008-2009** | ** ** | **Thereafter** | ** ** | **Total Fair Value** | ** ** |
| *** ***                                          | *** *** | **(in millions)**                                | *** *** |
| **Cinergy(2)**                                        |         |                                             |         |   |   |   |   |   |   |   |   |
| Prices actively quoted                                |         | $                                                | 74           |   | $ | 18 |   | $ | — |   | $ | — |   | $ | 92 |   |
|                                                  |         |                                             |         |   |   |   |   |   |   |   |   |
| Prices based on models and other valuation methods(3) |         | (4                                               | )            | (5 | ) | 2 |   | (3 | ) | (10 | ) |
|                                                  |         |                                             |         |   |   |   |   |   |   |   |   |
| Total                                                 |         | $                                                | 70           |   | $ | 13 |   | $ | 2 |   | $ | (3 | ) | $ | 82 |   |
|                                                  |         |                                             |         |   |   |   |   |   |   |   |   |
| **CG&E**                                          |         |                                             |         |   |   |   |   |   |   |   |   |
| Prices actively quoted                                |         | $                                                | 25           |   | $ | 13 |   | $ | — |   | $ | — |   | $ | 38 |   |
|                                                  |         |                                             |         |   |   |   |   |   |   |   |   |
| Prices based on models and other valuation methods(3) |         | 4                                                |         | (6 | ) | — |   | — |   | (2 | ) |
|                                                  |         |                                             |         |   |   |   |   |   |   |   |   |
| Total                                                 |         | $                                                | 29           |   | $ | 7 |   | $ | — |   | $ | — |   | $ | 36 |   |

----

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

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

(3)          A substantial portion ofthese amounts include option values.

 

*Generation PortfolioRisks*

**Cinergy** optimizes thevalue of its non-regulated portfolio. The portfolio includes generation assets(power and capacity), fuel, and emission allowances and we manage all of thesecomponents as a portfolio. We use models that forecast future generationoutput, fuel requirements, and emission allowance requirements based on forwardpower, fuel and emission allowance markets. The component pieces of theportfolio are bought and sold based on this model in order to manage theeconomic value of the portfolio. With the issuance of Statement of FinancialAccounting Standards No. 149, *Amendment of Statement 133on Derivative Instruments and Hedging Activities* (Statement 149),most forward power transactions from management of the portfolio are accountedfor at fair value. The other component pieces of the portfolio are typicallynot subject to Statement 149 and are accounted for using the accrual method,where changes in fair value are not recognized. As a result, we are subject to earnings volatility via mark-to-market gainsor losses from changes in the value of the contracts accounted for using fairvalue. A hypothetical $1.00 per MWh increase or decrease consistently appliedto all forward power prices would have resulted in an increase or decrease infair value of these contracts of approximately $3 million as of December 31,2004.

 

**Cinergy** is exposed torisk from changes in the market prices of fuel (primarily coal) and emissionallowances to the extent the risk is not mitigated by regulatory recoverymechanisms in Ohio and Indiana.  To theextent we must purchase fuel or emission allowances in a rising priceenvironment, increased cost of electricity production could result without acorresponding increase in revenue.  **Cinergy** manages this risk through the use of long-term fixedprice fuel contracts and acquisitions of emission allowances.  These risks at **CG&E**are partially mitigated in 2005 and significantly mitigated from 2006 through2008 by a retail fuel cost recovery mechanism established in Ohio as part ofthe RSP for non-residential customers beginning January 1, 2005 and forresidential customers beginning January 1, 2006.  This mechanism will recover costs for fueland emission allowances that exceed the amount originally included in the ratesfrozen in the **CG&E** transition plan throughDecember 31, 2008.  **PSI**continues to be protected against market price changes of fuel and emissionallowances costs incurred for its retail customers by the use of cost trackingand recovery mechanisms in the state of Indiana.

 

78

----

 

##### ***Concentrationsof Credit Risk***

Credit risk is the exposure to economic lossthat would occur as a result of nonperformance by counterparties, pursuant tothe terms of their contractual obligations. Specific components of credit risk include counterparty default risk,collateral risk, concentration risk, and settlement risk.

 

*Trade Receivables andPhysical Power Portfolio*

Our concentration of credit risk with respectto trade accounts receivable from electric and gas retail customers islimited.  The large number of customersand diversified customer base of residential, commercial, and industrialcustomers significantly reduces our credit risk.  Contracts within the physical portfolio ofpower marketing and trading operations are primarily with traditional electriccooperatives and municipalities and other investor-owned utilities.  At December 31, 2004, we believe thelikelihood of significant losses associated with credit risk in our tradeaccounts receivable or physical power portfolio is remote.

 

*Energy Trading CreditRisk*

**Cinergy’s** extension ofcredit for energy marketing and trading is governed by a Corporate CreditPolicy.  Written guidelines approved by **Cinergy’s** Risk Policy Committee document the managementapproval levels for credit limits, evaluation of creditworthiness, and creditrisk mitigation procedures.  **Cinergy** analyzes net credit exposure andestablishes credit reserves based on the counterparties’ credit rating, paymenthistory, and length of the outstanding obligation.  Exposures to credit risks are monitored dailyby the Corporate Credit Risk function, which is independent of all tradingoperations.  Energy commodity prices canbe extremely volatile and the market can, at times, lack liquidity.  Because of these issues, credit risk forenergy commodities is generally greater than with other commodity trading.

 

79

----

 

The following tables provide informationregarding **Cinergy’s** and **CG&E’s** exposure on energy tradingcontracts as well as the expected maturities of those exposures as of December31, 2004.  The tables include accountsreceivable and energy risk management assets, which are net of accounts payableand energy risk management liabilities with the same counterparties when wehave the right of offset.  The creditcollateral shown in the following tables includes cash and letters ofcredit.  As previously discussed, **PSI’s** remaining contracts are not material; therefore, wehave not presented **PSI** separatelyin the credit risk tables below.

 

**Cinergy(1)**
| **Rating**                            | ** ** | **Total Exposure****Before Credit Collateral** | ** ** | **Credit  Collateral** | ** ** | **Net  Exposure** | ** ** | **Percentage of****Total Net Exposure** | ** ** | **Number of  Counterparties  Greater than 10% of****Total Net Exposure** | ** ** | **Net Exposure of  Counterparties Greater than****10% of Total Net Exposure(4)** | ** ** |
|---------------------------------------|------------|------------------------------------------------|------------|------------------------|------------|-------------------|------------|-----------------------------------------|------------|--------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------|------------|
| * *                              | * *   | **(in  millions)**                             | * *   |
| * *                              | * *   | * *                                       | * *   | * *               | * *   | * *          | * *   | * *                                | * *   | * *                                                                 | * *   | * *                                                                              | * *   |
| Investment Grade(2)                   |       | $                                              | 737        |                   | $          | 75                |       | $                                       | 662        |                                                                     | 84         | %                                                                                     | —     |   | $ | — |   |
| Internally Rated-Investment Grade(3)  |       | 68                                             |       | 1                      |       | 67                |       | 9                                       |       | —                                                                   |       | —                                                                                |       |
| Non-Investment Grade                  |       | 135                                            |       | 90                     |       | 45                |       | 5                                       |       | —                                                                   |       | —                                                                                |       |
| Internally Rated-Non-Investment Grade |       | 51                                             |       | 37                     |       | 14                |       | 2                                       |       | —                                                                   |       | —                                                                                |       |
|                                  |       |                                           |       |                   |       |              |       |                                    |       | —                                                                   |       |                                                                                  |       |
| Total                                 |       | $                                              | 991        |                   | $          | 203               |       | $                                       | 788        |                                                                     | 100        | %                                                                                     | —     |   | $ | — |   |

 
| ** **                            | ** ** | ** **         | ** ** | **Maturity  of Credit Risk Exposure** | ** ** |
|---------------------------------------|------------|--------------------|------------|---------------------------------------|------------|
| ** **                            | ** ** | ** **         | ** ** | ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                            | ** ** | ** **         | ** ** | ** **                            | ** ** | ** ** | ** ** | **Exposure** | ** ** | **Total  Exposure** | ** ** |
| ** **                            | ** ** | ** **         | ** ** | ** **                            | ** ** | ** ** | ** ** | **Greater than** | ** ** | **Before  Credit** | ** ** |
| **Rating**                            | ** ** | **2005**           | ** ** | **2006-2007**                         | ** ** | **2008-2009** | ** ** | **5 Years** | ** ** | **Collateral** | ** ** |
| * *                              | * *   | **(in  millions)** | * *   |
| * *                              | * *   | * *           | * *   | * *                              | * *   | * * | * * | * * | * * | * * | * * |
| Investment Grade(2)                   |       | $                  | 636        |                                  | $          | 74 |   | $ | 16 |   | $ | 11 |   | $ | 737 |   |
| Internally Rated-Investment Grade(3)  |       | 61                 |       | 7                                     |       | — |   | — |   | 68 |   |
| Non-Investment Grade                  |       | 133                |       | 2                                     |       | — |   | — |   | 135 |   |
| Internally Rated-Non-Investment Grade |       | 50                 |       | 1                                     |       | — |   | — |   | 51 |   |
|                                  |       |               |       |                                  |       |   |   |   |   |   |   |
| Total                                 |       | $                  | 880        |                                  | $          | 84 |   | $ | 16 |   | $ | 11 |   | $ | 991 |   |

----

(1)          Includes amounts related to non-registrants.

(2)          Includes counterparties rated Investment Grade or thecounterparties’ obligations are guaranteed or secured by an Investment Gradeentity.

(3)          Counterparties include a variety of entities,including investor-owned utilities, privately held companies, cities andmunicipalities. **Cinergy** assigns internal creditratings to all counterparties within our credit risk portfolio, applyingfundamental analytical tools. Included in this analysis is a review of (but notlimited to) counterparty financial statements with consideration given tooff-balance sheet obligations and assets, specific business environment, accessto capital, and indicators from debt and equity capital markets.

(4)          Exposures, positive or negative, with counterpartiesthat are related to one another are not aggregated when no right of offsetexists and as a result, credit is extended and evaluated on a separate basis.

 

80

----

 

**CG&E**

** **
| ** **                            | ** ** | **Total Exposure Before Credit Collateral** | ** ** | **Credit Collateral** | ** ** | **Net Exposure** | ** ** | **Percentage of Total Net Exposure** | ** ** | **Number of Counterparties  Greater than 10% of Total Net Exposure** | ** ** | **Net Exposure of  Counterparties Greater than 10% of Total Net Exposure(3)** | ** ** |
|---------------------------------------|------------|---------------------------------------------|------------|-----------------------|------------|------------------|------------|--------------------------------------|------------|----------------------------------------------------------------------|------------|------------------------------------------------------------------------------------|------------|
| **Rating**                            | ** ** | ** **                                  | ** ** | ** **            | ** ** | ** **       | ** ** |
| * *                              | * *   | **(in millions)**                           | * *   |
| * *                              | * *   | * *                                    | * *   | * *              | * *   | * *         | * *   | * *                             | * *   | * *                                                             | * *   | * *                                                                           | * *   |
| Investment Grade(1)                   |       | $                                           | 165        |                  | $          | 21               |       | $                                    | 144        |                                                                 | 92         | %                                                                                  | 2          |   | $ | 45 |   |
| Internally Rated-Investment Grade(2)  |       | 8                                           |       | —                |       | 8                |       | 5                                    |       | —                                                               |       | —                                                                             |       |
| Non-Investment Grade                  |       | 18                                          |       | 15                    |       | 3                |       | 2                                    |       | —                                                               |       | —                                                                             |       |
| Internally Rated-Non-Investment Grade |       | 3                                           |       | 1                     |       | 2                |       | 1                                    |       | —                                                               |       | —                                                                             |       |
|                                  |       |                                        |       |                  |       |             |       |                                 |       |                                                                 |       |                                                                               |       |
| Total                                 |       | $                                           | 194        |                  | $          | 37               |       | $                                    | 157        |                                                                 | 100        | %                                                                                  | 2          |   | $ | 45 |   |

 
| ** **                            | ** **   | **Maturity of Credit Risk Exposure** | ** **   |
|---------------------------------------|--------------|--------------------------------------|--------------|
| ** **                            | ** **   | ** **                           | ** **   | ** ** | ** ** | ** ** | ** ** | **Exposure** | ** ** | **Total Exposure** | ** ** |
| ** **                            | ** **   | ** **                           | ** **   | ** ** | ** ** | ** ** | ** ** | **Greater than** | ** ** | **Before Credit** | ** ** |
| **Rating**                            | ** **   | **2005**                             | ** **   | **2006-2007** | ** ** | **2008-2009** | ** ** | **5 Years** | ** ** | **Collateral** | ** ** |
| *** ***                          | *** *** | **(in millions)**                    | *** *** |
| * *                              | * *     | * *                             | * *     | * * | * * | * * | * * | * * | * * | * * | * * |
| Investment Grade(1)                   |         | $                                    | 156          |   | $ | 8 |   | $ | 1 |   | $ | — |   | $ | 165 |   |
| Internally Rated-Investment Grade(2)  |         | 8                                    |         | — |   | — |   | — |   | 8 |   |
| Non-Investment Grade                  |         | 18                                   |         | — |   | — |   | — |   | 18 |   |
| Internally Rated-Non-Investment Grade |         | 3                                    |         | — |   | — |   | — |   | 3 |   |
|                                  |         |                                 |         |   |   |   |   |   |   |   |   |
| Total                                 |         | $                                    | 185          |   | $ | 8 |   | $ | 1 |   | $ | — |   | $ | 194 |   |

----

(1)   Includes counterpartiesrated Investment Grade or the counterparties’ obligations are guaranteed orsecured by an Investment Grade entity.

(2)   Counterparties includevarious cities and municipalities.

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

 

*Financial Derivatives*

Potential exposure to credit risk also existsfrom our use of financial derivatives such as interest rate swaps and treasurylocks.  Because these financialinstruments are transacted with highly rated financial institutions, we do notanticipate nonperformance by any of the counterparties.

 

##### ***RiskManagement***

We manage, on a portfolio basis, the marketrisks in our energy marketing and trading transactions subject to parametersestablished by our Risk Policy Committee. Our market and credit risks are monitored by the Global Risk Managementfunction to ensure compliance with stated risk management policies and procedures.  The Global Risk Management function operatesindependently from the business units, which originate and actively manage themarket risk exposures.  Policies andprocedures are periodically reviewed to assess their responsiveness to changingmarket and business conditions.  Creditrisk mitigation practices include requiring parent company guarantees, variousforms of collateral, and the use of mutual netting/closeout agreements.

 

#### **Exchange Rate Sensitivity**

**Cinergy** has exposureto fluctuations in exchange rates between the United States dollar and thecurrencies of foreign countries where we have investments.  When it is appropriate we will hedge ourexposure to cash flow transactions, such as a dividend payment by one of ourforeign subsidiaries.

 

81

----

 

#### **Interest Rate Sensitivity**

Our net exposure to changes in interest ratesprimarily consists of short-term debt instruments (including net money poolborrowings) and variable-rate pollution control debt.  The following table reflects the differentinstruments used and the method of benchmarking interest rates, as of December31, 2004:

 
| **Interest Benchmark**                            | ** ** | **2004**                      | ** ** |
|---------------------------------------------------|------------|-------------------------------|------------|
| * *                                          | * *   | * *                      | * *   | * * | * * | **(in millions)** | * * |
| * *                                          | * *   | * *                      | * *   | * * | * * | * * | * * |
| Short-term Bank Loans/Commercial Paper/Money Pool |       | •Short-term Money Market | ** ** | **Cinergy** | ** ** | **$** | **686** | ** ** |
|                                              |       | •Commercial Paper        | ** ** | **CG&E**and  subsidiaries | ** ** | **180** | ** ** |
|                                              |       | Composite Rate(1)             | ** ** | **PSI** | ** ** | **131** | ** ** |
|                                              |       | •LIBOR(2)                | ** ** | **ULH&P** | ** ** | **11** | ** ** |
|                                              |       |                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Pollution Control Debt                            |       | •Daily Market            | ** ** | **Cinergy** | ** ** | **741** | ** ** |
|                                              |       | •Weekly Market           | ** ** | **CG&E**and subsidiaries | ** ** | **290** | ** ** |
|                                              |       | •Auction Rate            | ** ** | **PSI** | ** ** | **426** | ** ** |
|                                                   |            |                               |            |  |  |  |  |  |

----

(1)          30-day Federal Reserve “AA”Industrial Commercial Paper Composite Rate

(2)          London Inter-Bank OfferedRate

 

Theweighted-average interest rates on the previously discussed instruments atDecember 31, were as follows:

 

| ** **                             | ** ** | **2004** | ** ** |
|----------------------------------------|------------|----------|------------|
|                                   |       |     |       |
| Short-term Bank Loans/Commercial Paper | ** ** | **2.5**  | **%**      |
| Money Pool                             | ** ** | **2.4**  | **%**      |
| Pollution Control Debt                 | ** ** | **2.3**  | **%**      |
|                                   |       |     |       |

 

At December 31, 2004, forward yield curvesproject an increase in applicable short-term interest rates over the next fiveyears.

 

82

----

 

The following table presents principal cashrepayments, by maturity date and other selected information, for eachregistrant’s long-term debt, other debt, and capital lease obligations as ofDecember 31, 2004:

 
| ** **                        | ** **   | **Expected Maturity Date** | ** **   |
|-----------------------------------|--------------|----------------------------|--------------|
| ** **                        | ** **   | ** **                 | ** **   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **There-** | ** ** | ** ** | ** ** | **Fair** | ** ** |
| **Liabilities**                   | ** **   | **2005**                   | ** **   | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **after** | ** ** | **Total** | ** ** | **Value** | ** ** |
| ** **                        | ** **   | **(in millions)**          | ** **   |
| *** ***                      | *** *** | *** ***               | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** |
| **Cinergy**                       |         |                       |         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Long-term Debt(1)(6)              |         | $                          | 200          | (4)(5) | $ | 326 |   | $ | 366 |   | $ | 513 |   | $ | 243 |   | $ | 2,223 |   | $ | 3,871 |   | $ | 4,074 |   |
| Weighted-average interest rate(2) |         | 6.8                        | %            | 6.6 | % | 7.6 | % | 6.4 | % | 7.4 | % | 7.1 | % | 7.0 | % |   |   |
|                              |         |                       |         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Other(3)                          |         | $                          | 20           |   | $ | 29 |   | $ | 360 |   | $ | 38 |   | $ | 27 |   | $ | 153 |   | $ | 627 |   | $ | 687 |   |
| Weighted-average interest rate(2) |         | 7.9                        | %            | 6.8 | % | 6.9 | % | 6.9 | % | 6.7 | % | 6.9 | % | 6.9 | % |   |   |
|                              |         |                       |         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Capital Leases                    |         |                       |         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Fixed-rate leases                 |         | $                          | 7            |   | $ | 7 |   | $ | 7 |   | $ | 10 |   | $ | 10 |   | $ | 24 |   | $ | 65 |   | $ | 65 |   |
| Interest rate(2)                  |         | 5.4                        | %            | 5.3 | % | 5.3 | % | 5.2 | % | 5.1 | % | 4.9 | % | 5.5 | % |   |   |
|                              |         |                       |         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **CG&E** and  subsidiaries    |         |                       |         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Long-term Debt(1)                 |         | $                          | 150          | (5) | $ | — |   | $ | 100 |   | $ | 120 |   | $ | 20 |   | $ | 1,240 |   | $ | 1,630 |   | $ | 1,677 |   |
| Weighted-average interest rate(2) |         | 6.9                        | %            | — | % | 6.9 | % | 6.4 | % | 7.9 | % | 5.1 | % | 5.5 | % |   |   |
|                              |         |                       |         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Capital Leases                    |         |                       |         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Fixed-rate leases                 |         | $                          | 4            |   | $ | 4 |   | $ | 4 |   | $ | 6 |   | $ | 6 |   | $ | 16 |   | $ | 40 |   | $ | 40 |   |
| Interest rate(2)                  |         | 5.3                        | %            | 5.3 | % | 5.2 | % | 5.2 | % | 5.1 | % | 4.9 | % | 5.4 | % |   |   |
|                              |         |                       |         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **PSI**                           |         |                       |         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Long-term Debt(1)                 |         | $                          | 50           | (4) | $ | 326 |   | $ | 266 |   | $ | 43 |   | $ | 223 |   | $ | 976 |   | $ | 1,884 |   | $ | 2,009 |   |
| Weighted-average interest rate(2) |         | 6.5                        | %            | 6.6 | % | 7.8 | % | 6.4 | % | 7.3 | % | 9.6 | % | 8.4 | % |   |   |
|                              |         |                       |         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Capital Leases                    |         |                       |         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Fixed-rate leases                 |         | $                          | 3            |   | $ | 3 |   | $ | 3 |   | $ | 4 |   | $ | 4 |   | $ | 8 |   | $ | 25 |   | $ | 25 |   |
| Interest rate(2)                  |         | 5.5                        | %            | 5.4 | % | 5.4 | % | 5.3 | % | 5.1 | % | 4.9 | % | 5.6 | % |   |   |
|                              |         |                       |         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **ULH&P**                     |         |                       |         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Long-term Debt                    |         | $                          | —       |   | $ | — |   | $ | — |   | $ | 20 |   | $ | 20 |   | $ | 55 |   | $ | 95 |   | $ | 100 |   |
| Weighted-average interest rate(2) |         | —                     | %            | — | % | — | % | 6.5 | % | 7.9 | % | 5.7 | % | 6.3 | % |   |   |
|                              |         |                       |         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Capital Leases                    |         |                       |         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Fixed-rate leases                 |         | $                          | 1            |   | $ | 1 |   | $ | 1 |   | $ | 1 |   | $ | 2 |   | $ | 3 |   | $ | 9 |   | $ | 9 |   |
| Interest rate(2)                  |         | 5.4                        | %            | 5.4 | % | 5.4 | % | 5.3 | % | 5.2 | % | 4.9 | % | 5.6 | % |   |   |
|                                   |              |                            |              |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

----

(1)          Long-term Debt includesamounts reflected as *Long-term debt duewithin 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, 2004 of the debt that is maturingin the year reported and includes the effects of an interest rate swap thatfixes the interest payments differently from the stated rate; and (2) forCapital Leases, the weighted-average interest rate is based on the averageinterest rate of the lease payments made during the year reported.

(3)          Promissory notes andlong-term notes payable related to investments under Cinergy Global Resources,Inc., Cinergy Investments, Inc., and debt related to CC Funding Trust.  See Note 3(b) of the “Notes to FinancialStatements” in “Item 8. Financial Statements and Supplementary Data” for adiscussion of the debt associated with the CC Funding Trust.

(4)          Includes **PSI’s** 6.50%Debentures due August 1, 2026, reflected as maturing in 2005, as the interestrate is due to reset on August 1, 2005. If the interest rate is not reset, the bonds are subject to mandatoryredemption by **PSI**.

(5)          **CG&E’s** 6.90%Debentures due June 1, 2025, are putable to **CG&E** at the optionof the holders on June 1, 2005. However, based on current market conditions, webelieve it is unlikely that the debentures will be put to **CG&E** on thisdate.  

(6)          **Includes amounts related to non-registrants.**

 

Our current policy in managing exposure tofluctuations in interest rates is to maintain approximately 30 percent of thetotal amount of outstanding debt in variable interest rate debtinstruments.  In maintaining this levelof exposure, we use interest rate swaps. Under the swaps, we agree with other parties to exchange, at specifiedintervals, the difference between fixed-rate and variable-rate interest amountscalculated on an agreed upon notional amount. In the future, we will continually monitor market conditions to evaluatewhether to modify our level of exposure to fluctuations in interest rates.

 

83

----

 

**CG&E** has anoutstanding interest rate swap agreement that decreased the percentage ofvariable-rate debt.  See Note 7(a) of the“Notes to Financial Statements” in “Item 8. Financial Statements andSupplementary Data” for additional information on financial derivatives.

 

84

----

 

**MD&A- ACCOUNTING MATTERS**

 

### **ACCOUNTING MATTERS**

#### **Critical Accounting Estimates**

Preparationof financial statements and related disclosures in compliance with GAAPrequires the use of assumptions and estimates regarding future events,including the likelihood of success of particular investments or initiatives,estimates of future prices or rates, legal and regulatory challenges, andanticipated recovery of costs. Therefore, the possibility exists for materially different reportedamounts under different conditions or assumptions.  We consider an accounting estimate to becritical if: 1) the accounting estimate requires us to make assumptions aboutmatters that were reasonably uncertain at the time the accounting estimate wasmade, and 2) changes in the estimate are reasonably likely to occur from periodto period.

 

These critical accounting estimates should beread in conjunction with the “Notes to Financial Statements” in “Item 8.Financial Statements and Supplementary Data”. We have other accounting policies that we consider to be significant;however, these policies do not meet the definition of critical accountingestimates, because they generally do not require us to make estimates orjudgments that are particularly difficult or subjective.

 

##### ***FairValue Accounting for Energy Marketing and Trading***

We use fair value accounting for energytrading contracts, which is required, with certain exceptions, by Statement133.  Short-term contracts used in ourtrading activities are generally priced using exchange based orover-the-counter price quotes.  Long-termcontracts typically must be valued using less actively quoted prices orvaluation models.  Use of model pricingrequires estimating surrounding factors such as volatility and price curvesbeyond what is actively quoted in the market. In addition, some contracts do not have fixed notional amounts and thereforemust be valued using estimates of volumes to be consumed by thecounterparty.  See “Changes in Fair Value”for additional information.

 

We measure these risks by using complexanalytical tools, both external and proprietary.  These models are dynamic and are continuouslyupdated with the most recent data to improve assessments of potential futureoutcomes.  We measure risks for contractsthat do not contain fixed notional amounts by obtaining historical data andprojecting expected consumption.  Thesemodels incorporate expectations surrounding the impacts that weather may playin future consumption.  The results ofthese measures assist us in managing such risks within our portfolio.  We also have a Global Risk Managementfunction within **Cinergy** that isindependent of the marketing and trading function and is under the oversight ofa Risk Policy Committee comprised primarily of senior company executives.  This group provides an independent evaluationof both forward price curves and the valuation of energy contracts.  See “Trading Portfolio Risks” for additionalinformation.

 

There is inherent risk in valuation modelinggiven the complexity and volatility of energy markets.  Fair value accounting has risk, including itsapplication to short-term contracts, as gains and losses recorded through itsuse are not yet realized.  Therefore, itis possible that results in future periods may be materially different ascontracts are ultimately settled.  Wemonitor potential losses using VaR analysis. As previously discussed, our one-day VaR at December 31, 2004, assuminga 95 percent confidence level, was approximately $1.9 million, which meansthere is a 95 percent statistical chance (based on market implied volatilities)that any adverse moves in the value of our portfolio will be less than thereported amount.  In addition, ourfive-day VaR at December 31, 2004, assuming the same 95 percent confidencelevel, was approximately $3.9 million.

 

For financial reporting purposes, assets andliabilities associated with energy trading transactions accounted for usingfair value are reflected on the Balance Sheets as *Energy**risk managementassets current*and*non-current*and*Energy risk management liabilities current*and*non-current*, classified as current ornon-current pursuant to each contract’s length. Net gains and losses resulting from revaluation of contracts during theperiod are recognized currently in the Statements of Income.

 

85

----

 

##### ***RegulatoryAccounting***

**CG&E**, **PSI**, and **ULH&P**are regulated utility companies.  Exceptwith respect to the electric generation-related assets and liabilities of **CG&E**, the companies apply theprovisions of Statement 71.  Inaccordance with Statement 71, regulatory actions may result in accountingtreatment different from that of non-rate regulated companies.  The deferral of costs (as regulatory assets)or amounts provided in current rates to cover costs to be incurred in thefuture (as regulatory liabilities) may be appropriate when the future recoveryor refunding of such costs is probable. In assessing probability, we consider such factors as regulatoryprecedent 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.  Ourcalculations under the fuel adjustment and emission allowance cost recoverymechanisms at **PSI**(and **CG&E**for non-residential retail customers beginning in 2005 and residential retailcustomers in 2006) involve the use of estimates.  Fuel costs (including purchased power wheneconomically displacing fuel) and emission allowance costs must be allocatedbetween **PSI’s** retail customers andwholesale customers, with the lowest costs allocated to retail customers.  This process is complex and involves the useof estimates that when finalized in future periods may result in adjustments toamounts deferred and collected from customers.

 

At December 31, 2004, regulatory assetstotaled $609 million for **CG&E**(including $10 million for **ULH&P**)and $421 million for **PSI**.  Current rates include the recovery of $602million for **CG&E** (including $9million for **ULH&P**) and $378million for **PSI**.  In addition to the regulatory assets, **CG&E** and **PSI** have regulatory liabilities totaling $165 million(including $30 million for **ULH&P**)and $392 million at December 31, 2004, respectively.  See Note 1(c) of the “Notes to FinancialStatements” in “Item 8. Financial Statements and Supplementary Data” foradditional detail regarding regulatory assets and regulatory liabilities.

 

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

Management judgment is required in developingour provision for income taxes, including the determination of deferred taxassets, deferred tax liabilities, and any valuation allowances recorded againstthe deferred tax assets.  We evaluate quarterly the realizability of ourdeferred tax assets by assessing our valuation allowance and adjusting theamount of such allowance, if necessary.  The factors used to assess thelikelihood of realization are our forecast of future taxable income and theavailability of tax planning strategies that can be implemented to realizedeferred tax assets.  These tax planningstrategies include the utilization of Section 29 tax credits associated withour production of synthetic fuel.  Failure to achieve forecasted taxableincome might affect our ability to utilize the Section 29 tax credits and theultimate realization of deferred tax assets.

 

##### ***Contingencies***

When it is probable that an environmental,tax, or other legal liability has been incurred, a loss is recognized when theamount of the loss can be reasonably estimated. Estimates of the probability and the amount of loss are often made basedon currently available facts, present laws and regulations, and consultationwith third-party experts.  Accounting forcontingencies requires significant judgment by management regarding theestimated probabilities and ranges of exposure to potential liability.  Management’s assessment of **Cinergy’s** exposure to contingencies couldchange to the extent there are additional future developments, administrativeactions, or as more information becomes available.  If actual obligations incurred are differentfrom our estimates, the recognition of the actual amounts may have a materialimpact on **Cinergy’s** financialposition and results of operations.

 

##### ***Impairmentof Long-lived Assets***

Current accounting standards requirelong-lived assets be measured for impairment whenever indicators of impairmentexist.  If deemed impaired under the standards,assets are written down to fair value with a charge to current periodearnings.  As a producer of electricity, **Cinergy**, **CG&E**,and **PSI** are owners of generatingplants, which are largely coal-fired.  AtDecember 31, 2004, the carrying value of these generating plants is $5 billionfor **Cinergy**, $2 billion for **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(a) of the “Notes to FinancialStatements” in “Item 8. Financial Statements and Supplementary Data” foradditional information.  While we cannotpredict the potential 

 

86

----

 

effect the resolution of these matters willhave on the recoverability of our coal-fired generating assets, we believe thatthe carrying values of these assets are recoverable.  In making this assessment, we consider suchfactors as the expected ability to recover through the regulatory process anyadditional investments in environmental compliance expenditures for **PSI**, the relative pricing of wholesale electricity in theregion, the anticipated demand, and the cost of coal.

 

For the gas-fired peaking plants that **Cinergy** owns that are not subject to cost-of-service-basedratemaking, the recoverability will be dependent on many factors, but primarilythe price of power compared to the cost of natural gas, often referred to asthe spark spread, over the life of the plants. While we currently believe these assets are recoverable on a nominalbasis (the basis required for evaluation under Statement 144 given our intentto continue operating these assets), changes in the estimates and assumptionsused (primarily power and gas prices along with their related volatilities) inevaluating these assets over their useful life could result in an impairment inthe future.  At December 31, 2004, thecarrying value of these gas-fired peaking plants is approximately $441 million.

 

We will continue to evaluate these assets forimpairment when events or circumstances indicate the carrying value may not berecoverable.

 

##### ***Impairmentof Unconsolidated Investments***

We evaluate the recoverability of investmentsin unconsolidated subsidiaries when events or changes in circumstances indicatethe carrying amount of the asset is other than temporarily impaired.  An investment is considered impaired if thefair value of the investment is less than its carrying value.  We only recognize an impairment loss when animpairment is considered to be other than temporary.  We consider an impairment to be other thantemporary when a forecasted recovery up to the investment’s carrying value isnot expected for a reasonable period of time. We evaluate several factors, including but not limited to our intent andability to hold the investment, the severity of the impairment, the duration ofthe impairment and the entity’s historical and projected financial performance,when determining whether or not impairment is other than temporary.

 

Fair value is determined by quoted marketprices, when available, however in most instances we rely on valuations basedon discounted cash flows and market multiples. There are many significant assumptions involved in performing suchvaluations, including but not limited to forecasted financial performance,discount rates, earnings multiples and terminal value considerations.  Variations in any one or a combination ofthese assumptions could result in different conclusions regarding impairment.

 

Once an investment is considered other thantemporarily impaired and an impairment loss is recognized, the carrying valueof the investment is not adjusted for any subsequent recoveries in fairvalue.  As of December 31, 2004, we donot have any material unrealized losses that are deemed to be temporary innature.  See Note 15(a) of the “Notes toFinancial Statements” in “Item 8. Financial Statements and Supplementary Data”for the amount of impairment charges incurred during the year.

 

#### **Accounting Changes**

***Consolidation of VIEs***

 

In January 2003, the FASB issuedInterpretation 46, which significantly changed the consolidation requirementsfor traditional SPEs and certain other entities subject to its scope.  This interpretation defines a VIE as (a) anentity that does not have sufficient equity to support its activities withoutadditional financial support or (b) any entity that has equity investors thatdo not have substantive voting rights, do not absorb first dollar losses, orreceive residual returns.  These entitiesmust be consolidated whenever **Cinergy** wouldbe anticipated to absorb greater than 50 percent of the losses or receivegreater than 50 percent of the returns.

 

In accordance with its two stage adoptionguidance, we implemented Interpretation 46 for traditional SPEs on July 1,2003, and for all other entities, including certain operating joint ventures,as of March 31, 2004.  The consolidationof certain operating joint ventures as of March 31, 2004, did not have amaterial impact on our financial position or results of operations.

 

87

----

 

On July 1, 2003, Interpretation 46 requiredus to consolidate two SPEs that have individual power sale agreements with CentralMaine Power Company.  Further, we were nolonger permitted to consolidate a trust that was established by **Cinergy Corp.** in 2001 to issueapproximately $316 million of combined preferred trust securities and stockpurchase contracts.  Prior period financialstatements were not restated for these changes. For further information on the accounting for these entities see Notes3(a) and (b) of the “Notes to Financial Statements” in “Item 8. FinancialStatements and Supplementary Data”.

 

**Cinergy** has concludedthat its accounts receivable sale facility, as discussed in Note 3(c) of the “Notesto Financial Statements” in “Item 8. Financial Statements and SupplementaryData”, will remain unconsolidated since it involves transfers of financialassets to a qualifying SPE, which is exempted from consolidation byInterpretation 46 and Statement of Financial Accounting Standards No. 140, *Accounting for Transfers and Servicing of FinancialAssets and Extinguishments of Liabilities*.

 

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

In December 2004, the FASB issued areplacement of Statement 123, *Statement of FinancialAccounting Standards No. 123 (revised 2004), Share-Based Payment*(Statement 123R).  This standard willrequire accounting for all stock-based compensation arrangements under the fairvalue method in addition to other provisions.

 

In 2003, we prospectively adopted accountingfor our stock-based compensation plans using the fair value recognitionprovisions of Statement 123, as amended by Statement of Financial AccountingStandards No. 148, *Accounting forStock-Based Compensation-Transition and Disclosure*, for all employeeawards granted or with terms modified on or after January 1, 2003.  Therefore, the impact of implementation ofStatement 123R on stock options within our stock-based compensation plans isnot expected to be material.  Statement123R contains certain provisions that will modify the accounting for variousstock-based compensation plans other than stock options.  We are in the process of evaluating theimpact of this new standard on these plans. **Cinergy** will adopt Statement 123R onJuly 1, 2005.

 

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

In October 2004, the American Jobs CreationAct (AJCA) was signed into law.  The AJCAincludes a one-time deduction of 85 percent of certain foreign earnings that arerepatriated, as defined in the AJCA.  InDecember 2004, the FASB issued Staff Position 109-2, *Accountingand Disclosure Guidance for the Foreign Earnings Repatriation Provision withinthe American Jobs Creation Act of 2004*.  The staff position allows additional time foran entity to evaluate the effect of the legislation on its plan forrepatriation of foreign earnings for purposes of applying Statement ofFinancial Accounting Standards No. 109, *Accountingfor Income Taxes*.  **Cinergy** will complete its evaluation of the effects of theprovision on its plan for repatriation of foreign earnings in 2005.

 

88

----

 

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

Reference is made to the “Market RiskSensitive Instruments” section of “Item 7. MD&A”.

 

89

----

 

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

** **

 

**FINANCIAL STATEMENTS**

 

**IndependentAuditors’ Report**

 

**CinergyCorp. and Subsidiaries**

ConsolidatedStatements of Income for the three years ended December 31, 2004

ConsolidatedBalance Sheets at December 31, 2004 and 2003

ConsolidatedStatements of Changes in Common Stock Equity for the three years ended December 31, 2004

ConsolidatedStatements of Cash Flows for the three years ended December 31, 2004

ConsolidatedStatements of Capitalization at December 31, 2004 and 2003

 

**The Cincinnati Gas & ElectricCompany and Subsidiaries**

ConsolidatedStatements of Income for the three years ended December 31, 2004

Consolidated Balance Sheetsat December 31, 2004 and 2003

ConsolidatedStatements of Changes in Common Stock Equity for the three years ended December 31, 2004

ConsolidatedStatements of Cash Flows for the three years ended December 31, 2004

ConsolidatedStatements of Capitalization at December 31, 2004 and 2003

 

**PSI Energy, Inc.and Subsidiary**

ConsolidatedStatements of Income for the three years ended December 31, 2004

ConsolidatedBalance Sheets at December 31, 2004 and 2003

ConsolidatedStatements of Changes in Common Stock Equity for the three years ended December 31, 2004

ConsolidatedStatements of Cash Flows for the three years ended December 31, 2004

ConsolidatedStatements of Capitalization at December 31, 2004 and 2003

 

**The Union Light,Heat and Power Company**

Statementsof Income for the three years ended December 31, 2004

BalanceSheets at December 31, 2004 and 2003

Statementsof Changes in Common Stock Equity for the three years ended December 31, 2004

Statementsof Cash Flows for the three years ended December 31, 2004

Statementsof Capitalization at December 31, 2004 and 2003

 

**Notes to FinancialStatements**

 

**FINANCIAL STATEMENT SCHEDULES**

 

ScheduleII - 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 inschedules other than those indicated previously, have been included in the BalanceSheets, the Statements of Income, related schedules, the notes thereto, oromitted as not required by the Rules of Regulation S-X.

 

90

----

 

**ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA**

** **

**REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

To the Board of Directors of Cinergy Corp.:

 

We have audited the accompanying consolidatedbalance sheets and statements of capitalization of Cinergy Corp. andsubsidiaries as of December 31, 2004 and 2003, and the related consolidatedstatements of income, changes in common stock equity, and cash flows for eachof the three years in the period ended December 31, 2004.  Our audits alsoincluded the financial statement schedule included in Item 15 of this AnnualReport.  These financial statements andthe financial statement schedule are the responsibility of the Company’smanagement.  Our responsibility is to express an opinion on thesefinancial statements and financial statement schedule based on our audits.

 

We conducted our audits in accordance withthe standards of the Public Company Accounting Oversight Board (UnitedStates).  Those standards require that we plan and perform the audit toobtain reasonable assurance about whether the financial statements are free ofmaterial misstatement.  An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financialstatements.  An audit also includes assessing the accounting principlesused and significant estimates made by management, as well as evaluating theoverall financial statement presentation.  We believe that our auditsprovide a reasonable basis for our opinion.

 

In our opinion, such consolidated financialstatements present fairly, in all material respects, the financial position ofCinergy Corp. and subsidiaries as of December 31, 2004 and 2003, and theresults of their operations and their cash flows for each of the three years inthe period ended December 31, 2004, in conformity with accounting principlesgenerally accepted in the United States of America.  Also, in our opinion, the financial statementschedule, when considered in relation to the basic consolidated financialstatements taken as a whole, presents fairly in all material respects theinformation set forth therein.

 

As discussed in Note 1 to the financialstatements, in 2003, Cinergy Corp. adopted Statement of Financial AccountingStandards (SFAS) No. 143, “Accounting for Asset Retirement Obligations;”Financial Accounting Standards Board Interpretation No. 46, “Consolidation ofVariable Interest Entities;” and the fair value recognition provisions of SFASNo. 123 “Accounting for Stock-Based Compensation.”

 

We have also audited, in accordance with thestandards of the Public Company Accounting Oversight Board (United States), theeffectiveness of the Company’s internal control over financial reporting as ofDecember 31, 2004, based on the criteria established in *Internal Control—Integrated Framework*issued by the Committee of Sponsoring Organizations of the Treadway Commissionand our report dated February 11, 2005 expressed an unqualified opinion onmanagement’s assessment of the effectiveness of the Company’s internal controlover financial reporting and an unqualified opinion on the effectiveness of theCompany’s internal control over financial reporting.

 
| /s/ Deloitte & Touche  LLP |   |
|--------------------------------|--------|
| Deloitte & Touche LLP      |   |
|                           |   |
| Cincinnati, Ohio               |   |
| February 11, 2005              |   |

 

91

----

 

## **REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

To the Board of Directors of The CincinnatiGas & Electric Company:

 

We have audited the accompanying consolidatedbalance sheets and statements of capitalization of The Cincinnati Gas &Electric Company and subsidiaries as of December 31, 2004 and 2003, and therelated consolidated statements of income, changes in common stock equity, andcash flows for each of the three years in the period ended December 31,2004.  Our audits also included thefinancial statement schedule included in Item 15 of this Annual Report.  These financial statements and the financialstatement schedule are the responsibility of the Company’s management.  Our responsibility is to express an opinionon these financial statements and financial statement schedule based on ouraudits.

 

We conducted our audits in accordance withthe standards of the Public Company Accounting Oversight Board (UnitedStates).  Those standards require that weplan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement.  An audit includes consideration of internalcontrol over financial reporting as a basis for designing audit procedures thatare appropriate in the circumstances, but not for the purpose of expressing anopinion on the effectiveness of the Company’s internal control over financial reporting.  Accordingly, we express no such opinion.  An audit also includes examining, on a testbasis, evidence supporting the amounts and disclosures in the financialstatements, assessing the accounting principles used and significant estimatesmade by management, as well as evaluating the overall financial statementpresentation.  We believe that our auditsprovide a reasonable basis for our opinion.

 

In our opinion, such consolidated financialstatements present fairly, in all material respects, the financial position ofThe Cincinnati Gas & Electric Company and subsidiaries as of December 31,2004 and 2003, and the results of their operations and their cash flows foreach of the three years in the period ended December 31, 2004, in conformitywith accounting principles generally accepted in the United States ofAmerica.  Also, in our opinion, thefinancial statement schedule, when considered in relation to the basicconsolidated financial statements taken as a whole, presents fairly in allmaterial respects the information set forth therein.

 

As discussed in Note 1 to the financialstatements, in 2003, The Cincinnati Gas & Electric Company adoptedStatement of Financial Accounting Standards (SFAS) No. 143, “Accounting forAsset Retirement Obligations.”

 
| /s/ Deloitte & Touche  LLP |   |
|--------------------------------|--------|
| Deloitte & Touche LLP      |   |
|                           |   |
| Cincinnati, Ohio               |   |
| February 11, 2005              |   |

 

92

----

 

## **REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

To the Board of Directors of PSI Energy,Inc.:

 

We have audited the accompanying consolidatedbalance sheets and statements of capitalization of PSI Energy, Inc. andsubsidiary as of December 31, 2004 and 2003, and the related consolidatedstatements of income, changes in common stock equity, and cash flows for eachof the three years in the period ended December 31, 2004.  Our audits also included the financialstatement schedule included in Item 15 of this Annual Report.  These financial statements and the financialstatement schedule are the responsibility of the Company’s management.  Our responsibility is to express an opinionon these financial statements and financial statement schedule based on ouraudits.

 

We conducted our audits in accordance withthe standards of the Public Company Accounting Oversight Board (UnitedStates).  Those standards require that weplan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement.  An audit includes consideration of internalcontrol over financial reporting as a basis for designing audit procedures thatare appropriate in the circumstances, but not for the purpose of expressing anopinion on the effectiveness of the Company’s internal control over financialreporting.  Accordingly, we express nosuch opinion.  An audit also includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements, 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 consolidated financialstatements present fairly, in all material respects, the financial position ofPSI Energy, Inc. and subsidiary as of December 31, 2004 and 2003, and theresults of their operations and their cash flows for each of the three years inthe period ended December 31, 2004, in conformity with accounting principlesgenerally accepted in the United States of America.  Also, in our opinion, the financial statementschedule, when considered in relation to the basic consolidated financialstatements taken as a whole, presents fairly in all material respects theinformation set forth therein.

 

As discussed in Note 1 to the financialstatements, in 2003, PSI Energy, Inc. adopted Statement of Financial AccountingStandards (SFAS) No. 143, “Accounting for Asset Retirement Obligations.”

 
| /s/ Deloitte & Touche  LLP |   |
|--------------------------------|--------|
| Deloitte & Touche LLP      |   |
|                           |   |
| Cincinnati, Ohio               |   |
| February 11, 2005              |   |

 

93

----

 

## **REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

## ** **

To the Board of Directors of The Union Light,Heat and Power Company:

 

We have audited the accompanying balancesheets and statements of capitalization of The Union Light, Heat and PowerCompany as of December 31, 2004 and 2003, and the related statements of income,changes in common stock equity, and cash flows for each of the three years inthe period ended December 31, 2004.  Ouraudits also included the financial statement schedule included in Item 15 ofthis Annual Report.  These financialstatements and the financial statement schedule are the responsibility of theCompany’s management.  Our responsibilityis to express an opinion on these financial statements and financial statementschedule based on our audits.

 

We conducted our audits in accordance withthe standards of the Public Company Accounting Oversight Board (UnitedStates).  Those standards require that weplan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement.  An audit includes consideration of internalcontrol over financial reporting as a basis for designing audit procedures thatare appropriate in the circumstances, but not for the purpose of expressing anopinion on the effectiveness of the Company’s internal control over financialreporting.  Accordingly, we express nosuch opinion.  An audit also includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements, 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 statementspresent fairly, in all material respects, the financial position of The UnionLight, Heat and Power Company as of December 31, 2004 and 2003, and the resultsof their operations and their cash flows for each of the three years in theperiod ended December 31, 2004, in conformity with accounting principlesgenerally accepted in the United States of America.  Also, in our opinion, the financial statementschedule, when considered in relation to the basic financial statements takenas a whole, presents fairly in all material respects the information set forththerein.

 

As discussed in Note 1 to the financialstatements, in 2003, The Union Light, Heat and Power Company adopted Statementof Financial Accounting Standards (SFAS) No. 143, “Accounting for AssetRetirement Obligations.”

 
| /s/ Deloitte & Touche  LLP |   |
|--------------------------------|--------|
| Deloitte & Touche LLP      |   |
|                           |   |
| Cincinnati, Ohio               |   |
| February 11, 2005              |   |

 

94

----

** CINERGY CORP.**

**AND SUBSIDIARY COMPANIES**

 

95

----

 

**CINERGY CORP.**

**CONSOLIDATEDSTATEMENTS OF INCOME**

 
| ** **                                                                                           | ** **   | **2004**                                      | ** **    | **2003**   | ** ** | **2002**  | ** ** |
|------------------------------------------------------------------------------------------------------|--------------|-----------------------------------------------|---------------|------------|------------|-----------|------------|
| *** ***                                                                                         | *** *** | **(in  thousands, except per share amounts)** | *** ***  |
| * *                                                                                             | * *     | * *                                      | * *      | * *   | * *   | * *  | * *   |
| **Operating Revenues**(Note 1(d))                                                                    |         |                                          | ** **    |       |       |      |       |
| Electric                                                                                             |         | **$**                                         | **3,536,649** | ** ** | $          | 3,320,256 |       | $ | 3,256,437 |   |
| Gas                                                                                                  |         | **783,316**                                   | ** **    | 835,507    |       | 590,471   |       |
| Other (Note 1(d)*(iii)*)                                                                             |         | **367,985**                                   | ** **    | 260,114    |       | 212,444   |       |
| **Total Operating Revenues**                                                                         |         | **4,687,950**                                 | ** **    | 4,415,877  |       | 4,059,352 |       |
|                                                                                                 |         | ** **                                    | ** **    |       |       |      |       |
| **Operating Expenses**                                                                               |         | ** **                                    | ** **    |       |       |      |       |
| Fuel, emission allowances, and purchased power                                                       |         | **1,244,027**                                 | ** **    | 1,136,950  |       | 950,463   |       |
| Gas purchased                                                                                        |         | **428,087**                                   | ** **    | 503,834    |       | 309,983   |       |
| Costs of fuel resold                                                                                 |         | **280,891**                                   | ** **    | 196,974    |       | 130,286   |       |
| Operation and maintenance                                                                            |         | **1,282,278**                                 | ** **    | 1,118,680  |       | 1,201,564 |       |
| Depreciation                                                                                         |         | **460,389**                                   | ** **    | 398,871    |       | 403,909   |       |
| Taxes other than income taxes                                                                        |         | **253,945**                                   | ** **    | 249,746    |       | 263,002   |       |
| **Total Operating Expenses**                                                                         |         | **3,949,617**                                 | ** **    | 3,605,055  |       | 3,259,207 |       |
|                                                                                                 |         | ** **                                    | ** **    |       |       |      |       |
| **Operating Income**                                                                                 |         | **738,333**                                   | ** **    | 810,822    |       | 800,145   |       |
|                                                                                                 |         | ** **                                    | ** **    |       |       |      |       |
| **Equity in Earnings of Unconsolidated  Subsidiaries**                                               |         | **48,249**                                    | ** **    | 15,201     |       | 15,261    |       |
| **Miscellaneous Income (Expense) - Net**                                                             |         | **(3,213**                                    | **)**         | 38,156     |       | 12,402    |       |
| **Interest Expense**                                                                                 |         | **275,238**                                   | ** **    | 270,874    |       | 243,652   |       |
| **Preferred Dividend Requirement of Subsidiary  Trust**(Note 3(b))                                   |         | **—**                                    | ** **    | 11,940     |       | 23,832    |       |
| **Preferred Dividend Requirements of Subsidiaries**                                                  |         | **3,432**                                     | ** **    | 3,433      |       | 3,433     |       |
|                                                                                                 |         | ** **                                    | ** **    |       |       |      |       |
| **Income Before Taxes**                                                                              |         | **504,699**                                   | ** **    | 577,932    |       | 556,891   |       |
|                                                                                                 |         | ** **                                    | ** **    |       |       |      |       |
| **Income Taxes**(Note 10)                                                                            |         | **103,831**                                   | ** **    | 143,508    |       | 160,255   |       |
|                                                                                                 |         | ** **                                    | ** **    |       |       |      |       |
| **Income Before Discontinued Operations and  Cumulative Effect of Changes in Accounting Principles** |         | **400,868**                                   | ** **    | 434,424    |       | 396,636   |       |
|                                                                                                 |         | ** **                                    | ** **    |       |       |      |       |
| Discontinued operations, net of tax (Note 14)                                                        |         | **—**                                    | ** **    | 8,886      |       | (25,161   | )          |
| Cumulative effect of changes in accounting principles, net of tax  (Note 1(q)*(iv)*)                 |         | **—**                                    | ** **    | 26,462     |       | (10,899   | )          |
| **Net Income**                                                                                       |         | **$**                                         | **400,868**   | ** ** | $          | 469,772   |       | $ | 360,576 |   |
|                                                                                                 |         | ** **                                    | ** **    |       |       |      |       |
| **Average Common Shares Outstanding - Basic**                                                        |         | **180,965**                                   | ** **    | 176,535    |       | 167,047   |       |
|                                                                                                 |         | ** **                                    | ** **    |       |       |      |       |
| **Earnings Per Common Share - Basic**(Note 17)                                                       |         | ** **                                    | ** **    |       |       |      |       |
| Income before discontinued operations and cumulative effect of  changes in accounting principles     |         | **$**                                         | **2.22**      | ** ** | $          | 2.46      |       | $ | 2.37 |   |
| Discontinued operations, net of tax (Note 14)                                                        |         | **—**                                    | ** **    | 0.05       |       | (0.15     | )          |
| Cumulative effect of changes in accounting principles, net of tax  (Note 1(q)*(iv)*)                 |         | **—**                                    | ** **    | 0.15       |       | (0.06     | )          |
| Net Income                                                                                           |         | **$**                                         | **2.22**      | ** ** | $          | 2.66      |       | $ | 2.16 |   |
|                                                                                                 |         | ** **                                    | ** **    |       |       |      |       |
| **Average Common Shares Outstanding - Diluted**                                                      |         | **183,531**                                   | ** **    | 178,473    |       | 169,052   |       |
|                                                                                                 |         | ** **                                    | ** **    |       |       |      |       |
| **Earnings Per Common Share - Diluted**(Note 17)                                                     |         | ** **                                    | ** **    |       |       |      |       |
| Income before discontinued operations and cumulative effect of  changes in accounting principles     |         | **$**                                         | **2.18**      | ** ** | $          | 2.43      |       | $ | 2.34 |   |
| Discontinued operations, net of tax (Note 14)                                                        |         | **—**                                    | ** **    | 0.05       |       | (0.15     | )          |
| Cumulative effect of changes in accounting principles, net of tax  (Note 1(q)*(iv)*)                 |         | **—**                                    | ** **    | 0.15       |       | (0.06     | )          |
| Net Income                                                                                           |         | **$**                                         | **2.18**      | ** ** | $          | 2.63      |       | $ | 2.13 |   |
|                                                                                                 |         | ** **                                    | ** **    |       |       |      |       |
| **Cash Dividends Declared Per Common Share**                                                         |         | **$**                                         | **1.88**      | ** ** | $          | 1.84      |       | $ | 1.80 |   |

** **

**The accompanying notes as they relate to Cinergy Corp. are an integralpart of these consolidated financial statements.**

 

96

----

 

**CINERGYCORP.**

**CONSOLIDATED BALANCE SHEETS**

 
| **ASSETS**                                                                                                                                        | ** ** | ** **                  | ** **     | ** ** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|----------------|------------|------------|
| ** **                                                                                                                                        | ** ** | **December  31**            | ** **     |
| ** **                                                                                                                                        | ** ** | **2004**                    | ** **     | **2003**   | ** ** |
| * *                                                                                                                                          | * *   | **(dollars  in thousands)** | * *       |
| **Current Assets**                                                                                                                                |       |                        | ** **     |       |       |
| Cash and cash equivalents                                                                                                                         |       | **$**                       | **164,541**    | ** ** | $          | 169,120 |   |
| Notes receivable, current                                                                                                                         |       | **214,513**                 | ** **     | 189,854    |       |
| Accounts receivable less accumulated provision for doubtful accounts  of $5,514 at December 31, 2004, and $7,884 at December 31, 2003 (Note 3(c)) |       | **1,061,140**               | ** **     | 1,074,518  |       |
| Fuel, emission allowances, and supplies (Note 1(g))                                                                                               |       | **444,750**                 | ** **     | 357,625    |       |
| Energy risk management current assets (Note 1(k)*(i)*)                                                                                            |       | **381,146**                 | ** **     | 305,058    |       |
| Prepayments and other                                                                                                                             |       | **174,624**                 | ** **     | 146,422    |       |
| **Total Current Assets**                                                                                                                          |       | **2,440,714**               | ** **     | 2,242,597  |       |
|                                                                                                                                              |       | ** **                  | ** **     |       |       |
| **Property, Plant, and Equipment - at Cost**                                                                                                      |       | ** **                  | ** **     |       |       |
| Utility plant in service (Note 19)                                                                                                                |       | **10,076,468**              | ** **     | 9,732,123  |       |
| Construction work in progress                                                                                                                     |       | **333,687**                 | ** **     | 275,459    |       |
| **Total Utility Plant**                                                                                                                           |       | **10,410,155**              | ** **     | 10,007,582 |       |
| Non-regulated property, plant, and equipment (Note 19)                                                                                            |       | **4,700,009**               | ** **     | 4,527,943  |       |
| Accumulated depreciation (Note 1(h)*(i)*)                                                                                                         |       | **5,180,699**               | ** **     | 4,908,019  |       |
| **Net Property, Plant, and Equipment**                                                                                                            |       | **9,929,465**               | ** **     | 9,627,506  |       |
|                                                                                                                                              |       | ** **                  | ** **     |       |       |
| **Other Assets**                                                                                                                                  |       | ** **                  | ** **     |       |       |
| Regulatory assets (Note 1(c))                                                                                                                     |       | **1,030,333**               | ** **     | 1,029,242  |       |
| Investments in unconsolidated subsidiaries                                                                                                        |       | **513,675**                 | ** **     | 494,520    |       |
| Energy risk management non-current assets (Note 1(k)*(i)*)                                                                                        |       | **138,787**                 | ** **     | 97,334     |       |
| Notes receivable, non-current                                                                                                                     |       | **193,857**                 | ** **     | 213,853    |       |
| Other investments                                                                                                                                 |       | **125,367**                 | ** **     | 184,044    |       |
| Goodwill and other intangible assets                                                                                                              |       | **60,502**                  | ** **     | 45,349     |       |
| Restricted funds held in trust                                                                                                                    |       | **358,006**                 | ** **     | —     |       |
| Other                                                                                                                                             |       | **191,611**                 | ** **     | 180,260    |       |
| **Total Other Assets**                                                                                                                            |       | **2,612,138**               | ** **     | 2,244,602  |       |
|                                                                                                                                              |       | ** **                  | ** **     |       |       |
| **Assets of Discontinued Operations**(Note 14)                                                                                                    |       | **—**                  | ** **     | 4,501      |       |
|                                                                                                                                              |       | ** **                  | ** **     |       |       |
| **Total Assets**                                                                                                                                  |       | **$**                       | **14,982,317** | ** ** | $          | 14,119,206 |   |

** **

**The accompanying notes as they relate to Cinergy Corp. are an integralpart of these consolidated financial statements.**

 

97

----

 

**CINERGYCORP.**

**CONSOLIDATED BALANCE SHEETS**

 
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                                                                                                                                                                                                         | ** ** | ** **                  | ** **     | ** ** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|----------------|------------|------------|
| ** **                                                                                                                                                                                                                                             | ** ** | **December 31**             | ** **     |
| ** **                                                                                                                                                                                                                                             | ** ** | **2004**                    | ** **     | **2003**   | ** ** |
| * *                                                                                                                                                                                                                                               | * *   | **(dollars  in thousands)** | * *       |
| **Current Liabilities**                                                                                                                                                                                                                                |       |                        | ** **     |       |       |
| Accounts payable                                                                                                                                                                                                                                       |       | **$**                       | **1,348,576**  | ** ** | $          | 1,240,423 |   |
| Accrued taxes                                                                                                                                                                                                                                          |       | **216,804**                 | ** **     | 217,993    |       |
| Accrued interest                                                                                                                                                                                                                                       |       | **54,473**                  | ** **     | 68,952     |       |
| Notes payable and other short-term obligations (Note 5)                                                                                                                                                                                                |       | **958,910**                 | ** **     | 351,412    |       |
| Long-term debt due within one year                                                                                                                                                                                                                     |       | **219,967**                 | ** **     | 839,103    |       |
| Energy risk management current liabilities (Note 1(k)*(i)*)                                                                                                                                                                                            |       | **310,741**                 | ** **     | 296,122    |       |
| Other                                                                                                                                                                                                                                                  |       | **171,188**                 | ** **     | 107,438    |       |
| **Total Current Liabilities**                                                                                                                                                                                                                          |       | **3,280,659**               | ** **     | 3,121,443  |       |
|                                                                                                                                                                                                                                                   |       | ** **                  | ** **     |       |       |
| **Non-Current Liabilities**                                                                                                                                                                                                                            |       | ** **                  | ** **     |       |       |
| Long-term debt (Note 4)                                                                                                                                                                                                                                |       | **4,227,741**               | ** **     | 4,131,909  |       |
| Deferred income taxes (Note 10)                                                                                                                                                                                                                        |       | **1,597,120**               | ** **     | 1,557,981  |       |
| Unamortized investment tax credits                                                                                                                                                                                                                     |       | **99,723**                  | ** **     | 108,884    |       |
| Accrued pension and other postretirement benefit costs (Note 9)                                                                                                                                                                                        |       | **688,277**                 | ** **     | 662,834    |       |
| Regulatory liabilities (Note 1(c))                                                                                                                                                                                                                     |       | **557,419**                 | ** **     | 490,856    |       |
| Energy risk management non-current liabilities (Note 1(k)*(i)*)                                                                                                                                                                                        |       | **127,340**                 | ** **     | 64,861     |       |
| Other                                                                                                                                                                                                                                                  |       | **225,298**                 | ** **     | 205,344    |       |
| **Total Non-Current Liabilities**                                                                                                                                                                                                                      |       | **7,522,918**               | ** **     | 7,222,669  |       |
|                                                                                                                                                                                                                                                   |       | ** **                  | ** **     |       |       |
| **Liabilities of Discontinued Operations**(Note 14)                                                                                                                                                                                                    |       | **—**                  | ** **     | 11,594     |       |
|                                                                                                                                                                                                                                                   |       | ** **                  | ** **     |       |       |
| **Commitments and Contingencies**(Note 11)                                                                                                                                                                                                             |       | ** **                  | ** **     |       |       |
|                                                                                                                                                                                                                                                   |       | ** **                  | ** **     |       |       |
| **Total Liabilities**                                                                                                                                                                                                                                  |       | **10,803,577**              | ** **     | 10,355,706 |       |
|                                                                                                                                                                                                                                                   |       | ** **                  | ** **     |       |       |
| **Cumulative Preferred Stock of Subsidiaries**                                                                                                                                                                                                         |       | ** **                  | ** **     |       |       |
| Not subject to mandatory redemption                                                                                                                                                                                                                    |       | **62,818**                  | ** **     | 62,818     |       |
|                                                                                                                                                                                                                                                   |       | ** **                  | ** **     |       |       |
| **Common Stock Equity**(Note 2)                                                                                                                                                                                                                        |       | ** **                  | ** **     |       |       |
| Common stock - $.01 par value; authorized shares - 600,000,000; issued  shares - 187,653,506 at December 31, 2004, and  178,438,369 at December 31, 2003; outstanding shares - 187,524,229 at  December 31, 2004, and 178,336,854 at December 31, 2003 |       | **1,877**                   | ** **     | 1,784      |       |
| Paid-in capital                                                                                                                                                                                                                                        |       | **2,559,715**               | ** **     | 2,195,985  |       |
| Retained earnings                                                                                                                                                                                                                                      |       | **1,613,340**               | ** **     | 1,551,003  |       |
| Treasury shares at cost - 129,277 shares at December 31, 2004, and  101,515 shares at December 31, 2003                                                                                                                                                |       | **(4,336**                  | **)**          | (3,255     | )          |
| Accumulated other comprehensive loss (Note 18)                                                                                                                                                                                                         |       | **(54,674**                 | **)**          | (44,835    | )          |
| **Total Common Stock Equity**                                                                                                                                                                                                                          |       | **4,115,922**               | ** **     | 3,700,682  |       |
|                                                                                                                                                                                                                                                   |       | ** **                  | ** **     |       |       |
| **Total Liabilities and Shareholders’ Equity**                                                                                                                                                                                                    |       | **$**                       | **14,982,317** | ** ** | $          | 14,119,206 |   |
|                                                                                                                                                                                                                                                   |       |                        | ** **     |       |       |

** **

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

 

98

----

 

**CINERGYCORP.**

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

** **
| ** **                                                                                | ** **   | ** **                                           | ** **   | ** **  | ** ** | ** **    | ** ** | ** **   | ** **    | **Accumulated**   | ** ** | **Total**    | ** ** |
|-------------------------------------------------------------------------------------------|--------------|------------------------------------------------------|--------------|-------------|------------|---------------|------------|--------------|---------------|-------------------|------------|--------------|------------|
| ** **                                                                                | ** **   | ** **                                           | ** **   | ** **  | ** ** | ** **    | ** ** | ** **   | ** **    | **Other**         | ** ** | **Common**   | ** ** |
| ** **                                                                                | ** **   | **Common**                                           | ** **   | **Paid-in** | ** ** | **Retained**  | ** ** | **Treasury** | ** **    | **Comprehensive** | ** ** | **Stock**    | ** ** |
| ** **                                                                                | ** **   | **Stock**                                            | ** **   | **Capital** | ** ** | **Earnings**  | ** ** | **Stock**    | ** **    | **Income (Loss)** | ** ** | **Equity**   | ** ** |
| *** ***                                                                              | *** *** | **(dollars in thousands, except per share amounts)** | *** *** |
| * *                                                                                  | * *     | * *                                             | * *     | * *    | * *   | * *      | * *   | * *     | * *      | * *          | * *   | * *     | * *   |
| **2002**                                                                                  |         |                                                 |         |        |       |          |       |         |          |              |       |         |       |
| Beginning balance (159,402,839 shares)                                                    |         | $                                                    | 1,594        |        | $          | 1,619,659     |       | $            | 1,337,135     |              | $          | —       |       | $ | (16,929 | ) | $ | 2,941,459 |   |
|                                                                                      |         |                                                 |         |        |       |          |       |         |          |              |       |         |       |
| Comprehensive income:                                                                     | ** **   | ** **                                           | ** **   | ** **  | ** ** | ** **    | ** ** | ** **   | ** **    | ** **        | ** ** | ** **   | ** ** |
| Net income                                                                                |         |                                                 |         |        |       | 360,576       |       |         |          |              |       | 360,576      |       |
| Other comprehensive income (loss), net of tax effect of $11,509 (Note  18)                |         |                                                 |         |        |       |          |       |         |          |              |       |         |       |
| Foreign currency translation adjustment, net of reclassification  adjustments (Note 1(r)) |         |                                                 |         |        |       |          |       |         |          | 25,917            |       | 25,917       |       |
| Minimum pension liability adjustment                                                      |         |                                                 |         |        |       |          |       |         |          | (13,763           | )          | (13,763      | )          |
| Unrealized loss on investment trusts                                                      |         |                                                 |         |        |       |          |       |         |          | (5,277            | )          | (5,277       | )          |
| Cash flow hedges (Note 1(k)*(ii)*)                                                        |         |                                                 |         |        |       |          |       |         |          | (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 |   |
|                                                                                      |         |                                                 |         |        |       |          |       |         |          |              |       |         |       |
| **2003**                                                                                  |         |                                                 |         |        |       |          |       |         |          |              |       |         |       |
| Comprehensive income:                                                                     | ** **   | ** **                                           | ** **   | ** **  | ** ** | ** **    | ** ** | ** **   | ** **    | ** **        | ** ** | ** **   | ** ** |
| Net income                                                                                |         |                                                 |         |        |       | 469,772       |       |         |          |              |       | 469,772      |       |
| Other comprehensive income (loss), net of tax effect of $11,700 (Note  18)                |         |                                                 |         |        |       |          |       |         |          |              |       |         |       |
| Foreign currency translation adjustment, net of reclassification  adjustments (Note 1(r)) |         |                                                 |         |        |       |          |       |         |          | 10,528            |       | 10,528       |       |
| Minimum pension liability adjustment                                                      |         |                                                 |         |        |       |          |       |         |          | (33,846           | )          | (33,846      | )          |
| Unrealized gain on investment trusts                                                      |         |                                                 |         |        |       |          |       |         |          | 6,757             |       | 6,757        |       |
| Cash flow hedges (Note 1(k)*(ii)*)                                                        |         |                                                 |         |        |       |          |       |         |          | 1,526             |       | 1,526        |       |
| Total comprehensive income                                                                |         |                                                 |         |        |       |          |       |         |          |              |       | 454,737      |       |
|                                                                                      |         |                                                 |         |        |       |          |       |         |          |              |       |         |       |
| Issuance of common stock - net (9,775,254 shares)                                         |         | 97                                                   |         | 269,977     |       |          |       |         |          |              |       | 270,074      |       |
| Treasury shares purchased (101,515  shares)                                               |         |                                                 |         |        |       |          |       | (3,255       | )             |              |       | (3,255       | )          |
| Dividends on common stock ($1.84 per share)                                               |         |                                                 |         |        |       | (322,371      | )          |         |          |              |       | (322,371     | )          |
| Other                                                                                     |         |                                                 |         | 7,872       |       | 149           |       |         |          |              |       | 8,021        |       |
| Ending balance (178,336,854  shares)                                                      |         | $                                                    | 1,784        |        | $          | 2,195,985     |       | $            | 1,551,003     |              | $          | (3,255       | )          | $ | (44,835 | ) | $ | 3,700,682 |   |
|                                                                                      |         |                                                 |         |        |       |          |       |         |          |              |       |         |       |
| **2004**                                                                                  |         |                                                 |         |        |       |          |       |         |          |              |       |         |       |
| **Comprehensive income:**                                                                 | ** **   | ** **                                           | ** **   | ** **  | ** ** | ** **    | ** ** | ** **   | ** **    | ** **        | ** ** | ** **   | ** ** |
| **Net income**                                                                            | ** **   | ** **                                           | ** **   | ** **  | ** ** | **400,868**   | ** ** | ** **   | ** **    | ** **        | ** ** | **400,868**  | ** ** |
| **Other comprehensive income (loss), net of tax  effect of $8,259**(Note 18)              | ** **   | ** **                                           | ** **   | ** **  | ** ** | ** **    | ** ** | ** **   | ** **    | ** **        | ** ** | ** **   | ** ** |
| **Foreign currency translation adjustment** (Note 1(r))                                   | ** **   | ** **                                           | ** **   | ** **  | ** ** | ** **    | ** ** | ** **   | ** **    | **14,953**        | ** ** | **14,953**   | ** ** |
| **Minimum pension liability adjustment**                                                  | ** **   | ** **                                           | ** **   | ** **  | ** ** | ** **    | ** ** | ** **   | ** **    | **(31,752**       | **)**      | **(31,752**  | **)**      |
| **Unrealized gain on investment trusts**                                                  | ** **   | ** **                                           | ** **   | ** **  | ** ** | ** **    | ** ** | ** **   | ** **    | **2,418**         | ** ** | **2,418**    | ** ** |
| **Cash flow hedges** (Note 1(k)*(ii)*)                                                    | ** **   | ** **                                           | ** **   | ** **  | ** ** | ** **    | ** ** | ** **   | ** **    | **4,542**         | ** ** | **4,542**    | ** ** |
| **Total comprehensive income**                                                            | ** **   | ** **                                           | ** **   | ** **  | ** ** | ** **    | ** ** | ** **   | ** **    | ** **        | ** ** | **391,029**  | ** ** |
| ** **                                                                                | ** **   | ** **                                           | ** **   | ** **  | ** ** | ** **    | ** ** | ** **   | ** **    | ** **        | ** ** | ** **   | ** ** |
| **Issuance of common stock - net (9,215,137  shares)**                                    | ** **   | **93**                                               | ** **   | **350,433** | ** ** | ** **    | ** ** | ** **   | ** **    | ** **        | ** ** | **350,526**  | ** ** |
| **Treasury shares purchased (27,762 shares)**                                             | ** **   | ** **                                           | ** **   | ** **  | ** ** | ** **    | ** ** | **(1,081**   | **)**         | ** **        | ** ** | **(1,081**   | **)**      |
| **Dividends on common stock ($1.88 per share)**                                           | ** **   | ** **                                           | ** **   | ** **  | ** ** | **(338,630**  | **)**      | ** **   | ** **    | ** **        | ** ** | **(338,630** | **)**      |
| **Other**                                                                                 | ** **   | ** **                                           | ** **   | **13,297**  | ** ** | **99**        | ** ** | ** **   | ** **    | ** **        | ** ** | **13,396**   | ** ** |
| **Ending balance (187,524,229 shares)**                                                   | ** **   | **$**                                                | **1,877**    | ** **  | **$**      | **2,559,715** | ** ** | **$**        | **1,613,340** | ** **        | **$**      | **(4,336**   | **)**      | **$** | **(54,674** | **)** | **$** | **4,115,922** | ** ** |
| ** **                                                                                | ** **   | ** **                                           | ** **   | ** **  | ** ** | ** **    | ** ** | ** **   | ** **    | ** **        | ** ** | ** **   | ** ** |

**The accompanying notes as they relate to CinergyCorp. are an integral part of these consolidated financial statements.**

** **

**99**

----

** **

**CINERGYCORP.**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

 
| ** **                                                                            | ** **   | **2004**                   | ** **   | **2003**   | ** ** | **2002** | ** ** |
|---------------------------------------------------------------------------------------|--------------|----------------------------|--------------|------------|------------|----------|------------|
| *** ***                                                                          | *** *** | **(dollars in thousands)** | *** *** |
| * *                                                                              | * *     | * *                   | * *     | * *   | * *   | * * | * *   |
| **Cash Flows from Continuing Operations**                                             |         |                       | ** **   |       |       |     |       |
| **Operating Activities**                                                              |         |                       | ** **   |       |       |     |       |
| Net income                                                                            |         | **$**                      | **400,868**  | ** ** | $          | 469,772  |       | $ | 360,576 |   |
| Adjustments to reconcile net income to net cash provided by operating  activities:    |         | ** **                 | ** **   |       |       |     |       |
| Depreciation                                                                          |         | **460,389**                | ** **   | 398,871    |       | 403,909  |       |
| (Income) Loss of discontinued operations, net of tax                                  |         | **—**                 | ** **   | (8,886     | )          | 25,161   |       |
| (Income) Loss on impairment or disposal of subsidiaries and  investments, net         |         | **48,144**                 | ** **   | (93        | )          | (16,518  | )          |
| Cumulative effect of changes in accounting principles, net of tax                     |         | **—**                 | ** **   | (26,462    | )          | 10,899   |       |
| Change in net position of energy risk management activities                           |         | **(40,443**                | **)**        | (11,723    | )          | (43,202  | )          |
| Deferred income taxes and investment tax credits - net                                |         | **(4,113**                 | **)**        | 85,108     |       | 148,069  |       |
| Equity in earnings of unconsolidated subsidiaries                                     |         | **(48,249**                | **)**        | (15,201    | )          | (15,261  | )          |
| Allowance for equity funds used during construction                                   |         | **(2,269**                 | **)**        | (7,532     | )          | (12,861  | )          |
| Regulatory asset/liability deferrals                                                  |         | **(38,868**                | **)**        | (81,791    | )          | (132,117 | )          |
| Regulatory asset amortization                                                         |         | **92,422**                 | ** **   | 89,931     |       | 115,967  |       |
| Accrued pension and other postretirement benefit costs                                |         | **25,443**                 | ** **   | 36,667     |       | 127,366  |       |
| Cost of removal                                                                       |         | **(17,763**                | **)**        | (16,598    | )          | —   |       |
| Changes in current assets and current liabilities:                                    |         | ** **                 | ** **   |       |       |     |       |
| Accounts and notes receivable                                                         |         | **(11,555**                | **)**        | 123,504    |       | (235,437 | )          |
| Fuel, emission allowances, and supplies                                               |         | **(89,699**                | **)**        | 1,410      |       | (81,303  | )          |
| Prepayments                                                                           |         | **(88,463**                | **)**        | 8,859      |       | (26,818  | )          |
| Accounts payable                                                                      |         | **108,476**                | ** **   | (89,149    | )          | 311,339  |       |
| Accrued taxes and interest                                                            |         | **(15,360**                | **)**        | (35,510    | )          | 65,019   |       |
| Other assets                                                                          |         | **(50,234**                | **)**        | (26,008    | )          | (50,572  | )          |
| Other liabilities                                                                     |         | **104,278**                | ** **   | 50,504     |       | 1,586    |       |
| **Net cash provided by operating activities**                                         |         | **833,004**                | ** **   | 945,673    |       | 955,802  |       |
|                                                                                  |         | ** **                 | ** **   |       |       |     |       |
| **Financing Activities**                                                              |         | ** **                 | ** **   |       |       |     |       |
| Change in short-term debt                                                             |         | **545,405**                | ** **   | (393,096   | )          | (442,472 | )          |
| Issuance of long-term debt                                                            |         | **39,361**                 | ** **   | 688,166    |       | 628,170  |       |
| Redemption of long-term debt                                                          |         | **(830,543**               | **)**        | (487,901   | )          | (112,578 | )          |
| Issuance of common stock                                                              |         | **350,526**                | ** **   | 270,074    |       | 267,861  |       |
| Dividends on common stock                                                             |         | **(338,630**               | **)**        | (322,371   | )          | (298,292 | )          |
| **Net cash provided by (used in) financing  activities**                              |         | **(233,881**               | **)**        | (245,128   | )          | 42,689   |       |
|                                                                                  |         | ** **                 | ** **   |       |       |     |       |
| **Investing Activities**                                                              |         | ** **                 | ** **   |       |       |     |       |
| Construction expenditures (less allowance for equity funds used  during construction) |         | **(697,643**               | **)**        | (704,117   | )          | (853,332 | )          |
| Proceeds from notes receivable                                                        |         | **17,460**                 | ** **   | 9,187      |       | —   |       |
| Withdrawal of restricted funds held in trust                                          |         | **25,273**                 | ** **   | —     |       | —   |       |
| Acquisitions and other investments                                                    |         | **(2,965**                 | **)**        | (87,859    | )          | (118,375 | )          |
| Proceeds from distributions by investments and sale of investments  and subsidiaries  |         | **54,173**                 | ** **   | 51,252     |       | 86,071   |       |
| **Net cash used in investing activities**                                             |         | **(603,702**               | **)**        | (731,537   | )          | (885,636 | )          |
|                                                                                  |         | ** **                 | ** **   |       |       |     |       |
| **Net increase (decrease) in cash and cash  equivalents from continuing operations**  |         | **(4,579**                 | **)**        | (30,992    | )          | 112,855  |       |
|                                                                                  |         | ** **                 | ** **   |       |       |     |       |
| **Cash and cash equivalents from continuing  operations at beginning of period**      |         | **169,120**                | ** **   | 200,112    |       | 87,257   |       |
|                                                                                  |         | ** **                 | ** **   |       |       |     |       |
| **Cash and cash equivalents from continuing  operations at end of period**            |         | **$**                      | **164,541**  | ** ** | $          | 169,120  |       | $ | 200,112 |   |
|                                                                                  |         | ** **                 | ** **   |       |       |     |       |
| **Cash Flows from Discontinued Operations**                                           |         | ** **                 | ** **   |       |       |     |       |
| Operating activities                                                                  |         | **$**                      | **(7,093**   | **)**      | $          | (5,871   | )          | $ | 40,397 |   |
| Financing activities                                                                  |         | **7,093**                  | ** **   | (14,898    | )          | (39,464  | )          |
| Investing activities                                                                  |         | **—**                 | ** **   | (202       | )          | (3,772   | )          |
|                                                                                  |         | ** **                 | ** **   |       |       |     |       |
| **Net decrease in cash and cash equivalents from  discontinued operations**           |         | **—**                 | ** **   | (20,971    | )          | (2,839   | )          |
| ** **                                                                            |         | ** **                 | ** **   |       |       |     |       |
| **Cash and cash equivalents from discontinued  operations at beginning of period**    |         | **—**                 | ** **   | 20,971     |       | 23,810   |       |
| ** **                                                                            |         | ** **                 | ** **   |       |       |     |       |
| **Cash and cash equivalents from discontinued  operations at end of period**          |         | **$**                      | **—**   | ** ** | $          | —   |       | $ | 20,971 |   |
| ** **                                                                            |         | ** **                 | ** **   |       |       |     |       |
| **Supplemental Disclosure of Cash Flow Information**                                  |         | ** **                 | ** **   |       |       |     |       |
| Cash paid during the year for:                                                        |         | ** **                 | ** **   |       |       |     |       |
| Interest (net of amount capitalized)                                                  |         | **$**                      | **298,142**  | ** ** | $          | 263,228  |       | $ | 253,266 |   |
| Income taxes                                                                          |         | **$**                      | **73,197**   | ** ** | $          | 92,175   |       | $ | 57,739 |   |
|                                                                                  |         |                       | ** **   |       |       |     |       |

**The accompanying notes as they relate to CinergyCorp. are an integral part of these consolidated financial statements.**

** **

** **

**100**

----

** **

**CINERGYCORP.**

**CONSOLIDATED STATEMENTS OF CAPITALIZATION**

                                                                                   
| ** **                                                                                | ** **   | **December 31**            | ** **    |
|-------------------------------------------------------------------------------------------|--------------|----------------------------|---------------|
| ** **                                                                                | ** **   | **2004**                   | ** **    | **2003** | ** ** |
| *** ***                                                                              | *** *** | **(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 |   |
| 6.90% Note Payable due February 16, 2007                                                  |         | **326,032**                | ** **    | 326,032 |   |
| **Total Other Long-term Debt**                                                            |         | **526,032**                | ** **    | 526,032 |   |
| Unamortized Premium and Discount - Net                                                    |         | **(3,980**                 | **)**         | (6,080 | ) |
| **Total - Cinergy Corp.**                                                                 |         | **522,052**                | ** **    | 519,952 |   |
|                                                                                      |         | ** **                 | ** **    |   |   |
| **Cinergy Global Resources, Inc.**                                                        |         | ** **                 | ** **    |   |   |
| Other Long-term Debt:                                                                     |         | ** **                 | ** **    |   |   |
| 6.20% Debentures due November 3, 2008                                                     |         | **150,000**                | ** **    | 150,000 |   |
| Variable interest rate of Euro Inter-Bank Offered Rate plus 1.2%,  maturing November 2016 |         | **89,391**                 | ** **    | 79,104 |   |
| **Total Other Long-term Debt**                                                            |         | **239,391**                | ** **    | 229,104 |   |
| Unamortized Premium and Discount - Net                                                    |         | **(126**                   | **)**         | (160 | ) |
| **Total - Cinergy Global Resources, Inc.**                                                |         | **239,265**                | ** **    | 228,944 |   |
|                                                                                      |         | ** **                 | ** **    |   |   |
| **Cinergy Investments, Inc.**                                                             |         | ** **                 | ** **    |   |   |
| Other Long-term Debt:                                                                     |         | ** **                 | ** **    |   |   |
| 9.23% Notes Payable, due November 5, 2016                                                 |         | **105,834**                | ** **    | 107,142 |   |
| 7.81% Notes Payable, due June 1, 2009                                                     |         | **74,773**                 | ** **    | 93,041 |   |
| Other                                                                                     |         | **17,930**                 | ** **    | 3,547 |   |
| **Total - Cinergy Investments, Inc.**                                                     |         | **198,537**                | ** **    | 203,730 |   |
|                                                                                      |         | ** **                 | ** **    |   |   |
| **Operating Companies**                                                                   | ** **   | ** **                 | ** **    | ** ** | ** ** |
| The Cincinnati Gas & Electric Company **(CG&E)** and subsidiaries                 |         | ** **                 | ** **    |   |   |
| First Mortgage Bonds                                                                      |         | **94,700**                 | ** **    | 94,700 |   |
| Other Long-term Debt                                                                      |         | **1,385,721**              | ** **    | 1,401,721 |   |
| Unamortized Premium and Discount - Net                                                    |         | **(36,753**                | **)**         | (37,614 | ) |
| **Total Long-term Debt**                                                                  |         | **1,443,668**              | ** **    | 1,458,807 |   |
| PSI Energy, Inc. **(PSI)**                                                                |         | ** **                 | ** **    |   |   |
| First Mortgage Bonds                                                                      |         | **620,720**                | ** **    | 620,720 |   |
| Secured Medium-term Notes                                                                 |         | **77,500**                 | ** **    | 77,500 |   |
| Other Long-term Debt                                                                      |         | **1,135,813**              | ** **    | 1,032,663 |   |
| Unamortized Premium and Discount - Net                                                    |         | **(9,814**                 | **)**         | (10,407 | ) |
| **Total Long-term Debt**                                                                  |         | **1,824,219**              | ** **    | 1,720,476 |   |
|                                                                                      |         | ** **                 | ** **    |   |   |
| **Total Consolidated Long-term Debt**                                                     |         | **$**                      | **4,227,741** | ** ** | $ | 4,131,909 |   |
|                                                                                      |         | ** **                 | ** **    |   |   |
| **Cumulative Preferred Stock of  Subsidiaries**                                           |         | ** **                 | ** **    |   |   |
| ** **                                                                                | ** **   | ** **                 | ** **    | ** ** | ** ** |
| **CG&E**and subsidiaries                                                              |         | **$**                      | **20,485**    | ** ** | $ | 20,485 |   |
| **PSI**                                                                                   |         | **42,333**                 | ** **    | 42,333 |   |
| **Total Cumulative Preferred Stock of Subsidiaries**                                      |         | **$**                      | **62,818**    | ** ** | $ | 62,818 |   |
|                                                                                      |         | ** **                 | ** **    |   |   |
| **Common Stock Equity**                                                                   |         | **$**                      | **4,115,922** | ** ** | $ | 3,700,682 |   |
|                                                                                      |         | ** **                 | ** **    |   |   |
| **Total Consolidated Capitalization**                                                     |         | **$**                      | **8,406,481** | ** ** | $ | 7,895,409 |   |
|                                                                                      |         |                       |          |   | ** ** |   |   |
|                                                                                           |              |                            |               |  |  |  |  |  |  |

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

 

101

----

 

**THE CINCINNATI GAS****&**

**ELECTRIC COMPANY**

**AND SUBSIDIARY COMPANIES**

** **

**102**

----

** **

**THE CINCINNATI GAS &ELECTRIC COMPANY**

**CONSOLIDATEDSTATEMENTS OF INCOME**

 
| ** **                                                                           | ** **   | **2004**                   | ** **    | **2003**   | ** ** | **2002**  | ** ** |
|--------------------------------------------------------------------------------------|--------------|----------------------------|---------------|------------|------------|-----------|------------|
| *** ***                                                                         | *** *** | **(dollars in thousands)** | *** ***  |
| * *                                                                             | * *     | * *                   | * *      | * *   | * *   | * *  | * *   |
| **Operating Revenues**(Note 1(d))                                                    |         |                       | ** **    |       |       |      |       |
| Electric                                                                             |         | **$**                      | **1,689,683** | ** ** | $          | 1,691,353 |       | $ | 1,618,687 |   |
| Gas                                                                                  |         | **690,675**                | ** **    | 627,720    |       | 437,092   |       |
| Other (Note 1(d)*(iii)*)                                                             |         | **130,365**                | ** **    | 62,876     |       | 81,631    |       |
| **Total Operating Revenues**                                                         |         | **2,510,723**              | ** **    | 2,381,949  |       | 2,137,410 |       |
|                                                                                 |         | ** **                 | ** **    |       |       |      |       |
| **Operating Expenses**                                                               |         | ** **                 | ** **    |       |       |      |       |
| Fuel, emission allowances, and purchased power                                       |         | **521,959**                | ** **    | 496,041    |       | 413,406   |       |
| Gas purchased                                                                        |         | **427,585**                | ** **    | 382,310    |       | 232,558   |       |
| Costs of fuel resold                                                                 |         | **98,898**                 | ** **    | 54,661     |       | 60,674    |       |
| Operation and maintenance                                                            |         | **594,381**                | ** **    | 499,556    |       | 531,482   |       |
| Depreciation                                                                         |         | **179,487**                | ** **    | 186,819    |       | 196,539   |       |
| Taxes other than income taxes                                                        |         | **198,445**                | ** **    | 199,818    |       | 197,827   |       |
| **Total Operating Expenses**                                                         |         | **2,020,755**              | ** **    | 1,819,205  |       | 1,632,486 |       |
|                                                                                 |         | ** **                 | ** **    |       |       |      |       |
| **Operating Income**                                                                 |         | **489,968**                | ** **    | 562,744    |       | 504,924   |       |
|                                                                                 |         | ** **                 | ** **    |       |       |      |       |
| **Miscellaneous Income - Net**                                                       |         | **16,228**                 | ** **    | 30,660     |       | 9,742     |       |
| **Interest Expense**                                                                 |         | **90,836**                 | ** **    | 115,215    |       | 95,629    |       |
| ** **                                                                           |         | ** **                 | ** **    |       |       |      |       |
| **Income Before Taxes**                                                              |         | **415,360**                | ** **    | 478,189    |       | 419,037   |       |
|                                                                                 |         | ** **                 | ** **    |       |       |      |       |
| **Income Taxes**(Note 10)                                                            |         | **158,518**                | ** **    | 178,077    |       | 155,341   |       |
|                                                                                 |         | ** **                 | ** **    |       |       |      |       |
| **Income Before Cumulative Effect of Changes in  Accounting Principles**             |         | **256,842**                | ** **    | 300,112    |       | 263,696   |       |
|                                                                                 |         | ** **                 | ** **    |       |       |      |       |
| Cumulative effect of changes in accounting principles, net of tax  (Note 1(q)*(iv)*) |         | **—**                 | ** **    | 30,938     |       | —    |       |
|                                                                                 |         | ** **                 | ** **    |       |       |      |       |
| **Net Income**                                                                       |         | **$**                      | **256,842**   | ** ** | $          | 331,050   |       | $ | 263,696 |   |
| ** **                                                                           |         | ** **                 | ** **    |       |       |      |       |
| **Preferred Dividend Requirement**                                                   |         | **845**                    | ** **    | 846        |       | 846       |       |
| ** **                                                                           |         | ** **                 | ** **    |       |       |      |       |
| **Net Income Applicable to Common Stock**                                            |         | **$**                      | **255,997**   | ** ** | $          | 330,204   |       | $ | 262,850 |   |
|                                                                                 |         |                       |          |       |       |      |       |
|                                                                                      |              |                            |               |            |            |           |            |  |  |  |  |  |

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

** **

**103**

----

** **

**THE CINCINNATI GAS &ELECTRIC COMPANY**

**CONSOLIDATED BALANCESHEETS**

 
| **ASSETS**                                                                                                                                      | ** **   | ** **                 | ** **    | ** ** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------|--------------|----------------------------|---------------|------------|------------|
| ** **                                                                                                                                      | ** **   | **December 31**            | ** **    |
| ** **                                                                                                                                      | ** **   | **2004**                   | ** **    | **2003**   | ** ** |
| *** ***                                                                                                                                    | *** *** | **(dollars in thousands)** | *** ***  |
| **Current Assets**                                                                                                                              |         |                       | ** **    |       |       |
| Cash and cash equivalents                                                                                                                       |         | **$**                      | **4,154**     | ** ** | $          | 15,842 |   |
| Notes receivable from affiliated companies                                                                                                      |         | **121,559**                | ** **    | 110,149    |       |
| Accounts receivable less accumulated provision for doubtful accounts of  $722 at December 31, 2004, and $1,602 at December 31, 2003 (Note 3(c)) |         | **145,105**                | ** **    | 107,733    |       |
| Accounts receivable from affiliated companies                                                                                                   |         | **30,916**                 | ** **    | 58,406     |       |
| Fuel, emission allowances, and supplies (Note 1(g))                                                                                             |         | **199,769**                | ** **    | 135,948    |       |
| Energy risk management current assets (Note 1(k)(i))                                                                                            |         | **148,866**                | ** **    | 72,830     |       |
| Prepayments and other                                                                                                                           |         | **54,650**                 | ** **    | 15,186     |       |
| **Total Current Assets**                                                                                                                        |         | **705,019**                | ** **    | 516,094    |       |
|                                                                                                                                            |         | ** **                 | ** **    |       |       |
| **Property, Plant, and Equipment - at Cost**                                                                                                    |         | ** **                 | ** **    |       |       |
| Utility plant in service (Note 19)                                                                                                              |         | ** **                 | ** **    |       |       |
| Electric                                                                                                                                        |         | **2,249,352**              | ** **    | 2,155,457  |       |
| Gas                                                                                                                                             |         | **1,179,764**              | ** **    | 1,104,797  |       |
| Common                                                                                                                                          |         | **249,576**                | ** **    | 288,394    |       |
| **Total Utility Plant In Service**                                                                                                              |         | **3,678,692**              | ** **    | 3,548,648  |       |
| Construction work in progress                                                                                                                   |         | **45,762**                 | ** **    | 71,947     |       |
| **Total Utility Plant**                                                                                                                         |         | **3,724,454**              | ** **    | 3,620,595  |       |
| Non-regulated property, plant, and equipment (Note 19)                                                                                          |         | **3,660,226**              | ** **    | 3,576,187  |       |
| Accumulated depreciation (Note 1(h)(i))                                                                                                         |         | **2,694,708**              | ** **    | 2,625,568  |       |
| **Net Property, Plant, and Equipment**                                                                                                          |         | **4,689,972**              | ** **    | 4,571,214  |       |
|                                                                                                                                            |         | ** **                 | ** **    |       |       |
| **Other Assets**                                                                                                                                |         | ** **                 | ** **    |       |       |
| Regulatory assets (Note 1(c))                                                                                                                   |         | **609,550**                | ** **    | 611,855    |       |
| Energy risk management non-current assets (Note 1(k)(i))                                                                                        |         | **47,276**                 | ** **    | 36,583     |       |
| Restricted funds held in trust                                                                                                                  |         | **93,671**                 | ** **    | —     |       |
| Other                                                                                                                                           |         | **86,871**                 | ** **    | 73,733     |       |
| **Total Other Assets**                                                                                                                          |         | **837,368**                | ** **    | 722,171    |       |
|                                                                                                                                            |         | ** **                 | ** **    |       |       |
| **Total Assets**                                                                                                                                |         | **$**                      | **6,232,359** | ** ** | $          | 5,809,479 |   |
|                                                                                                                                            |         |                       | ** **    |       |       |
|                                                                                                                                                 |              |                            |               |            |            |  |  |  |

**The accompanying notes as theyrelate to The Cincinnati Gas & Electric Company are an integral part ofthese consolidated financial statements.**

 

104

----

 

**THE CINCINNATI GAS &ELECTRIC COMPANY**

**CONSOLIDATED BALANCESHEETS**

 
| **LIABILITIES  AND SHAREHOLDER’S EQUITY**                                                                                                  | ** **   | ** **                 | ** **    | ** ** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------|--------------|----------------------------|---------------|------------|------------|
| ** **                                                                                                                                      | ** **   | **December 31**            | ** **    |
| ** **                                                                                                                                      | ** **   | **2004**                   | ** **    | **2003**   | ** ** |
| *** ***                                                                                                                                    | *** *** | **(dollars in thousands)** | *** ***  |
| **Current Liabilities**                                                                                                                         |         |                       | ** **    |       |       |
| Accounts payable                                                                                                                                |         | **$**                      | **332,316**   | ** ** | $          | 217,652 |   |
| Accounts payable to affiliated companies                                                                                                        |         | **85,127**                 | ** **    | 136,470    |       |
| Accrued taxes                                                                                                                                   |         | **149,010**                | ** **    | 146,216    |       |
| Accrued interest                                                                                                                                |         | **19,408**                 | ** **    | 21,572     |       |
| Notes payable and other short-term obligations (Note 5)                                                                                         |         | **112,100**                | ** **    | 112,100    |       |
| Notes payable to affiliated companies (Note 5)                                                                                                  |         | **180,116**                | ** **    | 49,126     |       |
| Long-term debt due within one year                                                                                                              |         | **150,000**                | ** **    | 110,000    |       |
| Energy risk management current liabilities (Note 1(k)(i))                                                                                       |         | **120,204**                | ** **    | 77,791     |       |
| Other                                                                                                                                           |         | **33,712**                 | ** **    | 32,319     |       |
| **Total Current Liabilities**                                                                                                                   |         | **1,181,993**              | ** **    | 903,246    |       |
|                                                                                                                                            |         | ** **                 | ** **    |       |       |
| **Non-Current Liabilities**                                                                                                                     |         | ** **                 | ** **    |       |       |
| Long-term debt (Note 4)                                                                                                                         |         | **1,443,668**              | ** **    | 1,458,807  |       |
| Deferred income taxes (Note 10)                                                                                                                 |         | **1,090,897**              | ** **    | 985,481    |       |
| Unamortized investment tax credits                                                                                                              |         | **73,120**                 | ** **    | 79,186     |       |
| Accrued pension and other postretirement benefit costs (Note 9)                                                                                 |         | **228,058**                | ** **    | 219,393    |       |
| Regulatory liabilities (Note 1(c))                                                                                                              |         | **164,846**                | ** **    | 155,336    |       |
| Energy risk management non-current liabilities (Note 1(k)(i))                                                                                   |         | **40,184**                 | ** **    | 11,665     |       |
| Other                                                                                                                                           |         | **70,395**                 | ** **    | 69,687     |       |
| **Total Non-Current Liabilities**                                                                                                               |         | **3,111,168**              | ** **    | 2,979,555  |       |
|                                                                                                                                            |         | ** **                 | ** **    |       |       |
| **Commitments and Contingencies**(Note 11)                                                                                                      |         | ** **                 | ** **    |       |       |
|                                                                                                                                            |         | ** **                 | ** **    |       |       |
| **Total Liabilities**                                                                                                                           |         | **4,293,161**              | ** **    | 3,882,801  |       |
| ** **                                                                                                                                      |         | ** **                 | ** **    |       |       |
| **Cumulative Preferred Stock**                                                                                                                  |         | ** **                 | ** **    |       |       |
| Not subject to mandatory redemption                                                                                                             |         | **20,485**                 | ** **    | 20,485     |       |
|                                                                                                                                            |         | ** **                 | ** **    |       |       |
| **Common Stock Equity**(Note 2)                                                                                                                 |         | ** **                 | ** **    |       |       |
| Common stock - $8.50 par value; authorized shares - 120,000,000; outstanding  shares—89,663,086 at December 31, 2004 and December 31, 2003 |         | **762,136**                | ** **    | 762,136    |       |
| Paid-in capital                                                                                                                                 |         | **584,176**                | ** **    | 586,528    |       |
| Retained earnings                                                                                                                               |         | **610,232**                | ** **    | 589,993    |       |
| Accumulated other comprehensive loss (Note 18)                                                                                                  |         | **(37,831**                | **)**         | (32,464    | )          |
| **Total Common Stock Equity**                                                                                                                   |         | **1,918,713**              | ** **    | 1,906,193  |       |
| ** **                                                                                                                                      |         | ** **                 | ** **    |       |       |
| **Total Liabilities and Shareholder’s Equity**                                                                                             |         | **$**                      | **6,232,359** | ** ** | $          | 5,809,479 |   |
|                                                                                                                                            |         |                       | ** **    |       |       |

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

** **

**105**

----

** **

**THECINCINNATI GAS & ELECTRIC COMPANY**

**CONSOLIDATEDSTATEMENTS OF CHANGES IN COMMON STOCK EQUITY**

 
| ** **                                                                   | ** **   | ** **                 | ** **   | ** **  | ** ** | ** **   | ** ** | **Accumulated**   | ** **  | **Total**    | ** ** |
|------------------------------------------------------------------------------|--------------|----------------------------|--------------|-------------|------------|--------------|------------|-------------------|-------------|--------------|------------|
| ** **                                                                   | ** **   | ** **                 | ** **   | ** **  | ** ** | ** **   | ** ** | **Other**         | ** **  | **Common**   | ** ** |
| ** **                                                                   | ** **   | **Common**                 | ** **   | **Paid-in** | ** ** | **Retained** | ** ** | **Comprehensive** | ** **  | **Stock**    | ** ** |
| ** **                                                                   | ** **   | **Stock**                  | ** **   | **Capital** | ** ** | **Earnings** | ** ** | **Income (Loss)** | ** **  | **Equity**   | ** ** |
| *** ***                                                                 | *** *** | **(dollars in thousands)** | *** *** |
| * *                                                                     | * *     | * *                   | * *     | * *    | * *   | * *     | * *   | * *          | * *    | * *     | * *   |
| **2002**                                                                     |         |                       |         |        |       |         |       |              |        |         |       |
| Beginning balance                                                            |         | $                          | 762,136      |        | $          | 571,926      |       | $                 | 408,706     |         | $          | (5,678 | ) | $ | 1,737,090 |   |
|                                                                         |         |                       |         |        |       |         |       |              |        |         |       |
| Comprehensive income:                                                        |         |                       |         |        |       |         |       |              |        |         |       |
| Net income                                                                   |         |                       |         |        |       | 263,696      |       |              |        | 263,696      |       |
| Other comprehensive loss, net of tax effect of $13,060 (Note 18)             |         |                       |         |        |       |         |       |              |        |         |       |
| Minimum pension liability adjustment                                         |         |                       |         |        |       |         |       | (872              | )           | (872         | )          |
| Unrealized loss on investment trusts                                         |         |                       |         |        |       |         |       | (462              | )           | (462         | )          |
| Cash flow hedges (Note 1(k)(ii))                                             |         |                       |         |        |       |         |       | (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 |   |
|                                                                         |         |                       |         |        |       |         |       |              |        |         |       |
| **2003**                                                                     |         |                       |         |        |       |         |       |              |        |         |       |
| Comprehensive income:                                                        |         |                       |         |        |       |         |       |              |        |         |       |
| Net income                                                                   |         |                       |         |        |       | 331,050      |       |              |        | 331,050      |       |
| Other comprehensive income (loss), net of tax effect of $4,321 (Note  18)    |         |                       |         |        |       |         |       |              |        |         |       |
| Minimum pension liability adjustment                                         |         |                       |         |        |       |         |       | (8,017            | )           | (8,017       | )          |
| Unrealized gain on investment trusts                                         |         |                       |         |        |       |         |       | 1                 |        | 1            |       |
| Cash flow hedges (Note 1(k)(ii))                                             |         |                       |         |        |       |         |       | 1,298             |        | 1,298        |       |
| Total comprehensive income                                                   |         |                       |         |        |       |         |       |              |        | 324,332      |       |
|                                                                         |         |                       |         |        |       |         |       |              |        |         |       |
| Dividends on preferred stock                                                 |         |                       |         |        |       | (846         | )          |              |        | (846         | )          |
| Dividends on common stock                                                    |         |                       |         |        |       | (227,863     | )          |              |        | (227,863     | )          |
| Contribution from parent company for reallocation of taxes                   |         |                       |         | 236         |       |         |       |              |        | 236          |       |
| Ending balance                                                               |         | $                          | 762,136      |        | $          | 586,528      |       | $                 | 589,993     |         | $          | (32,464 | ) | $ | 1,906,193 |   |
|                                                                         |         |                       |         |        |       |         |       |              |        |         |       |
| **2004**                                                                     | ** **   | ** **                 | ** **   | ** **  | ** ** | ** **   | ** ** | ** **        | ** **  | ** **   | ** ** |
| **Comprehensive income:**                                                    | ** **   | ** **                 | ** **   | ** **  | ** ** | ** **   | ** ** | ** **        | ** **  | ** **   | ** ** |
| **Net income**                                                               | ** **   | ** **                 | ** **   | ** **  | ** ** | **256,842**  | ** ** | ** **        | ** **  | **256,842**  | ** ** |
| **Other comprehensive income (loss), net of tax  effect of $3,453**(Note 18) | ** **   | ** **                 | ** **   | ** **  | ** ** | ** **   | ** ** | ** **        | ** **  | ** **   | ** ** |
| **Minimum pension liability adjustment**                                     | ** **   | ** **                 | ** **   | ** **  | ** ** | ** **   | ** ** | **(9,666**        | **)**       | **(9,666**   | **)**      |
| **Cash flow hedges**(Note 1(k)(ii))                                          | ** **   | ** **                 | ** **   | ** **  | ** ** | ** **   | ** ** | **4,299**         | ** **  | **4,299**    | ** ** |
| **Total comprehensive income**                                               | ** **   | ** **                 | ** **   | ** **  | ** ** | ** **   | ** ** | ** **        | ** **  | **251,475**  | ** ** |
| ** **                                                                   | ** **   | ** **                 | ** **   | ** **  | ** ** | ** **   | ** ** | ** **        | ** **  | ** **   | ** ** |
| **Dividends on preferred stock**                                             | ** **   | ** **                 | ** **   | ** **  | ** ** | **(845**     | **)**      | ** **        | ** **  | **(845**     | **)**      |
| **Dividends on common stock**                                                | ** **   | ** **                 | ** **   | ** **  | ** ** | **(235,758** | **)**      | ** **        | ** **  | **(235,758** | **)**      |
| **Other**                                                                    | ** **   | ** **                 | ** **   | **(2,352**  | **)**      | ** **   | ** ** | ** **        | ** **  | **(2,352**   | **)**      |
| **Ending balance**                                                           | ** **   | **$**                      | **762,136**  | ** **  | **$**      | **584,176**  | ** ** | **$**             | **610,232** | ** **   | **$**      | **(37,831** | **)** | **$** | **1,918,713** | ** ** |
| ** **                                                                   | ** **   | ** **                 | ** **   | ** **  | ** ** | ** **   | ** ** | ** **        | ** **  | ** **   | ** ** |

**The accompanying notes as theyrelate to The Cincinnati Gas & Electric Company are an integral part ofthese consolidated financial statements.**

 

106

----

 

**THE CINCINNATI GAS &ELECTRIC COMPANY**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

 
| ** **                                                                            | ** **   | **2004**                   | ** **   | **2003**   | ** ** | **2002** | ** ** |
|---------------------------------------------------------------------------------------|--------------|----------------------------|--------------|------------|------------|----------|------------|
| *** ***                                                                          | *** *** | **(dollars in thousands)** | *** *** |
| * *                                                                              | * *     | * *                   | * *     | * *   | * *   | * * | * *   |
| **Operating Activities**                                                              |         |                       | ** **   |       |       |     |       |
| Net income                                                                            |         | **$**                      | **256,842**  | ** ** | $          | 331,050  |       | $ | 263,696 |   |
| Adjustments to reconcile net income to net cash provided by operating  activities:    |         | ** **                 | ** **   |       |       |     |       |
| Depreciation                                                                          |         | **179,487**                | ** **   | 186,819    |       | 196,539  |       |
| Deferred income taxes and investment tax credits - net                                |         | **53,519**                 | ** **   | 82,228     |       | 104,103  |       |
| Cumulative effect of changes in accounting principles, net of tax                     |         | **—**                 | ** **   | (30,938    | )          | —   |       |
| Change in net position of energy risk management activities                           |         | **(15,797**                | **)**        | (20,593    | )          | (7,061   | )          |
| Allowance for equity funds used during construction                                   |         | **(458**                   | **)**        | (2,749     | )          | (356     | )          |
| Regulatory asset/liability deferrals                                                  |         | **(16,535**                | **)**        | (40,510    | )          | (84,694  | )          |
| Regulatory asset amortization                                                         |         | **48,649**                 | ** **   | 36,824     |       | 44,339   |       |
| Accrued pension and other postretirement benefit costs                                |         | **8,665**                  | ** **   | 18,109     |       | 20,559   |       |
| Cost of removal                                                                       |         | **(7,875**                 | **)**        | —     |       | —   |       |
| Changes in current assets and current liabilities:                                    |         | ** **                 | ** **   |       |       |     |       |
| Accounts and notes receivable                                                         |         | **(25,348**                | **)**        | 23,453     |       | 84,193   |       |
| Fuel, emission allowances, and supplies                                               |         | **(65,030**                | **)**        | (14,061    | )          | 19,014   |       |
| Prepayments                                                                           |         | **(39,586**                | **)**        | (6,393     | )          | 1,750    |       |
| Accounts payable                                                                      |         | **63,928**                 | ** **   | 9,608      |       | (38,441  | )          |
| Accrued taxes and interest                                                            |         | **938**                    | ** **   | (14,283    | )          | 48,885   |       |
| Other assets                                                                          |         | **(11,286**                | **)**        | 20,314     |       | 2,713    |       |
| Other liabilities                                                                     |         | **15,508**                 | ** **   | (21,117    | )          | (2,210   | )          |
|                                                                                  |         | ** **                 | ** **   |       |       |     |       |
| **Net cash provided by operating activities**                                         |         | **445,621**                | ** **   | 557,761    |       | 653,029  |       |
|                                                                                  |         | ** **                 | ** **   |       |       |     |       |
| **Financing Activities**                                                              |         | ** **                 | ** **   |       |       |     |       |
| Change in short-term debt, including net affiliate notes                              |         | **134,460**                | ** **   | 104,114    |       | (587,260 | )          |
| Issuance of long-term debt                                                            |         | **39,361**                 | ** **   | 256,198    |       | 580,570  |       |
| Redemption of long-term debt                                                          |         | **(110,000**               | **)**        | (394,899   | )          | (100,000 | )          |
| Dividends on preferred stock                                                          |         | **(845**                   | **)**        | (846       | )          | (846     | )          |
| Dividends on common stock                                                             |         | **(235,758**               | **)**        | (227,863   | )          | (185,909 | )          |
|                                                                                  |         | ** **                 | ** **   |       |       |     |       |
| **Net cash used in financing activities**                                             |         | **(172,782**               | **)**        | (263,296   | )          | (293,445 | )          |
|                                                                                  |         | ** **                 | ** **   |       |       |     |       |
| **Investing Activities**                                                              |         | ** **                 | ** **   |       |       |     |       |
| Construction expenditures (less allowance for equity funds used during  construction) |         | **(299,751**               | **)**        | (323,959   | )          | (323,320 | )          |
| Other investments                                                                     |         | **59**                     | ** **   | —     |       | (2       | )          |
| Proceeds from disposition of subsidiaries and investments                             |         | **15,165**                 | ** **   | —     |       | —   |       |
|                                                                                  |         | ** **                 | ** **   |       |       |     |       |
| **Net cash used in investing activities**                                             |         | **(284,527**               | **)**        | (323,959   | )          | (323,322 | )          |
|                                                                                  |         | ** **                 | ** **   |       |       |     |       |
| **Net increase (decrease) in cash and cash  equivalents**                             |         | **(11,688**                | **)**        | (29,494    | )          | 36,262   |       |
| ** **                                                                            |         | ** **                 | ** **   |       |       |     |       |
| **Cash and cash equivalents at beginning of period**                                  |         | **15,842**                 | ** **   | 45,336     |       | 9,074    |       |
| ** **                                                                            |         | ** **                 | ** **   |       |       |     |       |
| **Cash and cash equivalents at end of period**                                        |         | **$**                      | **4,154**    | ** ** | $          | 15,842   |       | $ | 45,336 |   |
|                                                                                  |         | ** **                 | ** **   |       |       |     |       |
| **Supplemental Disclosure of Cash Flow Information**                                  |         | ** **                 | ** **   |       |       |     |       |
| Cash paid during the year for:                                                        |         | ** **                 | ** **   |       |       |     |       |
| Interest (net of amount capitalized)                                                  |         | **$**                      | **92,542**   | ** ** | $          | 103,339  |       | $ | 86,895 |   |
| Income taxes                                                                          |         | **$**                      | **102,502**  | ** ** | $          | 45,937   |       | $ | 28,687 |   |
|                                                                                  |         |                       | ** **   |       |       |     |       |

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

** **

**107**

----

** **

**THE CINCINNATI GAS &ELECTRIC COMPANY**

**CONSOLIDATEDSTATEMENTS OF CAPITALIZATION**

 
| ** **                                                                                                                           | ** **   | **December 31**                        | ** **    |
|--------------------------------------------------------------------------------------------------------------------------------------|--------------|----------------------------------------|---------------|
| ** **                                                                                                                           | ** **   | **2004**                               | ** **    | **2003** | ** ** |
| *** ***                                                                                                                         | *** *** | **(dollars in thousands)**             | *** ***  |
| * *                                                                                                                             | * *     | * *                               | * *      | * * | * * |
| **Long-term Debt**(excludes current portion)                                                                                         |         |                                   |          |   |   |
| **CG&E**                                                                                                                         |         |                                   |          |   |   |
| First Mortgage Bonds:                                                                                                                |         |                                   |          |   |   |
| 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**                                                                                                       |         | **94,700**                             |          | 94,700 |   |
|                                                                                                                                 |         | ** **                             |          |   |   |
| Other Long-term Debt:                                                                                                                |         | ** **                             |          |   |   |
| Liquid Asset Notes with Coupon Exchange due October 1, 2007 (Executed  interest rate swap to fix the rate at 6.87% through maturity) |         | **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 |   |
| 5.70% Debentures due September 15, 2012, effective interest rate of  6.42%                                                           |         | **500,000**                            |          | 500,000 |   |
| 5.40% Debentures due June 15, 2033, effective interest rate of 6.90%                                                                 |         | **200,000**                            |          | 200,000 |   |
| 5 3/8% Debentures due June 15, 2033                                                                                                  |         | **200,000**                            |          | 200,000 |   |
| Series 2002A, Ohio Air Quality Development Revenue Refunding Bonds,  due September 1, 2037 (Pollution Control)                       |         | **42,000**                             |          | 42,000 |   |
| Series 2002B, Ohio Air Quality Development Revenue Refunding Bonds,  due September 1, 2037 (Pollution Control)                       |         | **42,000**                             |          | 42,000 |   |
| Series 2004A, Ohio Air Quality Development Revenue Bonds, due  November 1, 2039 (Pollution Control) (Note 4)                         |         | **47,000**                             |          | — |   |
| Series 2004B, Ohio Air Quality Development Revenue Bonds, due  November 1, 2039 (Pollution Control) (Note 4)                         |         | **47,000**                             |          | — |   |
| Series 1992A, 6.50% Collateralized Pollution Control Revenue  Refunding Bonds, due November 15, 2022                                 |         | **12,721**                             |          | 12,721 |   |
| **Total Other Long-term Debt**                                                                                                       |         | **1,290,721**                          |          | 1,346,721 |   |
|                                                                                                                                 |         | ** **                             |          |   |   |
| Unamortized Premium and Discount - Net                                                                                               |         | **(36,093**                            | )             | (37,299 | ) |
| **Total Long-term Debt**                                                                                                             |         | **1,349,328**                          |          | 1,404,122 |   |
|                                                                                                                                 |         | ** **                             |          |   |   |
| The Union Light, Heat and Power Company                                                                                              |         | ** **                             |          |   |   |
| Other Long-term Debt                                                                                                                 |         | **95,000**                             |          | 55,000 |   |
| Unamortized Premium and Discount - Net                                                                                               |         | **(660**                               | )             | (315 | ) |
| **Total Long-term Debt**                                                                                                             |         | **94,340**                             |          | 54,685 |   |
|                                                                                                                                 |         | ** **                             |          |   |   |
| **Total Consolidated Long-term Debt**                                                                                                |         | **$**                                  | **1,443,668** |   | $ | 1,458,807 |   |
|                                                                                                                                 |         | ** **                             |          |   |   |
| **Cumulative Preferred Stock**                                                                                                       | ** **   | ** **                             | ** **    | ** ** | ** ** |
| ** **                                                                                                                           | ** **   | ** **                             | ** **    | **Shares** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Par/  Stated   Value**                                                                                                             |         | **Authorized  Shares**                 |          | **Outstanding  at December 31, 2004** |   | **Series** |   | **Mandatory  Redemption** |   | ** ** |   |   |   |
| $                                                                                                                                    | 100          |                                   | 6,000,000     |   | 204,849 |   | 4%  - 4 3⁄4% |   | No |   | **$** | **20,485** |   | $ | 20,485 |   |
|                                                                                                                                 |         |                                   |          |   |   |   |   |   |   | ** ** |   |   |   |
| **Common Stock Equity**                                                                                                              |         |                                   |          |   |   |   |   | **$** | **1,918,713** |   | $ | 1,906,193 |   |
|                                                                                                                                 |         |                                   |          |   |   |   |   |   |   | ** ** |   |   |   |
| ** **                                                                                                                           |         | **Total Consolidated  Capitalization** |          |   |   | **$** | **3,382,866** |   | $ | 3,385,485 |   |
|                                                                                                                                 |         |                                   |          |   |   |   |   |   |   |   |   |   |   |
|                                                                                                                                      |              |                                        |               |  |  |  |  |  |  |  |  |  |  |  |  |  |

**The accompanying notes as theyrelate to The Cincinnati Gas & Electric Company are an integral part ofthese consolidated financial statements.**

 

108

----

 

**PSI ENERGY, INC.**

**AND SUBSIDIARY COMPANY**

** **

**109**

----

** **

**PSI ENERGY, INC.**

**CONSOLIDATED STATEMENTS OF INCOME**

 
| ** **                                                                           | ** **   | **2004**                   | ** **    | **2003**  | ** ** | **2002**  | ** ** |
|--------------------------------------------------------------------------------------|--------------|----------------------------|---------------|-----------|------------|-----------|------------|
| *** ***                                                                         | *** *** | **(dollars in thousands)** | *** ***  |
| * *                                                                             | * *     | * *                   | * *      | * *  | * *   | * *  | * *   |
| **Operating Revenues**(Note 1(d))                                                    |         |                       |          |      |       |      |       |
| Electric                                                                             |         | **$**                      | **1,753,699** |      | $          | 1,603,019 |       | $ | 1,610,578 |   |
|                                                                                 |         | ** **                 |          |      |       |      |       |
| **Operating Expenses**                                                               |         | ** **                 |          |      |       |      |       |
| Fuel, emission allowances, and purchased power                                       |         | **651,086**                |          | 630,216   |       | 547,031   |       |
| Operation and maintenance                                                            |         | **474,517**                |          | 448,668   |       | 470,263   |       |
| Depreciation                                                                         |         | **221,596**                |          | 163,938   |       | 154,524   |       |
| Taxes other than income taxes                                                        |         | **47,152**                 |          | 46,200    |       | 56,695    |       |
| **Total Operating Expenses**                                                         |         | **1,394,351**              |          | 1,289,022 |       | 1,228,513 |       |
|                                                                                 |         | ** **                 |          |      |       |      |       |
| **Operating Income**                                                                 |         | **359,348**                |          | 313,997   |       | 382,065   |       |
|                                                                                 |         | ** **                 |          |      |       |      |       |
| **Miscellaneous Income - Net**                                                       |         | **9,348**                  |          | 6,288     |       | 20,582    |       |
| **Interest Expense**                                                                 |         | **91,481**                 |          | 85,843    |       | 73,689    |       |
| ** **                                                                           |         | ** **                 |          |      |       |      |       |
| **Income Before Taxes**                                                              |         | **277,215**                |          | 234,442   |       | 328,958   |       |
|                                                                                 |         | ** **                 |          |      |       |      |       |
| **Income Taxes**(Note 10)                                                            |         | **112,213**                |          | 100,567   |       | 114,709   |       |
|                                                                                 |         | ** **                 |          |      |       |      |       |
| **Income Before Cumulative Effect of a Change in  Accounting Principle**             |         | **165,002**                |          | 133,875   |       | 214,249   |       |
|                                                                                 |         | ** **                 |          |      |       |      |       |
| Cumulative effect of a change in accounting principle, net of tax  (Note 1(q)*(iv)*) |         | **—**                 |          | (494      | )          | —    |       |
|                                                                                 |         | ** **                 |          |      |       |      |       |
| **Net Income**                                                                       |         | **$**                      | **165,002**   |      | $          | 133,381   |       | $ | 214,249 |   |
| ** **                                                                           |         | ** **                 |          |      |       |      |       |
| **Preferred Dividend Requirement**                                                   |         | **2,587**                  |          | 2,587     |       | 2,587     |       |
| ** **                                                                           |         | ** **                 |          |      |       |      |       |
| **Net Income Applicable to Common Stock**                                            |         | **$**                      | **162,415**   |      | $          | 130,794   |       | $ | 211,662 |   |
|                                                                                 |         |                       |          |      |       |      |       |
|                                                                                      |              |                            |               |           |            |           |            |  |  |  |  |  |

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

 

110

----

 

**PSIENERGY, INC.**

**CONSOLIDATED BALANCE SHEETS**

 
| **ASSETS**                                                                                                                                      | ** ** | ** **                  | ** **    | ** ** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|---------------|------------|------------|
| ** **                                                                                                                                      | ** ** | **December 31**             | ** **    |
| ** **                                                                                                                                      | ** ** | **2004**                    | ** **    | **2003**   | ** ** |
| * *                                                                                                                                        | * *   | **(dollars  in thousands)** | * *      |
| **Current Assets**                                                                                                                              |       |                        |          |       |       |
| Cash and cash equivalents                                                                                                                       |       | **$**                       | **10,794**    |       | $          | 6,565 |   |
| Restricted deposits                                                                                                                             |       | **22,063**                  |          | 92,675     |       |
| Notes receivable from affiliated companies                                                                                                      |       | **72,958**                  |          | 65,715     |       |
| Accounts receivable less accumulated provision for doubtful accounts of  $171 at December 31, 2004, and $1,110 at December 31, 2003 (Note 3(c)) |       | **31,177**                  |          | 37,194     |       |
| Accounts receivable from affiliated companies                                                                                                   |       | **437**                     |          | 459        |       |
| Fuel, emission allowances, and supplies (Note 1(g))                                                                                             |       | **108,793**                 |          | 149,392    |       |
| Energy risk management current assets (Note 1(k)*(i)*)                                                                                          |       | **2,820**                   |          | 7,959      |       |
| Prepayments and other                                                                                                                           |       | **8,984**                   |          | 5,303      |       |
| **Total Current Assets**                                                                                                                        |       | **258,026**                 |          | 365,262    |       |
|                                                                                                                                            |       | ** **                  |          |       |       |
| **Property, Plant, and Equipment - at Cost**                                                                                                    |       | ** **                  |          |       |       |
| Utility plant in service (Note 19)                                                                                                              |       | **6,397,776**               |          | 6,183,475  |       |
| Construction work in progress                                                                                                                   |       | **287,925**                 |          | 203,512    |       |
| **Total Utility Plant**                                                                                                                         |       | **6,685,701**               |          | 6,386,987  |       |
| Accumulated depreciation (Note 1(h)*(i)*)                                                                                                       |       | **2,284,932**               |          | 2,133,235  |       |
| **Net Property, Plant, and Equipment**(Note 19)                                                                                                 |       | **4,400,769**               |          | 4,253,752  |       |
|                                                                                                                                            |       | ** **                  |          |       |       |
| **Other Assets**                                                                                                                                |       | ** **                  |          |       |       |
| Regulatory assets (Note 1(c))                                                                                                                   |       | **420,783**                 |          | 417,387    |       |
| Energy risk management non-current assets (Note 1(k)*(i)*)                                                                                      |       | **1,690**                   |          | 7,061      |       |
| Other investments                                                                                                                               |       | **73,396**                  |          | 66,803     |       |
| Restricted funds held in trust                                                                                                                  |       | **264,335**                 |          | -          |       |
| Other                                                                                                                                           |       | **30,897**                  |          | 29,372     |       |
| **Total Other Assets**                                                                                                                          |       | **791,101**                 |          | 520,623    |       |
|                                                                                                                                            |       | ** **                  |          |       |       |
| **Total Assets**                                                                                                                                |       | **$**                       | **5,449,896** |       | $          | 5,139,637 |   |
|                                                                                                                                            |       |                        |          |       |       |

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

 

111

----

 

**PSIENERGY, INC.**

**CONSOLIDATED BALANCE SHEETS**

 
| **LIABILITIES  AND SHAREHOLDER’S EQUITY**                                                                                                                    | ** **   | ** **                 | ** **    | ** ** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------|----------------------------|---------------|------------|------------|
| ** **                                                                                                                                                        | ** **   | **December 31**            | ** **    |
| ** **                                                                                                                                                        | ** **   | **2004**                   | ** **    | **2003**   | ** ** |
| *** ***                                                                                                                                                      | *** *** | **(dollars in thousands)** | *** ***  |
| **Current Liabilities**                                                                                                                                           |         |                       |          |       |       |
| Accounts payable                                                                                                                                                  |         | **$**                      | **65,151**    | ** ** | $          | 58,286 |   |
| Accounts payable to affiliated companies                                                                                                                          |         | **38,292**                 | ** **    | 69,746     |       |
| Accrued taxes                                                                                                                                                     |         | **65,871**                 | ** **    | 69,419     |       |
| Accrued interest                                                                                                                                                  |         | **27,532**                 | ** **    | 26,615     |       |
| Notes payable and other short-term obligations (Note 5)                                                                                                           |         | **135,500**                | ** **    | 80,500     |       |
| Notes payable to affiliated companies (Note 5)                                                                                                                    |         | **130,580**                | ** **    | 188,446    |       |
| Long-term debt due within one year                                                                                                                                |         | **50,000**                 | ** **    | -          |       |
| Energy risk management current liabilities (Note 1(k)*(i)*)                                                                                                       |         | **1,428**                  | ** **    | 14,744     |       |
| Other                                                                                                                                                             |         | **31,898**                 | ** **    | 25,636     |       |
| **Total Current Liabilities**                                                                                                                                     |         | **546,252**                | ** **    | 533,392    |       |
|                                                                                                                                                              |         | ** **                 | ** **    |       |       |
| **Non-Current Liabilities**                                                                                                                                       |         | ** **                 | ** **    |       |       |
| Long-term debt (Note 4)                                                                                                                                           |         | **1,824,219**              | ** **    | 1,720,476  |       |
| Deferred income taxes (Note 10)                                                                                                                                   |         | **638,061**                | ** **    | 573,946    |       |
| Unamortized investment tax credits                                                                                                                                |         | **26,603**                 | ** **    | 29,698     |       |
| Accrued pension and other postretirement benefit costs (Note 9)                                                                                                   |         | **209,992**                | ** **    | 193,336    |       |
| Regulatory liabilities (Note 1(c))                                                                                                                                |         | **392,573**                | ** **    | 335,520    |       |
| Energy risk management non-current liabilities (Note 1(k)*(i)*)                                                                                                   |         | **475**                    | ** **    | 2,796      |       |
| Other                                                                                                                                                             |         | **88,190**                 | ** **    | 74,958     |       |
| **Total Non-Current Liabilities**                                                                                                                                 |         | **3,180,113**              | ** **    | 2,930,730  |       |
|                                                                                                                                                              |         | ** **                 | ** **    |       |       |
| **Commitments and Contingencies**(Note 11)                                                                                                                        |         | ** **                 | ** **    |       |       |
|                                                                                                                                                              |         | ** **                 | ** **    |       |       |
| **Total Liabilities**                                                                                                                                             |         | **3,726,365**              | ** **    | 3,464,122  |       |
|                                                                                                                                                              |         | ** **                 | ** **    |       |       |
| **Cumulative Preferred Stock**                                                                                                                                    |         | ** **                 | ** **    |       |       |
| Not subject to mandatory redemption                                                                                                                               |         | **42,333**                 | ** **    | 42,333     |       |
|                                                                                                                                                              |         | ** **                 | ** **    |       |       |
| **Common Stock Equity**(Note 2)                                                                                                                                   |         | ** **                 | ** **    |       |       |
| Common stock - without par value; $.01 stated value; authorized shares  - 60,000,000; outstanding shares - 53,913,701 at December 31, 2004 and  December 31, 2003 |         | **539**                    | ** **    | 539        |       |
| Paid-in capital                                                                                                                                                   |         | **626,019**                | ** **    | 627,274    |       |
| Retained earnings                                                                                                                                                 |         | **1,078,617**              | ** **    | 1,018,790  |       |
| Accumulated other comprehensive loss (Note 18)                                                                                                                    |         | **(23,977**                | **)**         | (13,421    | )          |
| **Total Common Stock Equity**                                                                                                                                     |         | **1,681,198**              | ** **    | 1,633,182  |       |
|                                                                                                                                                              |         | ** **                 | ** **    |       |       |
| **Total Liabilities and Shareholder’s Equity**                                                                                                               |         | **$**                      | **5,449,896** | ** ** | $          | 5,139,637 |   |
|                                                                                                                                                              |         |                       |          |       |       |
|                                                                                                                                                                   |              |                            |               |            |            |  |  |  |

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

 

112

----

 

**PSIENERGY, INC.**

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

 
| ** **                                                                   | ** **   | ** **                 | ** **   | ** **  | ** ** | ** **   | ** ** | **Accumulated**   | ** **    | **Total**    | ** ** |
|------------------------------------------------------------------------------|--------------|----------------------------|--------------|-------------|------------|--------------|------------|-------------------|---------------|--------------|------------|
| ** **                                                                   | ** **   | ** **                 | ** **   | ** **  | ** ** | ** **   | ** ** | **Other**         | ** **    | **Common**   | ** ** |
| ** **                                                                   | ** **   | **Common**                 | ** **   | **Paid-in** | ** ** | **Retained** | ** ** | **Comprehensive** | ** **    | **Stock**    | ** ** |
| ** **                                                                   | ** **   | **Stock**                  | ** **   | **Capital** | ** ** | **Earnings** | ** ** | **Income (Loss)** | ** **    | **Equity**   | ** ** |
| *** ***                                                                 | *** *** | **(dollars in thousands)** | *** *** |
| * *                                                                     | * *     | * *                   | * *     | * *    | * *   | * *     | * *   | * *          | * *      | * *     | * *   |
| **2002**                                                                     |         |                       |         |        |       |         |       |              |          |         |       |
| Beginning balance                                                            |         | $                          | 539          |        | $          | 416,414      |       | $                 | 880,129       |         | $          | (1,595 | ) | $ | 1,295,487 |   |
|                                                                         |         |                       |         |        |       |         |       |              |          |         |       |
| Comprehensive income:                                                        |         |                       |         |        |       |         |       |              |          |         |       |
| Net income                                                                   |         |                       |         |        |       | 214,249      |       |              |          | 214,249      |       |
| Other comprehensive loss, net of tax effect of $4,189 (Note 18)              |         |                       |         |        |       |         |       |              |          |         |       |
| Minimum pension liability adjustment                                         |         |                       |         |        |       |         |       | (2,138            | )             | (2,138       | )          |
| Unrealized 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 |   |
|                                                                         |         |                       |         |        |       |         |       |              |          |         |       |
| **2003**                                                                     |         |                       |         |        |       |         |       |              |          |         |       |
| Comprehensive income:                                                        |         |                       |         |        |       |         |       |              |          |         |       |
| Net income                                                                   |         |                       |         |        |       | 133,381      |       |              |          | 133,381      |       |
| Other comprehensive income (loss), net of tax effect of $3,645 (Note  18)    |         |                       |         |        |       |         |       |              |          |         |       |
| Minimum pension liability adjustment                                         |         |                       |         |        |       |         |       | (11,534           | )             | (11,534      | )          |
| Unrealized gain on investment trusts                                         |         |                       |         |        |       |         |       | 6,232             |          | 6,232        |       |
| Total comprehensive income                                                   |         |                       |         |        |       |         |       |              |          | 128,079      |       |
|                                                                         |         |                       |         |        |       |         |       |              |          |         |       |
| Dividends on preferred stock                                                 |         |                       |         |        |       | (2,587       | )          |              |          | (2,587       | )          |
| Dividends on common stock                                                    |         |                       |         |        |       | (93,950      | )          |              |          | (93,950      | )          |
| Contribution from parent company - equity infusion                           |         |                       |         | 200,000     |       |         |       |              |          | 200,000      |       |
| Contribution from parent company for reallocation of taxes                   |         |                       |         | 343         |       |         |       |              |          | 343          |       |
| Ending balance                                                               |         | $                          | 539          |        | $          | 627,274      |       | $                 | 1,018,790     |         | $          | (13,421 | ) | $ | 1,633,182 |   |
|                                                                         |         |                       |         |        |       |         |       |              |          |         |       |
| **2004**                                                                     |         |                       |         |        |       |         |       |              |          |         |       |
| **Comprehensive income:**                                                    | ** **   | ** **                 | ** **   | ** **  | ** ** | ** **   | ** ** | ** **        | ** **    | ** **   | ** ** |
| **Net income**                                                               | ** **   | ** **                 | ** **   | ** **  | ** ** | **165,002**  | ** ** | ** **        | ** **    | **165,002**  | ** ** |
| **Other comprehensive income (loss), net of tax  effect of $7,350**(Note 18) | ** **   | ** **                 | ** **   | ** **  | ** ** | ** **   | ** ** | ** **        | ** **    | ** **   | ** ** |
| **Minimum pension liability adjustment**                                     | ** **   | ** **                 | ** **   | ** **  | ** ** | ** **   | ** ** | **(12,597**       | **)**         | **(12,597**  | **)**      |
| **Unrealized gain on investment trusts**                                     | ** **   | ** **                 | ** **   | ** **  | ** ** | ** **   | ** ** | **2,041**         | ** **    | **2,041**    | ** ** |
| **Total comprehensive income**                                               | ** **   | ** **                 | ** **   | ** **  | ** ** | ** **   | ** ** | ** **        | ** **    | **154,446**  | ** ** |
| ** **                                                                   | ** **   | ** **                 | ** **   | ** **  | ** ** | ** **   | ** ** | ** **        | ** **    | ** **   | ** ** |
| **Dividends on preferred stock**                                             | ** **   | ** **                 | ** **   | ** **  | ** ** | **(2,587**   | **)**      | ** **        | ** **    | **(2,587**   | **)**      |
| **Dividends on common stock**                                                | ** **   | ** **                 | ** **   | ** **  | ** ** | **(102,588** | **)**      | ** **        | ** **    | **(102,588** | **)**      |
| **Other**                                                                    | ** **   | ** **                 | ** **   | **(1,255**  | **)**      | ** **   | ** ** | ** **        | ** **    | **(1,255**   | **)**      |
| **Ending balance**                                                           | ** **   | **$**                      | **539**      | ** **  | **$**      | **626,019**  | ** ** | **$**             | **1,078,617** | ** **   | **$**      | **(23,977** | **)** | **$** | **1,681,198** | ** ** |
|                                                                         |         |                       |         |        |       |         |       |              |          |         |       |
|                                                                              |              |                            |              |             |            |              |            |                   |               |              |            |  |  |  |  |  |  |

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

 

113

----

 

**PSIENERGY, INC.**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

 
| ** **                                                                         | ** **   | **2004**                   | ** **   | **2003**   | ** ** | **2002** | ** ** |
|------------------------------------------------------------------------------------|--------------|----------------------------|--------------|------------|------------|----------|------------|
| *** ***                                                                       | *** *** | **(dollars in thousands)** | *** *** |
| * *                                                                           | * *     | * *                   | * *     | * *   | * *   | * * | * *   |
| **Operating Activities**                                                           |         |                       |         |       |       |     |       |
| Net income                                                                         |         | **$**                      | **165,002**  | ** ** | $          | 133,381  |       | $ | 214,249 |   |
| Adjustments to reconcile net income to net cash provided by operating  activities: |         | ** **                 | ** **   |       |       |     |       |
| Depreciation                                                                       |         | **221,596**                | ** **   | 163,938    |       | 154,524  |       |
| Cumulative effect of a change in accounting principle, net of tax                  |         | **—**                 | ** **   | 494        |       | —   |       |
| Deferred income taxes and investment tax credits - net                             |         | **49,085**                 | ** **   | 38,424     |       | 33,908   |       |
| Change in net position of energy risk management activities                        |         | **(5,127**                 | **)**        | (1,133     | )          | 9,544    |       |
| Allowance for equity funds used during construction                                |         | **(1,811**                 | **)**        | (4,783     | )          | (12,505  | )          |
| Regulatory asset/liability deferrals                                               |         | **(22,333**                | **)**        | (41,282    | )          | (47,423  | )          |
| Regulatory asset amortization                                                      |         | **43,723**                 | ** **   | 53,107     |       | 71,628   |       |
| Accrued pension and other postretirement benefit costs                             |         | **16,656**                 | ** **   | 9,037      |       | 24,130   |       |
| Cost of removal                                                                    |         | **(9,887**                 | **)**        | (16,598    | )          | —   |       |
| Changes in current assets and current liabilities:                                 |         | ** **                 | ** **   |       |       |     |       |
| Accounts and notes receivable                                                      |         | **(1,204**                 | **)**        | 35,643     |       | 233,040  |       |
| Fuel, emission allowances, and supplies                                            |         | **39,234**                 | ** **   | 27,330     |       | (50,463  | )          |
| Prepayments                                                                        |         | **297**                    | ** **   | 686        |       | (2,908   | )          |
| Accounts payable                                                                   |         | **(24,589**                | **)**        | (104,515   | )          | (119,032 | )          |
| Accrued taxes and interest                                                         |         | **(2,631**                 | **)**        | (33,004    | )          | 2,961    |       |
| Other assets                                                                       |         | **(4,906**                 | **)**        | (5,721     | )          | (20,830  | )          |
| Other liabilities                                                                  |         | **20,358**                 | ** **   | (8,269     | )          | 8,224    |       |
|                                                                               |         | ** **                 | ** **   |       |       |     |       |
| **Net cash provided by operating activities**                                      |         | **483,463**                | ** **   | 246,735    |       | 499,047  |       |
|                                                                               |         | ** **                 | ** **   |       |       |     |       |
| **Financing Activities**                                                           |         | ** **                 | ** **   |       |       |     |       |
| Change in short-term debt, including net affiliate notes                           |         | **(57,866**                | **)**        | 15,542     |       | 46,991   |       |
| Issuance of long-term debt                                                         |         | **—**                 | ** **   | 431,968    |       | 47,600   |       |
| Redemption of long-term debt                                                       |         | **(1,100**                 | **)**        | (460,903   | )          | (23,979  | )          |
| Contribution from parent                                                           |         | **—**                 | ** **   | 200,000    |       | —   |       |
| Dividends on preferred stock                                                       |         | **(2,587**                 | **)**        | (2,587     | )          | (2,587   | )          |
| Dividends on common stock                                                          |         | **(102,588**               | **)**        | (93,950    | )          | (111,842 | )          |
|                                                                               |         | ** **                 | ** **   |       |       |     |       |
| **Net cash provided by (used in) financing  activities**                           |         | **(164,141**               | **)**        | 90,070     |       | (43,817  | )          |
|                                                                               |         | ** **                 | ** **   |       |       |     |       |
| **Investing Activities**                                                           |         | ** **                 | ** **   |       |       |     |       |
| Construction expenditures (less allowance for equity funds used                    |         | ** **                 | ** **   |       |       |     |       |
| during construction)                                                               |         | **(337,208**               | **)**        | (330,362   | )          | (451,326 | )          |
| Withdrawal of restricted funds held in trust                                       |         | **25,273**                 | ** **   | —     |       | —   |       |
| Other investments                                                                  |         | **(3,158**                 | **)**        | (1,885     | )          | (3,484   | )          |
|                                                                               |         | ** **                 | ** **   |       |       |     |       |
| **Net cash used in investing activities**                                          |         | **(315,093**               | **)**        | (332,247   | )          | (454,810 | )          |
|                                                                               |         | ** **                 | ** **   |       |       |     |       |
| **Net increase in cash and cash equivalents**                                      |         | **4,229**                  | ** **   | 4,558      |       | 420      |       |
| ** **                                                                         |         | ** **                 | ** **   |       |       |     |       |
| **Cash and cash equivalents at beginning of period**                               |         | **6,565**                  | ** **   | 2,007      |       | 1,587    |       |
| ** **                                                                         |         | ** **                 | ** **   |       |       |     |       |
| **Cash and cash equivalents at end of period**                                     |         | **$**                      | **10,794**   | ** ** | $          | 6,565    |       | $ | 2,007 |   |
|                                                                               |         | ** **                 | ** **   |       |       |     |       |
| **Supplemental Disclosure of Cash Flow Information**                               |         | ** **                 | ** **   |       |       |     |       |
| Cash paid during the year for:                                                     |         | ** **                 | ** **   |       |       |     |       |
| Interest (net of amount capitalized)                                               |         | **$**                      | **101,275**  | ** ** | $          | 95,733   |       | $ | 89,865 |   |
| Income taxes                                                                       |         | **$**                      | **60,353**   | ** ** | $          | 65,564   |       | $ | 27,401 |   |
|                                                                               |         |                       |         |       |       |     |       |

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

 

114

----

 

**PSIENERGY, INC.**

**CONSOLIDATED STATEMENTS OF CAPITALIZATION**

 
| ** **                                                                                                                                                                                              | ** **   | **December 31**            | ** **    |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------|----------------------------|---------------|
| ** **                                                                                                                                                                                              | ** **   | **2004**                   | ** **    | **2003** | ** ** |
| *** ***                                                                                                                                                                                            | *** *** | **(dollars in thousands)** | *** ***  |
| **Long-term Debt****(excludes current portion)**                                                                                                                                                        |         |                       |          |   |   |
|                                                                                                                                                                                                    |         |                       | ** **    |   |   |
| First Mortgage Bonds:                                                                                                                                                                                   |         |                       | ** **    |   |   |
| Series ZZ, 5 3⁄4% due February 15, 2028 (Pollution Control)                                                                                                                                          |         | **$**                      | **50,000**    | ** ** | $ | 50,000 |   |
| Series AAA, 7 1/8% 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, 8.55% to 8.57% as of December 31, 2004 and 2003,  respectively. Due December 27, 2011.                                                                                                        |         | **7,500**                  | ** **    | 7,500 |   |
| Series B, 6.37% to 8.24%, due August 15, 2008 to August 22, 2022                                                                                                                                        |         | **70,000**                 | ** **    | 70,000 |   |
| (Series A and B, 7.255% weighted average interest rate as of December  31, 2004 and 2003, respectively. 9.1 and 10.1 year weighted average remaining  life at December 31, 2004 and 2003, respectively) |         | ** **                 | ** **    |   |   |
| **Total Secured Medium-term Notes**                                                                                                                                                                     |         | **77,500**                 | ** **    | 77,500 |   |
|                                                                                                                                                                                                    |         | ** **                 | ** **    |   |   |
| Other Long-term Debt:                                                                                                                                                                                   |         | ** **                 | ** **    |   |   |
| Indiana Development Finance Authority Environmental Refunding Revenue  Bonds, due May 1, 2035                                                                                                           |         | **44,025**                 | ** **    | 44,025 |   |
| 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 |   |
| 7.25% Junior Maturing Principal Securities due March 15, 2028                                                                                                                                           |         | **2,658**                  | ** **    | 2,658 |   |
| 6.00% Rural Utilities Service Obligation payable in annual  installments                                                                                                                                |         | **79,888**                 | ** **    | 80,988 |   |
| 6.52% Senior Notes due March 15, 2009                                                                                                                                                                   |         | **97,342**                 | ** **    | 97,342 |   |
| 7.85% Debentures due October 15, 2007                                                                                                                                                                   |         | **265,000**                | ** **    | 265,000 |   |
| 5.00% Debentures due September 15, 2013                                                                                                                                                                 |         | **400,000**                | ** **    | 400,000 |   |
| Series 2002A, Indiana Development Finance Authority Environmental  Refunding Revenue Bonds, due March 1, 2031                                                                                           |         | **23,000**                 | ** **    | 23,000 |   |
| Series 2002B, Indiana Development Finance Authority Environmental  Refunding Revenue Bonds, due March 1, 2019                                                                                           |         | **24,600**                 | ** **    | 24,600 |   |
| Series 2003, Indiana Development Finance Authority Environmental  Refunding Revenue Bonds, due April 1, 2022                                                                                            |         | **35,000**                 | ** **    | 35,000 |   |
| Series 2004B, Indiana Development Finance Authority Environmental  Revenue Bonds, due December 1, 2039 (Note 4)                                                                                         |         | **77,125**                 | ** **    | — |   |
| Series 2004C, Indiana Development Finance Authority Environmental  Revenue Bonds, due December 1, 2039 (Note 4)                                                                                         |         | **77,125**                 | ** **    | — |   |
| **Total Other Long-term Debt**                                                                                                                                                                          |         | **1,135,813**              | ** **    | 1,032,663 |   |
|                                                                                                                                                                                                    |         | ** **                 | ** **    |   |   |
| Unamortized Premium and Discount - Net                                                                                                                                                                  |         | **(9,814**                 | **)**         | (10,407 | ) |
| **Total Long-term Debt**                                                                                                                                                                                |         | **$**                      | **1,824,219** | ** ** | $ | 1,720,476 |   |
|                                                                                                                                                                                                    |         |                       | ** **    |   |   |

 
| **Cumulative Preferred Stock** | ** ** | ** **                            | ** ** | ** **             | ** **    | ** ** | ** **       | ** **     | ** **    | ** ** | ** ** |
|--------------------------------|------------|---------------------------------------|------------|------------------------|---------------|------------|------------------|----------------|---------------|------------|------------|
| ** **                     | ** ** | ** **                            | ** ** | ** **             | ** **    | ** ** | ** **       | ** **     | ** **    | ** ** | ** ** |
| ** **                     | ** ** | ** **                            | ** ** | **Shares**             | ** **    | ** ** | ** **       | ** **     | ** **    | ** ** | ** ** | ** ** | ** ** |
| **Par/Stated**                 | ** ** | **Authorized**                        | ** ** | **Outstanding at**     | ** **    | ** ** | ** **       | **Mandatory**  | ** **    | ** ** | ** ** | ** ** | ** ** |
| **Value**                      | ** ** | **Shares**                            | ** ** | **December  31, 2004** | ** **    | **Series** | ** **       | **Redemption** |          |       |       |   |   |
| $                              | 100        |                                  | 5,000,000  |                   | 347,445       |       | 3  1/2% - 6 7/8% |           | No            |       | **$**      | **34,744** |   | $ | 34,744 |   |
| $                              | 25         |                                  | 5,000,000  |                   | 303,544       |       | 4.16%  - 4.32%   |           | No            |       | **7,589**  |   | 7,589 |   |
| **Total Preferred Stock**      |       |                                  |       |                   |          |       |             | **$**          | **42,333**    |       | $          | 42,333 |   |
|                           |       |                                  |       |                   |          |       |             |           |          | ** ** |       |   |   |
| **Common Stock Equity**        |       |                                  |       |                   |          |       |             | **$**          | **1,681,198** |       | $          | 1,633,182 |   |
|                           |       |                                  |       |                   |          |       |             |           |          | ** ** |       |   |   |
|                           |       | **Total Consolidated Capitalization** |       | **$**                  | **3,547,750** |       | $                | 3,395,991      |          |
|                           |       |                                  |       |                   |          |       |             |           |          |       |       |   |   |
|                                |            |                                       |            |                        |               |            |                  |                |               |            |            |  |  |  |  |  |  |

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

 

115

----

 

**THE UNION LIGHT, HEAT**

**AND POWER COMPANY**

** **

**116**

----

** **

**THEUNION LIGHT, HEAT AND POWER COMPANY**

**STATEMENTS OF INCOME**

 
| ** **                                                             | ** **   | **2004**                   | ** **   | **2003** | ** ** | **2002** | ** ** |
|------------------------------------------------------------------------|--------------|----------------------------|--------------|----------|------------|----------|------------|
| *** ***                                                           | *** *** | **(dollars in thousands)** | *** *** |
| * *                                                               | * *     | * *                   | * *     | * * | * *   | * * | * *   |
| **Operating Revenues**(Note 1(d))                                      |         |                       |         |     |       |     |       |
| Electric                                                               |         | **$**                      | **230,068**  |     | $          | 222,081  |       | $ | 226,856 |   |
| Gas                                                                    |         | **124,475**                |         | 110,072  |       | 81,706   |       |
| **Total Operating Revenues**                                           |         | **354,543**                |         | 332,153  |       | 308,562  |       |
|                                                                   |         | ** **                 |         |     |       |     |       |
| **Operating Expenses**                                                 |         | ** **                 |         |     |       |     |       |
| Electricity purchased from parent company for resale (Note 1(s)*(ii)*) |         | **162,497**                |         | 154,572  |       | 159,734  |       |
| Gas purchased                                                          |         | **79,278**                 |         | 69,774   |       | 46,886   |       |
| Operation and maintenance                                              |         | **55,810**                 |         | 53,704   |       | 50,223   |       |
| Depreciation                                                           |         | **20,034**                 |         | 18,315   |       | 17,350   |       |
| Taxes other than income taxes                                          |         | **3,544**                  |         | 4,412    |       | 4,598    |       |
| **Total Operating Expenses**                                           |         | **321,163**                |         | 300,777  |       | 278,791  |       |
|                                                                   |         | ** **                 |         |     |       |     |       |
| **Operating Income**                                                   |         | **33,380**                 |         | 31,376   |       | 29,771   |       |
| ** **                                                             |         | ** **                 |         |     |       |     |       |
| **Miscellaneous Income - Net**                                         |         | **813**                    |         | 3,561    |       | 666      |       |
| **Interest Expense**                                                   |         | **5,179**                  |         | 6,127    |       | 5,938    |       |
| ** **                                                             |         | ** **                 |         |     |       |     |       |
| **Income Before Taxes**                                                |         | **29,014**                 |         | 28,810   |       | 24,499   |       |
|                                                                   |         | ** **                 |         |     |       |     |       |
| **Income Taxes**(Note 10)                                              |         | **10,376**                 |         | 9,781    |       | 12,349   |       |
|                                                                   |         | ** **                 |         |     |       |     |       |
| **Net Income**                                                         |         | **$**                      | **18,638**   |     | $          | 19,029   |       | $ | 12,150 |   |
|                                                                   |         | ** **                 |         |     |       |     |       |
|                                                                        |              |                            |              |          |            |          |            |  |  |  |  |  |

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

 

117

----

 

**THEUNION LIGHT, HEAT AND POWER COMPANY**

**BALANCE SHEETS**

 
| **ASSETS**                                                                                                                                   | ** **   | ** **                 | ** **   | ** ** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------|--------------|----------------------------|--------------|------------|------------|
| ** **                                                                                                                                   | ** **   | **December 31**            | ** **   |
| ** **                                                                                                                                   | ** **   | **2004**                   | ** **   | **2003**   | ** ** |
| *** ***                                                                                                                                 | *** *** | **(dollars in thousands)** | *** *** |
| **Current Assets**                                                                                                                           |         |                       |         |       |       |
| Cash and cash equivalents                                                                                                                    |         | **$**                      | **4,197**    | ** ** | $          | 1,899 |   |
| Notes receivable from affiliated companies                                                                                                   |         | **20,675**                 | ** **   | 17,906     |       |
| Accounts receivable less accumulated provision for doubtful accounts of  $13 at December 31, 2004, and $192 at December 31, 2003 (Note 3(c)) |         | **1,451**                  | ** **   | 2,458      |       |
| Accounts receivable from affiliated companies                                                                                                |         | **5,671**                  | ** **   | 4,407      |       |
| Fuel and supplies                                                                                                                            |         | **8,500**                  | ** **   | 7,936      |       |
| Prepayments and other                                                                                                                        |         | **285**                    | ** **   | 279        |       |
| **Total Current Assets**                                                                                                                     |         | **40,779**                 | ** **   | 34,885     |       |
|                                                                                                                                         |         | ** **                 | ** **   |       |       |
| **Property, Plant, and Equipment - at Cost**                                                                                                 |         | ** **                 | ** **   |       |       |
| Utility plant in service                                                                                                                     |         | ** **                 | ** **   |       |       |
| Electric                                                                                                                                     |         | **285,828**                | ** **   | 273,895    |       |
| Gas                                                                                                                                          |         | **256,667**                | ** **   | 239,670    |       |
| Common                                                                                                                                       |         | **42,176**                 | ** **   | 53,297     |       |
| **Total Utility Plant In Service**                                                                                                           |         | **584,671**                | ** **   | 566,862    |       |
| Construction work in progress                                                                                                                |         | **6,070**                  | ** **   | 6,165      |       |
| **Total Utility Plant**                                                                                                                      |         | **590,741**                | ** **   | 573,027    |       |
| Accumulated depreciation (Note 1(h)*(i)*)                                                                                                    |         | **176,726**                | ** **   | 176,368    |       |
| **Net Property, Plant, and Equipment**(Note 19)                                                                                              |         | **414,015**                | ** **   | 396,659    |       |
|                                                                                                                                         |         | ** **                 | ** **   |       |       |
| **Other Assets**                                                                                                                             |         | ** **                 | ** **   |       |       |
| Regulatory assets (Note 1(c))                                                                                                                |         | **10,070**                 | ** **   | 16,150     |       |
| Other                                                                                                                                        |         | **2,801**                  | ** **   | 977        |       |
| **Total Other Assets**                                                                                                                       |         | **12,871**                 | ** **   | 17,127     |       |
|                                                                                                                                         |         | ** **                 | ** **   |       |       |
| **Total Assets**                                                                                                                             |         | **$**                      | **467,665**  | ** ** | $          | 448,671 |   |
|                                                                                                                                         |         |                       | ** **   |       |       |

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

 

118

----

**THEUNION LIGHT, HEAT AND POWER COMPANY**

**BALANCE SHEETS**

 
| **LIABILITIES  AND SHAREHOLDER’S EQUITY**                                                                                              | ** **   | ** **                 | ** **   | ** ** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------|--------------|----------------------------|--------------|------------|------------|
| ** **                                                                                                                                  | ** **   | **December 31**            | ** **   |
| ** **                                                                                                                                  | ** **   | **2004**                   | ** **   | **2003**   | ** ** |
| *** ***                                                                                                                                | *** *** | **(dollars in thousands)** | *** *** |
| **Current Liabilities**                                                                                                                     |         |                       |         |       |       |
| Accounts payable                                                                                                                            |         | **$**                      | **16,028**   | ** ** | $          | 13,431 |   |
| Accounts payable to affiliated companies                                                                                                    |         | **22,236**                 | ** **   | 21,131     |       |
| Accrued interest                                                                                                                            |         | **1,370**                  | ** **   | 1,230      |       |
| Notes payable to affiliated companies (Note 5)                                                                                              |         | **11,246**                 | ** **   | 45,233     |       |
| Other                                                                                                                                       |         | **7,009**                  | ** **   | 7,113      |       |
| **Total Current Liabilities**                                                                                                               |         | **57,889**                 | ** **   | 88,138     |       |
|                                                                                                                                        |         | ** **                 | ** **   |       |       |
| **Non-Current Liabilities**                                                                                                                 |         | ** **                 | ** **   |       |       |
| Long-term debt (Note 4)                                                                                                                     |         | **94,340**                 | ** **   | 54,685     |       |
| Deferred income taxes (Note 10)                                                                                                             |         | **58,422**                 | ** **   | 55,488     |       |
| Unamortized investment tax credits                                                                                                          |         | **2,626**                  | ** **   | 2,879      |       |
| Accrued pension and other postretirement benefit costs (Note 9)                                                                             |         | **17,762**                 | ** **   | 16,953     |       |
| Regulatory liabilities (Note 1(c))                                                                                                          |         | **29,979**                 | ** **   | 27,443     |       |
| Other                                                                                                                                       |         | **14,136**                 | ** **   | 13,729     |       |
| **Total Non-Current Liabilities**                                                                                                           |         | **217,265**                | ** **   | 171,177    |       |
|                                                                                                                                        |         | ** **                 | ** **   |       |       |
| **Commitments and Contingencies**(Note 11)                                                                                                  |         | ** **                 | ** **   |       |       |
|                                                                                                                                        |         | ** **                 | ** **   |       |       |
| **Total Liabilities**                                                                                                                       |         | **275,154**                | ** **   | 259,315    |       |
|                                                                                                                                        |         | ** **                 | ** **   |       |       |
| **Common Stock Equity** (Note 2)                                                                                                            |         | ** **                 | ** **   |       |       |
| Common stock - $15.00 par value; authorized shares - 1,000,000; outstanding  shares—585,333 at December 31, 2004 and December 31, 2003 |         | **8,780**                  | ** **   | 8,780      |       |
| Paid-in capital                                                                                                                             |         | **23,455**                 | ** **   | 23,541     |       |
| Retained earnings                                                                                                                           |         | **161,562**                | ** **   | 157,524    |       |
| Accumulated other comprehensive loss                                                                                                        |         | **(1,286**                 | **)**        | (489       | )          |
| **Total Common Stock Equity**                                                                                                               |         | **192,511**                | ** **   | 189,356    |       |
|                                                                                                                                        |         | ** **                 | ** **   |       |       |
| **Total Liabilities and Shareholder’s Equity**                                                                                         |         | **$**                      | **467,665**  | ** ** | $          | 448,671 |   |
|                                                                                                                                        |         |                       |         |       |       |

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

 

119

----

** **

**THEUNION LIGHT, HEAT AND POWER COMPANY**

**STATEMENTS OF CHANGES IN COMMON STOCK EQUITY**

 
| ** **                                                 | ** ** | **Common**

**Stock**       | ** ** | **Paid-in**

**Capital** | ** ** | **Retained**

**Earnings** | ** **  | **Accumulated**

**Other**

**Comprehensive**

**Loss** | ** **  | **Total Common Stock**

**Equity** | ** ** |
|------------------------------------------------------------|------------|-----------------------------|------------|--------------------------|------------|----------------------------|-------------|---------------------------------------------------------|-------------|------------------------------------|------------|
| ** **                                                 | ** ** | **(dollars  in thousands)** | ** ** |
| * *                                                   | * *   | * *                    | * *   | * *                 | * *   | * *                   | * *    | * *                                                | * *    | * *                           | * *   |
| **2002**                                                   |       |                        |       |                     |       |                       |        |                                                    |        |                               |       |
| Beginning balance                                          |       | $                           | 8,780      |                     | $          | 21,111                     |        | $                                                       | 142,320     |                               | $          | (8 | ) | $ | 172,203 |   |
|                                                       |       |                        |       |                     |       |                       |        |                                                    |        |                               |       |
| Comprehensive income:                                      | ** ** | ** **                  | ** ** | ** **               | ** ** | ** **                 | ** **  | ** **                                              | ** **  | ** **                         | ** ** |
| Net income                                                 |       |                        |       |                     |       | 12,150                     |        |                                                    |        | 12,150                             |       |
| Other comprehensive loss, net of tax effect of $36         |       |                        |       |                     |       |                       |        |                                                    |        |                               |       |
| Minimum pension liability adjustment                       |       |                        |       |                     |       |                       |        | (52                                                     | )      | (52                                | )          |
| Total comprehensive income                                 |       |                        |       |                     |       |                       |        |                                                    |        | 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 |   |
|                                                       |       |                        |       |                     |       |                       |        |                                                    |        |                               |       |
| **2003**                                                   | ** ** | ** **                  | ** ** | ** **               | ** ** | ** **                 | ** **  | ** **                                              | ** **  | ** **                         | ** ** |
| Comprehensive income:                                      | ** ** | ** **                  | ** ** | ** **               | ** ** | ** **                 | ** **  | ** **                                              | ** **  | ** **                         | ** ** |
| Net income                                                 |       |                        |       |                     |       | 19,029                     |        |                                                    |        | 19,029                             |       |
| Other comprehensive loss, net of tax effect of $291        |       |                        |       |                     |       |                       |        |                                                    |        |                               |       |
| Minimum pension liability adjustment                       |       |                        |       |                     |       |                       |        | (429                                                    | )      | (429                               | )          |
| Total comprehensive income                                 |       |                        |       |                     |       |                       |        |                                                    |        | 18,600                             |       |
|                                                       |       |                        |       |                     |       |                       |        |                                                    |        |                               |       |
| Dividends on common stock                                  |       |                        |       |                     |       | (6,305                     | )      |                                                    |        | (6,305                             | )          |
| Contribution from parent company for reallocation of taxes |       |                        |       | (103                     | )          |                       |        |                                                    |        | (103                               | )          |
| Ending balance                                             |       | $                           | 8,780      |                     | $          | 23,541                     |        | $                                                       | 157,524     |                               | $          | (489 | ) | $ | 189,356 |   |
|                                                       |       |                        |       |                     |       |                       |        |                                                    |        |                               |       |
| **2004**                                                   | ** ** | ** **                  | ** ** | ** **               | ** ** | ** **                 | ** **  | ** **                                              | ** **  | ** **                         | ** ** |
| **Comprehensive income:**                                  | ** ** | ** **                  | ** ** | ** **               | ** ** | ** **                 | ** **  | ** **                                              | ** **  | ** **                         | ** ** |
| **Net income**                                             | ** ** | ** **                  | ** ** | ** **               | ** ** | **18,638**                 | ** **  | ** **                                              | ** **  | **18,638**                         | ** ** |
| **Other comprehensive loss, net of tax effect of  $539**   | ** ** | ** **                  | ** ** | ** **               | ** ** | ** **                 | ** **  | ** **                                              | ** **  | ** **                         | ** ** |
| **Minimum pension liability adjustment**                   | ** ** | ** **                  | ** ** | ** **               | ** ** | ** **                 | ** **  | **(797)**                                               | ** **  | **(797**                           | **)**      |
| **Total comprehensive income**                             | ** ** | ** **                  | ** ** | ** **               | ** ** | ** **                 | ** **  | ** **                                              | ** **  | **17,841**                         | ** ** |
| ** **                                                 | ** ** | ** **                  | ** ** | ** **               | ** ** | ** **                 | ** **  | ** **                                              | ** **  | ** **                         | ** ** |
| **Dividends on common stock**                              | ** ** | ** **                  | ** ** | ** **               | ** ** | **(14,600**                | **) ** | ** **                                              | ** **  | **(14,600**                        | **)**      |
| **Other**                                                  | ** ** | ** **                  | ** ** | **(86**                  | **)**      | ** **                 | ** **  | ** **                                              | ** **  | **(86**                            | **)**      |
| **Ending balance**                                         | ** ** | **$**                       | **8,780**  | ** **               | **$**      | **23,455**                 | ** **  | **$**                                                   | **161,562** | ** **                         | **$**      | **(1,286** | **)** | **$** | **192,511** | ** ** |
| ** **                                                 | ** ** | ** **                  | ** ** | ** **               | ** ** | ** **                 | ** **  | ** **                                              | ** **  | ** **                         | ** ** |
|                                                            |            |                             |            |                          |            |                            |             |                                                         |             |                                    |            |  |  |  |  |  |  |

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

** **

**120**

----

** **

**THEUNION LIGHT, HEAT AND POWER COMPANY**

**STATEMENTS OF CASH FLOWS**

 
| ** **                                                                            | ** **   | **2004**                   | ** **   | **2003** | ** ** | **2002** | ** ** |
|---------------------------------------------------------------------------------------|--------------|----------------------------|--------------|----------|------------|----------|------------|
| *** ***                                                                          | *** *** | **(dollars in thousands)** | *** *** |
| * *                                                                              | * *     | * *                   | * *     | * * | * *   | * * | * *   |
| **Operating Activities**                                                              |         |                       |         |     |       |     |       |
| Net income                                                                            |         | **$**                      | **18,638**   |     | $          | 19,029   |       | $ | 12,150 |   |
| Adjustments to reconcile net income to net cash provided by operating  activities:    |         | ** **                 |         |     |       |     |       |
| Depreciation                                                                          |         | **20,034**                 |         | 18,315   |       | 17,350   |       |
| Deferred income taxes and investment tax credits - net                                |         | **7,601**                  |         | 7,808    |       | 3,116    |       |
| Allowance for equity funds used during construction                                   |         | **18**                     |         | (183     | )          | (794     | )          |
| Regulatory asset/liability deferrals                                                  |         | **(2,337**                 | )            | (8,138   | )          | 7,787    |       |
| Regulatory asset amortization                                                         |         | **1,613**                  |         | 1,843    |       | (1,452   | )          |
| Accrued pension and other postretirement benefit costs                                |         | **809**                    |         | 1,333    |       | 2,343    |       |
| Cost of removal                                                                       |         | **(1,588**                 | )            | —   |       | —   |       |
| Changes in current assets and current liabilities:                                    |         | ** **                 |         |     |       |     |       |
| Accounts and notes receivable                                                         |         | **(3,026**                 | )            | (9,060   | )          | 8,997    |       |
| Fuel and supplies                                                                     |         | **(564**                   | )            | 246      |       | 2,653    |       |
| Prepayments                                                                           |         | **(6**                     | )            | 37       |       | (16      | )          |
| Accounts payable                                                                      |         | **3,702**                  |         | 3,449    |       | 6,997    |       |
| Accrued taxes and interest                                                            |         | **(729**                   | )            | (1,185   | )          | (4,981   | )          |
| Other assets                                                                          |         | **1,815**                  |         | (3,521   | )          | 2,852    |       |
| Other liabilities                                                                     |         | **(599**                   | )            | 3,088    |       | 3,705    |       |
|                                                                                  |         | ** **                 |         |     |       |     |       |
| **Net cash provided by operating activities**                                         |         | **45,381**                 |         | 33,061   |       | 60,707   |       |
|                                                                                  |         | ** **                 |         |     |       |     |       |
| **Financing Activities**                                                              |         | ** **                 |         |     |       |     |       |
| Change in short-term debt, including net affiliate notes                              |         | **(33,987**                | )            | 31,157   |       | (12,356  | )          |
| Issuance of long-term debt                                                            |         | **39,361**                 |         | —   |       | —   |       |
| Redemption of long-term debt                                                          |         | **—**                 |         | (20,000  | )          | —   |       |
| Dividends on common stock                                                             |         | **(14,600**                | )            | (6,305   | )          | (9,670   | )          |
|                                                                                  |         | ** **                 |         |     |       |     |       |
| **Net cash provided by (used in) financing  activities**                              |         | **(9,226**                 | )            | 4,852    |       | (22,026  | )          |
|                                                                                  |         | ** **                 |         |     |       |     |       |
| **Investing Activities**                                                              |         | ** **                 |         |     |       |     |       |
| Construction expenditures (less allowance for equity funds used during  construction) |         | **(33,857**                | )            | (39,940  | )          | (38,854  | )          |
|                                                                                  |         | ** **                 |         |     |       |     |       |
| **Net cash used in investing activities**                                             |         | **(33,857**                | )            | (39,940  | )          | (38,854  | )          |
|                                                                                  |         | ** **                 |         |     |       |     |       |
| **Net increase (decrease) in cash and cash  equivalents**                             |         | **2,298**                  |         | (2,027   | )          | (173     | )          |
| ** **                                                                            |         | ** **                 |         |     |       |     |       |
| **Cash and cash equivalents at beginning of period**                                  |         | **1,899**                  |         | 3,926    |       | 4,099    |       |
| ** **                                                                            |         | ** **                 |         |     |       |     |       |
| **Cash and cash equivalents at end of period**                                        |         | **$**                      | **4,197**    |     | $          | 1,899    |       | $ | 3,926 |   |
| ** **                                                                            |         | ** **                 |         |     |       |     |       |
| **Supplemental Disclosure of Cash Flow Information**                                  |         | ** **                 |         |     |       |     |       |
| Cash paid during the year for:                                                        |         | ** **                 |         |     |       |     |       |
| Interest (net of amount capitalized)                                                  |         | **$**                      | **4,796**    |     | $          | 5,842    |       | $ | 5,067 |   |
| Income taxes                                                                          |         | **$**                      | **2,827**    |     | $          | 3,001    |       | $ | 2,398 |   |
|                                                                                  |         |                       |         |     |       |     |       |
|                                                                                       |              |                            |              |          |            |          |            |  |  |  |  |

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

** **

**121**

----

** **

**THEUNION LIGHT, HEAT AND POWER COMPANY**

**STATEMENTS OF CAPITALIZATION**

 
| ** **                                              | ** ** | **December 31**             | ** **  |
|---------------------------------------------------------|------------|-----------------------------|-------------|
| ** **                                              | ** ** | **2004**                    | ** **  | **2003** | ** ** |
| * *                                                | * *   | **(dollars  in thousands)** | * *    |
| * *                                                | * *   | * *                    | * *    | * * | * * |
| **Long-term Debt**** **(excludes  current portion) |       |                        |        |   |   |
|                                                    |       |                        |        |   |   |
| Other Long-term Debt:                                   |       |                        |        |   |   |
| 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 |   |
| 5.00% Debentures due December 15, 2014 (Note 4)         |       | **40,000**                  |        | — |   |
| **Total Other Long-term Debt**                          |       | **95,000**                  |        | 55,000 |   |
|                                                    |       | ** **                  |        |   |   |
| Unamortized Premium and Discount - Net                  |       | **(660**                    | )           | (315 | ) |
| **Total Long-term Debt**                                |       | **$**                       | **94,340**  |   | $ | 54,685 |   |
|                                                    |       | ** **                  |        |   |   |
| **Common Stock Equity**                                 |       | **$**                       | **192,511** |   | $ | 189,356 |   |
|                                                    |       | ** **                  |        |   |   |
| **Total Capitalization**                                |       | **$**                       | **286,851** |   | $ | 244,041 |   |
|                                                    |       |                        |        |   |   |
|                                                         |            |                             |             |  |  |  |  |  |  |

**The accompanying notes as theyrelate to The Union Light, Heat and Power Company are an integral part of thesefinancial statements**

 

122

----

 

**NOTES TO FINANCIAL STATEMENTS**

 

### **NOTES TO FINANCIALSTATEMENTS**

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

 

**1.**              Summary of Significant AccountingPolicies

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

**CinergyCorp.**, a Delaware corporation organized in 1993, owns all outstanding commonstock of **CG&E** and **PSI**, both of which are publicutilities.  As a result of thisownership, we are considered a utility holding company.  Because we are a holding company withmaterial utility subsidiaries operating in multiple states, we are registeredwith and are subject to regulation by the Securities and Exchange Commission(SEC) under the Public Utility Holding Company Act of 1935, as amended(PUHCA).  Our other principalsubsidiaries are Cinergy****Services, Inc.(Services) and Cinergy****Investments,Inc. (Investments).

 

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

 

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

 

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

 

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

•     Sale and/or transportation  of natural gas 

•     Electric commodity  marketing and trading operations |
|                              |   |   |
| **PSI**                           |   | •     Generation, transmission,  distribution, and sale of electricity |
|                              |   |   |
| **ULH&P**(1)                  |   | •     Transmission, distribution,  and sale of electricity 

•     Sale and transportation of  natural gas |

----

| (1) | See  Note 19 for further discussion of the possible transfer of generation assets. |
|-----|------------------------------------------------------------------------------------|

 

Services is a service company that providesour subsidiaries with a variety of centralized administrative, management, andsupport services.  Investments holds mostof our non-regulated, energy-related businesses and investments, includingnatural gas marketing and trading operations (which are primarily conductedthrough Cinergy****Marketing & Trading, LP(Marketing & Trading), one of its subsidiaries).

 

123

----

 

We conduct operations through oursubsidiaries and manage our businesses through the following three reportablesegments:

 

•                  Commercial Business Unit(Commercial);

•                  Regulated Business Unit(Regulated); and

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

 

See Note 16 for further discussion of ourreportable segments.

 

***(b)***                                  Presentation

Management makes estimates and assumptionswhen preparing financial statements under generally accepted accountingprinciples (GAAP).  Actual results coulddiffer, as these estimates and assumptions involve judgment about future eventsor performance.  These estimates andassumptions affect various matters, including:

 

•                  the reportedamounts of assets and liabilities in our Balance Sheets at the dates of thefinancial statements;

•                  the disclosureof contingent assets and liabilities at the dates of the financial statements;and

•                  the reportedamounts of revenues and expenses in our Statements of Income during the reportingperiods.

 

Additionally, we have reclassified certainprior-year amounts in the financial statements of **Cinergy**, **CG&E**,**PSI**, and **ULH&P** to conform to currentpresentation.

 

We use three different methods to reportinvestments in subsidiaries or other companies: the consolidation method; theequity method; and the cost method.

 

*(i)      Consolidation Method*

For traditional operating entities, we usethe consolidation method when we own a majority of the voting stock of or havethe ability to control a subsidiary.  Forvariable interest entities (VIE) (discussed further in Note 3), we use theconsolidation method when we anticipate absorbing a majority of the losses orreceiving a majority of the returns of an entity, should they occur.  We eliminate all significant intercompanytransactions when we consolidate these accounts.  Our consolidated financial statements includethe accounts of **Cinergy**, **CG&E**, and **PSI**, and their wholly-owned subsidiaries.

 

*(ii)     Equity Method*

We use the equity method to report investments,joint ventures, partnerships, subsidiaries, and affiliated companies in whichwe do not have control, but have the ability to exercise influence overoperating and financial policies (generally, 20 percent to 50 percentownership).  Under the equity method wereport:

 

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

•                    our percentageshare of the earnings from the entity as *Equityin earnings of unconsolidated subsidiaries* in our Statements ofIncome.

 

*(iii)   Cost Method*

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

 

124

----

 

***(c)***                                  Regulation

Our utility operating companies and certainof our non-utility subsidiaries must comply with the rules prescribed by theSEC under the PUHCA.  Our utilityoperating companies must also comply with the rules prescribed by the FederalEnergy Regulatory Commission (FERC) and the applicable state utilitycommissions of Ohio, Indiana, and Kentucky.

 

Our utility operating companies use the sameaccounting policies and practices for financial reporting purposes asnon-regulated companies under GAAP. However, sometimes actions by the FERC and the state utility commissionsresult in accounting treatment different from that used by non-regulatedcompanies.  When this occurs, we applythe provisions of Financial Accounting Standards Board (FASB) Statement ofFinancial Accounting Standards No. 71, *Accountingfor the Effects of Certain Types of Regulation*(Statement 71).  In accordance with Statement 71, we recordregulatory assets and liabilities (expenses deferred for future recovery fromcustomers or amounts provided in current rates to cover costs to be incurred inthe future, respectively) on our Balance Sheets.

 

The state of Ohio passed comprehensiveelectric deregulation legislation in 1999, and in 2000, the Public UtilitiesCommission of Ohio (PUCO) approved a stipulation agreement relating to **CG&E’s**transition plan creating aRegulatory Transition Charge (RTC) designed to recover **CG&E’s** generation-related regulatoryassets and transition costs over a ten-year period beginning January 1,2001.  Accordingly, application ofStatement 71 was discontinued for the generation portion of **CG&E’s** business and Statement ofFinancial Accounting Standards No. 101, *RegulatedEnterprises - Accounting for the Discontinuation of Application of FASBStatement No. 71*,was applied.  Excluding **CG&E’s**deregulated generation-related assets andliabilities, as of December 31, 2004, **CG&E**,**PSI**, and **ULH&P** continue to meet the criteria ofStatement 71.  However, to the extentIndiana or Kentucky implements deregulation legislation, the application ofStatement 71 will need to be reviewed. Based on our utility operating companies’ current regulatory orders andthe regulatory environment in which they currently operate, the recovery ofregulatory assets recognized in the accompanying Balance Sheets as of December31, 2004, is probable.  For a furtherdiscussion of **CG&E’s**regulatory developmentssee Note 11(b)(*iii*).  For a further discussion of **PSI’s** regulatory developments see Notes11(b)(*i*) and 11(b)(*ii*).

 

125

----

Our regulatory assets, liabilities, andamounts authorized for recovery through regulatory orders at December 31, 2004,and 2003, were as follows:

 
| ** **                                                           | ** ** | **2004**          | ** ** | **2003**   | ** ** |
|----------------------------------------------------------------------|------------|-------------------|------------|------------|------------|
| ** **                                                           | ** ** | **CG&E**(1)   | ** ** | **PSI**    | ** ** | **Cinergy** | ** ** | **CG&E**(1) | ** ** | **PSI** | ** ** | **Cinergy** | ** ** |
| ** **                                                           | ** ** | **(in millions)** | ** ** |
| Regulatory assets                                                    |       |              |       |       |       |   |   |   |   |   |   |   |   |
|                                                                 |       |              |       |       |       |   |   |   |   |   |   |   |   |
| Amounts due from customers - income taxes(2)                         |       | **$**             | **74**     | ** ** | **$**      | **22** | ** ** | **$** | **96** | ** ** | $ | 53 |   | $ | 22 |   | $ | 75 |   |
| Gasification services agreement buyout costs(3)(4)                   |       | **—**        | ** ** | **227**    | ** ** | **227** | ** ** | — |   | 235 |   | 235 |   |
| Post-in-service carrying costs and deferred operating expenses(4)(9) |       | **3**             | ** ** | **80**     | ** ** | **83** | ** ** | 2 |   | 70 |   | 72 |   |
| Deferred merger costs                                                |       | **—**        | ** ** | **38**     | ** ** | **38** | ** ** | 1 |   | 46 |   | 47 |   |
| Unamortized costs of reacquiring debt                                |       | **15**            | ** ** | **25**     | ** ** | **40** | ** ** | 17 |   | 28 |   | 45 |   |
| RTC recoverable assets(4) (5)                                        |       | **494**           | ** ** | **—** | ** ** | **494** | ** ** | 517 |   | — |   | 517 |   |
| Capital-related distribution costs(6)                                |       | **11**            | ** ** | **—** | ** ** | **11** | ** ** | — |   | — |   | — |   |
| Other                                                                |       | **12**            | ** ** | **29**     | ** ** | **41** | ** ** | 22 |   | 16 |   | 38 |   |
|                                                                 |       | ** **        | ** ** | ** ** | ** ** | ** ** | ** ** |   |   |   |   |   |   |
| Total Regulatory assets                                              |       | **$**             | **609**    | ** ** | **$**      | **421** | ** ** | **$** | **1,030** | ** ** | $ | 612 |   | $ | 417 |   | $ | 1,029 |   |
|                                                                 |       | ** **        | ** ** | ** ** | ** ** | ** ** | ** ** |   |   |   |   |   |   |
| Total Regulatory assets authorized for recovery(7)                   |       | **$**             | **602**    | ** ** | **$**      | **378** | ** ** | **$** | **980** | ** ** | $ | 604 |   | $ | 317 |   | $ | 921 |   |
|                                                                 |       | ** **        | ** ** | ** ** | ** ** | ** ** | ** ** |   |   |   |   |   |   |
| Regulatory liabilities                                               |       | ** **        | ** ** | ** ** | ** ** | ** ** | ** ** |   |   |   |   |   |   |
|                                                                 |       | ** **        | ** ** | ** ** | ** ** | ** ** | ** ** |   |   |   |   |   |   |
| Accrued cost of removal(8)                                           |       | **$**             | **(164**   | **)**      | **$**      | **(367** | **)** | **$** | **(531** | **)** | $ | (155 | ) | $ | (336 | ) | $ | (491 | ) |
| Deferred fuel costs                                                  |       | **(1**            | **)**      | **(25**    | **)**      | **(26** | **)** | — |   | — |   | — |   |
| Total Regulatory liabilities                                         |       | **$**             | **(165**   | **)**      | **$**      | **(392** | **)** | **$** | **(557** | **)** | $ | (155 | ) | $ | (336 | ) | $ | (491 | ) |

----

| (1) | Includes $10 million at  December 31, 2004, and $16 million at December 31, 2003, related to **ULH&P’s**regulatory assets. Of these amounts, $9  million at December 31, 2004, and $15 million at December 31, 2003, have been  authorized for recovery. Includes $(30) million and $(27) million of  regulatory liabilities at December 31, 2004 and 2003, respectively, related  to **ULH&P**.                                                                                                                    |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | The various regulatory  commissions overseeing the regulated business operations of our utility  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**,  **PSI**, and **ULH&P**.                                                                                                                                                                                                      |
| (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) | Regulatory assets earning  a return at December 31, 2004.                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| (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) | In November 2004, **CG&E’s** rate stabilization plan (RSP) was approved by  the PUCO. **CG&E** will have the ability  to defer certain capital-related distribution costs from July 1, 2004 through  December 31, 2005 with recovery from non-residential customers to be provided  through a rider from January 1, 2006 through December 31, 2010.                                                                                                                                                                 |
| (7) | At December 31, 2004,  these amounts were being recovered through rates charged to customers over  remaining periods ranging from 1 to 60 years for **CG&E**, 1 to 51 years for **PSI**, and 1 to 16 years for **ULH&P**.                                                                                                                                                                                                                                                                                                |
| (8) | Represents amounts  received for anticipated future removal and retirement costs of regulated  property, plant, and equipment that do not represent legal obligations  pursuant to Statement of Financial Accounting Standards No. 143, *Accounting for Asset Retirement Obligations* (Statement 143).  See Note 1(j) for a further discussion of Statement 143.                                                                                                                                                                 |
| (9) | For **PSI**,  this amount includes $38 million that is not yet authorized for recovery and  is not earning a return at December 31, 2004.                                                                                                                                                                                                                                                                                                                                                                                        |

 

***(d)***                                  Revenue Recognition

*(i)      UtilityRevenues*

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

 

126

----

 

Theamount of unbilled revenues for **Cinergy**,**CG&E**, **PSI**, and **ULH&P**as of December 31, 2004, 2003, and 2002 were as follows:

 

| ** **                    | ** ** | **2004**           | ** ** | **2003** | ** ** | **2002** | ** ** |
|-------------------------------|------------|--------------------|------------|----------|------------|----------|------------|
| ** **                    | ** ** | **(in  millions)** | ** ** |
| * *                      | * *   | * *           | * *   | * * | * *   | * * | * *   |
| **Cinergy**                   |       | **$**              | **203**    |     | $          | 176      |       | $ | 153 |   |
| **CG&E** and subsidiaries |       | **129**            |       | 112      |       | 89       |       |
| **PSI**                       |       | **74**             |       | 64       |       | 64       |       |
| **ULH&P**                 |       | **23**             |       | 20       |       | 15       |       |
|                          |       |               |       |     |       |     |       |
|                               |            |                    |            |          |            |          |            |  |  |  |

*(ii)  EnergyMarketing and Trading Revenues*

We market and trade electricity, natural gas,and other energy-related products.  Manyof the contracts associated with these products qualify as derivatives inaccordance with Statement of Financial Accounting Standards No. 133, *Accounting for Derivative Instruments and HedgingActivities* (Statement 133), further discussed in (k)(*i*). We designate derivative transactions as either trading or non-trading atthe time they are originated in accordance with Emerging Issues Task Force(EITF) Issue 02-3, *Issues Involved inAccounting for Derivative Contracts Held for Trading Purposes and ContractsInvolved in Energy Trading and Risk Management Activities* (EITF02-3).  Trading contracts are reported ona net basis and non-trading contracts are reported on a gross basis.

 

1.                                       NetReporting

Net reporting requires presentation ofrealized and unrealized gains and losses on trading derivatives on a net basisin *Operating Revenues* pursuant tothe requirements of EITF 02-3, regardless of whether the transactions weresettled physically.  Energy derivativesinvolving frequent buying and selling with the objective of generating profitsfrom differences in price are classified as trading and reported net.

 

2.                                       GrossReporting

Gross reporting requires presentation ofsales contracts in *Operating Revenues*and purchase contracts in *Fuel, emissionallowances, and purchased power* expense or *Gas purchased* expense.  Non-trading derivatives typically involvephysical delivery of the underlying commodity and are therefore generallypresented on a gross basis.

 

Derivatives are classified as non-tradingonly when (a) the contracts involve the purchase of gas or electricity to serveour native load requirements (end-use customers within our utility operatingcompanies’ franchise service territories), or (b) the contracts involve thesale of gas or electricity and we have the intent and projected ability tofulfill substantially all obligations from company-owned assets, whichgenerally is limited to the sale of generation to third parties when it is notrequired to meet native load requirements.

 

*(iii)   Other Operating Revenues*

**Cinergy** and **CG&E** recognize revenue from coal origination, whichrepresents contract structuring and marketing of physical coal.  These revenues are included in *Other Operating Revenues* on the Statements of Income.  *Other Operating Revenues*for **Cinergy** also includes sales ofsynthetic fuel.

 

***(e)***                                  Energy Purchases and Fuel Costs

The expenses associated with electric and gasservices include:

 

•      fuel used to generate electricity and theassociated transportation costs;

•      costs of emission allowances;

•      electricity purchased from others; and

•      natural gas purchased from others and theassociated transportation costs.

 

127

----

 

These expenses are shown in the Statements ofIncome of **Cinergy**, **CG&E**, and **PSI** as *Fuel, emissionallowances, and purchased power* expense and *Gas purchased*expense.  These expenses are shown in **ULH&P’s** Statements of Income as *Electricity purchased from parent company for resale*expenseand *Gas purchased*expense.

 

**PSI** utilizes acost tracking recovery mechanism (commonly referred to as a fuel adjustmentclause) that recovers retail and a portion of its wholesale fuel costs fromcustomers.  Indiana law limits the amountof fuel costs that **PSI** can recoverto an amount that will not result in earning a return in excess of that allowedby the IURC.  The fuel adjustment clauseis calculated based on the estimated cost of fuel in the next three-monthperiod, and is trued up after actual costs are known.  **PSI** records anyunder-recovery or over-recovery resulting from the differences betweenestimated and actual costs as a deferred asset or liability until it is billedor refunded to its customers, at which point it is adjusted through fuelexpense.

 

In addition to thefuel adjustment clause, **PSI** utilizes apurchased power tracking mechanism approved by the IURC for the recovery ofcosts related to certain specified purchases of power necessary to meet nativeload peak demand requirements to the extent such costs are not recoveredthrough the existing fuel adjustment clause.

 

As part of the PUCO’s November 2004 approvalof **CG&E’s** RSP, a cost trackingrecovery mechanism was established to recover costs of retail fuel and emissionallowances that exceed the amount originally included in the rates frozen inthe **CG&E** transition plan.  This mechanism was effective January 1, 2005for non-residential customers and will be effective January 1, 2006 forresidential customers.  **CG&E** will begin utilizing a tracking mechanism approvedby the PUCO for the recovery of system reliability capacity costs related tocertain specified purchases of power. This mechanism was effective January 1, 2005 for non-residentialcustomers and will be effective January 1, 2006 for residential customers.  See Note 11(b)(*iii*)for additional information.

 

***(f)***                                    Cash and Cash Equivalents

We define *Cashand cash equivalents* on our Balance Sheets and Statements of CashFlows as investments with maturities of three months or less when acquired.

 

***(g)***                                 Fuel, Emission Allowances, and Supplies

We maintain coal inventories for use in theproduction of electricity and emission allowances inventories for regulatorycompliance purposes due to the production of electricity.  These inventories are accounted for at thelower of cost or market, with cost being determined using the weighted-averagemethod.

 

Prior to January 1, 2003, natural gas held instorage for our gas trading operations was accounted for at fair value.  All other gas held in storage was accountedfor at the lower of cost or market, cost being determined through theweighted-average method.  EffectiveJanuary 1, 2003, accounting for our gas trading operations’ gas held in storagewas adjusted to the lower of cost or market method with a cumulative effectadjustment, as required by EITF 02-3. See (q)(*iv*) for a summaryof the cumulative effect adjustments.

 

Materials and supplies inventory is accountedfor on a weighted-average cost basis.

 

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

*Property, Plant, and Equipment* includes theutility and non-regulated business property and equipment that is in use, beingheld for future use, or under construction. We report our *Property, Plant, andEquipment* at its original cost, which includes:

 

•      materials;

•      contractor fees;

•      salaries;

•      payroll taxes;

•      fringe benefits;

•      financing costs of funds used duringconstruction (described in (*ii*)and (*iii*)); and

•      other miscellaneous amounts.

 

128

----

 

We capitalize costs for regulated property,plant, and equipment that are associated with the replacement or the additionof equipment that is considered a property unit.  Property units areintended to describe an item or group of items. The cost of normal repairs and maintenance is expensed as incurred.  On an annual basis, we perform majorpre-planned maintenance activities on our generating units.  These pre-planned activities are accountedfor when incurred.  When regulatedproperty, plant, and equipment is retired, **Cinergy**charges the original cost, less salvage, to *Accumulateddepreciation* and the cost of removal to *Regulatory liabilities*, which is consistent with thecomposite method of depreciation.  See(j) for further information on accrued cost of removal.  A gain or loss is recorded on the sale ofregulated property, plant, and equipment if an entire operating unit, as definedby the FERC, is sold.  A gain or loss isrecorded on non-regulated property, plant, and equipment whenever there is arelated sale or retirement.

 

*(i)      Depreciation*

We determine the provisions for depreciationexpense using the straight-line method. The depreciation rates are based on periodic studies of the estimateduseful lives and the net cost to remove the properties.  Inclusion of cost of removal in depreciationrates was discontinued for all non-regulated property beginning in 2003 as aresult of adopting Statement 143.  Ourutility operating companies use composite depreciation rates.  These rates are approved by the respectivestate utility commissions with respect to regulated property.  The average depreciation rates for *Property, Plant, and Equipment* arepresented in the following table.

 

| ** **                              | ** ** | **2004**   | ** ** | **2003** | ** ** | **2002** | ** ** |
|-----------------------------------------|------------|------------|------------|----------|------------|----------|------------|
|                                    |       | ** ** | ** ** |     |       |     |       |
| **Cinergy(1)**                          |       | **3.2**    | **%**      | 2.8      | %          | 3.0      | %          |
|                                    |       | ** ** | ** ** |     |       |     |       |
| **CG&E**** **and  subsidiaries |       | **2.6**    | ** ** | 2.6      |       | 2.9      |       |
|                                    |       | ** ** | ** ** |     |       |     |       |
| **PSI**                                 |       | **3.7**    | ** ** | 3.1      |       | 3.0      |       |
|                                    |       | ** ** | ** ** |     |       |     |       |
| **ULH&P**                           |       | **3.5**    | ** ** | 3.2      |       | 3.2      |       |

----

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

 

In June 2004, **PSI**implemented new depreciation rates, as a result of changes in useful lives ofproduction assets and an increased rate for cost of removal, that were approvedin **PSI’s** latest retail rate case.  The impact of this change in accountingestimate was an increase of approximately $18 million in **Cinergy’s** and **PSI’s** 2004 *Depreciation*expense.  The prospective impact of thischange in accounting estimate is expected to be an increase of approximately$30 million in annual *Depreciation*expense, which will be collected in revenues over that same period.

 

*(ii)     Allowancefor Funds Used During Construction (AFUDC)*

Our utility operating companies financeconstruction projects with borrowed funds and equity funds.  Regulatory authorities allow us to record thecosts of these funds as part of the cost of construction projects.  AFUDC is calculated using a methodology authorizedby the regulatory authorities.

 

129

----

 

The equity component of AFUDC, which iscredited to *Miscellaneous Income (Expense) — Net*,for the years ended December 31, 2004, 2003, and 2002, was as follows:

 

| ** **                    | ** ** | **2004**          | ** ** | **2003** | ** ** | **2002** | ** ** |
|-------------------------------|------------|-------------------|------------|----------|------------|----------|------------|
| ** **                    | ** ** | **(in millions)** | ** ** |
| * *                      | * *   | * *          | * *   | * * | * *   | * * | * *   |
| **Cinergy**                   |       | **$**             | **1.6**    |     | $          | 7.5      |       | $ | 12.9 |   |
| **CG&E** and subsidiaries |       | **0.5**           |       | 2.7      |       | 0.4      |       |
| **PSI**                       |       | **1.1**           |       | 4.8      |       | 12.5     |       |
| **ULH&P**                 |       | **—**        |       | 0.2      |       | 0.8      |       |
|                               |            |                   |            |          |            |          |            |  |  |  |

 

Theborrowed funds component of AFUDC, which is recorded on a pre-tax basis and iscredited to *Interest Expense*, for the years endedDecember 31, 2004, 2003, and 2002, was as follows:

 

| ** **                    | ** ** | **2004**          | ** ** | **2003** | ** ** | **2002** | ** ** |
|-------------------------------|------------|-------------------|------------|----------|------------|----------|------------|
| ** **                    | ** ** | **(in millions)** | ** ** |
| * *                      | * *   | * *          | * *   | * * | * *   | * * | * *   |
| **Cinergy**                   |       | **$**             | **2.7**    |     | $          | 5.7      |       | $ | 10.1 |   |
| **CG&E** and subsidiaries |       | **0.4**           |       | 1.0      |       | 1.0      |       |
| **PSI**                       |       | **2.3**           |       | 4.7      |       | 9.1      |       |
| **ULH&P**                 |       | **0.1**           |       | 0.1      |       | 0.2      |       |
|                               |            |                   |            |          |            |          |            |  |  |  |

 

With the deregulation of **CG&E’s** generation assets, the AFUDCmethod is no longer used to capitalize the cost of funds used duringgeneration-related construction at **CG&E**.  See (*iii*)for a discussion of capitalized interest. The equity and borrowed funds components of AFUDC have decreased from2004 as compared to 2003 and 2002.  Themajority of **PSI’s** projects are being recoveredthrough a construction work in progress (CWIP) tracker.  Once CWIP projects are approved and includedin the CWIP tracking mechanism, the costs of funds are no longer accrued on theproject.

 

*(iii)         CapitalizedInterest*

**Cinergy** capitalizes interest costs for non-regulatedconstruction projects in accordance with Statement of Financial AccountingStandards No. 34, *Capitalization of InterestCost* (Statement 34).  Theprimary differences from AFUDC are that the Statement 34 methodology does notinclude a component for equity funds and does not emphasize short-termborrowings over long-term borrowings. Capitalized interest costs, which are recorded on a pre-tax basis, forthe years ended December 31, 2004, 2003, and 2002, were as follows:

 

| ** **                    | ** ** | **2004**          | ** ** | **2003** | ** ** | **2002** | ** ** |
|-------------------------------|------------|-------------------|------------|----------|------------|----------|------------|
| ** **                    | ** ** | **(in millions)** | ** ** |
| * *                      | * *   | * *          | * *   | * * | * *   | * * | * *   |
| **Cinergy**                   |       | **$**             | **4.5**    |     | $          | 7.9      |       | $ | 7.3 |   |
| **CG&E** and subsidiaries |       | **4.1**           |       | 7.7      |       | 7.3      |       |
|                               |            |                   |            |          |            |          |            |  |  |  |

 

***(i)***                                    Impairments

*(i)      Long-LivedAssets*

In accordance with Statement of FinancialAccounting Standards No. 144, *Accounting for theImpairment or Disposal of Long-Lived Assets*, we evaluate long-livedassets for impairment when events or changes in circumstances indicate that thecarrying value of such assets may not be recoverable.  So long as an asset or group of assets is notheld for sale, the determination of whether an impairment has occurred is basedon an estimate of undiscounted future cash flows attributable to the assets, ascompared with the carrying value of the assets. If an impairment has occurred, the amount of the impairment recognizedis determined by estimating the fair value of the assets and recording aprovision for an impairment loss if the carrying value is greater than the fairvalue.  Once assets are classified asheld for sale, the comparison of undiscounted cash flows to carrying value isdisregarded and 

 

130

----

 

an impairment loss is recognized for anyamount by which the carrying value exceeds the fair value of the assets lesscost to sell.

 

*(ii)     UnconsolidatedInvestments*

We evaluate the recoverability of investmentsin unconsolidated subsidiaries when events or changes in circumstances indicatethe carrying amount of the asset is other than temporarily impaired.  An investment is considered impaired if thefair value of the investment is less than its carrying value.  We only recognize an impairment loss when animpairment is considered to be other than temporary.  We consider an impairment to be other thantemporary when a forecasted recovery up to the investment’s carrying value isnot expected for a reasonable period of time. We evaluate several factors, including but not limited to our intent andability to hold the investment, the severity of the impairment, the duration ofthe impairment and the entity’s historical and projected financial performance,when determining whether or not an impairment is other than temporary.  Once an investment is considered other thantemporarily impaired and an impairment loss is recognized (as *Miscellaneous Income (Expense)-Net*), the carrying value ofthe investment is not adjusted for any subsequent recoveries in fairvalue.  As of December 31, 2004, we donot have any material unrealized losses that are deemed to be temporary innature.  See Note 15(a) for the amount ofimpairment charges incurred during the year.

 

***(j)***                                    Asset Retirement Obligations and AccruedCost of Removal

In accordance with Statement 143, werecognize the fair value of legal obligations associated with the retirement orremoval of long-lived assets at the time the obligations are incurred and canbe reasonably estimated.  The initialrecognition of this liability is accompanied by a corresponding increase in property,plant, and equipment.  Subsequent to theinitial recognition, the liability is adjusted for any revisions to theexpected value of the retirement obligation (with corresponding adjustments toproperty, plant, and equipment), and for accretion of the liability due to thepassage of time (recognized as *Operation andmaintenance* expense). Additional depreciation expense is recorded prospectively for anyproperty, plant, and equipment increases.

 

We do not recognize liabilities for assetretirement obligations for which the fair value cannot be reasonablyestimated.  **CG&E** and **PSI**have asset retirement obligations associated with river structures at certaingenerating stations.  However, theretirement date for these river structures cannot be reasonably estimated;therefore, the fair value of the associated liability currently cannot beestimated and no amounts are recognized in the financial statements.

 

**CG&E’s** transmissionand distribution business, **PSI**,and **ULH&P** ratably accrue theestimated retirement and removal cost of rate regulated property, plant, andequipment when removal of the asset is considered likely, in accordance withestablished regulatory practices.  Theaccrued, but not incurred, balance for these costs is classified as *Regulatory liabilities*, under Statement 71, as previouslydisclosed in (c).  Effective with ouradoption of Statement 143, on January 1, 2003, we do not accrue the estimatedcost of removal when no legal obligation associated with retirement or removalexists for any of our non-regulated assets (including **CG&E’s** generation assets).  See (q)(*iv*)for a summary of cumulative effect adjustments.

 

***(k)***                                Derivatives

We account for derivatives under Statement133, which requires all derivatives, subject to certain exemptions, to beaccounted for at fair value.  Changes ina derivative’s fair value must be recognized currently in earnings unlessspecific hedge accounting criteria are met. Gains and losses on derivatives that qualify as hedges can (a) offsetrelated fair value changes on the hedged item in the Statements of Income forfair value hedges; or (b) be recorded in other comprehensive income for cashflow hedges.  To qualify for hedgeaccounting, derivatives must be designated as a hedge (for example, an offsetof interest rate risks) and must be effective at reducing the risk associatedwith the hedged item.  Accordingly,changes in the fair values or cash flows of instruments designated as hedgesmust be highly correlated with changes in the fair values or cash flows of therelated hedged items.

 

131

----

 

*(i)      EnergyMarketing and Trading*

We account for all energy trading derivativesat fair value.  These derivatives areshown in our Balance Sheets as *Energy riskmanagement assets* and *Energy riskmanagement liabilities*. Changes in a derivative’s fair value represent unrealized gains andlosses and are recognized as revenues in our Statements of Income unlessspecific hedge accounting criteria are met.

 

Non-trading derivatives involve the physicaldelivery of energy and are therefore typically accounted for as accrualcontracts, unless the contract does not qualify for the normal purchases andsales scope exception in Statement 133. Accrual contracts are not adjusted for changes in fair value.

 

Although we intend to settle accrualcontracts with company-owned assets, occasionally we settle these contractswith purchases on the open trading markets. The cost of these purchases could be in excess of the associatedrevenues.  We recognize the gains orlosses on these transactions as delivery occurs.  Open market purchases may occur for thefollowing reasons:

 

•                    generatingstation outages;

•                    least-costalternative;

•                    native loadrequirements; and

•                    extremeweather.

 

Wevalue derivatives using end-of-the-period fair values, utilizing the followingfactors (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

•                    model pricing(which considers time value and historical volatility factors of electricityand natural gas).

 

In October 2002, the EITF reached a consensusin EITF 02-3 to rescind EITF Issue 98-10, *Accountingfor Contracts Involved in Energy Trading and Risk Management Activities*(EITF98-10).  EITF 98-10 permittednon-derivative contracts to be accounted for at fair value if certain criteriawere met.  Effective with the adoption ofEITF 02-3 on January 1, 2003, non-derivative contracts and natural gas held instorage that were previously accounted for at fair value were required to beaccounted for on an accrual basis, with gains and losses on the transactionsbeing recognized at the time the contract was settled.  See (q)(*iv*)for a summary of cumulative effect adjustments.

 

As a response to this discontinuance of fairvalue accounting, in June 2003, **Cinergy**began designating derivatives as fair value hedges for certain volumes of ournatural gas held in storage.  Under thisaccounting election, changes in the fair value of both the derivative as wellas the hedged item (the specified gas held in storage) are included in theStatements of Income.  We assess theeffectiveness of the derivatives in offsetting the change in fair value of thegas held in storage on a quarterly basis. Selected information on **Cinergy’s** hedgeaccounting activities was as follows:

 

| ** **                                                                                                           | ** **   | **2004**          | ** **   | **2003**     | ** **   |
|----------------------------------------------------------------------------------------------------------------------|--------------|-------------------|--------------|--------------|--------------|
| ** **                                                                                                           | ** **   | **(in millions)** | ** **   |
| *** ***                                                                                                         | *** *** | *** ***      | *** *** | *** *** | *** *** |
| Portion of gain (loss) on hedging instruments determined to be  ineffective                                          |         | **$**             | **(2**       | **)**        | $            | — |   |
| Portion of gain on hedging instruments related to changes in time  value excluded from assessment of ineffectiveness |         | **28**            | ** **   | 5            |         |
|                                                                                                                 |         | ** **        | ** **   |         |         |
| Total included in *Gas operating revenues*                                                                           | ** **   | **$**             | **26**       | ** **   | $            | 5 |   |

 

*(ii)          Financial*

In addition to energy marketing and trading,we use derivative financial instruments to manage exposure to fluctuations ininterest rates.  We use interest rate swaps(an agreement by two parties to exchange fixed-interest rate 

 

132

----

 

cash flows for variable-interest rate cashflows) and treasury locks (an agreement that fixes the yield or price on aspecific treasury security for a specific period, which we sometimes use inconnection with the issuance of fixed rate debt).  We account for such derivatives at fair valueand assess the effectiveness of any such derivative used in hedging activities.

 

At December 31, 2004, the ineffectiveness ofinstruments that we have classified as cash flow hedges of variable-rate debtinstruments was not material. Reclassification of unrealized gains or losses on cash flow hedges ofdebt instruments from *Accumulated othercomprehensive income* (*loss*)occurs as interest is accrued on the debt instrument.  The unrealized losses that will bereclassified as a charge to *Interest Expense*during the twelve-month period ending December 31, 2005, are not expected to bematerial.

 

***(l)***                                    Intangible Assets

We adopted Statement of Financial AccountingStandards No. 142, *Goodwill and OtherIntangible Assets* (Statement 142) in the first quarter of 2002.  Under the provisions of Statement 142,goodwill and other intangible assets with indefinite lives are notamortized.  Statement 142 requires thatgoodwill is assessed annually, or when circumstances indicate that the fairvalue of a reporting unit has declined significantly, by applying afair-value-based test.  This test isapplied at the “reporting unit” level, which is not broader than the currentbusiness segments discussed in Note 16. Acquired intangible assets are separately recognized if the benefit ofthe intangible asset is obtained through contractual or other legal rights, orif the intangible asset can be sold, transferred, licensed, rented, orexchanged, regardless of intent to do so.

 

We finalized our transition impairment testin the fourth quarter of 2002 and recognized a non-cash impairment charge ofapproximately $11 million (net of tax) for goodwill related to certain of ourinternational assets.  This amount isreflected in **Cinergy’s** Statementsof Income as a cumulative effect adjustment, net of tax.  See (q)(*iv*)for a summary of cumulative effect adjustments.

 

***(m)***                              Income Taxes

**Cinergy** and itssubsidiaries file a consolidated federal income tax return andcombined/consolidated state and local tax returns in certainjurisdictions.  **Cinergy** and its subsidiaries have an incometax allocation agreement, which conforms to the requirements of the PUHCA.  The corporate taxable income method is usedto allocate tax benefits to the subsidiaries whose investments or results ofoperations provide those tax benefits. Any tax liability not directly attributable to a specific subsidiary isallocated proportionately among the subsidiaries as required by the agreement.

 

Statement of Financial Accounting StandardsNo. 109, *Accounting for Income Taxes* (Statement 109), requires an assetand 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. We evaluate quarterly the realizability of our deferred tax assets byassessing our valuation allowance and adjusting the amount of such allowance,if necessary.

 

Investment tax credits, which have been usedto reduce our federal income taxes payable, have been deferred for financialreporting purposes.  These deferredinvestment tax credits are being amortized over the useful lives of theproperty to which they are related.  Fora further discussion of income taxes, see Note 10.

 

***(n)***                                 Contingencies

In the normal course of business, **Cinergy**, **CG&E**,**PSI**, and **ULH&P** are****subject to various regulatory actions, proceedings, andlawsuits related to environmental, tax, or other legal matters.  We reserve for these potential contingencieswhen they are deemed probable and reasonably estimable liabilities.  We believe that the amounts provided for inour financial statements are adequate. However, these amounts are estimates based upon assumptions involvingjudgment and therefore actual results could differ.  For further discussion of contingencies, seeNote 11.

 

133

----

 

***(o)***                                  Pension and Other Postretirement Benefits

**Cinergy**providesbenefits to retirees in the form of pension and other postretirementbenefits.  Our reported costs ofproviding these pension and other postretirement benefits are developed byactuarial valuations and are dependent upon numerous factors resulting fromactual plan experience and assumptions of future experience.  Changes made to the provisions of the plansmay impact current and future pension costs. Pension costs associated with **Cinergy’s**defined benefit plans are impacted by employee demographics, thelevel of contributions we make to the plan, and earnings on plan assets.  These pension costs may also be significantlyaffected by changes in key actuarial assumptions, including anticipated ratesof return on plan assets and the discount rates used in determining theprojected benefit obligation.  Changes inpension obligations associated with the previously discussed factors are notimmediately recognized as pension costs on the Statements of Income but aredeferred and amortized in the future over the average remaining service periodof active plan participants to the extent they exceed certain thresholdsprescribed by Statement of Financial Accounting Standards No. 87, *Employers’ Accounting for Pensions* (Statement 87).

 

Other postretirement benefit costs areimpacted by employee demographics, per capita claims costs, and health carecost trend rates and may also be affected by changes in key actuarialassumptions, including the discount rate used in determining the accumulatedpostretirement benefit obligation (APBO). Changes in postretirement benefit obligations associated with thesefactors are not immediately recognized as postretirement benefit costs but aredeferred and amortized in the future over the average remaining service periodof active plan participants to the extent they exceed certain thresholdsprescribed by Statement of Financial Accounting Standards No. 106, *Employers’ Accounting for Postretirement BenefitsOther Than Pensions*(Statement 106).

 

**Cinergy**reviews andupdates its actuarial assumptions for its pension and postretirement benefitplans on an annual basis, unless plan amendments or other significant eventsrequire earlier remeasurement at an interim period.  For additional information on pension andother postretirement benefits, see Note 9.

 

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

In2003, we prospectively adopted accounting for our stock-based compensationplans using the fair value recognition provisions of Statement of FinancialAccounting Standards No. 123, *Accounting forStock-Based Compensation* (Statement 123), as amended by Statement ofFinancial Accounting Standards No. 148, *Accountingfor Stock-Based Compensation-Transition and Disclosure*(Statement148), for all employee awards granted or with terms modified on or after January1, 2003.  Prior to 2003, we had accountedfor our stock-based compensation plans using the intrinsic value method underAccounting Principles Board Opinion No. 25, *Accountingfor Stock Issued to Employees* (APB 25).  See Note 2(c) for further information on ourstock-based compensation plans.  Theimpact on our *Net Income* andearnings per common share (EPS) if the fair value based method had been appliedto all outstanding and unvested awards in each period was not material.  In December 2004, the FASB issued a revisionof Statement 123 entitled *Share-Based Payment*.  See (q)(*ii*) for furtherinformation.

 

***(q)***                                  Accounting Changes

*(i)      Consolidationof VIEs*

In January 2003, the FASB issuedInterpretation No. 46, *Consolidation ofVariable Interest Entities* (Interpretation 46), which significantlychanged the consolidation requirements for traditional special purpose entities(SPE) and certain other entities subject to its scope.  This interpretation defines a VIE as (a) anentity that does not have sufficient equity to support its activities withoutadditional financial support or (b) any entity that has equity investors thatdo not have substantive voting rights, do not absorb first dollar losses, orreceive residual returns.  These entitiesmust be consolidated whenever **Cinergy** wouldbe anticipated to absorb greater than 50 percent of the losses or receivegreater than 50 percent of the returns.

 

In accordance with its two stage adoptionguidance, we implemented Interpretation 46 for traditional SPEs on July 1,2003, and for all other entities, including certain operating joint ventures,as of March 31, 2004.  The consolidationof certain operating joint ventures as of March 31, 2004, did not have amaterial impact on our financial position or results of operations.

 

134

----

 

On July 1, 2003, Interpretation 46 requiredus to consolidate two SPEs that have individual power sale agreements withCentral Maine Power Company (CMP). Further, we were no longer permitted to consolidate a trust that wasestablished by **Cinergy Corp.** in2001 to issue approximately $316 million of combined preferred trust securitiesand stock purchase contracts.  Priorperiod financial statements were not restated for these changes.  For further information on the accounting forthese entities see Notes 3(a) and (b).

 

**Cinergy** has concludedthat its accounts receivable sale facility, as discussed in Note 3(c), willremain unconsolidated since it involves transfers of financial assets to aqualifying SPE, which is exempted from consolidation by Interpretation 46 andStatement of Financial Accounting Standards No. 140, *Accounting for Transfers and Servicing of Financial Assets andExtinguishments of Liabilities* (Statement 140).

 

*(ii)     Share-BasedPayment*

In December 2004, the FASB issued areplacement of Statement 123, *Statement of FinancialAccounting Standards No. 123 (revised 2004), Share-Based Payment*(Statement 123R).  This standard willrequire accounting for all stock-based compensation arrangements under the fairvalue method in addition to other provisions.

 

In 2003, we prospectively adopted accountingfor our stock-based compensation plans using the fair value recognitionprovisions of Statement 123, as amended by Statement 148, for all employeeawards granted or with terms modified on or after January 1, 2003.  Therefore, the impact of implementation ofStatement 123R on stock options within our stock-based compensation plans isnot expected to be material.  Statement123R contains certain provisions that will modify the accounting for variousstock-based compensation plans other than stock options.  We are in the process of evaluating theimpact of this new standard on these plans. **Cinergy** will adopt Statement 123R onJuly 1, 2005.

 

*(iii)   IncomeTaxes*

In October 2004, the American Jobs CreationAct (AJCA) was signed into law.  The AJCAincludes a one-time deduction of 85 percent of certain foreign earnings thatare repatriated, as defined in the AJCA. In December 2004, the FASB issued Staff Position 109-2, *Accounting and Disclosure Guidance for the Foreign EarningsRepatriation Provision within the American Jobs Creation Act of 2004*.  The staff position allows additional time foran entity to evaluate the effect of the legislation on its plan forrepatriation of foreign earnings for purposes of applying Statement 109.  **Cinergy** willcomplete its evaluation of the effects of the provision on its plan forrepatriation of foreign earnings in 2005.

 

135

----

 

*(iv)    CumulativeEffect of Changes in Accounting Principles, Net of Tax*

In 2003, **Cinergy**, **CG&E**, and **PSI** recognized *Cumulative effect of changes in accounting principles, net of tax*as a result of the reversal of accrued cost of removal for non-regulated generatingassets in conjunction with the adoption of Statement 143 and the change inaccounting for certain energy related contracts from fair value to accrual inaccordance with the rescission of EITF 98-10. In 2002, **Cinergy** recognized a *Cumulative effect of a change in accounting principle, net of tax*loss as a result of the valuation and impairment of goodwill with theimplementation of Statement 142.  Thefollowing table summarizes these cumulative effect adjustments and theirrelated tax effects.

 
| ** **                                           | ** ** | **Year to Date December 31** | ** ** |
|------------------------------------------------------|------------|------------------------------|------------|
| ** **                                           | ** ** | **2003**                     | ** ** | **2002** | ** ** |
| ** **                                           | ** ** | **Before-tax Amount**        | ** ** | **Tax (Expense) Benefit** | ** ** | **Net-of-tax Amount** | ** ** | **Before-tax Amount** | ** ** | **Tax (Expense) Benefit** | ** ** | **Net-of-tax Amount** | ** ** |
| ** **                                           | ** ** | **(in millions)**            | ** ** |
| **Cinergy(1)**                                       |       | ** **                   | ** ** | ** ** | ** ** | ** ** | ** ** |   |   |   |   |   |   |
| Goodwill impairment (Statement 142 adoption)         |       | $                            | —     |   | $ | — |   | $ | — |   | $ | (11 | ) | $ | — |   | $ | (11 | ) |
| Rescission of EITF 98-10 (EITF 02-3 adoption)        |       | (20                          | )          | 8 |   | (12 | ) | — |   | — |   | — |   |
| Asset retirement obligation (Statement 143 adoption) |       | 64                           |       | (25 | ) | 39 |   | — |   | — |   | — |   |
|                                                 |       | $                            | 44         |   | $ | (17 | ) | $ | 27 |   | $ | (11 | ) | $ | — |   | $ | (11 | ) |
| **CG&E**                                         | ** ** |                         |       |   |   |   |   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Rescission of EITF 98-10 (EITF 02-3 adoption)        |       | $                            | (13        | ) | $ | 5 |   | $ | (8 | ) | $ | — |   | $ | — |   | $ | — |   |
| Asset retirement obligation (Statement 143 adoption) |       | 64                           |       | (25 | ) | 39 |   | — |   | — |   | — |   |
|                                                 |       | $                            | 51         |   | $ | (20 | ) | $ | 31 |   | $ | — |   | $ | — |   | $ | — |   |
| **PSI**                                              | ** ** |                         |       |   |   |   |   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Rescission of EITF 98-10 (EITF 02-3 adoption)        |       | $                            | (1         | ) | $ | 0.5 |   | $ | (0.5 | ) | $ | — |   | $ | — |   | $ | — |   |
|                                                 |       | $                            | (1         | ) | $ | 0.5 |   | $ | (0.5 | ) | $ | — |   | $ | — |   | $ | — |   |

----

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

 

***(r)***                                  Translation of Foreign Currency

We translate the assets and liabilities offoreign subsidiaries, whose functional currency (generally, the local currencyof the country in which the subsidiary is located) is not the United Statesdollar, using the appropriate exchange rate as of the end of the year.  We translate income and expense items usingthe average exchange rate prevailing during the month the respectivetransaction occurs.  We recordtranslation gains and losses in *Accumulatedother comprehensive income (loss)*, which is a component of commonstock equity.  When a foreign subsidiaryis sold, the cumulative translation gain or loss as of the date of sale isremoved from *Accumulated other comprehensiveincome (loss)* and is recognized as a component of the gain or losson the sale of the subsidiary in our Statements of Income.

 

***(s)***                                  Related Party Transactions

**CG&E**,**PSI**,****and**ULH&P** engage in related partytransactions.  These transactions, whichare eliminated upon consolidation, are generally performed at cost and inaccordance with the SEC regulations under the PUHCA and the applicable stateand federal commission regulations.  TheBalance Sheets of our utility operating companies reflect amounts payable toand/or receivable from related parties as *Accountspayable to affiliated companies* and *Accountsreceivable from affiliated companies*.  The significant related party transactionsare disclosed below.

 

*(i)           Services*

Services provides our regulated andnon-regulated subsidiaries with a variety of centralized administrative,management, and support services in accordance with agreements approved by theSEC under the PUHCA.  The costs of theseservices are charged to our companies on a direct basis, or for general costswhich cannot be directly attributed, based on predetermined allocation factors,including the following ratios:

 

•                    sales;

•                    electric peakload;

 

136

----

 

•                    number ofemployees;

•                    number ofcustomers; and

•                    constructionexpenditures.

 

These costs were as follows for the yearsended December 31, 2004, 2003, and 2002:

 

| ** **                    | ** **   | **2004**          | ** **   | **2003**     | ** **   | **2002**     | ** **   |
|-------------------------------|--------------|-------------------|--------------|--------------|--------------|--------------|--------------|
| ** **                    | ** **   | **(in millions)** | ** **   |
| *** ***                  | *** *** | *** ***      | *** *** | *** *** | *** *** | *** *** | *** *** |
| **CG&E** and subsidiaries |         | **$**             | **286**      |         | $            | 219          |         | $ | 206 |   |
| **PSI**                       |         | **230**           |         | 193          |         | 190          |         |
| **ULH&P**                 |         | **21**            |         | 22           |         | 23           |         |
|                               |              |                   |              |              |              |              |              |  |  |  |

 

During 2002 and 2003, Cinergy****Power Generation Services, LLC (Generation Services) suppliedelectric production-related construction, operation and maintenance services tocertain of our subsidiaries pursuant to agreements approved by the SEC underthe PUHCA.  **CG&E**and subsidiaries received services from GenerationServices in the amounts of $96 million and $104 million for the years endedDecember 31, 2003 and 2002, respectively. **PSI**received services in the amounts of$55 million and $58 million for the years ended December 31, 2003 and 2002,respectively.  Effective January 1, 2004,these services are now provided by Services and/or directly by **CG&E** and **PSI** as allGeneration Services employees were transferred to other affiliatedcorporations.

 

*(ii)          PurchasedEnergy*

**ULH&P** purchasesenergy from **CG&E** pursuant to acontract 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**. **ULH&P** purchased energyfrom **CG&E** for resale in theamounts of $162 million, $155 million, and $160 million for the years endedDecember 31, 2004, 2003, and 2002, respectively.  These amounts are reflected in the Statementsof Income for **ULH&P** as *Electricity purchased from parent company for resale*.  For information on the proposed transfer of generatingassets to **ULH&P** and the effectit will have on purchased energy see Note 19.

 

**PSI** and **CG&E**purchase energy from each other under a federal and state approved jointoperating agreement.  These sales andpurchases are reflected in the Statements of Income of **PSI** and **CG&E**as *Electric operating revenues*and *Fuel, emission allowances, and purchasedpower* expense and were as follows for the years ended December 31,2004, 2003, and 2002:

 

| ** **                  | ** **   | **2004**          | ** **   | **2003**     | ** **   | **2002**     | ** **   |
|-----------------------------|--------------|-------------------|--------------|--------------|--------------|--------------|--------------|
| *** ***                | *** *** | **(in millions)** | *** *** |
| *** ***                | *** *** | *** ***      | *** *** | *** *** | *** *** | *** *** | *** *** |
| **CG&E**                |         | ** **        | ** **   |         |         |         |         |
| Electric operating revenues |         | **$**             | **48**       | ** **   | $            | 63           |         | $ | 59 |   |
| Purchased power(1)          |         | **80**            | ** **   | 74           |         | 43           |         |
| **PSI**                     |         | ** **        | ** **   |         |         |         |         |
| Electric operating revenues |         | **80**            | ** **   | 74           |         | 43           |         |
| Purchased power(1)          |         | **48**            | ** **   | 63           |         | 59           |         |
|                             |              |                   |              |              |              |              |              |  |  |  |

----

| (1)   Includes intercompany purchases that are  presented net in accordance with EITF 02-3. |
|-------------------------------------------------------------------------------------------------------|

 

To supplement native load requirements, **CG&E**and **PSI** have, from time to time, purchased peaking power from **Cinergy**Capital & Trading, Inc. (Capital & Trading),an indirect wholly-owned subsidiary of **CinergyCorp.**, under theterms of a wholesale market-based tariff. There were no purchases in 2004. For the year ended December 31, 2003, payments under this contracttotaled approximately $5 million for **CG&E**.  For the year ended December 31, 2002,payments under this contract for **CG&E**and **PSI** totaled approximately $27million and $28 million, respectively. For **PSI**, certain of theseamounts were deferred and have subsequently been recovered.

 

137

----

 

**CG&E** and **PSI** have an agreement with Marketing & Tradingto purchase gas for certain gas-fired peaking plants.  Purchases under this agreement wereapproximately $4 million, $6 million, and $9 million for **CG&E** and $37 million, $20 million, and$5 million for **PSI** for the yearsended December 31, 2004, 2003, and 2002, respectively.  The amounts are reflected in the Statementsof Income of **CG&E** and **PSI** as *Fuel,emission allowances, and purchased power*expense.

 

*(iii)         Other*

**CG&E** and **ULH&P** enter into various agreementswith Marketing & Trading to manage their****interstatepipeline transportation, storage capacity, and gas supply contracts.  Under the terms of these agreements,Marketing & Trading is obligated to deliver natural gas to meet **CG&E’s**and**ULH&P’s** requirements. Payments under these agreements for the years ended December 31, 2004,2003 and 2002 were approximately $480 million, $413 million and $40 million for**CG&E** and subsidiaries, and $79million, $78 million and $7 million for **ULH&P**.  These amounts are recorded in the Statementsof Income for **CG&E** and **ULH&P** as *Gas purchased* expense. Certain of these amounts for **CG&E** and **ULH&P** have been deferred for future recovery.  In addition, certain of these amounts for **CG&E** are presented net in *Gasoperating revenues* in accordance with EITF 02-3.

 

In 2004, **CG&E** and **PSI** purchased emission allowances from each other under afederal and state approved joint operating agreement.  These purchases, which totaled approximately$11 million and $36 million for **CG&E**and **PSI**, respectively, are reflected in theemission allowances inventories of both **CG&E** and **PSI**.

 

In February 2003, **PSI** acquired gas-fired peaking plants in Henry County, Indianaand Butler County, Ohio from two non-regulated affiliates.  For a further discussion on the transfer ofthese generating assets see Note 19.

** **

**CinergyCorp.**, Services, and our utility operating companies participate in a moneypool arrangement to better manage cash and working capital requirements.  These amounts are reflected in *Notes payable to affiliated companies* and *Notes receivable from affiliated companies*on the Balance Sheets of our utility operating companies.  For a further discussion on the money poolagreement see Note 5.

 

138

----

 

**2.**              Common Stock

***(a)***                                  Changes In Common Stock Outstanding

The following table reflects informationrelated to shares of **Cinergy Corp.**common stock issued for stock-based plans.

 
| ** **                                                         | ** ** | **Shares Authorized for Issuance under Plan** | ** ** | **Number of Shares Available for Future Issuance(2)** | ** ** | ** **

** **

** **

**Shares Used to Grant or Settle Awards** | ** ** |
|--------------------------------------------------------------------|------------|-----------------------------------------------|------------|-------------------------------------------------------|------------|-------------------------------------------------------------------------------|------------|
| ** **                                                         | ** ** | ** **                                    | ** ** | **2004**                                              | ** ** | **2003**                                                                      | ** ** | **2002** | ** ** |
| ** **                                                         | ** ** | ** **                                    | ** ** | ** **                                            | ** ** | ** **                                                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cinergy Corp. 1996 Long-Term Incentive Compensation Plan (LTIP)    |       | 14,500,000                                    |       | 3,122,900                                             |       | **1,729,679**                                                                 |       | 1,742,046 |   | 674,005 |   |
|                                                               |       |                                          |       |                                                  |       | ** **                                                                    |       |   |   |   |   |
| Cinergy Corp. Stock Option Plan (SOP)                              |       | 5,000,000                                     |       | 1,318,500                                             |       | **393,523**                                                                   |       | 421,611 |   | 870,867 |   |
|                                                               |       |                                          |       |                                                  |       | ** **                                                                    |       |   |   |   |   |
| Cinergy Corp. Employee Stock Purchase and Savings Plan             |       | 2,000,000                                     |       | 1,482,664                                             |       | **—**                                                                    |       | 168,756 |   | 4,912 |   |
|                                                               |       |                                          |       |                                                  |       | ** **                                                                    |       |   |   |   |   |
| Cinergy Corp. UK Sharesave Scheme                                  |       | 75,000                                        |       | 62,200                                                |       | **7,313**                                                                     |       | 3,364 |   | 8,878 |   |
|                                                               |       |                                          |       |                                                  |       | ** **                                                                    |       |   |   |   |   |
| Cinergy Corp. Retirement Plan for Directors                        |       | 175,000                                       | (1)        | —                                                |       | **5,909**                                                                     |       | 5,602 |   | 1,768 |   |
|                                                               |       |                                          |       |                                                  |       | ** **                                                                    |       |   |   |   |   |
| Cinergy Corp. Directors’ Equity Compensation Plan             |       | 75,000                                        |       | 41,034                                                |       | **1,095**                                                                     |       | 3,824 |   | 196 |   |
|                                                               |       |                                          |       |                                                  |       | ** **                                                                    |       |   |   |   |   |
| Cinergy Corp. Directors’ Deferred Compensation Plan           |       | 200,000                                       |       | 103,234                                               |       | **5,388**                                                                     |       | 25,826 |   | — |   |
|                                                               |       |                                          |       |                                                  |       | ** **                                                                    |       |   |   |   |   |
| Cinergy Corp. 401(k) Plans                                         |       | 6,469,373                                     | (1)        | 2,785,258                                             |       | **1,174,600**                                                                 |       | 1,544,900 |   | 964,615 |   |
|                                                               |       |                                          |       |                                                  |       | ** **                                                                    |       |   |   |   |   |
| Cinergy Corp. Direct Stock Purchase and Dividend Reinvestment Plan |       | 3,000,000                                     | (1)        | 1,035,551                                             |       | **627,205**                                                                   |       | 679,301 |   | 657,943 |   |
|                                                               |       |                                          |       |                                                  |       | ** **                                                                    |       |   |   |   |   |
| Cinergy Corp. 401(k) Excess Plan                                   |       | 100,000                                       | (1)        | —                                                |       | **—**                                                                    |       | — |   | — |   |

----

| (1) | Plan  does not contain an authorization limit.   The number of shares presented reflects amounts registered with the SEC  as of December 31, 2004. |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | Shares  available exclude the number of shares to be issued upon exercise of  outstanding options, warrants, and rights.                                |

 

We retired 829,575 shares of common stock in2004, 519,976 shares in 2003, and 422,908 shares in 2002, mainly representingshares tendered as payment for the exercise of previously granted stockoptions.

 

In February 2002, **Cinergy Corp.** issued 6.5 million shares of common stock withnet proceeds of approximately $200 million which were used to reduce short-termdebt and for other general corporate purposes.

 

In January 2003, **Cinergy Corp.** filed a registration statement with the SEC withrespect to the issuance of common stock, preferred stock, and other securitiesin an aggregate offering amount of $750 million.  In February 2003, **Cinergy** sold 5.7 million shares of **Cinergy Corp.** common stock with net proceeds of approximately$175 million under this registration statement. The net proceeds from the transaction were used to reduce short-termdebt of **Cinergy Corp.** and forother general corporate purposes.  InDecember 2004, **Cinergy Corp.** issued 6.1 millionshares of common stock with net proceeds of approximately $247 million, whichwere used to reduce short-term debt.

 

In January and February 2005, **Cinergy****Corp.** issued atotal of 9.2 million shares of common stock pursuant to certain stock purchasecontracts that were issued as a component of combined securities in December2001.  Net proceeds from the transactionof approximately $316 million were used to reduce short-term debt.  See Note 3(b) for further discussion of thesecurities.

 

**CinergyCorp.** owns all of the common stock of **CG&E**and **PSI**.  All of **ULH&P’s**common stock is held by **CG&E**.

 

139

----

 

***(b)***                                  Dividend Restrictions

**CinergyCorp.’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.** dividends on their commonstock.  **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.

 

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

We currently have the following stock-basedcompensation plans:

 

•       LTIP;

•       SOP;

•       Employee Stock Purchase and Savings Plan;

•       UK Sharesave Scheme;

•       Retirement Plan for Directors;

•       Directors’ Equity Compensation Plan;

•       Directors’ Deferred Compensation Plan;

•       401(k) Plans; and

•       401(k) Excess Plan.

 

The LTIP, the SOP, the Employee Stock Purchaseand Savings Plan, 401(k) Plans, and the 401(k) Excess Plan are discussedbelow.  The activity in 2004, 2003, and2002 for the remaining stock-based compensation plans was not significant.

 

In2003, we prospectively adopted accounting for our stock-based compensationplans using the fair value recognition provisions of Statement 123, as amendedby Statement 148, for all employee awards granted or with terms modified on orafter January 1, 2003.  Prior to 2003, wehad accounted for our stock-based compensation plans using the intrinsic valuemethod under APB 25.  See Note 1(p) foradditional information on costs we recognized related to stock-basedcompensation plans.  Effective July 1,2005, **Cinergy** will adopt Statement 123R.  See Note 1(q)(*ii*)for additional information regarding this new accounting standard.

 

*(i)           LTIP*

Under this plan, certain key employees may begranted incentive and non-qualified stock options, stock appreciation rights(SARs), restricted stock, dividend equivalents, phantom stock, the opportunityto earn performance-based shares and certain other stock-based awards.  Stock options are granted to participantswith an option price equal to or greater than the fair market value on thegrant date, and generally with a vesting period of three years.  The vesting period begins on the grant dateand all options expire within 10 years from that date.

 

Historically, the performance-based shareshave been paid 100 percent in the form of common stock.  In order to maintain market competitiveness withrespect to the form of LTIP awards and to ensure continued compliance withinternal guidelines on common share dilution, in 2003, the CompensationCommittee of the **Cinergy Corp.**Board of Directors approved the future payment of performance-based shareawards 50 percent in common stock and 50 percent in cash.  As a result, the expected cash payout portionof the performance shares is reported in *CurrentLiabilities - Other* and *Non-CurrentLiabilities - Other*.

 

140

----

 

Entitlement to performance-based shares isbased on **Cinergy’s** totalshareholder return (TSR) over designated Cycles as measured against apre-defined peer group.  Target grants ofperformance-based shares were made for the following Cycles:

 

| **Cycle**    | ** **   | **Grant   Date** | ** **   | **Performance   Period** | ** **   | **Target   Grant of Shares** | ** **   |
|--------------|--------------|------------------|--------------|--------------------------|--------------|------------------------------|--------------|
| ** **   | ** **   | ** **       | ** **   | ** **               | ** **   | **(in thousands)**           | ** **   |
| *** *** | *** *** | *** ***     | *** *** | *** ***             | *** *** | *** ***                 | *** *** |
| VII          |         | 1/2003           |         | 2003-2005                |         | 411                          |         |
| VIII         |         | 1/2004           |         | 2004-2006                |         | 404                          |         |
| IX           |         | 1/2005           |         | 2005-2007                |         | 395                          |         |
|         |         |             |         |                     |         |                         |         |

 

Participants may earn additional performanceshares if **Cinergy’s** TSR exceedsthat of the 55th percentile of the TSR of its peer group.  For the three-year performance period endedDecember 31, 2004 (Cycle VI), approximately 634,000 shares (including dividendequivalent shares) were earned, based on our relative TSR.

 

*(ii)          SOP*

The SOP is designed to align executivecompensation with shareholder interests. Under the SOP, incentive and non-qualified stock options, SARs, and SARsin tandem with stock options may be granted to key employees, officers, andoutside directors.  The activity underthis plan has predominantly consisted of the grant 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.  As of October 2004,no additional incentive stock options may be granted under the plan.

 

*(iii)         EmployeeStock Purchase and Savings Plan*

The Employee Stock Purchase and Savings Planallows essentially all full-time, regular employees to purchase shares ofcommon stock pursuant to a stock option feature.  The last offering period began May 1, 2001,and ended June 30, 2003, with 168,101 shares purchased and the remaining cashdistributed to the respective participants. The purchase price for all shares under this offering was $32.78.

 

141

----

Activity for 2004, 2003, and 2002 for theLTIP, SOP, and Employee Stock Purchase and Savings Plan is summarized asfollows:

 
| ** **                       | ** ** | **LTIP and SOP**   | ** ** | **Employee Stock Purchase and Savings Plan**(1) | ** ** |
|----------------------------------|------------|--------------------|------------|-------------------------------------------------|------------|
| ** **                       | ** ** | **Shares Subject** | ** ** | **Weighted Average**                            | ** ** | **Shares Subject** | ** ** | **Weighted Average** | ** ** |
| ** **                       | ** ** | **to Option**      | ** ** | **Exercise Price**                              | ** ** | **to Option** | ** ** | **Exercise Price** | ** ** |
| ** **                       | ** ** | ** **         | ** ** | ** **                                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Balance at December 31, 2001     |       | 7,447,778          |       | $                                               | 27.63      |   | 278,325 |   | $ | 32.78 |   |
|                             |       |               |       |                                            |       |   |   |   |   |
| Options granted(2)               |       | 1,241,200          |       | 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 granted(2)               |       | 897,100            |       | 34.30                                           |       | — |   | — |   |
| Options exercised                |       | (1,630,046         | )          | 24.89                                           |       | (168,101 | ) | 32.78 |   |
| Options forfeited                |       | (59,300            | )          | 30.51                                           |       | (50,069 | ) | 32.78 |   |
|                             |       |               |       |                                            |       |   |   |   |   |
| Balance at December 31, 2003     |       | 6,569,454          |       | 30.79                                           |       | — |   | $ | — |   |
|                             |       |               |       |                                            |       |   |   |   |   |
| **Options granted(2)**           | ** ** | **739,200**        | ** ** | **38.79**                                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Options exercised**            | ** ** | **(1,950,570**     | **)**      | **26.41**                                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Options forfeited**            | ** ** | **(32,700**        | **)**      | **35.95**                                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                       | ** ** | ** **         | ** ** | ** **                                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Balance at December 31, 2004** | ** ** | **5,325,384**      | ** ** | **$**                                           | **33.35**  | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                       | ** ** | ** **         | ** ** | ** **                                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Options Exercisable(3):**      | ** ** | ** **         | ** ** | ** **                                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| At December 31, 2002             |       | 3,744,420          |       | $                                               | 28.98      |   |   |   |   |   |
| At December 31, 2003             |       | 3,700,346          |       | $                                               | 29.52      |   |   |   |   |   |
| **At December 31, 2004**         | ** ** | **2,706,876**      | ** ** | **$**                                           | **32.01**  | ** ** | ** ** | ** ** | ** ** | ** ** |

----

| (1) | Shares  were not offered after June 30, 2003.                                                                                      |
|-----|------------------------------------------------------------------------------------------------------------------------------------|
| (2) | Options  were not granted under the SOP during 2004, 2003, or 2002.                                                                |
| (3) | The  options under the Employee Stock Purchase and Savings Plan are generally only  exercisable at the end of the offering period. |

 

The weighted average fair value of optionsgranted under the LTIP was $5.65 in 2004, $4.96 in 2003, and $4.95 in2002.  The fair values of options grantedwere estimated as of the grant date using the Black-Scholes option-pricing modeland the following assumptions:

 

| ** **              | ** ** | **LTIP**   | ** ** |
|-------------------------|------------|------------|------------|
| ** **              | ** ** | **2004**   | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Risk-free interest rate |       | **3.35**   | **%**      | 3.02 | % | 3.92 | % |
| Expected dividend yield |       | **4.97**   | **%**      | 5.34 | % | 5.66 | % |
| Expected life           |       | **5.33**   | **yrs.**   | 5.35 | yrs. | 5.42 | yrs. |
| Expected volatility     |       | **24.47**  | **%**      | 26.15 | % | 26.45 | % |

 

Priceranges, along with certain other information, for options outstanding under thecombined LTIP and SOP plans at December 31, 2004, were as follows:

 
| ** **               | ** ** | ** **           | ** ** | ** **                          | ** ** | **Outstanding**                                 | ** ** | **Exercisable**      | ** ** |
|--------------------------|------------|----------------------|------------|-------------------------------------|------------|-------------------------------------------------|------------|----------------------|------------|
| **Exercise Price Range** | ** ** | **Number of Shares** | ** ** | **Weighted Average Exercise Price** | ** ** | **Weighted Average Remaining Contractual Life** | ** ** | **Number of Shares** | ** ** | **Weighted Average Exercise Price** | ** ** |
| ** **               | ** ** | ** **           | ** ** | ** **                          | ** ** | ** **                                      | ** ** | ** **           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| $                        | 23.66      |                 | -          |                                | $          | 33.64                                           |       | 2,315,346            |       | $ | 29.59 |   | 6.00  yrs. |   | 1,264,238 |   | $ | 27.42 |   |
| $                        | 33.88      |                 | -          |                                | $          | 36.88                                           |       | 2,061,638            |       | $ | 35.09 |   | 5.90  yrs. |   | 1,233,938 |   | $ | 35.60 |   |
| $                        | 37.82      |                 | -          |                                | $          | 39.65                                           |       | 948,400              |       | $ | 38.74 |   | 7.68  yrs. |   | 208,700 |   | $ | 38.59 |   |
|                          |            |                      |            |                                     |            |                                                 |            |                      |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

142

----

 

*(iv)    401(k)Plans*

We sponsor 401(k) employee retirement plansthat cover substantially all United States employees.  Employees can contribute up to 50 percent ofpre-tax base salary (subject to Internal Revenue Service (IRS) limits) and upto 15 percent of after-tax base salary. We make matching contributions to these plans in the form of **Cinergy Corp.** common stock, contributing100 percent of the first three percent of an employee’s pre-tax contributionsplus 50 percent of the next two percent of an employee’s pre-tax contributions,and we have the discretion to make incentive matching contributions based on **Cinergy’s** net income. Employees are immediately vested in both their contributions and ourmatching contributions.

 

**Cinergy’s**, **CG&E’s**, and **PSI’s** matching contributions for the years ended December 31,2004, 2003, and 2002 were as follows:

 

| ** **                    | ** **   | **2004**     | ** **   | **2003**          | ** **   | **2002**     | ** **   |
|-------------------------------|--------------|--------------|--------------|-------------------|--------------|--------------|--------------|
| ** **                    | ** **   | ** **   | ** **   | **(in millions)** | ** **   | ** **   | ** **   |
| *** ***                  | *** *** | *** *** | *** *** | *** ***      | *** *** | *** *** | *** *** |
| **Cinergy**(1)                |         | **$**        | **20**       |              | $            | 18           |         | $ | 19 |   |
| **CG&E** and subsidiaries |         | **5**        |         | 3                 |         | 3            |         |
| **PSI**                       |         | **4**        |         | 4                 |         | 3            |         |
|                               |              |              |              |                   |              |              |              |  |  |  |

----

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

 

Effective January 1, 2003, each **Cinergy** employee whose pension benefit isdetermined using a cash balance formula is also eligible to receive an annualdeferred profit sharing contribution, calculated as a percentage of thatemployee’s total pension eligible earnings. The deferred profit sharing contribution made by **Cinergy** is based on the corporate netincome performance level for the year, and is made to the 401(k) plans in theform of **Cinergy Corp.** commonstock.  Each year’s contribution mustremain invested in **Cinergy Corp.**common stock for a minimum of three years, or until an employee reaches age50.  Employees age 50 or older maytransfer their benefit from **Cinergy Corp.**common stock into another investment option offered under our 401(k)plans.  Employees vest in their benefitupon reaching three years of service, or immediately upon reaching age 65 whileemployed.  **Cinergy** has recorded approximately $2.4 million and $1.5million, respectively, of profit sharing contribution costs for the years endedDecember 31, 2004 and December 31, 2003.

 

*(v)     401(k)Excess Plan*

The 401(k) Excess Plan is a non-qualifieddeferred compensation plan for a select group of **Cinergy** management and other highly compensatedemployees.  It is a means by which theseemployees can defer additional compensation, and receive company matchingcontributions, provided they have already contributed the maximum amount(pursuant to the anti-discrimination rules for highly compensated employees)under the qualified 401(k) Plans.  Allfunds deferred are held in a rabbi trust administered by an independent trustee.

 

**3.**              Variable Interest Entities

***(a)***                                  Power Sale SPEs

In accordance with Interpretation 46, weconsolidate two SPEs that have individual power sale agreements with CMP forapproximately 45 megawatts (MW) of capacity, ending in 2009, and 35 MW ofcapacity, ending in 2016.  In addition,these SPEs have individual power purchase agreements with Capital & Tradingto supply the power.  Capital &Trading also provides various services, including certain credit supportfacilities.  Upon the initial consolidationof these two SPEs on July 1, 2003, approximately $239 million of notesreceivable, $225 million of non-recourse debt, and miscellaneous other assetsand liabilities were included on **Cinergy’s**Balance Sheets.  The debt was incurred bythe SPEs to finance the buyout of the existing power contracts that CMP heldwith the former suppliers.  The cashflows from the notes receivable are designed to repay the debt.  Notes 4 and 8 provide additional informationregarding the debt and the notes receivable, respectively.

 

143

----

 

***(b)***                                  Preferred Trust Securities

In December 2001, **Cinergy Corp.**issued approximately $316 million notionalamount of combined securities consisting of (a) 6.9 percent preferred trustsecurities, due February 2007, and (b) stock purchase contracts obligating theholders to purchase between 9.2 and 10.8 million shares of **Cinergy Corp.** common stock by February2005.  A $50 preferred trust security andstock purchase contract were sold together as a single security unit(Unit).  The preferred trust securitieswere issued through a trust whose common stock is 100 percent owned by **Cinergy Corp**. The stock purchase contractswere issued directly by **Cinergy Corp.** The trust loaned the proceeds from the issuanceof the securities to **Cinergy Corp.**inexchange for a note payable to the trust that was eliminated inconsolidation.  The proceeds of $306million, which is net of approximately $10 million of issuance costs, were usedto pay down **Cinergy Corp.’s** short-termindebtedness.  In January and February2005, certain holders settled the stock purchase contracts early and elected toremove the units from the remarketing.  InFebruary 2005, the remaining preferred trust securities were successfullyremarketed and the dividend rate was reset at 6.9 percent.  The preferred trust securities will mature inFebruary 2007.  To settle the stockpurchase contracts, Cinergy Corp. issued 9.2 million shares of common stock atthe ceiling price of $34.40 per share as the market price of the stock exceededthe ceiling price of the contract.  Netproceeds of approximately $316 million were used to repay short-termindebtedness.

 

Each Unit continues to receive quarterly cashpayments of 6.9 percent per annum of the notional amount, which represents apreferred trust security dividend.  EachUnit received quarterly cash payments of 2.6 percent per annum of the notionalamount, which represented principal and interest on the stock purchase contracts.  These payments ceased upon delivery of theshares in January and February 2005.  Thetrust’s ability to pay dividends on the preferred trust securities is solelydependent on its receipt of interest payments from **Cinergy Corp.**on the note payable.  However, **Cinergy Corp.**has fully and unconditionallyguaranteed the preferred trust securities.

 

As of July 1, 2003, we no longer consolidatethe trust that was established to issue the preferred trust securities.  The preferred trust securities are no longerincluded in **Cinergy Corp.’s**BalanceSheets.  In addition, the note payableowed to the trust, which has a current carrying value of $322 million, isincluded in *Long-term debt*.

 

***(c)***                                  Sales of Accounts Receivable

In February 2002, **CG&E**, **PSI**,and **ULH&P** entered into anagreement to sell certain of their accounts receivable and relatedcollections.  **Cinergy Corp.** formed **Cinergy**ReceivablesCompany, LLC (**Cinergy**Receivables) to purchase,on a revolving basis, nearly all of the retail accounts receivable and relatedcollections of **CG&E**, **PSI**, and **ULH&P**.  **CinergyCorp.** does not consolidate **Cinergy**Receivablessince it meets the requirements to be accounted for as a qualifying SPE.  The transfers of receivables are accountedfor as sales, pursuant to Statement 140.

 

The proceeds obtained from the sales ofreceivables are largely cash but do include a subordinated note from **Cinergy**Receivables for a portion of the purchase price(typically approximates 25 percent of the total proceeds).  The note is subordinate to senior loans that **Cinergy**Receivables obtains from commercial paper conduitscontrolled by unrelated financial institutions. **Cinergy**Receivables provides creditenhancement related to senior loans in the form of over-collateralization ofthe purchased receivables.  However, theover-collateralization is calculated monthly and does not extend to the entirepool of receivables held by **Cinergy**Receivablesat any point in time.  As such, thesesenior loans do not have recourse to all assets of **Cinergy**Receivables.  These loans provide the cash portion of theproceeds paid to **CG&E**, **PSI**, and **ULH&P**.

 

This subordinated note is a retained interest(right to receive a specified portion of cash flows from the sold assets) underStatement 140 and is classified within *Notesreceivable from affiliated companies* in the accompanying BalanceSheets of **CG&E**, **PSI**, and **ULH&P**and is classified within *Notes receivable*on **Cinergy Corp.’s** BalanceSheets.  In addition, **Cinergy Corp.’s** investment in **Cinergy**Receivables constitutes a purchased beneficialinterest (purchased right to receive specified cash flows, in our case residualcash flows), which is subordinate to the retained interests held by **CG&E**, **PSI**,and **ULH&P**.  The carrying values of the retained interestsare determined by allocating the carrying value of the receivables between theassets sold and the interests retained based on relative fair value.  The key assumptions in estimating fair valueare credit losses and selection of discount rates.  Because (a) the receivables generally turn inless than two months, (b) credit losses are reasonably predictable due to each 

 

144

----

 

company’s broad customer base and lack ofsignificant concentration, and (c) the purchased beneficial interest issubordinate to all retained interests and thus would absorb losses first, theallocated bases of the subordinated notes are not materially different thantheir face value.  Interest accrues to **CG&E**, **PSI**,and **ULH&P** on the retainedinterests using the accretable yield method, which generally approximates thestated rate on the notes since the allocated basis and the face value arenearly equivalent.  **Cinergy Corp.** records income from **Cinergy**Receivables in a similar manner.  We record an impairment charge against thecarrying value of both the retained interests and purchased beneficial interestwhenever we determine that an other-than-temporary impairment has occurred(which is unlikely unless credit losses on the receivables far exceed theanticipated level).

 

The key assumptions used in measuring theretained interests are as follows (all amounts are averages of the assumptionsused in sales during the period):

 

| ** **                           | ** ** | **Cinergy** | ** ** | **CG&E**and subsidiaries | ** ** | **PSI**  | ** ** | **ULH&P** | ** ** |
|--------------------------------------|------------|-------------|------------|------------------------------|------------|----------|------------|---------------|------------|
| ** **                           | ** ** | **2004**    | ** ** | **2003**                     | ** ** | **2004** |       | **2003**      | ** ** | **2004** | ** ** | **2003** | ** ** | **2004** | ** ** | **2003** | ** ** |
| Anticipated credit loss rate         |       | **0.7**     | **%**      | 0.6                          | %          | **0.9**  | **%**      | 0.8           | %          | **0.5** | **%** | 0.5 | % | **1.2** | **%** | 1.0 | % |
| Discount rate on expected cash flows |       | **3.8**     | **%**      | 4.4                          | %          | **3.8**  | **%**      | 4.4           | %          | **3.8** | **%** | 4.4 | % | **3.8** | **%** | 4.4 | % |
| Receivables turnover rate(1)         |       | **12.6**    | **%**      | 12.8                         | %          | **13.4** | **%**      | 13.6          | %          | **11.5** | **%** | 11.8 | % | **12.9** | **%** | 13.2 | % |

----

| (1)    Receivables at each month-end divided by  annualized sales for the month. |   | ** ** | ** ** |   |   |
|-------------------------------------------------------------------------------------------------|--------|------------|------------|--------|--------|

 

The hypothetical effect on the fair value ofthe retained interests assuming both a 10 percent and 20 percent unfavorablevariation in credit losses or discount rates is not material due to the shortturnover of receivables and historically low credit loss history.

 

**CG&E** retains servicing responsibilities for its role as a collection agent onthe amounts due on the sold receivables. However, **Cinergy**Receivablesassumes the risk of collection on the purchased receivables without recourse to**CG&E**, **PSI**, and **ULH&P** in the event of aloss.  While no direct recourse to **CG&E**, **PSI**, and **ULH&P** exists, these entities risk loss in the event collections are notsufficient to allow for full recovery of their retained interests.  No servicing asset or liability is recordedsince the servicing fee paid to **CG&E** approximates a market rate.

 

145

----

 

The following table shows the gross and netreceivables sold, retained interests, purchased beneficial interest, sales, andcash flows during the periods ending December 31, 2004 and 2003.

 

| ** **                            | ** **   | **2004**           | ** **   |
|---------------------------------------|--------------|--------------------|--------------|
| ** **                            | ** **   | **Cinergy**        | ** **   | **CG&E**and subsidiaries | ** ** | **PSI** | ** ** | **ULH&P** | ** ** |
| ** **                            | *** *** | **(in millions)**  | *** *** |
| * *                              | * *     | * *           | * *     | * * | * * | * * | * * | * * | * * |
| Receivables sold as of period end     |         | **$**              | **538**      | ** ** | **$** | **339** | ** ** | **$** | **199** | ** ** | **$** | **54** | ** ** |
| Less: Retained interests              |         | **194**            | ** **   | **121** | ** ** | **73** | ** ** | **21** | ** ** |
|                                  |         | ** **         | ** **   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net receivables sold as of period end |         | **$**              | **344**      | ** ** | **$** | **218** | ** ** | **$** | **126** | ** ** | **$** | **33** | ** ** |
|                                  |         | ** **         | ** **   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Purchased beneficial interest         |         | **$**              | **18**       | ** ** | **$** | **—** | ** ** | **$** | **—** | ** ** | **$** | **—** | ** ** |
|                                  |         | ** **         | ** **   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Sales during period**               |         | ** **         | ** **   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Receivables sold                      |         | **$**              | **3,895**    | ** ** | **$** | **2,253** | ** ** | **$** | **1,642** | ** ** | **$** | **367** | ** ** |
| Loss recognized on sale               |         | **38**             | ** **   | **25** | ** ** | **13** | ** ** | **4** | ** ** |
|                                  |         | ** **         | ** **   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Cash flows during period**          |         | ** **         | ** **   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash proceeds from sold receivables   |         | **$**              | **3,835**    | ** ** | **$** | **2,213** | ** ** | **$** | **1,622** | ** ** | **$** | **360** | ** ** |
| Collection fees received              |         | **2**              | ** **   | **2** | ** ** | **—** | ** ** | **—** | ** ** |
| Return received on retained interests |         | **17**             | ** **   | **10** | ** ** | **7** | ** ** | **2** | ** ** |
| ** **                            |         |               |         |   |   |   |   |   |   |
| ** **                            | ** **   | **2003**           | ** **   |
| ** **                            | ** **   | **Cinergy**        | ** **   | **CG&E**and subsidiaries | ** ** | **PSI** | ** ** | ** **

**ULH&P** | ** ** |
| ** **                            | ** **   | **(in  millions)** | ** **   |
| ** **                            | ** **   | ** **         | ** **   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Receivables sold as of period end     |         | $                  | 487          |   | $ | 310 |   | $ | 177 |   | $ | 50 |   |
| Less: Retained interests              |         | 172                |         | 107 |   | 65 |   | 18 |   |
|                                  |         |               |         |   |   |   |   |   |   |
| Net receivables sold as of period end |         | $                  | 315          |   | $ | 203 |   | $ | 112 |   | $ | 32 |   |
|                                  |         |               |         |   |   |   |   |   |   |
| Purchased beneficial interest         |         | $                  | 14           |   | $ | — |   | $ | — |   | $ | — |   |
|                                  |         |               |         |   |   |   |   |   |   |
| **Sales during period**               |         |               |         |   |   |   |   |   |   |
| Receivables sold                      |         | $                  | 3,681        |   | $ | 2,140 |   | $ | 1,541 |   | $ | 346 |   |
| Loss recognized on sale               |         | 36                 |         | 23 |   | 13 |   | 4 |   |
|                                  |         |               |         |   |   |   |   |   |   |
| **Cash flows during period**          |         |               |         |   |   |   |   |   |   |
| Cash proceeds from sold receivables   |         | $                  | 3,601        |   | $ | 2,092 |   | $ | 1,509 |   | $ | 337 |   |
| Collection fees received              |         | 2                  |         | 2 |   | — |   | — |   |
| Return received on retained interests |         | 16                 |         | 9 |   | 7 |   | 2 |   |

 

A decline in the long-term senior unsecuredcredit ratings of **CG&E**, **PSI**, or **ULH&P**below investment grade would result in a termination of the sale program anddiscontinuance of future sales of receivables, and could prevent Cinergy Receivablesfrom borrowing additional funds from commercial paper conduits.

 

***(d)***                                  Other

**Cinergy** also holdsinterests in several joint ventures, primarily engaged in cogeneration andenergy efficiency operations, that are considered VIEs which do not requireconsolidation.  Our exposure to loss fromour involvement with these entities is not material.

 

146

----

 

**4.**              Long-Term Debt

Refer to the Statements of Capitalization fordetailed information for **Cinergy’s**,**CG&E’s**, **PSI’s**, and **ULH&P’s**long-term debt.

 

In March 2003, **PSI** borrowed the proceeds from the IndianaDevelopment Finance Authority’s issuance of $35 million of its EnvironmentalRefunding Revenue Bonds, Series 2003, due April 1, 2022.  Interest was initially set at 1.05percent and resets every 35 days by auction. Because the holders cannot tender the bonds for purchase by the issuerwhile the Bonds are in the auction rate mode, **PSI’s**obligation is classified as *Long-term debt*.  Later in March 2003, the proceeds from thisborrowing plus the interest income earned were used to cause therefunding of the $35 million principal amount outstanding of the Cityof Princeton, Indiana Pollution Control Revenue Refunding Bonds, 1997Series.

 

InApril 2003, **PSI** redeemed $26.8million of the following Series A, Medium-term Notes:

 

| **Principal Amount** | ** **   | **Interest Rate** | ** **   | **Maturity Date** | ** **   |
|----------------------|--------------|-------------------|--------------|-------------------|--------------|
| **(in millions)**    | ** **   | ** **        | ** **   | ** **        | ** **   |
| *** ***         | *** *** | *** ***      | *** *** | *** ***      | *** *** |
| $                    | 2.0          |              | 8.37         | %                 | 11/08/2006   |   |
| 5.0                  |         | 8.81              |         | 05/16/2022        |         |
| 3.0                  |         | 8.80              |         | 05/18/2022        |         |
| 16.8                 |         | 8.67              |         | 06/01/2022        |         |
|                      |              |                   |              |                   |              |  |

 

In June 2003, **CG&E** issued $200 million principal amount of its 5 3/8%2003 Series B Debentures due June 15, 2033 (effective interest rate of 5.66percent).  Proceeds from this issuancewere used for general corporate purposes, including the funding of capitalexpenditures related to construction projects and environmental complianceinitiatives, and the repayment of outstanding indebtedness.

 

Also, in June 2003, **CG&E** modified existing debt resultingin a $200 million principal amount 5.40% 2003 Series A Debenture with a 30-yearmaturity.  The effective interest rate is6.90 percent.

 

In June 2003, **CG&E** also redeemed its $100 million 8.28% JuniorSubordinated Debentures due July 1, 2025.

 

**Cinergy** adoptedInterpretation 46 on July 1, 2003, as discussed in Note 1(q)(*i*). The adoption of this new accounting principle had the following effectson long-term debt:

 

•                  **Cinergy** no longerconsolidates the trust that held Company obligated, mandatorily redeemable,preferred trust securities of subsidiary, holding solely debt securities of thecompany.  This resulted in the removal ofthese securities from our 2003 Balance Sheet and the addition to long-term debtof a $319 million (net of discount) note payable that **Cinergy Corp.** owes to the trust.

 

•                  **Cinergy** consolidatedtwo SPEs effective July 1, 2003.  As aresult, **Cinergy** has approximately$200 million of additional non-recourse debt as of December 31, 2004, comprisedof two separate notes.

 

The first note, with aDecember 31, 2004 balance of $93 million bears an interest rate of 7.81 percentand matures in June 2009.  The secondnote, with a December 31, 2004 balance of $107 million, bears an interest rateof 9.23 percent and matures in November 2016.

 

In September 2003, **PSI** redeemed $56 million of its 5.93% Series B, Medium-termNotes at maturity.

 

In September 2003, **PSI** issued $400 million principal amount of its 5.00%Debentures due September 15, 2013 (effective interest rate of 5.20percent).  Proceeds from this issuance wereused for the early redemption at par of two subordinated promissory notes to **Cinergy Corp.** totaling $376 million, issuedas consideration for two gas fired electric peaking facilities transferred from**Cinergy Corp.** to **PSI**in early 2003.  The remaining proceedswere used 

 

147

----

 

to reduce short-term indebtedness associatedwith general corporate purposes including funding capital expenditures relatedto construction projects and environmental compliance initiatives.

 

InOctober 2003, **CG&E** redeemedits $265.5 million First Mortgage Bonds, 7.20% due October 1, 2023.

 

In December 2003, **ULH&P** redeemed $20 million of its 6.11% Senior Debenturesat maturity.

 

In February 2004, **CG&E** repaid at maturity $110 million of its 6.45% FirstMortgage Bonds.

 

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

 

In September 2004, **Cinergy Corp**. repaid at maturity $500 million of its 6.25%Debentures.

 

In November 2004, **CG&E**borrowed the proceeds from the Ohio Air QualityDevelopment Authority’s issuance of $47 million principal amount of its Stateof Ohio Air Quality Development Revenue Bonds 2004 Series A and $47 millionprincipal amount of its State of Ohio Air Quality Development Revenue Bonds2004 Series B (for loans totaling $94 million), both due November 1, 2039.  Payment of principal and interest on theBonds when due is insured by separate bond insurance policies issued by XLCapital Assurance.  The initial interestrate for both Series A and Series B was 1.92%. The interest rates on Series A and Series B were initially reset onJanuary 5, 2005 and January 12, 2005, respectively, and then every 35 days byauction thereafter.  Because the holderscannot tender the Bonds for purchase by the issuer while the Bonds are in theauction rate mode, these debt obligations are classified as *Long-term debt*.  **CG&E**is using the proceeds from these borrowings to assist in financing its portionof the costs of acquiring, constructing and installing certain solid wastedisposal facilities comprising air quality facilities at Units 7 and 8 at**CG&E’s** majority-owned Miami FortGenerating Station (Miami Fort Station).

 

In December 2004, **PSI** borrowed the proceeds from the Indiana Development FinanceAuthority’s issuance of $77 million principal amount of its EnvironmentalRevenue Bonds, Series 2004B and $77 million principal amount of itsEnvironmental Revenue Bonds, Series 2004C, both due December 1, 2039 (for loanstotaling $154 million).  Payment ofprincipal and interest on the Bonds when due is insured by separate bondinsurance policies issued by XL Capital Assurance.  The initial interest rate for Series 2004Bwas 1.80% and for Series 2004C was 1.85%. The interest rates on both Series 2004B and Series 2004C were initiallyreset on January 11, 2005 and then every 35 days by auction thereafter.  Because the holders cannot tender the Bondsfor purchase by the issuer while the Bonds are in the auction rate mode, these debtobligations are classified as *Long-term**debt*.  **PSI** is using the proceeds from theseborrowings to assist in the acquisition and construction of solid wastedisposal facilities located at various generating stations in Indiana.

 

In December 2004, **ULH&P**issued $40 million principal amount of its 5.00% Debentures due December 15,2014 (effective interest rate of 5.26%). Proceeds from this issuance were used for general corporate purposes andthe repayment of outstanding indebtedness.

 

148

----

The following table reflects the long-termdebt maturities excluding any redemptions due to the exercise of callprovisions or capital lease obligations. Callable means we have the right to buy back a given security from theholder at a specified price before maturity.

** **

**Long-termDebt Maturities**

 

| ** **   | ** **   | **Cinergy(1)**    | ** **   | **CG&E** and subsidiaries | ** **   | **PSI**      | ** **   | **ULH&P** | ** **   |
|--------------|--------------|-------------------|--------------|-------------------------------|--------------|--------------|--------------|---------------|--------------|
| ** **   | ** **   | **(in millions)** | ** **   |
| *** *** | *** *** | *** ***      | *** *** | *** ***                  | *** *** | *** *** | *** *** | *** ***  | *** *** |
| 2005(2)      |         | $                 | 220          |                          | $            | 150          |         | $             | 50           |   | $ | — |   |
|         |         |              |         |                          |         |         |         |          |         |
| 2006         |         | 355               |         | —                        |         | 326          |         | —        |         |
|         |         |              |         |                          |         |         |         |          |         |
| 2007         |         | 726               |         | 100                           |         | 266          |         | —        |         |
|         |         |              |         |                          |         |         |         |          |         |
| 2008         |         | 551               |         | 120                           |         | 43           |         | 20            |         |
|         |         |              |         |                          |         |         |         |          |         |
| 2009         |         | 270               |         | 20                            |         | 223          |         | 20            |         |
|         |         |              |         |                          |         |         |         |          |         |
| Thereafter   |         | 2,376             |         | 1,240                         |         | 976          |         | 55            |         |
|         |         |              |         |                          |         |         |         |          |         |
| Total        |         | $                 | 4,498        |                          | $            | 1,630        |         | $             | 1,884        |   | $ | 95 |   |

----

| (1)   The  results of **Cinergy**also include  amounts related to non-registrants.                                                                                                   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2)   **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. |

 

Maintenance and replacement fund provisionscontained in **PSI’s** first mortgagebond indenture require:  (1) cashpayments, (2) bond retirements, or (3) pledges of unfunded property additionseach year based on an amount related to **PSI’s**net revenues.

 

**CG&E’s** transmissionand distribution assets of approximately $2.8 billion are subject to the lienof its first mortgage bond indenture. The utility property of **PSI**is also subject to the lien of its first mortgage bond indenture.

 

Asdiscussed previously, **CG&E** and **PSI** periodically borrowed proceeds from the issuance of taxexempt bonds for the purpose of funding the acquisition and construction ofsolid waste disposal facilities located at various generating stations inIndiana and Ohio.  Because some of thesefacilities have not commenced construction and others are not yet complete, proceedsfrom the borrowings have been placed in escrow with a trustee and may be drawnupon only as facilities are built and qualified costs incurred.  In the event any of the proceeds are notdrawn, **CG&E** and **PSI**would eventually be required to return the unused proceeds to bondholders.  **CG&E** and **PSI** expect to draw down all of the proceeds over the nextthree years.

 

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

Short-term obligations may include:

 

•                    short-termnotes;

•                    variable ratepollution control notes;

•                    commercialpaper; and

•                    money pool.

 

##### ***Short-termNotes***

Short-term borrowings mature within one yearfrom the date of issuance.  We primarilyuse unsecured revolving lines of credit and the sale of commercial paper forshort-term borrowings.  A portion of **Cinergy Corp.’s** revolving lines is used toprovide credit support for commercial paper and letters of credit.  When revolving lines are reserved forcommercial paper or backing letters of credit, they are not available foradditional borrowings.  The fees paid tosecure short-term borrowings were immaterial during each of the years endedDecember 31, 2004, 2003, and 2002.

 

149

----

At December 31, 2004, **Cinergy Corp.** had $1.3 billion remainingunused and available capacity relating to its $2 billion revolving creditfacilities.  These revolving creditfacilities include the following:

 

| **Credit Facility**          | ** **   | **Expiration**    | ** **   | **Established Lines** | ** **   | **Outstanding and Committed** | ** **   | **Unused and Available** | ** **   |
|------------------------------|--------------|-------------------|--------------|-----------------------|--------------|-------------------------------|--------------|--------------------------|--------------|
| ** **                   | ** **   | **(in millions)** | ** **   |
| *** ***                 | *** *** | *** ***      | *** *** | *** ***          | *** *** | *** ***                  | *** *** | *** ***             | *** *** |
| Five-year senior revolving   |         | December  2009    |         |                  |         |                          |         |                     |         |
| Direct borrowing             |         |              |         | $                     |         |                          | $            | —                   |         | $ |   |   |
| Commercial paper support     |         |              |         |                  |         | —                        |         |                     |         |
|                         |         |              |         |                  |         |                          |         |                     |         |
| Total five-year facility(1)  |         |              |         | 1,000                 |         | —                        |         | 1,000                    |         |
|                         |         |              |         |                  |         |                          |         |                     |         |
| Three-year senior revolving  |         | April  2007       |         |                  |         |                          |         |                     |         |
| Direct borrowing             |         |              |         |                  |         | —                        |         |                     |         |
| Commercial paper support     |         |              |         |                  |         | 676                           |         |                     |         |
| Letter of credit support     |         |              |         |                  |         | 12                            |         |                     |         |
|                         |         |              |         |                  |         |                          |         |                     |         |
| Total three-year facility(2) |         |              |         | 1,000                 |         | 688                           |         | 312                      |         |
|                         |         |              |         |                  |         |                          |         |                     |         |
| Total Credit Facilities      |         |              |         | $                     |  2,000  |                          | $            |  688                |         | $ |  1,312 |   |

----

| (1)   In April 2004, **Cinergy  Corp.** successfully placed a $500 million 364-day senior unsecured  revolving credit facility which replaced the $600 million 364-day senior  unsecured revolving credit facility that expired in April 2004. In December  2004, **Cinergy Corp.** successfully  replaced the $500 million 364-day facility with a $1 billion five-year  facility. **CG&E** and **PSI**each have $500 million borrowing sublimits on this facility. |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2)   In April 2004, **Cinergy  Corp.** successfully placed a $1 billion three-year senior unsecured  revolving credit facility. This facility replaced the $400 million three-year  senior unsecured revolving credit facility that was set to expire in May  2004.                                                                                                                                                                                                          |

 

In addition to revolving credit facilities, **Cinergy Corp.**, **CG&E**, and **PSI**alsomaintain uncommitted lines of credit. These facilities are not guaranteed sources of capital and represent aninformal agreement to lend money, subject to availability, with pricing to bedetermined at the time of advance.  **Cinergy Corp.**, **CG&E**, and **PSI**have established uncommitted lines of $40 million, $15 million, and $60million, respectively, all of which remained unused as of December 31, 2004.

 

##### ***VariableRate Pollution 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, weekly, or monthly basis, they are reflected in *Notes payable and other short-term obligations*on the Balance Sheets of **Cinergy**, **CG&E**, and **PSI**.  At December 31,2004, **Cinergy**, **CG&E** and**PSI**had $273 million, $112 million and $136 million, respectively, outstanding invariable rate pollution control notes, classified as short-term debt.  **ULH&P**hadno outstanding short-term pollution control notes.  Any short-term pollution control noteborrowings outstanding do not reduce the unused and available short-term debtregulatory authority of **CG&E**, **PSI**, and **ULH&P**.

 

In August 2003, **CG&E** caused the remarketing by the Ohio Air QualityDevelopment Authority of $84 million of its State of Ohio Air QualityDevelopment Revenue Refunding Bonds, due September 1, 2030.  The issuance consists of a $42 million 1995Series A and a $42 million 1995 Series B. The remarketing effected the conversion from a daily interest rate resetmode supported by a letter of credit to an unsecured weekly interest ratemode.  The interest rate for both serieswas initially set at 1.30 percent and will reset every seven days goingforward.  Because the holders of thesenotes have the right to have their notes redeemed on a weekly basis, they arereflected in *Notes payable and othershort-term obligations* on the Balance Sheets of **Cinergy** and **CG&E**.

 

Also in August 2003, **CG&E** caused the remarketing by the OhioAir Quality Development Authority of $12.1 million of its State of Ohio AirQuality Development Revenue Bonds 2001 Series A due August 1, 2033.  The remarketing affected the conversion froman unsecured one-year interest rate reset mode to a daily interest rate reset

 

150

----

 

mode supported by a standby letter ofcredit.  The interest rate was initiallyset at 0.95 percent and will be reset daily going forward.  Because the holders of these notes have theright to have their notes redeemed on a daily basis, they are reflected in *Notes payable and other short-term obligations*on the Balance Sheets of **Cinergy**and **CG&E**.

 

In December 2003, **PSI** borrowed the proceeds from the issuance by the IndianaDevelopment Finance Authority of $80.5 million of its Indiana DevelopmentFinance Authority Environmental Revenue Bonds due December 1, 2038.  The issuance consists of two $40.25 million tranchesdesignated Series 2003A and Series 2003B. The initial interest rate for both tranches was 1.27 percent and isreset weekly.  Proceeds from theborrowing are being used for the acquisition and construction of various solidwaste disposal facilities located at various generating stations inIndiana.  The remaining funds are beingheld in escrow by an independent trustee and will be drawn down as thefacilities are built.  Because theholders of these notes have the right to have their notes redeemed on a weeklybasis, they are reflected in *Notes payableand other short-term obligations* on the Balance Sheets of **Cinergy** and **PSI**.

 

In August 2004, **PSI** borrowed the proceeds from the issuance by the IndianaDevelopment Finance Authority of $55 million principal amount of itsEnvironmental Revenue Bonds, Series 2004A, due August 2039.  The initial interest rate for the bonds was1.13 percent and is reset weekly. Proceeds from the borrowing will be used for the acquisition andconstruction of various solid waste disposal facilities located at variousgenerating stations in Indiana.  Thefunds are being held in escrow by an independent trustee and will be drawn uponas facilities are built.  Holders ofthese notes are entitled to credit enhancement in the form of a standby letterof credit which, if drawn upon, provides for the payment of both interest andprincipal on the notes.  Because theholders of these notes have the right to have their notes redeemed on a weeklybasis, they are reflected in *Notes payableand other short-term obligations* on **Cinergy’s**and **PSI’s**Balance Sheets.

 

##### ***CommercialPaper***

**CinergyCorp.’s**commercial paper program is supported by **Cinergy Corp.’s** $2 billion revolving creditfacilities.  The commercial paper programsupports, in part, the short-term borrowing needs of **CG&E** and **PSI**and eliminates their need for separate commercial paper programs.  In September 2004, **CinergyCorp.** expanded its commercial paper program from $800 million to amaximum outstanding principal amount of $1.5 billion.  As of December 31, 2004, **Cinergy Corp.** had $676 million in commercial paper outstanding.

 

##### ***MoneyPool***

**Cinergy Corp.**, Services, and our utilityoperating companies participate in a money pool arrangement to better managecash and working capital requirements. Under this arrangement, those companies with surplus short-term fundsprovide short-term loans to affiliates (other than **Cinergy Corp.**) participating under this arrangement.  This surplus cash may be from internal orexternal sources.  The amountsoutstanding under this money pool arrangement are shown as a component of *Notes receivable from affiliated companies*and/or *Notes payable to affiliated companies*on the Balance Sheets of **CG&E**,**PSI**, and **ULH&P**. Any money pool borrowings outstanding reduce the unused and availableshort-term debt regulatory authority of **CG&E**,**PSI**, and **ULH&P**.

 

151

----

The following table summarizes our *Notes payable and other short-term obligations*and *Notes payable to affiliated companies*.

 
| ** **                   | ** ** | **December 31, 2004** | ** ** | **December 31, 2003** | ** ** |
|------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                   | ** ** | **Established Lines** | ** ** | **Outstanding**       | ** ** | **Weighted Average Rate** | ** ** | **Established Lines** | ** ** | **Outstanding** | ** ** | **Weighted Average Rate** | ** ** |
| ** **                   | ** ** | **(in millions)**     | ** ** |
| ** **                   | ** ** | ** **            | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Cinergy**                  | ** ** | ** **            | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Cinergy Corp.**            |       |                  |       |                  |       |   |   |   |   |   |   |   |   |
| Revolving lines              |       | **$**                 | **2,000**  | ** **            | **$**      | **—** | ** ** | **—** | **%** | $ | 1,000 |   | $ | — |   | — | % |
| Uncommitted lines(1)         |       | **40**                | ** ** | **—**            | ** ** | **—** | ** ** | 40 |   | — |   | — |   |
| Commercial paper(2)          |       | ** **            | ** ** | **676**               | ** ** | **2.45** | ** ** |   |   | 146 |   | 1.18 |   |
|                         |       | ** **            | ** ** | ** **            | ** ** | ** ** | ** ** |   |   |   |   |   |   |
| Utility operating companies  |       | ** **            | ** ** | ** **            | ** ** | ** ** | ** ** |   |   |   |   |   |   |
| Uncommitted lines(1)         |       | **75**                | ** ** | **—**            | ** ** | **—** | ** ** | 75 |   | — |   | — |   |
| Pollution control notes      |       | ** **            | ** ** | **248**               | ** ** | **2.43** | ** ** |   |   | 193 |   | 1.37 |   |
|                         |       | ** **            | ** ** | ** **            | ** ** | ** ** | ** ** |   |   |   |   |   |   |
| Non-regulated subsidiaries   |       | ** **            | ** ** | ** **            | ** ** | ** ** | ** ** |   |   |   |   |   |   |
| Revolving lines(3)           |       | **158**               | ** ** | **8**                 | ** ** | **5.67** | ** ** | 19 |   | 10 |   | 5.90 |   |
| Short-term debt              |       | ** **            | ** ** | **2**                 | ** ** | **4.50** | ** ** |   |   | 2 |   | 4.80 |   |
| Pollution control notes      |       | ** **            | ** ** | **25**                | ** ** | **2.30** | ** ** |   |   | — |   | — |   |
|                         |       | ** **            | ** ** | ** **            | ** ** | ** ** | ** ** |   |   |   |   |   |   |
| **Cinergy Total**            |       | ** **            | ** ** | **$**                 | **959**    | ** ** | **2.47** | **%** |   |   | $ | 351 |   | 1.45 | % |
|                         |       | ** **            | ** ** | ** **            | ** ** | ** ** | ** ** |   |   |   |   |   |   |
| **CG&E**and subsidiaries |       | ** **            | ** ** | ** **            | ** ** | ** ** | ** ** |   |   |   |   |   |   |
| Uncommitted lines(1)         |       | **$**                 | **15**     | ** **            | **$**      | **—** | ** ** | **—** | **%** | $ | 15 |   | — |   | — | % |
| Pollution control notes      |       | ** **            | ** ** | **112**               | ** ** | **2.34** | ** ** |   |   | 112 |   | 1.28 |   |
| Money pool                   |       | ** **            | ** ** | **180**               | ** ** | **2.38** | ** ** |   |   | 49 |   | 1.11 |   |
|                         |       | ** **            | ** ** | ** **            | ** ** | ** ** | ** ** |   |   |   |   |   |   |
| **CG&E Total**           |       | ** **            | ** ** | **$**                 | **292**    | ** ** | **2.36** | **%** |   |   | $ | 161 |   | 1.23 |   |
| ** **                   |       | ** **            | ** ** | ** **            | ** ** | ** ** | ** ** |   |   |   |   |   |   |
| **PSI**                      |       | ** **            | ** ** | ** **            | ** ** | ** ** | ** ** |   |   |   |   |   |   |
| Uncommitted lines(1)         |       | **$**                 | **60**     | ** **            | **$**      | **—** | ** ** | **—** | **%** | $ | 60 |   | $ | — |   | — | % |
| Pollution control notes      |       | ** **            | ** ** | **136**               | ** ** | **2.49** | ** ** |   |   | 81 |   | 1.48 |   |
| Money pool                   |       | ** **            | ** ** | **130**               | ** ** | **2.38** | ** ** |   |   | 188 |   | 1.11 |   |
|                         |       | ** **            | ** ** | ** **            | ** ** | ** ** | ** ** |   |   |   |   |   |   |
| **PSI Total**                |       | ** **            | ** ** | **$**                 | **266**    | ** ** | **2.44** | **%** |   |   | $ | 269 |   | 1.22 | % |
|                         |       | ** **            | ** ** | ** **            | ** ** | ** ** | ** ** |   |   |   |   |   |   |
| **ULH&P**                |       | ** **            | ** ** | ** **            | ** ** | ** ** | ** ** |   |   |   |   |   |   |
| Money pool                   |       | ** **            | ** ** | **$**                 | **11**     | ** ** | **2.38** | **%** |   |   | $ | 45 |   | 1.11 | % |
|                         |       | ** **            | ** ** | ** **            | ** ** | ** ** | ** ** |   |   |   |   |   |   |
| **ULH&P Total**          |       | ** **            | ** ** | **$**                 | **11**     | ** ** | **2.38** | **%** |   |   | $ | 45 |   | 1.11 | % |

----

| (1)   These facilities are not guaranteed sources  of capital and represent an informal agreement to lend money, subject to  availability, with pricing to be determined at the time of advance.                               |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2)   In September 2004, **Cinergy  Corp.** increased its commercial paper program limit from $800  million to $1.5 billion. The commercial paper program is supported by **Cinergy Corp.’s** revolving lines of  credit. |
| (3)   In December 2004, **Cinergy**Canada,  Inc. successfully placed a $150 million three-year senior revolving credit  facility.                                                                                              |

 

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

 

•                    a consolidatednet worth of $2 billion; and

•                    a ratio ofconsolidated indebtedness to consolidated total capitalization not in excess of65 percent.

 

As part of **CG&E’s**$500 million sublimit under the $1 billion five-year credit facility, **CG&E** has covenanted to maintain:

 

•                    a consolidatednet worth of $1 billion; and

•                    a ratio ofconsolidated indebtedness to consolidated total capitalization not in excess of65 percent.

 

152

----

 

As part of **PSI’s**$500 million sublimit under the $1 billion five-year credit facility, **PSI** has covenanted to maintain:

 

•                    a consolidatednet worth of $900 million; and

•                    a ratio ofconsolidated indebtedness to consolidated total capitalization not in excess of65 percent.

 

A breach of these covenants could result inthe termination of the credit facilities and the acceleration of the relatedindebtedness.  In addition to breaches ofcovenants, certain other events that could result in the termination ofavailable credit and acceleration of the related indebtedness include:

 

•                    bankruptcy;

•                    defaults inthe payment of other indebtedness; and

•                    judgmentsagainst the company that are not paid or insured.

 

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

 

Asdiscussed in Note 1(q)(*i*),long-term debt increased in the third quarter of 2003 resulting from theadoption of Interpretation 46.  The debtwhich was recorded as a result of this new accounting pronouncement did notcause **Cinergy Corp.** to be inbreach of any covenants at the time of adoption.  As of December 31, 2004, **Cinergy**,**CG&E**, and **PSI**are in compliance with all of their debt covenants.

 

**6.**              Leases

***(a)***                                  Operating Leases

We have entered into operating leaseagreements for various facilities and properties such as computer,communication and transportation equipment, and office space.  Total rental payments on operating leases foreach of the past three years are detailed in the following table.  This table also shows future minimum leasepayments required for operating leases with remaining non-cancelable leaseterms in excess of one year as of December 31, 2004:

 
| ** **                              | ** **   | **Lease Expense** | ** **   | **Estimated Minimum Lease Payments** | ** **   |
|-----------------------------------------|--------------|-------------------|--------------|--------------------------------------|--------------|
| ** **                              | ** **   | **2002**          | ** **   | **2003**                             | ** **   | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **Thereafter** | ** ** | **Total** | ** ** |
| ** **                              | ** **   | **(in millions)** | ** **   |
| *** ***                            | *** *** | *** ***      | *** *** | *** ***                         | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** |
| **Cinergy**(1)                          |         | $                 | 64           |                                 | $            | 72 |   | **$** | **85** |   | $ | 43 |   | $ | 36 |   | $ | 28 |   | $ | 18 |   | $ | 14 |   | $ | 27 |   | $ | 166 |   |
| **CG&E**** **and  subsidiaries |         | 30                |         | 34                                   |         | **36** |   | 10 |   | 8 |   | 7 |   | 5 |   | 4 |   | 6 |   | 40 |   |
| **PSI**                                 |         | 23                |         | 31                                   |         | **32** |   | 11 |   | 10 |   | 9 |   | 7 |   | 6 |   | 13 |   | 56 |   |
| **ULH&P**                           |         | 4                 |         | 4                                    |         | **4** |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
|                                         |              |                   |              |                                      |              |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

----

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

 

***(b)***                                  Capital Leases

In each of the years 1999 through 2004, **CG&E**, **PSI**,and **ULH&P** entered into capitallease agreements to fund the purchase of gas and electric meters, andassociated equipment.  The lease termsare for 120 months commencing with the date of purchase and contain buyoutoptions ranging from 48 to 105 months. It is our objective to own the meters and associated equipmentindefinitely and the operating companies plan to exercise the buyout option atmonth 105.  As of December 31, 2004, **Cinergy’s** effective interest rate oncapital lease obligations outstanding was 5.5 percent.  The meters and associated equipment aredepreciated at the same rate as if owned by the operating companies.  **CG&E**,**PSI**, and **ULH&P** each recorded a capital leaseobligation, included in *Non-CurrentLiabilities-Other*.

 

153

----

The total minimum lease payments and thepresent values for these capital lease items are shown below:

 

| ** **                              | ** **   | **Total Minimum Lease Payments** | ** **   |
|-----------------------------------------|--------------|----------------------------------|--------------|
| ** **                              | ** **   | **Cinergy**                      | ** **   | **CG&E** and subsidiaries | ** ** | **PSI** | ** ** | **ULH&P** | ** ** |
| *** ***                            | *** *** | **(in millions)**                | *** *** |
| *** ***                            | *** *** | *** ***                     | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** |
| Total minimum lease payments(1)         |         | $                                | 79           |   | $ | 49 |   | $ | 30 |   | $ | 11 |   |
| Less: amount representing interest      |         | (14                              | )            | (9 | ) | (5 | ) | (2 | ) |
|                                    |         |                             |         |   |   |   |   |   |   |
| Present value of minimum lease payments |         | $                                | 65           |   | $ | 40 |   | $ | 25 |   | $ | 9 |   |

----

| (1)   Annual minimum lease payments are  immaterial. |   |
|----------------------------------------------------------------|--------|

 

**7.**                    Financial Instruments

***(a)***                                  Financial Derivatives

We have entered into financial derivativecontracts for the purpose of managing financial instrument risk.

 

Our current policy of managing exposure tofluctuations in interest rates is to maintain approximately 30 percent of thetotal amount of outstanding debt in variable interest rate debtinstruments.  In maintaining this levelof exposure, we use interest rate swaps. Under the swaps, we agree with other parties to exchange, at specifiedintervals, the difference between fixed-rate and variable-rate interest amountscalculated on an agreed notional amount. **CG&E** has an outstandinginterest rate swap agreement that decreased the percentage of variable-ratedebt.  Under the provisions of the swap,which has a notional amount of $100 million, **CG&E**pays a fixed-rate and receives a variable-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 debt agreementthat it is hedging, we anticipate that this swap will continue to be effectiveas a hedge.  Changes in fair value ofthis swap are recorded in *Accumulated othercomprehensive income (loss)*.  **Cinergy Corp.** had three interest rate swaps with a combinednotional amount of $250 million which settled in September 2004.  These swaps qualified as fair value hedgesunder the provisions of Statement 133.

 

Treasury locks are agreements that fix theyield or price on a specified treasury security for a specified period, whichwe sometimes use in connection with the issuance of fixed-rate debt.  On September 23, 2002, **CG&E** issued $500 million principalamount senior unsecured debentures due September 15, 2012, with an interestrate of 5.70 percent.  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.  The treasury lock effectively fixed thebenchmark interest rate (i.e., the treasury component of the interest rate, butnot the credit spread) for 50 percent of the offering from July 2002 throughthe issuance date in order to reduce the exposure associated with treasury ratevolatility.  With the issuance of thedebt, the treasury lock was settled. Given the use of hedge accounting, this settlement was reflected inother *Accumulated other comprehensive income (loss)*on an after-tax basis in the amount of $13 million, rather than a charge to netincome.  This amount will be reclassifiedto*Interest**Expense* over the 10-year life of therelated debt as interest is accrued.

 

See Note 1(k)(*ii*)for additional information on financial derivatives.  In the future, we will continually monitormarket conditions to evaluate whether to modify our use of financial derivativecontracts to manage financial instrument risk.

 

154

----

 

***(b)***                                  Fair Value of Other Financial Instruments

The estimated fair values of other financialinstruments were as follows (this information does not claim to be a valuationof the companies as a whole):

 
| ** **                                       | ** **   | **December 31, 2004** | ** **   | **December 31, 2003** | ** **   |
|--------------------------------------------------|--------------|-----------------------|--------------|-----------------------|--------------|
| **Financial Instruments**                        | ** **   | **Carrying Amount**   | ** **   | **Fair Value**        | ** **   | **Carrying Amount** | ** ** | **Fair Value** | ** ** |
| *** ***                                     | *** *** | **(in millions)**     | *** *** |
| *** ***                                     | *** *** | *** ***          | *** *** | *** ***          | *** *** | *** *** | *** *** | *** *** | *** *** |
| **Cinergy**(1)                                   |         |                  |         |                  |         |   |   |   |   |
| First mortgage bonds and other long-term debt(2) |         | **$**                 | **4,448**    | ** **            | **$**        | **4,710** |   | $ | 4,971 |   | $ | 5,297 |   |
|                                             |         | ** **            | ** **   | ** **            |         |   |   |   |   |
| **CG&E** and subsidiaries                    |         | ** **            | ** **   | ** **            |         |   |   |   |   |
| First mortgage bonds and other long-term debt(2) |         | **$**                 | **1,594**    | ** **            | **$**        | **1,641** |   | $ | 1,569 |   | $ | 1,582 |   |
|                                             |         | ** **            | ** **   | ** **            |         |   |   |   |   |
| **PSI**                                          |         | ** **            | ** **   | ** **            |         |   |   |   |   |
| First mortgage bonds and other long-term debt(2) |         | **$**                 | **1,874**    | ** **            | **$**        | **1,999** |   | $ | 1,720 |   | $ | 1,861 |   |
|                                             |         | ** **            | ** **   | ** **            |         |   |   |   |   |
| **ULH&P**                                    |         | ** **            | ** **   | ** **            |         |   |   |   |   |
| Other long-term debt                             |         | **$**                 | **94**       | ** **            | **$**        | **99** |   | $ | 55 |   | $ | 61 |   |

----

| (1)   The  results of **Cinergy** also include  amounts related to non-registrants. |   |
|-----------------------------------------------------------------------------------------------|--------|
| (2)   Includes  amounts reflected as *Long-term debt due  within one year*.         |   |

 

The following methods and assumptions wereused to estimate the fair values of each major class of instruments:

 

*(i)      Cash andcash equivalents, Restricted deposits, and Notes payable and other short-termobligations*

Due to the short period to maturity, thecarrying amounts reflected on the Balance Sheets approximate fair values.

 

*(ii)     Long-termdebt*

The fair values of long-term debt issues wereestimated based on the latest quoted market prices or, if not listed on the NewYork Stock Exchange, on the present value of future cash flows.  The discount rates used approximate theincremental borrowing costs for similar instruments.

 

***(c)***                                  Concentrations of Credit Risk

Credit risk is the exposure to economic lossthat would occur as a result of nonperformance by counterparties, pursuant tothe terms of their contractual obligations. Specific components of credit risk include counterparty default risk,collateral risk, concentration risk, and settlement risk.

 

*(i)      TradeReceivables and Physical Power Portfolio*

Our concentration of credit risk with respectto trade accounts receivable from electric and gas retail customers islimited.  The large number of customersand diversified customer base of residential, commercial, and industrialcustomers significantly reduces our credit risk.  Contracts within the physical portfolio ofpower marketing and trading operations are primarily with traditional electriccooperatives and municipalities and other investor-owned utilities.  At December 31, 2004, we believe thelikelihood of significant losses associated with credit risk in our tradeaccounts receivable or physical power portfolio is remote.

 

*(ii)     EnergyTrading Credit Risk*

**Cinergy’s** extension ofcredit for energy marketing and trading is governed by a Corporate CreditPolicy.  Written guidelines approved by **Cinergy’s** Risk Policy Committee documentthe management approval levels for credit 

 

155

----

 

limits, evaluation of creditworthiness, andcredit risk mitigation procedures. Exposures to credit risks are monitored daily by the Corporate CreditRisk function, which is independent of all trading operations.  As of December 31, 2004, approximately 93percent of the credit exposure, net of credit collateral, related to energytrading and marketing activity was with counterparties rated investment gradeor the counterparties’ obligations were guaranteed or secured by an investmentgrade entity.  The majority of theseinvestment grade counterparties are externally rated.  If a counterparty has an external rating, thelower of Standard & Poor’s or Moody’s Investors Service is used; otherwise,**Cinergy’s** internal rating of thecounterparty is used.  The remainingseven percent represents $59 million with counterparties rated non-investmentgrade.

 

As of December 31, 2004, **CG&E** had a concentration of tradingcredit exposure of approximately $45 million with two counterparties accountingfor greater than 10 percent of **CG&E’s**total trading credit exposure.  Thesecounterparties are rated investment grade.

 

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

 

We continually review and monitor our creditexposure to all counterparties and secondary counterparties.  If appropriate, we may adjust our creditreserves to attempt to compensate for increased credit risk within theindustry.  Counterparty credit limits maybe adjusted on a daily basis in response to changes in a counterparty’sfinancial status or public debt ratings.

 

*(iii)   FinancialDerivatives*

Potential exposure to credit risk also existsfrom our use of financial derivatives such as interest rate swaps and treasurylocks.  Because these financialinstruments are transacted with highly rated financial institutions, we do notanticipate nonperformance by any of the counterparties.

 

**8.**              Notes Receivable

As discussed in Note 1(q)(*i*), **Cinergy**consolidated two previously unconsolidated SPEs effective July 1, 2003.  As a result, **Cinergy** has approximately $214 million and $231 million ofadditional notes receivable as of December 31, 2004 and 2003, respectively,comprised of two separate notes.

 

The first note, with a December 31, 2004balance of $101 million and a December 31, 2003 balance of $118 million, bearsan effective interest rate of 7.81 percent and matures in August 2009.  The second note, with a balance of $113million as of December 31, 2004 and 2003, respectively, bears an effectiveinterest rate of 9.23 percent and matures in December 2016.

 

Thefollowing table reflects the maturities of these notes as of December 31, 2004.

 

| **Notes Receivable Maturities** | ** **   |
|---------------------------------|--------------|
| **(in millions)**               | ** **   |
| *** ***                    | *** *** | *** *** | *** *** |
| 2005                            |         | $ | 20 |   |
| 2006                            |         | 22 |   |
| 2007                            |         | 25 |   |
| 2008                            |         | 29 |   |
| 2009                            |         | 24 |   |
| Thereafter                      |         | 94 |   |
|                            |         |   |   |
| Total                           |         | $ | 214 |   |

 

 

156

----

 

 

**9.**              Pension and OtherPostretirement Benefits

**Cinergy Corp.** sponsors bothpension and other postretirement benefit plans.

 

Our qualified defined benefit pension planscover substantially all United States employees meeting certain minimum age andservice requirements.  During 2002,eligible **Cinergy** employees wereoffered the opportunity to make a one-time election, effective January 1, 2003,to either continue to have their pension benefit determined by the traditionaldefined benefit pension formula or to have their benefit determined using acash balance formula.  A similar electionwas provided to certain union employees at a later time.

 

The traditional defined benefit programutilizes a final average pay formula to determine pension benefits.  These benefits are based on:

 

•                  years of participation;

•                  age at retirement; and

•                  the applicable averageSocial Security wage base.

 

Benefits are accrued under the cash balanceformula based upon a percentage of pension eligible earnings plusinterest.  In addition, participants withthe cash balance formula may request a lump-sum cash payment upon terminationof their employment, which may result in increased cash requirements frompension plan assets.  At the effectivetime of the election, benefits ceased accruing under the traditional definedbenefit pension formula for employees who elected the cash balanceformula.  There was no change toretirement benefits earned prior to the effective time of the election.  The pension benefits of all non-union andcertain union employees hired after December 31, 2002 are calculated using thecash balance formula.  At December 31,2004, approximately 80 percent of **Cinergy’s**employees remain in the traditional defined benefit program.

 

The introduction of the cash balance featuresto our defined benefit plans did not have a material effect on our financialposition or results of operations.

 

Funding for the qualified defined benefitpension plans is based on actuarially determined contributions, the maximum ofwhich is generally the amount deductible for tax purposes and the minimum beingthat required by the Employee Retirement Income Security Act of 1974, asamended.  The pension plans’ assetsconsist of investments in equity and debt securities.

 

**Cinergy’s** investmentstrategy with respect to pension assets is designed to achieve a moderate levelof overall portfolio risk in keeping with our desired risk objective, which isestablished through careful consideration of plan liabilities, plan fundedstatus, and corporate financial condition. The portfolio’s target asset allocation is 60 percent equity and 40percent debt with specified allowable ranges around these targets.  Within the equity segment, we are broadlydiversified across domestic, developed international, and emerging marketequities, with the largest concentration being domestic.  Further diversification is achieved throughallocations to growth/value and small-, mid-, and large-cap equities.  Within the debt segment, we principallymaintain separate “core plus” and “core” portfolios.  The “core plus” portfolio makes tactical useof the “plus” sectors (e.g., high yield, developed international, emergingmarkets, etc.) while the “core” portfolio is a domestic, investment gradeportfolio.  In late 2004, **Cinergy** commenced the implementation of an alternativeinvestment strategy in its investment program. This strategy incorporates an investment in a fund of hedge funds inconjunction with an S&P 500 swaps and futures overlay program and will beclassified as part of our large-cap United States equity allocation.  Other than the alternative investmentstrategy, the use of derivatives is currently limited to collateralizedmortgage obligations and asset-backed securities.  Investment risk is measured and monitored onan ongoing basis through quarterly investment portfolio reviews, annualliability measurements, and periodic asset/liability studies.

 

157

----

 

**Cinergy** uses a September 30 measurement date for itsdefined benefit pension plans.  The assetallocation at September 30, 2004 and 2003 by asset category was as follows:

 
| ** **           | ** ** | **Percentage of Fair Value of Plan Assets at September 30** | ** ** |
|----------------------|------------|-------------------------------------------------------------|------------|
| **Asset Category**   | ** ** | **2004**                                                    | ** ** | **2003** | ** ** |
|                 |       |                                                        |       |   |   |
| Equity securities(1) |       | **62%**                                                     | ** ** | 62% |   |
| Debt securities(2)   | ** ** | **38%**                                                     | ** ** | 38% |   |

----

(1)   The portfolio’s target asset allocation is60 percent equity with an allowable range of 50 percent to 70 percent.

(2)   The portfolio’s target asset allocation is40 percent debt with an allowable range of 30 percent to 50 percent.

 

In addition, **CinergyCorp.** sponsors non-qualified pension plans (plans that do not meetthe criteria for certain 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 (65 percent) and debt (35 percent) securities at December31, 2004, is not restricted to the payment of plan benefits and therefore, notconsidered plan assets under Statement87.  At December 31, 2004 and2003, trust assets were approximately $10 million and $9 million, respectively,and are reflected in **Cinergy’s**Balance Sheets as *Other investments*.

 

In 2003 and 2002, **Cinergy** offered voluntary early retirement programs to certainindividuals.  In accordance withStatement of Financial Accounting Standards No. 88, *Employers’ Accounting for Settlements and Curtailments of DefinedBenefit Pension Plans and for Termination Benefits*(Statement 88), **Cinergy** recognized expense of approximately$9 million and $39 million in 2003 and 2002, respectively.

 

**Cinergy Corp.** providescertain health care and life insurance benefits to retired United Statesemployees and their eligible dependents. These benefits are subject to minimum age and service requirements.  The health care benefits include medicalcoverage, dental coverage, and prescription 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 (65 percent) and debt (35 percent) securities at December 31, 2004, isnot restricted to the payment of plan benefits and therefore, not consideredplan assets under Statement 106.  AtDecember 31, 2004 and 2003, trust assets were approximately $71 million and $64million, respectively, and are reflected in **Cinergy’s**Balance Sheets as *Other investments*.

 

Basedon preliminary estimates, we expect 2005 contributions of $72 million forqualified pension benefits.  As discussedpreviously, we do not hold “plan assets” as defined by Statement 87 andStatement 106 for our non-qualified pension plans and other postretirementbenefit costs, and therefore contributions are equal to the benefit paymentspresented in the following table.

 

Thefollowing estimated benefits payments, which reflect future service, areexpected to be paid:

 
| ** **                | ** **   | ** **                     | ** **   | ** **                         | ** ** | **Other**                   | ** ** |
|---------------------------|--------------|--------------------------------|--------------|------------------------------------|------------|-----------------------------|------------|
| ** **                | ** **   | **Qualified Pension Benefits** | ** **   | **Non-Qualified Pension Benefits** | ** ** | **Postretirement Benefits** | ** ** |
| *** ***              | *** *** | **(in millions)**              | *** *** |
| * *                  | * *     | * *                       | * *     | * *                           | * *   | * *                    | * *   |
| **2005**                  |         | $                              | 77           |                               | $          | 9                           |       | $ | 25 |   |
| **2006**                  |         | 76                             |         | 9                                  |       | 26                          |       |
| **2007**                  |         | 77                             |         | 9                                  |       | 27                          |       |
| **2008**                  |         | 78                             |         | 9                                  |       | 28                          |       |
| **2009**                  |         | 80                             |         | 11                                 |       | 29                          |       |
| **Five years thereafter** |         | 443                            |         | 56                                 |       | 162                         |       |
|                           |              |                                |              |                                    |            |                             |            |  |  |  |

 

158

----

 

Our benefit plans’ costs for the past threeyears included the following components:

 
| ** **                                      | ** **   | **Qualified**        | ** **   | **Non-Qualified**    | ** ** | **Other**                   | ** ** |
|-------------------------------------------------|--------------|----------------------|--------------|----------------------|------------|-----------------------------|------------|
| ** **                                      | ** **   | **Pension Benefits** | ** **   | **Pension Benefits** | ** ** | **Postretirement Benefits** | ** ** |
| ** **                                      | ** **   | **2004**             |         | **2003**             | ** ** | **2002**                    | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| *** ***                                    | *** *** | **(in millions)**    | *** *** |
| * *                                        | * *     | * *             | * *     | * *             | * *   | * *                    | * *   | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * |
| Service cost                                    |         | **$**                | **35**       | ** **           | $          | 31                          |       | $ | 27 |   | **$** | **5** | ** ** | $ | 3 |   | $ | 3 |   | **$** | **5** | ** ** | $ | 4 |   | $ | 3 |   |
| Interest cost                                   |         | **89**               | ** **   | 86                   |       | 79                          |       | **7** | ** ** | 7 |   | 5 |   | **22** | ** ** | 23 |   | 20 |   |
| Expected return on plans’ assets           |         | **(81**              | **)**        | (81                  | )          | (86                         | )          | **—** | ** ** | **—** |   | **—** |   | **—** | ** ** | **—** |   | **—** |   |
| Amortization of transition (asset) obligation   |         | **(1**               | **)**        | (1                   | )          | (1                          | )          | **—** | ** ** | **—** |   | **—** |   | **1** | ** ** | 3 |   | 5 |   |
| Amortization of prior service cost              |         | **5**                | ** **   | 5                    |       | 6                           |       | **2** | ** ** | 1 |   | 1 |   | **—** | ** ** | **—** |   | **—** |   |
| Recognized actuarial (gain) loss                |         | **2**                | ** **   | **—**           |       | (6                          | )          | **2** | ** ** | 2 |   | 1 |   | **8** | ** ** | 5 |   | 1 |   |
| Voluntary early retirement costs (Statement 88) |         | **—**           | ** **   | 9                    |       | 39                          |       | **—** | ** ** | **—** |   | **—** |   | **—** | ** ** | **—** |   | **—** |   |
| Net periodic benefit cost                       |         | **$**                | **49**       | ** **           | $          | 49                          |       | $ | 58 |   | **$** | **16** | ** ** | $ | 13 |   | $ | 10 |   | **$** | **36** | ** ** | $ | 35 |   | $ | 29 |   |
|                                                 |              |                      |              |                      |            |                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The net periodic benefitcost by registrant was as follows:

 
| ** **                    | ** **   | **Qualified**        | ** **   | **Non-Qualified**    | ** ** | **Other**                   | ** ** |
|-------------------------------|--------------|----------------------|--------------|----------------------|------------|-----------------------------|------------|
| ** **                    | ** **   | **Pension Benefits** | ** **   | **Pension Benefits** | ** ** | **Postretirement Benefits** | ** ** |
| ** **                    | ** **   | **2004**             | ** **   | **2003**             | ** ** | **2002**                    | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| *** ***                  | *** *** | **(in millions)**    | *** *** | *** ***         |
| * *                      | * *     | * *             | * *     | * *             | * *   | * *                    | * *   | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * |
| **Cinergy**(1)                |         | **$**                | **49**       | ** **           | $          | 49                          |       | $ | 58 |   | **$** | **16** | ** ** | $ | 13 |   | $ | 10 |   | **$** | **36** | ** ** | $ | 35 |   | $ | 29 |   |
| **CG&E** and subsidiaries |         | **15**               | ** **   | 10                   |       | 7                           |       | **1** | ** ** | 1 |   | 1 |   | **9** | ** ** | 9 |   | 7 |   |
| **PSI**                       |         | **13**               | ** **   | 12                   |       | 12                          |       | **1** | ** ** | 1 |   | 1 |   | **20** | ** ** | 18 |   | 15 |   |
| **ULH&P**                 |         | **1**                | ** **   | 1                    |       | 2                           |       | **—** | ** ** | — |   | — |   | **1** | ** ** | 1 |   | — |   |
|                               |              |                      |              |                      |            |                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

----

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

 

159

----

 

The following table provides a reconciliationof the changes in the plans’ benefit obligations and fair value of assets for2004 and 2003, and a statement of the funded status for both years.  **Cinergy**uses a September 30 measurement date for its defined benefit pension plans andother postretirement benefit plans.

 

| ** **                                       | ** **   | ** **           | ** **   | ** **           | ** ** | ** **         | ** ** | ** ** | ** ** | **Other**  | ** ** |
|--------------------------------------------------|--------------|----------------------|--------------|----------------------|------------|--------------------|------------|------------|------------|------------|------------|
| ** **                                       | ** **   | **Qualified**        | ** **   | **Non-Qualified**    | ** ** | **Postretirement** | ** ** |
| ** **                                       | ** **   | **Pension Benefits** | ** **   | **Pension Benefits** | ** ** | **Benefits**       | ** ** |
| ** **                                       | ** **   | **2004**             | ** **   | **2003**             | ** ** | **2004**           | ** ** | **2003**   | ** ** | **2004**   | ** ** | **2003** | ** ** |
| *** ***                                     | *** *** | **(in millions)**    | *** *** |
| * *                                         | * *     | * *             | * *     | * *             | * *   | * *           | * *   | * *   | * *   | * *   | * *   | * * | * * |
| **Change in benefit obligation**                 |         |                 |         |                 |       |               |       |       |       |       |       |   |   |
|                                             |         |                 |         |                 |       |               |       |       |       |       |       |   |   |
| Benefit obligation at beginning of period        |         | **$**                | **1,458**    | ** **           | $          | 1,315              |       | **$**      | **108**    | ** ** | $          | 98 |   | **$** | **399** | ** ** | $ | 343 |   |
|                                             |         | ** **           | ** **   |                 |       | ** **         | ** ** |       |       | ** ** | ** ** |   |   |
| Service cost                                     |         | **35**               | ** **   | 31                   |       | **5**              | ** ** | 3          |       | **5**      | ** ** | 4 |   |
| Interest cost                                    |         | **88**               | ** **   | 86                   |       | **7**              | ** ** | 7          |       | **22**     | ** ** | 23 |   |
| Amendments(1)                                    |         | **(1**               | **)**        | **—**           |       | **8**              | ** ** | **—** |       | **(24**    | **)**      | (3 | ) |
| Actuarial (gain) loss                            |         | **69**               | ** **   | 98                   |       | **—**         | ** ** | 7          |       | **27**     | ** ** | 54 |   |
| Benefits paid                                    |         | **(71**              | **)**        | (72                  | )          | **(8**             | **)**      | (7         | )          | **(20**    | **)**      | (22 | ) |
|                                             |         | ** **           | ** **   |                 |       | ** **         | ** ** |       |       | ** ** | ** ** |   |   |
| Benefit obligation at end of period              |         | **1,578**            | ** **   | 1,458                |       | **120**            | ** ** | 108        |       | **409**    | ** ** | 399 |   |
|                                             |         | ** **           | ** **   |                 |       | ** **         | ** ** |       |       | ** ** | ** ** |   |   |
| **Change in plan assets**                        |         | ** **           | ** **   |                 |       | ** **         | ** ** |       |       | ** ** | ** ** |   |   |
|                                             |         | ** **           | ** **   |                 |       | ** **         | ** ** |       |       | ** ** | ** ** |   |   |
| Fair value of plan assets at beginning of period |         | **877**              | ** **   | 757                  |       | **—**         | ** ** | **—** |       | **—** | ** ** | **—** |   |
|                                             |         | ** **           | ** **   |                 |       | ** **         | ** ** |       |       | ** ** | ** ** |   |   |
| Actual return on plan assets                     |         | **98**               | ** **   | 118                  |       | **—**         | ** ** | **—** |       | **—** | ** ** | **—** |   |
| Employer contribution                            |         | **117**              | ** **   | 74                   |       | **8**              | ** ** | 7          |       | **20**     | ** ** | 22 |   |
| Benefits paid                                    |         | **(71**              | **)**        | (72                  | )          | **(8**             | **)**      | (7         | )          | **(20**    | **)**      | (22 | ) |
|                                             |         | ** **           | ** **   |                 |       | ** **         | ** ** |       |       | ** ** | ** ** |   |   |
| Fair value of plan assets at end of period       |         | **1,021**            | ** **   | 877                  |       | **—**         | ** ** | **—** |       | **—** | ** ** | **—** |   |
|                                             |         | ** **           | ** **   |                 |       | ** **         | ** ** |       |       | ** ** | ** ** |   |   |
| **Funded status**                                |         | **(557**             | **)**        | (581                 | )          | **(120**           | **)**      | (108       | )          | **(409**   | **)**      | (399 | ) |
|                                             |         | ** **           | ** **   |                 |       | ** **         | ** ** |       |       | ** ** | ** ** |   |   |
| Unrecognized prior service cost                  |         | **30**               | ** **   | 36                   |       | **19**             | ** ** | 13         |       | **(2**     | **)**      | — |   |
| Unrecognized net actuarial loss                  |         | **304**              | ** **   | 256                  |       | **38**             | ** ** | 43         |       | **189**    | ** ** | 176 |   |
| Unrecognized net transition (asset) obligation   |         | **—**           | ** **   | (1                   | )          | **—**         | ** ** | **—** |       | **4**      | ** ** | 27 |   |
| Employer contribution                            |         | **—**           | ** **   | **—**           |       | **2**              | ** ** | **—** |       | **5**      | ** ** | **—** |   |
|                                             |         | ** **           | ** **   |                 |       | ** **         | ** ** |       |       | ** ** | ** ** |   |   |
| Accrued benefit cost at December 31              |         | **$**                | **(223**     | **)**                | $          | (290               | )          | **$**      | **(61**    | **)**      | $          | (52 | ) | **$** | **(213** | **)** | $ | (196 | ) |
|                                             |         | ** **           | ** **   |                 |       | ** **         | ** ** |       |       | ** ** | ** ** |   |   |
| **Amounts recognized in balance sheets**         |         | ** **           | ** **   |                 |       | ** **         | ** ** |       |       | ** ** | ** ** |   |   |
|                                             |         | ** **           | ** **   |                 |       | ** **         | ** ** |       |       | ** ** | ** ** |   |   |
| Accrued benefit liability                        |         | **$**                | **(366**     | **)**                | $          | (366               | )          | **$**      | **(109**   | **)**      | $          | (101 | ) | **$** | **(213** | **)** | $ | (196 | ) |
| Intangible asset                                 |         | **30**               | ** **   | 22                   |       | **19**             | ** ** | 13         |       | **—** | ** ** | **—** |   |
| Accumulated other comprehensive income (pre-tax) |         | **113**              | ** **   | 54                   |       | **29**             | ** ** | 36         |       | **—** | ** ** | **—** |   |
|                                             |         | ** **           | ** **   |                 |       | ** **         | ** ** |       |       | ** ** | ** ** |   |   |
| Net recognized at end of period                  |         | **$**                | **(223**     | **)**                | $          | (290               | )          | **$**      | **(61**    | **)**      | $          | (52 | ) | **$** | **(213** | **)** | $ | (196 | ) |

----

(1)          For 2003, the Qualified Pension Benefitsincludes approximately $9 million of voluntary early retirement expenses inaccordance with Statement 88, as previously discussed.

 

The accumulated benefit obligation for thequalified defined benefit pension plans was approximately $1,387 million andapproximately $1,237 million for 2004 and 2003, respectively.  The accumulated benefit obligation for thenon-qualified defined benefit pension plans was approximately $111 million and$102 million for 2004 and 2003, respectively.

 

160

----

 

The weighted-average assumptions used todetermine benefit obligations were as follows:

 
| ** **                           | ** ** | **Qualified  Pension Benefits** | ** ** | **Non-Qualified Pension  Benefits** | ** ** | **Other  Postretirement   Benefits** | ** ** |
|--------------------------------------|------------|---------------------------------|------------|-------------------------------------|------------|--------------------------------------|------------|
| ** **                           | ** ** | **2004**                        | ** ** | **2003**                            | ** ** | **2004**                             | ** ** | **2003** | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                 |       |                            |       |                                |       |                                 |       |   |   |   |   |   |   |
| Discount rate                        | ** ** | **6.25**                        | **%**      | 6.25                                | %          | **6.25**                             | **%**      | 6.25 | % | **5.75** | **%** | 6.25 | % |
| Rate of future compensation increase |       | **4.00**                        | ** ** | 4.00                                |       | **4.00**                             | ** ** | 4.00 |   | **N/A** | ** ** | N/A |   |

 

The weighted-average assumptions used todetermine net periodic benefit cost for the years ended December 31, 2004,2003, and 2002 were as follows:

 
| ** **                            | ** ** | **Qualified Pension Benefits** | ** ** | **Non-Qualified Pension Benefits** | ** ** | **Other Postretirement Benefits** | ** ** |
|---------------------------------------|------------|--------------------------------|------------|------------------------------------|------------|-----------------------------------|------------|
| ** **                            | ** ** | **2004**                       | ** ** | **2003**                           | ** ** | **2002**                          | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|                                  |       |                           |       |                               |       |                              |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Discount rate                         |       | **6.25**                       | **%**      | 6.75                               | %          | 7.50                              | %          | **6.25** | **%** | 6.75 | % | 7.50 | % | **6.25** | **%** | 6.75 | % | 7.50 | % |
| Expected return on plans’ assets |       | **8.50**                       | ** ** | 9.00                               |       | 9.25                              |       | **N/A** | ** ** | N/A |   | N/A |   | **N/A** | ** ** | N/A |   | 3.00 |   |
| Rate of future compensation increase  |       | **4.00**                       | ** ** | 4.00                               |       | 4.00                              |       | **4.00** | ** ** | 4.00 |   | 4.00 |   | **N/A** | ** ** | N/A |   | N/A |   |

 

The calculation of **Cinergy’s**expected long-term rate of return is a two-step process.  Capital market assumptions (e.g., forecasts)are first developed for various asset classes based on underlying fundamentaland economic drivers of performance. Such drivers for equity and debt instruments include profit margins,dividend yields, and interest paid for use of capital.  Risk premiums for each asset class are thendeveloped based on factors such as expected illiquidity, credit spreads,inflation uncertainty and country/currency risk.  Current valuation factors such as presentinterest and inflation rate levels underpin this process.

 

The assumptions are then modeled via aprobability based multi-factor capital market methodology.  Through this modeling process, a range ofpossible 10-year annualized returns are generated for each strategic assetclass.  Those returns falling at the 50thpercentile are utilized in the calculation of **Cinergy’s**expected long-term rate of return.

 

The assumed health care cost trend rates wereas follows:

 
| ** **                                                                         | ** ** | **2004**   | ** ** | **2003**   | ** ** |
|------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| ** **                                                                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Health care cost trend rate assumed for next year                                  | ** ** | **8.00**   | **%**      | 9.00       | %          |
| Rate to which the cost trend rate is assumed to decline (the ultimate  trend rate) | ** ** | **5.00**   | **%**      | 5.00       | %          |
| Year that the rate reaches the ultimate trend rate                                 |       | **2008**   | ** ** | 2008       |       |

 

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

 
| ** **                                              | ** **   | **One-Percentage- Point Increase** | ** **   | **One-Percentage- Point Decrease** | ** ** |
|---------------------------------------------------------|--------------|------------------------------------|--------------|------------------------------------|------------|
| *** ***                                            | *** *** | **(in millions)**                  | *** *** |
| * *                                                | * *     | * *                           | * *     | * *                           | * *   |
| Effect on total of service and interest cost components |         | $                                  | 4            |                               | $          | (3 | ) |
| Effect on APBO                                          |         | 48                                 |         | (43                                | )          |
|                                                         |              |                                    |              |                                    |            |  |  |

 

On December 8, 2003, President Bush signedinto law the Medicare Prescription Drug, Improvement and Modernization Act of2003 (the Act).  The Act introduced aprescription drug benefit to retirees as well as a federal subsidy to sponsorsof retiree health care benefit plans that provide a prescription drug benefitthat is actuarially equivalent to the benefit provided by Medicare.  We believe that our coverage for prescriptiondrugs is at least

 

161

----

 

actuarially equivalent to the benefitsprovided by Medicare for most current retirees because our benefits for thatgroup substantially exceed the benefits provided by Medicare, thereby allowingus to qualify for the subsidy.  We haveaccounted for the subsidy as a reduction of our APBO.  The APBO was reduced by approximately $17million and will be amortized as an actuarial gain over future periods, thusreducing future benefit costs.  Theimpact on our 2004 net periodic benefit cost was not material.  Our accounting treatment for the subsidy isconsistent with FASB Staff Position No. 106-2, *Accountingand Disclosure Requirements Related to the Medicare Prescription Drug,Improvement and Modernization Act of 2003*.

 

In January 2004, **Cinergy** announced to employees the creation of a new retireeHealth Reimbursement Account (HRA) option, which will impact the postretirementhealthcare benefits provided by **Cinergy**.  HRAs are bookkeeping accounts that can beused to pay for qualified medical expenses after retirement.  The majority of employees had the opportunityduring the Fall of 2004 to make a one-time election to remain in **Cinergy’s** current retiree healthcareprogram or to move to the new HRA option. Approximately 40 percent of **Cinergy’s**employees elected the new HRA option. The HRA option has no effect on current retirees receivingpostretirement benefits from **Cinergy**.  As is the case under the current retireehealth program, employees who participate in the HRA option, generally, willbecome eligible to receive their HRA benefit only upon retirement on or afterthe age of 50 with at least five years of service.  We expect that the impact of the new HRAoption will not be material to our other postretirement benefit costs.

 

162

----

 

**10.**       Income Taxes

The following table showsthe significant components of **Cinergy’s**,**CG&E’s**, **PSI’s**, and **ULH&P’s** netdeferred income tax liabilities as of December 31:

 
| ** **                                              | ** **   | **Cinergy(1)**    | ** **   | **CG&E**and subsidiaries | ** ** | **PSI**    | ** ** | **ULH&P** | ** ** |
|---------------------------------------------------------|--------------|-------------------|--------------|------------------------------|------------|------------|------------|---------------|------------|
| ** **                                              | ** **   | **2004**          | ** **   | **2003**                     | ** ** | **2004**   | ** ** | **2003**      | ** ** | **2004** | ** ** | **2003** | ** ** | **2004** | ** ** | **2003** | ** ** |
| *** ***                                            | *** *** | **(in millions)** | *** *** |
| * *                                                | * *     | * *          | * *     | * *                     | * *   | * *   | * *   | * *      | * *   | * * | * * | * * | * * | * * | * * | * * | * * |
| **Deferred Income Tax Liability**                       |         |              |         |                         |       |       |       |          |       |   |   |   |   |   |   |   |   |
| Property, plant, and  equipment                         |         | **$**             | **1,706**    | ** **                   | $          | 1,525      |       | **$**         | **971**    | ** ** | $ | 879 |   | **$** | **656** | ** ** | $ | 569 |   | **$** | **63** | ** ** | $ | 50 |   |
| Unamortized costs of  reacquiring debt                  |         | **15**            | ** **   | 16                           |       | **6**      | ** ** | 6             |       | **9** | ** ** | 10 |   | **—** | ** ** | — |   |
| Deferred operating  expenses and carrying costs         |         | **—**        | ** **   | 2                            |       | **—** | ** ** | 1             |       | **—** | ** ** | — |   | **—** | ** ** | — |   |
| Purchased power tracker                                 |         | **4**             | ** **   | 4                            |       | **—** | ** ** | —        |       | **4** | ** ** | 4 |   | **—** | ** ** | — |   |
| RTC                                                     |         | **194**           | ** **   | 204                          |       | **194**    | ** ** | 204           |       | **—** | ** ** | — |   | **—** | ** ** | — |   |
| Net energy risk management  assets                      |         | **51**            | ** **   | 10                           |       | **5**      | ** ** | 10            |       | **—** | ** ** | — |   | **—** | ** ** | — |   |
| Amounts due from  customers-income taxes                |         | **39**            | ** **   | 47                           |       | **28**     | ** ** | 26            |       | **11** | ** ** | 22 |   | **2** | ** ** | 4 |   |
| Gasification services  agreement buyout costs           |         | **86**            | ** **   | 86                           |       | **—** | ** ** | —        |       | **86** | ** ** | 86 |   | **—** | ** ** | — |   |
| Other                                                   |         | **32**            | ** **   | 24                           |       | **19**     | ** ** | 15            |       | **7** | ** ** | — |   | **—** | ** ** | 11 |   |
|                                                    |         | ** **        | ** **   |                         |       | ** ** | ** ** |          |       | ** ** | ** ** |   |   | ** ** | ** ** |   |   |
| **Total Deferred Income Tax  Liability**                |         | **2,127**         | ** **   | 1,918                        |       | **1,223**  | ** ** | 1,141         |       | **773** | ** ** | 691 |   | **65** | ** ** | 65 |   |
|                                                    |         | ** **        | ** **   |                         |       | ** ** | ** ** |          |       | ** ** | ** ** |   |   | ** ** | ** ** |   |   |
| **Deferred Income Tax Asset**                           |         | ** **        | ** **   |                         |       | ** ** | ** ** |          |       | ** ** | ** ** |   |   | ** ** | ** ** |   |   |
| Unamortized investment tax  credits                     |         | **39**            | ** **   | 39                           |       | **29**     | ** ** | 30            |       | **11** | ** ** | 9 |   | **1** | ** ** | 1 |   |
| Accrued pension and other  postretirement benefit costs |         | **222**           | ** **   | 195                          |       | **60**     | ** ** | 98            |       | **65** | ** ** | 58 |   | **5** | ** ** | 4 |   |
| Net energy risk management  liabilities                 |         | **28**            | ** **   | 9                            |       | **—** | ** ** | —        |       | **28** | ** ** | 9 |   | **—** | ** ** | — |   |
| Deferred operating  expenses and carrying costs         |         | **26**            | ** **   | —                       |       | **9**      | ** ** | —        |       | **—** | ** ** | — |   | **—** | ** ** | — |   |
| Rural Utilities Service  obligation                     |         | **27**            | ** **   | 28                           |       | **—** | ** ** | —        |       | **27** | ** ** | 28 |   | **—** | ** ** | — |   |
| Tax credit carryovers                                   |         | **121**           | ** **   | 47                           |       | **—** | ** ** | —        |       | **—** | ** ** | — |   | **—** | ** ** | — |   |
| Other                                                   |         | **67**            | ** **   | 42                           |       | **34**     | ** ** | 28            |       | **4** | ** ** | 13 |   | **1** | ** ** | 5 |   |
|                                                    |         | ** **        | ** **   |                         |       | ** ** | ** ** |          |       | ** ** | ** ** |   |   | ** ** | ** ** |   |   |
| **Total Deferred Income Tax Asset**                     |         | **530**           | ** **   | 360                          |       | **132**    | ** ** | 156           |       | **135** | ** ** | 117 |   | **7** | ** ** | 10 |   |
|                                                    |         | ** **        | ** **   |                         |       | ** ** | ** ** |          |       | ** ** | ** ** |   |   | ** ** | ** ** |   |   |
| **Net Deferred Income Tax  Liability**                  |         | **$**             | **1,597**    | ** **                   | $          | 1,558      |       | **$**         | **1,091**  | ** ** | $ | 985 |   | **$** | **638** | ** ** | $ | 574 |   | **$** | **58** | ** ** | $ | 55 |   |
|                                                         |              |                   |              |                              |            |            |            |               |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

----

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

** **

**Cinergy** and itssubsidiaries file a consolidated federal income tax return andcombined/consolidated state and local tax returns in certainjurisdictions.  **Cinergy** and its subsidiaries have an incometax allocation agreement, which conforms to the requirements of the PUHCA.  The corporate taxable income method is usedto allocate tax benefits to the subsidiaries whose investments or results ofoperations provide those tax benefits. Any tax liability not directly attributable to a specific subsidiary isallocated proportionately among the subsidiaries as required by the agreement.

 

163

----

 

The following table summarizes federal andstate income taxes charged (credited) to income for **Cinergy**, **CG&E**,**PSI**, and **ULH&P**:

 

| ** **                                                          | ** **   | **Cinergy(1)**    | ** **   | **CG&E** and subsidiaries | ** ** | **PSI**    | ** ** | **ULH&P** | ** ** |
|---------------------------------------------------------------------|--------------|-------------------|--------------|-------------------------------|------------|------------|------------|---------------|------------|
| ** **                                                          | ** **   | **2004**          | ** **   | **2003**                      | ** ** | **2002**   | ** ** | **2004**      | ** ** | **2003** | ** ** | **2002** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| *** ***                                                        | *** *** | **(in millions)** | *** *** |
| * *                                                            | * *     | * *          | * *     | * *                      | * *   | * *   | * *   | * *      | * *   | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * |
| **Current Income Taxes**                                            |         | ** **        | ** **   |                          |       |       |       |          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Federal                                                             |         | **$**             | **78**       | ** **                    | $          | 34         |       | $             | 16         |   | **$** | **88** | ** ** | $ | 84 |   | $ | 50 |   | **$** | **52** | ** ** | $ | 45 |   | $ | 71 |   | **$** | **3** | ** ** | $ | 1 |   | $ | 3 |   |
| State                                                               |         | **30**            | ** **   | 25                            |       | (4         | )          | **17**        | ** ** | 12 |   | 1 |   | **11** | ** ** | 17 |   | 10 |   | **—** | ** ** | 1 |   | 6 |   |
| **Total Current Income Taxes**                                      |         | **108**           | ** **   | 59                            |       | 12         |       | **105**       | ** ** | 96 |   | 51 |   | **63** | ** ** | 62 |   | 81 |   | **3** | ** ** | 2 |   | 9 |   |
|                                                                |         | ** **        | ** **   |                          |       |       |       | ** **    | ** ** |   |   |   |   | ** ** | ** ** |   |   |   |   | ** ** | ** ** |   |   |   |   |
| **Deferred Income Taxes**                                           |         | ** **        | ** **   |                          |       |       |       | ** **    | ** ** |   |   |   |   | ** ** | ** ** |   |   |   |   | ** ** | ** ** |   |   |   |   |
| Federal                                                             |         | ** **        | ** **   |                          |       |       |       | ** **    | ** ** |   |   |   |   | ** ** | ** ** |   |   |   |   | ** ** | ** ** |   |   |   |   |
| Depreciation and other property, plant, and equipment-related items |         | **126**           | ** **   | 130                           |       | 172        |       | **76**        | ** ** | 74 |   | 74 |   | **61** | ** ** | 41 |   | 80 |   | **7** | ** ** | 8 |   | 3 |   |
| Pension and other postretirement benefit costs                      |         | **(29**           | **)**        | 23                            |       | (17        | )          | **—**    | ** ** | 10 |   | (5 | ) | **(14** | **)** | 7 |   | (7 | ) | **—** | ** ** | **—** |   | **—** |   |
| Unrealized energy risk management transactions                      |         | **26**            | ** **   | 6                             |       | 9          |       | **13**        | ** ** | 5 |   | 2 |   | **1** | ** ** | 1 |   | (3 | ) | **—** | ** ** | **—** |   | **—** |   |
| Fuel costs                                                          |         | **(48**           | **)**        | 7                             |       | (23        | )          | **(27**       | **)**      | 5 |   | 9 |   | **(21** | **)** | 3 |   | (32 | ) | **(1** | **)** | **—** |   | (1 | ) |
| Purchased power tracker                                             |         | **4**             | ** **   | (5                            | )          | 2          |       | **5**         | ** ** | **—** |   | **—** |   | **(1** | **)** | (7 | ) | 2 |   | **—** | ** ** | **—** |   | **—** |   |
| Gasification services agreement buyout costs                        |         | **—**        | ** **   | (3                            | )          | (3         | )          | **—**    | ** ** | **—** |   | **—** |   | **—** | ** ** | (3 | ) | (3 | ) | **—** | ** ** | **—** |   | **—** |   |
| Tax credit carryovers                                               |         | **(74**           | **)**        | (47                           | )          | **—** |       | **—**    | ** ** | **—** |   | **—** |   | **—** | ** ** | **—** |   | **—** |   | **—** | ** ** | **—** |   | **—** |   |
| Other-net                                                           |         | **3**             | ** **   | (40                           | )          | (14        | )          | **(7**        | **)**      | (20 | ) | 8 |   | **13** | ** ** | (8 | ) | (8 | ) | **—** | ** ** | (2 | ) | 1 |   |
|                                                                |         | ** **        | ** **   |                          |       |       |       | ** **    | ** ** |   |   |   |   | ** ** | ** ** |   |   |   |   | ** ** | ** ** |   |   |   |   |
| **Total Deferred Federal Income Taxes**                             |         | **8**             | ** **   | 71                            |       | 126        |       | **60**        | ** ** | 74 |   | 88 |   | **39** | ** ** | 34 |   | 29 |   | **6** | ** ** | 6 |   | 3 |   |
|                                                                |         | ** **        | ** **   |                          |       |       |       | ** **    | ** ** |   |   |   |   | ** ** | ** ** |   |   |   |   | ** ** | ** ** |   |   |   |   |
| State                                                               |         | **(4**            | **)**        | 22                            |       | 30         |       | **(1**        | **)**      | 13 |   | 21 |   | **13** | ** ** | 8 |   | 8 |   | **1** | ** ** | 2 |   | **—** |   |
|                                                                |         | ** **        | ** **   |                          |       |       |       | ** **    | ** ** |   |   |   |   | ** ** | ** ** |   |   |   |   | ** ** | ** ** |   |   |   |   |
| **Total Deferred Income Taxes**                                     |         | **4**             | ** **   | 93                            |       | 156        |       | **59**        | ** ** | 87 |   | 109 |   | **52** | ** ** | 42 |   | 37 |   | **7** | ** ** | 8 |   | 3 |   |
|                                                                |         | ** **        | ** **   |                          |       |       |       | ** **    | ** ** |   |   |   |   | ** ** | ** ** |   |   |   |   | ** ** | ** ** |   |   |   |   |
| **Investment Tax Credits-Net**                                      |         | **(8**            | **)**        | (8                            | )          | (8         | )          | **(5**        | **)**      | (5 | ) | (5 | ) | **(3** | **)** | (3 | ) | (3 | ) | **—** | ** ** | **—** |   | **—** |   |
|                                                                |         | ** **        | ** **   |                          |       |       |       | ** **    | ** ** |   |   |   |   | ** ** | ** ** |   |   |   |   | ** ** | ** ** |   |   |   |   |
| **Total Income Taxes**                                              |         | **$**             | **104**      | ** **                    | $          | 144        |       | $             | 160        |   | **$** | **159** | ** ** | $ | 178 |   | $ | 155 |   | **$** | **112** | ** ** | $ | 101 |   | $ | 115 |   | **$** | **10** | ** ** | $ | 10 |   | $ | 12 |   |

----

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

 

Internal Revenue Code (IRC) Section 29provides a tax credit (nonconventional fuel source credit) for qualified fuelsproduced and sold by a taxpayer to an unrelated person during the taxableyear.  The nonconventional fuel sourcecredit reduced current federal income tax expense approximately $98 million,$84 million, and $42 million for 2004, 2003, and 2002, respectively.  See Note 11(c)(*iv*)for further information on this tax credit.

 

164

----

 

The following table presents a reconciliationof federal income taxes (which are calculated by multiplying the statutoryfederal income tax rate by book income before federal income tax) to thefederal income tax expense reported in the Statements of Income for **Cinergy**, **CG&E**,**PSI**, and **ULH&P**.

 
| ** **                                                                 | ** **   | **Cinergy(1)**    | ** **   | **CG&E** and subsidiaries | ** ** | **PSI**    | ** ** | **ULH&P** | ** ** |
|----------------------------------------------------------------------------|--------------|-------------------|--------------|-------------------------------|------------|------------|------------|---------------|------------|
| ** **                                                                 | ** **   | **2004**          | ** **   | **2003**                      | ** ** | **2002**   | ** ** | **2004**      | ** ** | **2003** | ** ** | **2002** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| *** ***                                                               | *** *** | **(in millions)** | *** *** |
| * *                                                                   | * *     | * *          | * *     | * *                      | * *   | * *   | * *   | * *      | * *   | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * |
| Statutory federal income tax provision                                     |         | **$**             | **167**      | ** **                    | $          | 186        |       | $             | 186        |   | **$** | **140** | ** ** | $ | 158 |   | $ | 139 |   | **$** | **89** | ** ** | $ | 73 |   | $ | 109 |   | **$** | **9** | ** ** | $ | 9 |   | $ | 6 |   |
| Increases (reductions) in taxes resulting from:                            |         | ** **        | ** **   |                          |       |       |       | ** **    | ** ** |   |   |   |   | ** ** | ** ** |   |   |   |   | ** ** | ** ** |   |   |   |   |
| Amortization of investment tax credits                                     |         | **(8**            | **)**        | (8                            | )          | (8         | )          | **(5**        | **)**      | (5 | ) | (5 | ) | **(3** | **)** | (3 | ) | (3 | ) | **—** | ** ** | **—** |   | **—** |   |
| Depreciation and other property, plant, and equipment-related  differences |         | **8**             | ** **   | 4                             |       | **—** |       | **4**         | ** ** | 1 |   | 1 |   | **4** | ** ** | 4 |   | (1 | ) | **—** | ** ** | (2 | ) | **—** |   |
| Preferred dividend requirements of subsidiaries                            |         | **1**             | ** **   | 1                             |       | 1          |       | **—**    | ** ** | **—** |   | **—** |   | **—** | ** ** | **—** |   | **—** |   | **—** | ** ** | **—** |   | **—** |   |
| Income tax credits                                                         |         | **(97**           | **)**        | (84                           | )          | (42        | )          | **—**    | ** ** | **—** |   | **—** |   | **—** | ** ** | **—** |   | **—** |   | **—** | ** ** | **—** |   | **—** |   |
| Foreign tax adjustments                                                    |         | **4**             | ** **   | 5                             |       | 3          |       | **—**    | ** ** | **—** |   | **—** |   | **—** | ** ** | **—** |   | **—** |   | **—** | ** ** | **—** |   | **—** |   |
| Employee SOP dividend                                                      |         | **(7**            | **)**        | (6                            | )          | (3         | )          | **—**    | ** ** | **—** |   | **—** |   | **—** | ** ** | **—** |   | **—** |   | **—** | ** ** | **—** |   | **—** |   |
| Other-net                                                                  |         | **10**            | ** **   | (1                            | )          | (3         | )          | **4**         | ** ** | (1 | ) | (2 | ) | **(2** | **)** | 2 |   | (8 | ) | **—** | ** ** | **—** |   | **—** |   |
|                                                                       |         | ** **        | ** **   |                          |       |       |       | ** **    | ** ** |   |   |   |   | ** ** | ** ** |   |   |   |   | ** ** | ** ** |   |   |   |   |
| **Federal Income Tax Expense**                                             |         | **$**             | **78**       | ** **                    | $          | 97         |       | $             | 134        |   | **$** | **143** | ** ** | $ | 153 |   | $ | 133 |   | **$** | **88** | ** ** | $ | 76 |   | $ | 97 |   | **$** | **9** | ** ** | $ | 7 |   | $ | 6 |   |

----

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

 

165

----

 

**11.**       Commitments andContingencies

***(a)***                                  Environmental

*(i)   OzoneTransport Rulemakings*

In October 1998, the United StatesEnvironmental Protection Agency (EPA) finalized its ozone transport rule, alsoknown as the nitrogen oxides (NOX) State Implementation Plan (SIP)Call, which addresses wind-blown ozone and ozone precursors that impact airquality in downwind states.  The EPA’sfinal rule, which applies to 22 states in the eastern United States includingthe three states in which our electric utilities operate, required states todevelop rules to reduce NOX emissions from utility and industrialsources.  In a related matter, inresponse to petitions filed by several states alleging air quality impacts fromupwind sources located in other states, the EPA issued a rule pursuant toSection 126 of the Clean Air Act (CAA) that required reductions similar tothose required under the NOX SIP Call.  Various states and industry groups challengedthe final rules in the Court of Appeals for the District of Columbia Circuit,but the court upheld the key provisions of the rules.

 

The EPA has proposed withdrawal of the Section126 rule in states with approved rules under the final NOX SIP Call,which includes Indiana, Kentucky, and Ohio. All three states have adopted a cap and trade program as the mechanismto achieve the required reductions.  **Cinergy**, **CG&E**, and **PSI** have installed selective catalyticreduction units (SCR) and other pollution controls and implemented certaincombustion improvements at various generating stations to comply with the NOXSIP Call.  **Cinergy** also utilizes the NOX emission allowancemarket to buy or sell NOX emission allowances as appropriate.  We currently estimate that we will incurcapital costs of approximately $23 million in addition to $777 million alreadyincurred to comply with this program.

 

*(ii)  Section 126Petitions*

In March 2004, the state of North Carolinafiled a petition under Section 126 of the CAA in which it alleges that sourcesin 13 upwind states including Ohio, Indiana, and Kentucky, significantlycontribute to North Carolina’s non-attainment with certain ambient air qualitystandards.  Depending on the EPA’s finaldisposition of the pending petition and its proposal discussed previously, **Cinergy’s** generating stations could becomesubject to requirements for additional sulfur dioxide (SO2) and NOXemissions reductions.  We expect adecision from the EPA on this matter by August 2005.  It is unclear at this time whether anyadditional reductions would be necessary beyond those required under the CAA.

 

*(iii) Clean AirAct Lawsuit*

InNovember 1999, and through subsequent amendments, the United States brought alawsuit in the United States Federal District Court for the Southern Districtof Indiana (District Court) against **Cinergy**,**CG&E**, and **PSI** alleging various violations of theCAA.  Specifically, the lawsuit allegesthat we violated the CAA by not obtaining Prevention of SignificantDeterioration (PSD), Non-Attainment New Source Review (NSR), and Ohio andIndiana SIP permits for various projects at our owned and co-owned generatingstations.  Additionally, the suit claimsthat we violated an Administrative Consent Order entered into in 1998 betweenthe EPA and **Cinergy** relating toalleged violations of Ohio’s SIP provisions governing particulate matter atUnit 1 at **CG&E’s** W.C. BeckjordGenerating Station (Beckjord Station). The suit seeks (1) injunctive relief to require installation ofpollution control technology on various generating units at **CG&E’s** Beckjord Station and Miami FortStation, and **PSI’s** CayugaGenerating Station, Gallagher Generating Station, Wabash River Generating Station,and Gibson Generating Station (Gibson Station), and (2) civil penalties inamounts of up to $27,500 per day for each violation.  In addition, three northeast states and twoenvironmental groups have intervened in the case.  The case is currently in discovery, and theDistrict Court has set the case for trial by jury commencing in February 2006.

 

InMarch 2000, the United States also filed in the District Court an amendedcomplaint in a separate lawsuit alleging violations of the CAA relating to PSD,NSR, and Ohio SIP requirements regarding various generating stations, includinga generating station operated by Columbus Southern Power Company (CSP) andjointly-owned by CSP, The Dayton Power and Light Company (DP&L), and **CG&E**. The EPA is seeking injunctive relief and civil penalties of up to$27,500 per day for each violation.  Thissuit is being defended by CSP.  In April2001, the District Court in that case ruled that the Government and theintervening plaintiff environmental groups cannot seek

 

166

----

 

monetarydamages for alleged violations that occurred prior to November 3, 1994;however, they are entitled to seek injunctive relief for such allegedviolations.  Neither party appealed thatdecision.

 

Inaddition, **Cinergy** and **CG&E** have been informed by DP&Lthat in June 2000, the EPA issued a Notice of Violation (NOV) to DP&L foralleged violations of PSD, NSR, and Ohio SIP requirements at a generatingstation operated by DP&L and jointly-owned by **CG&E**.  The NOVindicated the EPA may (1) issue an order requiring compliance with therequirements of the Ohio SIP, or (2) bring a civil action seeking injunctiverelief and civil penalties of up to $27,500 per day for each violation.  In September 2004, Marilyn Wall and theSierra Club brought a lawsuit against **Cinergy**,DP&L and CSP for alleged violations of the CAA at this same generatingstation.

 

Weare unable to predict whether resolution of these matters would have a materialeffect on our financial position or results of operations.  We intend to vigorously defend against theseallegations.

 

*(iv) CarbonDioxide (CO2*) Lawsuit

In July 2004, the states of Connecticut, NewYork, California, Iowa, New Jersey, Rhode Island, Vermont, Wisconsin, and theCity of New York brought a lawsuit in the United States District Court for theSouthern District of New York against **Cinergy**, American Electric Power Company,Inc., American Electric Power Service Corporation, The Southern Company,Tennessee Valley Authority, and Xcel Energy Inc.  That same day, a similar lawsuit was filed inthe United States District Court for the Southern District of New York againstthe same companies by Open Space Institute, Inc., Open Space Conservancy, Inc.,and The Audubon Society of New Hampshire. These lawsuits allege that the defendants’ emissions of CO2from the combustion of fossil fuels at electric generating facilitiescontribute to global warming and amount to a public nuisance.  The complaints also allege that thedefendants could generate the same amount of electricity while emittingsignificantly less CO2. Plaintiffs are seeking an injunction requiring each defendant to cap itsCO2 emissions and then reduce them by a specified percentage eachyear for at least a decade.  **Cinergy** intends to defend these lawsuitsvigorously in court and filed motions to dismiss with the other defendants inSeptember 2004.  We are not able topredict whether resolution of these matters would have a material effect on ourfinancial position or results of operations.

 

*(v)   SelectiveCatalytic Reduction Units at Gibson Generating Station*

In May 2004, SCRs and other pollution controlequipment became operational at Units 4 and 5 of **PSI’s** Gibson Station in accordance with compliance deadlinesunder the NOX SIP Call.  InJune and July 2004, Gibson Station temporarily shut down the equipment on theseunits due to a concern over an acid aerosol mist haze (plume) sometimesoccurring in areas near the plant. Portions of the plume from those units’ stacks appeared to break apartand descend to ground level at certain times under certain weatherconditions.  As a result, and, workingwith the City of Mt. Carmel, Illinois, Illinois EPA, Indiana Department ofEnvironmental Management (IDEM), EPA, and the State of Illinois, we developed aprotocol regarding the use of the SCRs while we explored alternatives toaddress this issue.  After the protocolwas finalized, the Illinois Attorney General brought an action in Wabash CountyCircuit Court against **PSI** seeking apreliminary injunction to enforce the protocol. In August 2004, the court granted that preliminary injunction.  **PSI** isappealing that decision to the Fifth District Appellate Court, but we cannotpredict the ultimate outcome of that appeal or of the underlying action by theIllinois Attorney General.

 

We will seek recovery of any related capitalas well as increased emission allowance expenditures through the regulatoryprocess.  We do not believe costs related to resolving this matterwill have a material impact on our financial position or results of operations.

 

*(vi) ZimmerGenerating Station (Zimmer Station) Lawsuit*

In November 2004, a citizen of the Village ofMoscow, Ohio, the town adjacent to **CG&E’s**Zimmer Station, brought a purported class action in the United States DistrictCourt for the Southern District of Ohio seeking monetary damages and injunctiverelief against **CG&E** for alleged violations ofthe CAA, the Ohio SIP, Ohio laws against nuisance and common lawnuisance.  **CG&E** filed a motion to dismissthe lawsuit on primarily procedural grounds and we intend to defend againstthese claims vigorously.  At this time, we cannot predict whether theoutcome of this matter will have a material impact on our financial position orresult of operations.

 

167

----

 

*(vii)        ManufacturedGas Plant (MGP) Sites*

Coal tar residues, relatedhydrocarbons, and various metals have been found in at least 22 sites that **PSI** or its predecessors previously ownedand sold in a series of transactions with Northern Indiana Public ServiceCompany (NIPSCO) and Indiana Gas Company, Inc. (IGC).  The 22 sites are in the process of beingstudied and will be remediated, if necessary. In 1998 NIPSCO, IGC, and **PSI**entered into Site Participation and Cost Sharing Agreements to allocateliability and responsibilities between them. The IDEM oversees investigation and cleanup of all of these sites.  Thus far, **PSI**has primary responsibility for investigating, monitoring and, if necessary,remediating nine of these sites.  InDecember 2003, **PSI** entered into avoluntary remediation plan with the state of Indiana, providing a formalframework for the investigation and cleanup of the sites.

 

In April 1998, **PSI** filed suit in Hendricks County in thestate of Indiana against its general liability insurance carriers.  **PSI**sought a declaratory judgment to obligate its insurance carriers to (1) defendMGP claims against **PSI** andcompensate **PSI** for its costs ofinvestigating, preventing, mitigating, and remediating damage to property andpaying claims related to MGP sites; or (2) pay **PSI’s** cost of defense. The trial court issued a variety of rulings with respect to the claimsand defenses in the litigation.  **PSI**appealed certain adverse rulings to theIndiana Court of Appeals and the appellate court remanded the case to the trialcourt.  **PSI**settled its claims with all but one of the insurance carriers in January 2005prior to commencement of the trial.  Withrespect to the lone insurance carrier, a jury returned a verdict against **PSI** in February 2005. **PSI** is considering whether to appealthis decision.  At the present time, **PSI** cannot predict the outcome of this litigation if it wereto appeal the decision.

 

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

 

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

 

*(viii)       AsbestosClaims Litigation*

**CG&E** and **PSI** have been named as defendants orco-defendants in lawsuits related to asbestos at their electric generatingstations.  Currently, there areapproximately 100 pending lawsuits.  Inthese lawsuits, plaintiffs claim to have been exposed to asbestos-containingproducts in the course of their work at the **CG&E**and **PSI** generating stations.  The plaintiffs further claim that as the propertyowner of the generating stations,**CG&E**and **PSI** should be held liable fortheir injuries and illnesses based on an alleged duty to warn and protect themfrom any asbestos exposure.  A majorityof the 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.

 

Of these lawsuits, one case filed against **PSI** has been tried to verdict.  The jury returned a verdict against **PSI** in the amount of approximately $500,000on a negligence claim and a verdict for **PSI**on punitive damages.  **PSI** received an adverse ruling in itsinitial appeal of the negligence claim verdict, but the Indiana Supreme Courtaccepted the transfer of the case and heard oral argument in June 2004.  In addition, **PSI** has settled a number of other lawsuits for amounts, whichneither individually nor in the aggregate, are material to **PSI’s** financial position or results ofoperations.

 

At this time, **CG&E** and **PSI**arenot able to predict the ultimate outcome of these lawsuits or the impact on **CG&E’s** and **PSI’s** financial position or results of operations.

 

168

----

 

***(b)***                                  Regulatory

*(i)   PSI RetailElectric Rate Case*

In May 2004, the IURC issued an order approving**PSI’s**base retail electric rate case,and **PSI** implemented base retail electricrate changes to its tariffs.  Whencombined with revenue increases attributable to **PSI’s** environmental construction-work-in-progress trackingmechanism, the order results in an approximate $140 million increase in annualrevenues.  **PSI’s** original request for an approximate $180 million annualrevenue increase was reduced by approximately $20 million for a lower return onequity, approximately $15 million of assumed profits included in base ratesrelated to off-system sales (subject to future adjustment through a trackingmechanism and a 50/50 sharing agreement), and approximately $5 million ofadditional items.  The order authorizesfull recovery of all requested regulatory assets and an overall 7.3 percentreturn, including a 10.5 percent return on equity.  In addition, the IURC’s order provides **PSI** the continuation of a purchased powertracker and the establishment of new trackers for future NOXemission allowance costs and certain costs related to the Midwest IndependentTransmission System Operator, Inc. (Midwest ISO).

 

*(ii)  PSIEnvironmental Compliance Case*

In November 2004,******PSI**filed a compliance plan case with the IURCseeking approval of**PSI’s** plan forcomplying with pending SO2, NOX, and mercury emissionreduction requirements, including approval of cost recovery and an overall rateof return of eight percent related to certain projects.  **PSI** requestedapproval to recover the financing, depreciation, and operating and maintenancecosts, among others, related to approximately $1.08 billion in capital projectsdesigned to reduce emissions of SO2, NOX, and Mercury at **PSI’s** coal burning generating stations.  An evidentiary hearing is scheduled for April2005 and a final IURC Order is expected in the third quarter of 2005.

 

*(iii) CG&E Electric Rate Filings*

**CG&E** made multiplerate filings in 2003 with the PUCO seeking approval of **CG&E’s**methodology for establishing market-based rates for generation service at theend of the market development period and to recover investments made in thetransmission and distribution system. The PUCO requested in these proceedings that **CG&E** propose a RSP to mitigate the potential forsignificant rate increases when the market development (frozen rate) periodcomes to an end.  In January 2004, **CG&E**filed its proposed RSP.  In May 2004, **CG&E**enteredinto a settlement agreement with many of the parties to these proceedingsrequesting that the PUCO approve a modified version of the RSP.  In September 2004, the PUCO issued an orderseeking to modify several key provisions of this settlement and as a result ofthese modifications, **CG&E**fileda petition for rehearing in October 2004. The PUCO approved a modified version of the plan in November 2004, themajor features of which are as follows:

 

•                  **Provider of Last Resort (POLR) Charge:**  **CG&E** willbegin to collect a POLR charge from non-residential customers effective January1, 2005, and from residential customers effective January 1, 2006.  The POLR charge includes several discretecharges, the most significant being an annually adjusted component (AAC)intended to provide cost recovery primarily for environmental complianceexpenditures; an infrastructure maintenance fund charge (IMF) intended to provide compensationto **CG&E** for committing its physicalcapacity to meet its POLR obligation; and********a system reliability tracker (SRT) intended toprovide cost recovery for capacity purchases, purchased power, reservecapacity, and related market costs for purchases to meet capacity needs.  We anticipate the collection of the AAC andIMF will result in an approximate $36 million increase in revenues in 2005 andan additional $50 million in 2006.  TheSRT will be billed based on dollar-for-dollar costs incurred.  A portion of these charges are avoidable bycertain customers who switch to an alternative generation supplier.  Therefore, these estimates are subject tochange, depending on the level of switching that occurs in future periods.  In 2007 and 2008, **CG&E**could seek additional increases in the AAC component of the POLR based on **CG&E’s** actual net costs for the specified expenditures.

•                  **Generation Rates and Fuel Recovery: **A new rate has been established for generation service afterthe market development period ends.  Inaddition, a fuel cost recovery mechanism will be established to recover costsfor fuel, emission allowances, and certain purchased power costs, that exceedthe amount originally included in the rates frozen in the **CG&E** transition plan.  These new rates will apply to 

 

169

----

 

                        non-residentialcustomers beginning January 1, 2005 and to residential customers beginningJanuary 1, 2006.

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

•                  **Transmission Cost Recovery: **Transmissioncost recovery mechanisms will be established beginning January 1, 2005 fornon-residential customers and January 1, 2006 for residential customers.  The transmission cost recovery mechanismswill permit **CG&E** to recover Midwest ISOcharges, all FERC approved transmission costs, and all congestion costsallocable to retail ratepayers that are provided service by **CG&E**.

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

 

**CG&E** had also filedan electric distribution base rate case for residential and non-residentialcustomers to be effective January 1, 2005. Under the terms of the RSP described previously, **CG&E** withdrew this base rate case and,in February 2005, **CG&E** fileda new distribution base rate case with rates to become effective January 1,2006.  The requested amount of theincrease is approximately $78 million.

 

*(iv) ULH&PGas Rate Case*

In the second quarter of 2001, **ULH&P** filed a retail gas rate case with the KPSC requesting, among otherthings, recovery of costs associated with an accelerated gas main replacementprogram of up to $112 million over ten years. The costs would be recovered through a tracking mechanism for an initialthree year period, with the possibility of renewal up to ten years.  The tracking mechanism allows **ULH&P** to recover depreciation costs and rate of return annually over the lifeof the deferred assets.  Through December 31,2004, **ULH&P** has recovered approximately $5.1 millionunder this tracking mechanism.  TheKentucky Attorney General has appealed to the Franklin Circuit Court the KPSC’sapproval of the tracking mechanism and the new tracking mechanism rates.  At the present time, **ULH&P** cannotpredict the timing or outcome of this litigation.

 

In February 2005, **ULH&P**filed a gas base rate case with the KPSC.  **ULH&P** is requestingapproval to continue the tracking mechanism in addition to its request for a $14million increase in base rates, which is a seven percent increase in currentretail gas rates.

 

*(v)   GasDistribution Plant*

In June 2003, the PUCO approved an amendedsettlement agreement between **CG&E**and the PUCO Staff in a gas distribution safety case arising out of a gas leakat a service head-adapter (SHA) style riser on **CG&E’s** distribution system.  The amended settlement agreement required **CG&E** to expend a minimum of $700,000 toreplace SHA risers by December 31, 2003, and to file a comprehensive planaddressing all SHA risers on its distribution system.  **CG&E** fileda comprehensive plan with the PUCO in December 2004 providing for replacementof approximately 5,000 risers in 2005 with continued monitoringthereafter.  **CG&E**estimates the replacement cost of the approximately 5,000 SHA risers will notbe material.   At this time, **Cinergy**,**CG&E**,****and **ULH&P**cannotpredict the outcome of this matter.

 

***(c)***                                  Other

*(i)   GasCustomer Choice*

In January 2000,Investments sold Cinergy Resources, Inc. (Resources), a former subsidiary, toLicking Rural Electrification, Inc., doing business as The Energy Cooperative(Energy Cooperative).  In February 2001, **Cinergy**, **CG&E**, and Resources were namedas defendants 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 consolidated into one suit(Class-action).  In October 2001, **Cinergy**, **CG&E**,and Investments initiated litigation against Energy Cooperative requesting

 

170

----

 

indemnification byEnergy Cooperative for the claims asserted by former customers in theClass-action litigation (**Cinergy**lawsuit).

 

In March 2001, **Cinergy**, **CG&E**, and Investments werenamed as defendants in a lawsuit filed by Energy Cooperative and Resources(Energy Cooperative lawsuit).  Thislawsuit concerned any obligations or liabilities Investments may have had toEnergy Cooperative following its sale of Resources.  All three matters were settled in the secondquarter of 2004.  In the EnergyCooperative lawsuit, Energy Cooperative agreed to indemnify **Cinergy**,**CG&E**and Investmentsfor the claims asserted by the former residential customers in the Class-actionlitigation.  In exchange, **Cinergy**has agreed to settle claimsthat it brought in the **Cinergy******lawsuit.  The settlement received final court approvalin January 2005.  None of thesesettlements are material to **Cinergy’s**financialposition or results of operations.

 

*(ii)  EnergyMarket Investigations*

In July 2003, **Cinergy** received a subpoena from the Commodity Futures TradingCommission (CFTC).  The CFTC requestsought certain information regarding our trading activities, including pricereporting to energy industry publications for the period May 2000 throughJanuary 2001.  Based on our review ofthese matters, we terminated one employee and took disciplinary action on asecond employee.  In November 2004, wesettled this matter with the CFTC with a payment of $3 million.

 

In August 2003, **Cinergy**, along with Marketing & Trading and 37 othercompanies, were named as defendants in civil litigation filed as a purportedclass action on behalf of all persons who purchased and/or sold New YorkMercantile Exchange natural gas futures and options contracts between January1, 2000, and December 31, 2002.  Thecomplaint alleges that improper price reporting caused damages to theclass.  Two similar lawsuits havesubsequently been filed, and these three lawsuits have been consolidated forpretrial purposes.  Plaintiffs filed aconsolidated class action complaint in January 2004.  **Cinergy’s**motion to dismiss was granted in September 2004 leaving only Marketing &Trading in the lawsuit.  We believe thisaction against Marketing & Trading is without merit and intend to defendthis lawsuit vigorously.

 

In the second quarter of 2003, **Cinergy** received initial and follow-upthird-party subpoenas from the SEC requesting information related to particulartrading activity with one of its counterparties who was the target of aninvestigation by the SEC.  **Cinergy** fully cooperated with the SEC inconnection with this matter and has received no further requests since thesecond quarter of 2003.

 

From time to time, **Cinergy**receivessubpoenas regarding investigations into energy market practices that variousAssistant United States Attorneys are conducting.  We understand that we are neither a targetnor into energy market practices are we under investigation by the Departmentof Justice in relation to any of these communications.

 

At this time, we do not believe the outcomeof these investigations and litigation will have a material impact on **Cinergy’s** financial position or results ofoperations.

 

*(iii) Patents*

Ronald A. Katz Technology Licensing, L.P.(RAKTL) has offered us a license to a portfolio of patents claiming that thepatents may be infringed by certain products and services utilized by us.  The patents purportedly relate to variousaspects of telephone call processing in **Cinergy**call centers.  As of thisdate, no legal proceedings have been instituted against us, but if the RAKTLpatents are valid, enforceable, and apply to our business, we could be requiredto seek a license from RAKTL or to discontinue certain activities.  Based on the information we have at thistime, we do not believe resolution of this matter will have a material impacton our financial position or results of operations.

 

*(iv) SyntheticFuel Production*

In July 2002, Capital & Trading acquireda coal-based synthetic fuel production facility.  The synthetic fuel produced at this facilityqualifies for tax credits (through 2007) in accordance with IRC Section 29 ifcertain

 

171

----

 

requirements are satisfied.  The three key requirements are that (a) thesynthetic fuel differs significantly in chemical composition from the coal usedto produce such synthetic fuel, (b) the fuel produced is sold to an unrelatedentity and (c) the fuel was produced from a facility that was placed in servicebefore July 1, 1998.

 

During the third quarter of 2004, severalunrelated entities announced that the IRS had or threatened to challenge theplaced in service dates of some of the entities’ synthetic fuel plants.  A successful IRS challenge could result indisallowance of all credits previously claimed for fuel produced by the subjectplants.  **Cinergy’s**sale of synthetic fuel has generated approximately $219 million in tax creditsthrough December 31, 2004, of which approximately $96 million were generated in2004.

 

The IRS has not yet audited **Cinergy** for anytax year in which **Cinergy** hasclaimed Section 29 credits related to synthetic fuel.  However, it is reasonable to anticipate thatthe IRS will evaluate the placed in service date and other key requirements forclaiming the credit.  We anticipate thisaudit to begin in the spring of 2005.

 

**Cinergy** received aprivate letter ruling from the IRS in connection with the acquisition of thefacility that specifically addressed the significant chemical changerequirement.  Additionally, although notaddressed in the letter ruling, we believe that our facility’s in service datemeets the Section 29 requirements.

 

IRC Section 29 also provides for a phase-outof the credit based on the price of crude oil. The phase-out is based on a prescribed calculation and definition ofcrude oil prices.  We do not expect anyimpact on our ability to utilize Section 29 credits in 2004.  Future increases in crude oil prices abovethe price stipulated by the IRS could negatively impact our ability to utilizecredits in subsequent years.

 

*(v)   Guarantees*

In the ordinary course of business, **Cinergy**enters into various agreementsproviding financial or performance assurances to third parties on behalf ofcertain unconsolidated subsidiaries and joint ventures.  These agreements are entered into primarilyto support or enhance the creditworthiness otherwise attributed to theseentities****on a stand-alone basis,thereby facilitating the extension of sufficient credit to accomplish theirintended commercial purposes.  Theguarantees have various termination dates, from short-term (less than one year)to open-ended.

 

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

 

**Cinergy**has guaranteedthe payment of approximately $9 million as of December 31, 2004, for borrowingsby individuals under the Director, Officer, and Key Employee Stock PurchaseProgram.  **Cinergy**may be obligated to pay the debt’s principal and anyrelated interest in the event of an unexcused breach of a guaranteed paymentobligation by certain directors, officers, and key employees.  The guarantees do not have a set terminationdate; however, the borrowings associated with these guarantees are due in March2005.

 

**CinergyCorp.** has also provided performance guarantees on behalf of certainunconsolidated subsidiaries and joint ventures. These guarantees support performance under various agreements andinstruments (such as construction contracts, operations and maintenanceagreements, and energy service agreements). **Cinergy Corp.**may be liablein the event of an unexcused breach of a guaranteed performance obligation byan unconsolidated subsidiary.  **Cinergy Corp.** has estimated its maximumpotential liability to be $52 million under these guarantees as of December 31,2004.  **CinergyCorp.** may also have recourse to third parties for claims required tobe paid under certain of these guarantees. The majority of these guarantees expire at the completion of theunderlying performance agreement, the majority of which expire from 2016 to2019.

 

**Cinergy**has 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 

 

172

----

 

contained in the contract.  In some cases, particularly with respect topurchase and sale agreements, the potential liability for certainindemnification obligations is capped, in whole or in part (generally at anaggregate amount not exceeding the sale price), and subject to a deductibleamount before****any payments wouldbecome due.** **In other cases (such as indemnifications for willfulmisconduct of employees in a joint venture), the maximum potential liability isnot estimable given that the magnitude of any claims under thoseindemnifications would be a function of the extent of damages actuallyincurred.  **Cinergy** has estimated the maximum potential liability, whereestimable, to be $128 million under these indemnification provisions.  The termination period for the majority ofmatters provided by indemnification provisions in these types of agreementsgenerally ranges from 2005 to 2009.

 

We believe the likelihood that **Cinergy**would be required to perform orotherwise incur any significant losses associated with any or all of theguarantees described in the preceding paragraphs is remote.

 

*(vi) Constructionand Other Commitments*

Forecasted construction and other committedexpenditures for the year 2005 and for the five-year period 2005-2009 (innominal dollars) are presented in the table below:

 
| ** **                    | ** **   | **2005**          | ** **   | **2005-2009** | ** ** |
|-------------------------------|--------------|-------------------|--------------|---------------|------------|
| *** ***                  | *** *** | **(in millions)** | *** *** |
| * *                      | * *     | * *          | * *     | * *      | * *   |
| **Cinergy**(1)                |         | **$**             | **1,115**    | ** **    | $          | 5,430 |   |
| **CG&E** and subsidiaries |         | **430**           | ** **   | 2,345         |       |
| **PSI**                       |         | **620**           | ** **   | 2,645         |       |
| **ULH&P**                 |         | **80**            | ** **   | 335           |       |
|                               |              |                   |              |               |            |  |  |

----

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

 

This forecast includes an estimate ofexpenditures in accordance with the companies’ plans regarding environmentalcompliance.

 

173

----

 

**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 theintegrated transmission and distribution systems, which are operated andmaintained by **PSI**.  The Statements of Income reflect **CG&E’s** and **PSI’s** portions of all operating costs associated with thejointly-owned facilities.

 

As of December 31, 2004, **CG&E’s** and **PSI’s** investments in jointly-owned plant or facilities were asfollows:

 
| ** **                         | ** **   | **Ownership**     | ** **   | **Property, Plant, and** | ** ** | **Accumulated**  | ** ** | **Construction Work in** | ** ** |
|------------------------------------|--------------|-------------------|--------------|--------------------------|------------|------------------|------------|--------------------------|------------|
| ** **                         | ** **   | **Share**         | ** **   | **Equipment**            | ** ** | **Depreciation** | ** ** | **Progress**             | ** ** |
| *** ***                       | *** *** | **(in millions)** | *** *** |
| * *                           | * *     | * *          | * *     | * *                 | * *   | * *         | * *   | * *                 | * *   |
| **CG&E**                       |         |              |         |                     |       |             |       |                     |       |
| Production:                        |         |              |         |                     |       |             |       |                     |       |
| Miami Fort Station (Units 7 and 8) |         | 64.00             | %            | $                        | 328        |             | $          | 133                      |       | $ | 18 |   |
| Beckjord Station (Unit 6)          |         | 37.50             |         | 45                       |       | 29               |       | —                   |       |
| Stuart Station(1)                  |         | 39.00             |         | 384                      |       | 161              |       | 15                       |       |
| Conesville  Station (Unit 4)(1)    |         | 40.00             |         | 76                       |       | 48               |       | 5                        |       |
| Zimmer Station                     |         | 46.50             |         | 1,308                    |       | 438              |       | 4                        |       |
| East Bend Station                  |         | 69.00             |         | 394                      |       | 200              |       | 5                        |       |
| Killen Station(1)                  |         | 33.00             |         | 206                      |       | 112              |       | 1                        |       |
| Transmission                       |         | Various           |         | 88                       |       | 44               |       | —                   |       |
|                               |         |              |         |                     |       |             |       |                     |       |
| **PSI**                            |         |              |         |                     |       |             |       |                     |       |
| Production:                        |         |              |         |                     |       |             |       |                     |       |
| Gibson Station (Unit 5)            |         | 50.05             |         | 287                      |       | 131              |       | 6                        |       |
| Transmission and local facilities  |         | 94.54             |         | 2,567                    |       | 1,006            |       | —                   |       |
|                                    |              |                   |              |                          |            |                  |            |                          |            |  |  |  |

----

(1)   Station is not operated by **CG&E**.

 

174

----

 

**13.**       Quarterly Financial Data(unaudited)
| ** **                                                                                       | ** **   | **First**                                   | ** **   | **Second**  | ** ** | **Third**   | ** ** | **Fourth**  | ** ** | ** ** | ** ** |
|--------------------------------------------------------------------------------------------------|--------------|---------------------------------------------|--------------|-------------|------------|-------------|------------|-------------|------------|------------|------------|
| ** **                                                                                       | ** **   | **Quarter**                                 | ** **   | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Total**  | ** ** |
| *** ***                                                                                     | *** *** | **(in millions, except per share amounts)** | *** *** |
| **Cinergy**(1)                                                                                   |         |                                        |         |        |       |        |       |        |       |       |       |
|                                                                                             |         |                                        |         |        |       |        |       |        |       |       |       |
| **2004**                                                                                         |         |                                        |         |        |       |        |       |        |       |       |       |
|                                                                                             |         |                                        |         |        |       |        |       |        |       |       |       |
| **Results of Operations:**                                                                       |         |                                        |         |        |       |        |       |        |       |       |       |
| Operating Revenues                                                                               |         | **$**                                       | **1,289**    | ** **  | **$**      | **1,054**   | ** ** | **$**       | **1,129**  | ** ** | **$**      | **1,216** | ** ** | **$** | **4,688** | ** ** |
| Operating Income                                                                                 |         | **216**                                     | ** **   | **137**     | ** ** | **183**     | ** ** | **202**     | ** ** | **738**    | ** ** |
| Net Income                                                                                       |         | **103**                                     | ** **   | **59**      | ** ** | **93**      | ** ** | **146**     | ** ** | **401**    | ** ** |
| ** **                                                                                       | ** **   | ** **                                  | ** **   | ** **  | ** ** | ** **  | ** ** | ** **  | ** ** | ** ** | ** ** |
| **Per Share Data:**                                                                              | ** **   | ** **                                  | ** **   | ** **  | ** ** | ** **  | ** ** | ** **  | ** ** | ** ** | ** ** |
| EPS - basic:                                                                                     |         |                                        |         |        |       |        |       |        |       |       |       |
| Net Income                                                                                       |         | **0.57**                                    | ** **   | **0.33**    | ** ** | **0.51**    | ** ** | **0.81**    | ** ** | **2.22**   | ** ** |
| EPS - diluted:                                                                                   |         | ** **                                  | ** **   | ** **  | ** ** | ** **  | ** ** | ** **  | ** ** | ** ** | ** ** |
| Net Income                                                                                       |         | **0.57**                                    | ** **   | **0.32**    | ** ** | **0.50**    | ** ** | **0.79**    | ** ** | **2.18**   | ** ** |
|                                                                                             |         |                                        |         |        |       |        |       |        |       |       |       |
| **2003**                                                                                         |         |                                        |         |        |       |        |       |        |       |       |       |
|                                                                                             |         |                                        |         |        |       |        |       |        |       |       |       |
| **Results of Operations:**                                                                       |         |                                        |         |        |       |        |       |        |       |       |       |
| Operating Revenues                                                                               |         | $                                           | 1,268        |        | $          | 934         |       | $           | 1,092      |       | $          | 1,122 |   | $ | 4,416 |   |
| Operating Income                                                                                 |         | 256                                         |         | 138         |       | 205         |       | 212         |       | 811        |       |
|                                                                                             |         |                                        |         |        |       |        |       |        |       |       |       |
| Income before discontinued operations and cumulative effect of  changes in accounting principles |         | 140                                         |         | 76          |       | 112         |       | 107         |       | 435        |       |
| Discontinued operations, net of tax(2)                                                           |         | —                                      |         | 9           |       | —      |       | —      |       | 9          |       |
| Cumulative effect of changes in accounting principles, net of tax(3)                             |         | 26                                          |         | —      |       | —      |       | —      |       | 26         |       |
| Net Income                                                                                       |         | $                                           | 166          |        | $          | 85          |       | $           | 112        |       | $          | 107 |   | $ | 470 |   |
|                                                                                             |         |                                        |         |        |       |        |       |        |       |       |       |
| **Per Share Data:**                                                                              |         |                                        |         |        |       |        |       |        |       |       |       |
| EPS - basic:                                                                                     |         |                                        |         |        |       |        |       |        |       |       |       |
| Income before discontinued operations and cumulative  effect of changes in accounting principles |         | 0.81                                        |         | 0.42        |       | 0.63        |       | 0.60        |       | 2.46       |       |
| Discontinued operations, net of tax(2)                                                           |         | —                                      |         | 0.05        |       | —      |       | —      |       | 0.05       |       |
| Cumulative effect of changes in accounting principles, net  of tax(3)                            |         | 0.15                                        |         | —      |       | —      |       | —      |       | 0.15       |       |
| Net Income                                                                                       |         | $                                           | 0.96         |        | $          | 0.47        |       | $           | 0.63       |       | $          | 0.60 |   | $ | 2.66 |   |
| EPS - diluted:                                                                                   |         |                                        |         |        |       |        |       |        |       |       |       |
| Income before discontinued operations and cumulative effect of  changes in accounting principles |         | 0.80                                        |         | 0.42        |       | 0.62        |       | 0.59        |       | 2.43       |       |
| Discontinued operations, net of tax(2)                                                           |         | —                                      |         | 0.05        |       | —      |       | —      |       | 0.05       |       |
| Cumulative effect of changes in accounting principles, net of tax(3)                             |         | 0.15                                        |         | —      |       | —      |       | —      |       | 0.15       |       |
| Net Income                                                                                       |         | $                                           | 0.95         |        | $          | 0.47        |       | $           | 0.62       |       | $          | 0.59 |   | $ | 2.63 |   |
|                                                                                                  |              |                                             |              |             |            |             |            |             |            |            |            |  |  |  |  |  |  |  |  |

 

175

----

 
| ** **                                                           | ** **   | **First**                                   | ** **   | **Second**  | ** ** | **Third**   | ** ** | **Fourth**  | ** ** | ** ** | ** ** |
|----------------------------------------------------------------------|--------------|---------------------------------------------|--------------|-------------|------------|-------------|------------|-------------|------------|------------|------------|
| ** **                                                           | ** **   | **Quarter**                                 | ** **   | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Total**  | ** ** |
| *** ***                                                         | *** *** | **(in millions, except per share amounts)** | *** *** |
|                                                                 |         |                                        |         |        |       |        |       |        |       |       |       |
| **CG&E**and subsidiaries                                         |         |                                        |         |        |       |        |       |        |       |       |       |
|                                                                 |         |                                        |         |        |       |        |       |        |       |       |       |
| **2004**                                                             |         |                                        |         |        |       |        |       |        |       |       |       |
|                                                                 |         |                                        |         |        |       |        |       |        |       |       |       |
| **Results of Operations:**                                           |         |                                        |         |        |       |        |       |        |       |       |       |
| Operating Revenues                                                   |         | **$**                                       | **765**      | ** **  | **$**      | **546**     | ** ** | **$**       | **554**    | ** ** | **$**      | **646** | ** ** | **$** | **2,511** | ** ** |
| Operating Income                                                     |         | **144**                                     | ** **   | **106**     | ** ** | **120**     | ** ** | **120**     | ** ** | **490**    | ** ** |
| Net Income                                                           |         | **77**                                      | ** **   | **55**      | ** ** | **64**      | ** ** | **61**      | ** ** | **257**    | ** ** |
|                                                                 |         |                                        |         |        |       |        |       |        |       |       |       |
| **2003**                                                             |         |                                        |         |        |       |        |       |        |       |       |       |
|                                                                 |         |                                        |         |        |       |        |       |        |       |       |       |
| **Results of Operations:**                                           |         |                                        |         |        |       |        |       |        |       |       |       |
| Operating Revenues                                                   |         | $                                           | 704          |        | $          | 483         |       | $           | 541        |       | $          | 654 |   | $ | 2,382 |   |
| Operating Income                                                     |         | 157                                         |         | 102         |       | 144         |       | 160         |       | 563        |       |
|                                                                 |         |                                        |         |        |       |        |       |        |       |       |       |
| Income before cumulative effect of changes in accounting principles  |         | 86                                          |         | 51          |       | 79          |       | 84          |       | 300        |       |
| Cumulative effect of changes in accounting principles, net of tax(3) |         | 31                                          |         | —      |       | —      |       | —      |       | 31         |       |
| Net Income                                                           |         | $                                           | 117          |        | $          | 51          |       | $           | 79         |       | $          | 84 |   | $ | 331 |   |
|                                                                 |         |                                        |         |        |       |        |       |        |       |       |       |
| **PSI**                                                              |         |                                        |         |        |       |        |       |        |       |       |       |
|                                                                 |         |                                        |         |        |       |        |       |        |       |       |       |
| **2004**                                                             |         |                                        |         |        |       |        |       |        |       |       |       |
|                                                                 |         |                                        |         |        |       |        |       |        |       |       |       |
| **Results of Operations:**                                           |         |                                        |         |        |       |        |       |        |       |       |       |
| Operating Revenues                                                   |         | **$**                                       | **416**      | ** **  | **$**      | **414**     | ** ** | **$**       | **480**    | ** ** | **$**      | **444** | ** ** | **$** | **1,754** | ** ** |
| Operating Income                                                     |         | **87**                                      | ** **   | **67**      | ** ** | **112**     | ** ** | **93**      | ** ** | **359**    | ** ** |
| Net Income                                                           |         | **41**                                      | ** **   | **25**      | ** ** | **48**      | ** ** | **51**      | ** ** | **165**    | ** ** |
|                                                                 |         |                                        |         |        |       |        |       |        |       |       |       |
| **2003**                                                             |         |                                        |         |        |       |        |       |        |       |       |       |
|                                                                 |         |                                        |         |        |       |        |       |        |       |       |       |
| **Results of Operations:**                                           |         |                                        |         |        |       |        |       |        |       |       |       |
| Operating Revenues                                                   |         | $                                           | 412          |        | $          | 361         |       | $           | 437        |       | $          | 393 |   | $ | 1,603 |   |
| Operating Income                                                     |         | 74                                          |         | 55          |       | 89          |       | 96          |       | 314        |       |
|                                                                 |         |                                        |         |        |       |        |       |        |       |       |       |
| Income before cumulative effect of a change in accounting principle  |         | 34                                          |         | 23          |       | 38          |       | 39          |       | 134        |       |
| Cumulative effect of a change in accounting principle, net of tax(3) |         | (1                                          | )            | —      |       | —      |       | —      |       | (1         | )          |
| Net Income                                                           |         | $                                           | 33           |        | $          | 23          |       | $           | 38         |       | $          | 39 |   | $ | 133 |   |

----

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

(2)   SeeNote 14 for further explanation.

(3)   SeeNote 1(q)(*iv*) for further explanation ofcumulative effect of changes in accounting principles.

 

176

----

 

**14.**       Discontinued Operations

During 2002, **Cinergy** began taking steps to monetize certain non-coreinvestments, including renewable and international investments within Commercial.  During the second half of 2002, **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, after-tax, of $7 million in 2002.  Included in this net loss were cumulative foreigncurrency translation losses of approximately $4 million, after-tax.

 

During 2003, **Cinergy** completed the disposal of its gas distributionoperation in South Africa, sold its remaining wind assets in the United States,and substantially sold or liquidated the assets of its energy marketingbusiness in the Czech Republic.

 

As a result of the 2003 transactions, assetsof approximately $140 million were sold or converted into cash and liabilitiesof approximately $100 million were assumed by buyers or liquidated.  The net, after-tax, gain from these disposaland liquidation transactions was approximately $9 million (including a netafter-tax cumulative currency translation gain of approximately $6 million).

 

GAAP requires different accounting treatmentfor investment disposals involving entities which are consolidated and entitieswhich are accounted for under the equity method.  The consolidated entities have been presentedas *Discontinued operations*, *net of tax* in **Cinergy’s** Statements of Income and as *Assets/Liabilities of Discontinued Operations*in **Cinergy’s** Balance Sheets.  The accompanying financial statements andprior year financial statements have been reclassified to account for theseentities as such.  The disposal of theentities accounted for using the equity method cannot be presented asdiscontinued operations.  A gain ofapproximately $17 million on the sale of these entities is included in *Miscellaneous Income (Expense)-Net*in **Cinergy’s** 2002 Statements of Income.

 

177

----

 

The following table reflects the assets andliabilities, the results of operations, and the income (loss) on disposalrelated to investments accounted for as discontinued operations for the yearsended December 31, 2003 and 2002.  We didnot have any investments accounted for as discontinued operations in 2004.

 
| ** **                                                    | ** **   | **December 31**   | ** **   |
|---------------------------------------------------------------|--------------|-------------------|--------------|
| ** **                                                    | ** **   | **2003**          | ** **   | **2002** | ** ** |
| *** ***                                                  | *** *** | **(in millions)** | *** *** |
| * *                                                      | * *     | * *          | * *     | * * | * * |
| **Revenues**(1)                                               |         | $                 | 22           |   | $ | 95 |   |
|                                                          |         |              |         |   |   |
| **Income (Loss) Before Taxes**                                |         | $                 | 4            |   | $ | (27 | ) |
|                                                          |         |              |         |   |   |
| **Income Taxes Benefit**                                      |         | $                 | 4            |   | $ | 2 |   |
|                                                          |         |              |         |   |   |
| **Income (Loss) from Discontinued Operations**                |         |              |         |   |   |
| Income (Loss) from operations, net of tax                     |         | $                 | —       |   | $ | (1 | ) |
| Gain (Loss) on disposal, net of tax(2)                        |         | 9                 |         | (24 | ) |
|                                                          |         |              |         |   |   |
| **Total Income (Loss) from Discontinued Operations**          |         | $                 | 9            |   | $ | (25 | ) |
|                                                          |         |              |         |   |   |
| **Assets**                                                    |         |              |         |   |   |
| Current assets                                                |         | $                 | 5            |   | $ | 49 |   |
| Property, plant, and equipment-net                            |         | —            |         | 78 |   |
| Other assets                                                  |         | —            |         | 20 |   |
|                                                          |         |              |         |   |   |
| **Total Assets**                                              |         | $                 | 5            |   | $ | 147 |   |
|                                                          |         |              |         |   |   |
| **Liabilities**                                               |         |              |         |   |   |
| Current liabilities                                           |         | $                 | 12           |   | $ | 7 |   |
| Long-term debt (including Long-term debt due within one year) |         | —            |         | 85 |   |
| Other                                                         |         | —            |         | 17 |   |
|                                                          |         |              |         |   |   |
| **Total Liabilities**                                         |         | $                 | 12           |   | $ | 109 |   |

----

(1)   Presented for informationalpurposes only.  All results of operationsare reported net in our Statements of Income.

(2)   For 2002, approximately $17million of this amount represents a write-down to fair value, less cost tosell, on assets classified as held for sale at December 31, 2002.  The remaining loss on disposal for 2002represents actual losses on completed sales.

 

The losses included in the 2002 discontinuedoperations primarily pertain to two investments.  In one case, the primary customer of acombined heat and power plant filed for bankruptcy resulting in a significantreduction in future expected revenues from the investment.  This investment was sold in December2002.  In the second case, the retailmarket of a gas distribution business did not develop as expected, and weelected to exit the business rather than invest the additional capital whichwould be required to reach a sustainable level of market penetration.  The investment was written down to itsrealizable value in December 2002 and was subsequently sold in April 2003.

 

178

----

 

**15.**       Investment Activity

***(a)***                                  Investment Impairment

**Cinergy** holds aportfolio of direct and indirect investments in Power Technology andInfrastructure (discussed further in Note 16). During 2004, **Cinergy**recognized approximately $56 million in impairment and disposal chargesprimarily associated with this portfolio. A substantial portion of these charges relate to a company in which **Cinergy** holds a non-controlling interest,that sold its major assets.  This companyis involved in the development and sale of outage management software.  Based on the terms of the transaction, **Cinergy** concluded that this cost methodinvestment was other-than-temporarily impaired. These impairment charges are included in *Miscellaneous Income (Expense) — Net* in **Cinergy’s**Statements of Income.

 

***(b)***                                  Sale of Investment

Power Technology and Infrastructure holds aninvestment in a company that develops, owns and operates wireless communicationtowers.  In July 2004, this companyagreed to sell the majority of its assets. Most of the assets contemplated in the purchase/sale agreement were soldin the fourth quarter of 2004 and we recorded a gain of approximately $21million relating to this sale.  Theseearnings are reflected in *Equity in Earningsof Unconsolidated Subsidiaries* in **Cinergy’s**Statementsof Income.

 

**16.**       Financial Information by BusinessSegment

We conduct operations through oursubsidiaries and manage our businesses through the following three reportablesegments:

 

•                  Commercial;

•                  Regulated; and

•                  Power Technology andInfrastructure.

 

Commercial manages our wholesale generationand energy marketing and trading activities. Commercial also performs energy risk management activities, providescustomized energy solutions and is responsible for all of our internationaloperations.

 

Regulated consists of **PSI’s** regulated generation and transmissionand distribution operations, and **CG&E**andits subsidiaries’ regulated electric and gas transmission and distributionsystems.  Regulated plans, constructs,operates, and maintains **Cinergy’s**transmission and distribution systems and delivers gas and electric energy toconsumers.  Regulated also earns revenuesfrom wholesale customers primarily by these customers transmitting electricpower through **Cinergy’s**transmission system.  These businessesare subject to cost of service rate making where rates to be charged tocustomers are based on prudently incurred costs over a test period plus areasonable rate of return.

 

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

 

Following are the financial results bybusiness unit.  Certain prior yearamounts have been reclassified to conform to the current presentation.

 

179

----

 

 Financialresults by business unit for the years ended December 31, 2004, 2003, and 2002,are as indicated below:

 

**Business Units**

| ** **                                        | ** **   | **2004**                    | ** **   |
|---------------------------------------------------|--------------|-----------------------------|--------------|
| ** **                                        | ** **   | **Cinergy  Business Units** | ** **   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                        | ** **   | ** **                  | ** **   | **Reconciling  Regulated** | ** ** | **Power  Technology** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                        | ** **   | **Commercial**              | ** **   | ** ** | **and  Infrastructure** | ** ** | **Total** | ** ** | **All  Other(1)** | ** ** | **Eliminations(2)** | ** ** | **Consolidated** | ** ** |
| *** ***                                      | *** *** | **(in millions)**           | *** *** |
| Operating revenues -                              |         | ** **                  | ** **   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| External customers                                | ** **   | **$**                       | **1,665**    | ** ** | **$** | **3,023** | ** ** | **$** | **—** | ** ** | **$** | **4,688** | ** ** | **$** | **—** | ** ** | **$** | **—** | ** ** | **$** | **4,688** | ** ** |
| Intersegment revenues                             | ** **   | **163**                     | ** **   | **—** | ** ** | **—** | ** ** | **163** | ** ** | **—** | ** ** | **(163** | **)** | **—** | ** ** |
|                                              | ** **   | ** **                  | ** **   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Gross Margins                                     | ** **   | ** **                  | ** **   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Electric(3)                                       | ** **   | **637**                     | ** **   | **1,656** | ** ** | **—** | ** ** | **2,293** | ** ** | **—** | ** ** | **—** | ** ** | **2,293** | ** ** |
| Gas(4)                                            | ** **   | **92**                      | ** **   | **263** | ** ** | **—** | ** ** | **355** | ** ** | **—** | ** ** | **—** | ** ** | **355** | ** ** |
|                                              | ** **   | ** **                  | ** **   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Depreciation                                      | ** **   | **133**                     | ** **   | **326** | ** ** | **1** | ** ** | **460** | ** ** | **—** | ** ** | **—** | ** ** | **460** | ** ** |
| Equity in earnings of unconsolidated subsidiaries | ** **   | **25**                      | ** **   | **3** | ** ** | **20** | ** ** | **48** | ** ** | **—** | ** ** | **—** | ** ** | **48** | ** ** |
| Interest expense(5)                               | ** **   | **121**                     | ** **   | **149** | ** ** | **5** | ** ** | **275** | ** ** | **—** | ** ** | **—** | ** ** | **275** | ** ** |
|                                              | ** **   | ** **                  | ** **   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Income taxes                                      | ** **   | **(61**                     | **)(6)**     | **178** | ** ** | **(13** | **)** | **104** | ** ** | **—** | ** ** | **—** | ** ** | **104** | ** ** |
|                                              | ** **   | ** **                  | ** **   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Segment profit (loss)(7)                          | ** **   | **179**                     | ** **   | **253** | ** ** | **(31** | **)** | **401** | ** ** | **—** | ** ** | **—** | ** ** | **401** | ** ** |
|                                              | ** **   | ** **                  | ** **   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Total segment assets                              | ** **   | **4,992**                   | ** **   | **9,774** | ** ** | **136** | ** ** | **14,902** | ** ** | **80** | ** ** | **—** | ** ** | **14,982** | ** ** |
| Investments in unconsolidated subsidiaries        | ** **   | **413**                     | ** **   | **18** | ** ** | **83** | ** ** | **514** | ** ** | **—** | ** ** | **—** | ** ** | **514** | ** ** |
| Total expenditures for long-lived assets          | ** **   | **176**                     | ** **   | **517** | ** ** | **7** | ** ** | **700** | ** ** | **—** | ** ** | **—** | ** ** | **700** | ** ** |
|                                                   |              |                             |              |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

----

(1)   The All Other categoryrepresents miscellaneous corporate items, which are not allocated to businessunits for purposes of segment performance measurement.

(2)   The Reconciling Eliminationscategory eliminates the intersegment revenues of Commercial.

(3)   Electric gross margins arecalculated as *Electric operating revenues* less *Fuel, emission allowances, and purchased power* expense fromthe Statements of Income.

(4)   Gas gross margins arecalculated as *Gas operating revenues* less *Gas purchased* expense from the Statements of Income.

(5)   Interest incomeis deemed immaterial.

(6)   The reduction in incometaxes in 2004, as compared to 2003, primarily reflects lower business unittaxable income and also includes an increase in the annual tax creditsassociated with the production and sale of synthetic fuel.  For further information, see Note 11(c)(*iv*).

(7)   Management utilizes Segmentprofit (loss), after taxes, to evaluate segment performance.

 

180

----

 

| ** **                                                            | ** **   | **2003**                   | ** **   |          |
|-----------------------------------------------------------------------|--------------|----------------------------|--------------|---------------|
| ** **                                                            | ** **   | **Cinergy Business Units** | ** **   | ** **    | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                            | ** **   | ** **                 | ** **   | ** **    | ** ** | **Power Technology** | ** ** | ** ** | ** ** | ** ** | ** ** | **Reconciling  Eliminations (2)** | ** ** | ** ** | ** ** |   |
| ** **                                                            | ** **   | **Commercial**             | ** **   | **Regulated** | ** ** | **and Infrastructure** | ** ** | **Total** | ** ** | **All Other (1)** | ** ** | ** ** | **Consolidated** | ** ** |   |
| *** ***                                                          | *** *** | **(in millions)**          | *** *** |          |
| Operating revenues -                                                  |         |                       |         |          |   |   |   |   |   |   |   |   |   |   |   |   |
| External customers                                                    |         | $                          | 1,630        |          | $ | 2,786 |   | $ | — |   | $ | 4,416 |   | $ | — |   | $ | — |   | $ | 4,416 |   |   |
| Intersegment revenues                                                 |         | 185                        |         | 1             |   | — |   | 186 |   | — |   | (186 | ) | — |   |   |
|                                                                  |         |                       |         |          |   |   |   |   |   |   |   |   |   |   |   |   |
| Gross margins                                                         |         |                       |         |          |   |   |   |   |   |   |   |   |   |   |   |   |
| Electric(3)                                                           |         | 714                        |         | 1,469         |   | — |   | 2,183 |   | — |   | — |   | 2,183 |   |   |
| Gas(4)                                                                |         | 88                         |         | 244           |   | — |   | 332 |   | — |   | — |   | 332 |   |   |
|                                                                  |         |                       |         |          |   |   |   |   |   |   |   |   |   |   |   |   |
| Depreciation                                                          |         | 135                        |         | 264           |   | — |   | 399 |   | — |   | — |   | 399 |   |   |
| Equity in earnings (losses) of unconsolidated subsidiaries            |         | 14                         |         | 4             |   | (3 | ) | 15 |   | — |   | — |   | 15 |   |   |
| Interest expense(5)                                                   |         | 94                         |         | 160           |   | 17 |   | 271 |   | — |   | — |   | 271 |   |   |
|                                                                  |         |                       |         |          |   |   |   |   |   |   |   |   |   |   |   |   |
| Income taxes                                                          |         | 7(6                        | )            | 148           |   | (11 | ) | 144 |   | — |   | — |   | 144 |   |   |
|                                                                  |         |                       |         |          |   |   |   |   |   |   |   |   |   |   |   |   |
| Discontinued operations, net of tax(7)                                |         | 9                          |         | —        |   | — |   | 9 |   | — |   | — |   | 9 |   |   |
| Cumulative effect of changes in accounting principles (net of tax)(8) |         | 26                         |         | —        |   | — |   | 26 |   | — |   | — |   | 26 |   |   |
|                                                                  |         |                       |         |          |   |   |   |   |   |   |   |   |   |   |   |   |
| Segment profit (loss)(9)                                              |         | 275                        |         | 211           |   | (16 | ) | 470 |   | — |   | — |   | 470 |   |   |
|                                                                  |         |                       |         |          |   |   |   |   |   |   |   |   |   |   |   |   |
| Segment assets from continuing operations                             |         | 5,361                      |         | 8,515         |   | 175 |   | 14,051 |   | 63 |   | — |   | 14,114 |   |   |
| Segment assets from discontinued operations                           |         | 5                          |         | —        |   | — |   | 5 |   | — |   | — |   | 5 |   |   |
| Total segment assets                                                  |         | 5,366                      |         | 8,515         |   | 175 |   | 14,056 |   | 63 |   | — |   | 14,119 |   |   |
|                                                                  |         |                       |         |          |   |   |   |   |   |   |   |   |   |   |   |   |
| Investments in unconsolidated subsidiaries                            |         | 400                        |         | 14            |   | 81 |   | 495 |   | — |   | — |   | 495 |   |   |
| Total expenditures for long-lived assets                              |         | 158                        |         | 554           |   | — |   | 712 |   | — |   | — |   | 712 |   |   |
|                                                                       |              |                            |              |               |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

----

(1)   The All Other categoryrepresents miscellaneous corporate items, which are not allocated to businessunits for purposes of segment performance measurement.

(2)   The Reconciling Eliminationscolumn eliminates the intersegment revenues of Commercial.

(3)   Electric gross margins arecalculated as *Electric operating revenues* less *Fuel, emission allowances, and purchased power* expense fromthe Statements of Income.

(4)   Gas gross margins arecalculated as *Gas operating revenues* less *Gas purchased* expense from the Statements of Income.

(5)   Interest income is deemedimmaterial. 

(6)   The decrease in 2003, ascompared to 2002, in part reflects the effect of tax credits associated withproduction of synthetic fuel beginning in July 2002.

(7)   For further information, seeNote 14.

(8)   For further information, seeNote 1(q)(*iv*).

(9)   Management utilizes Segmentprofit (loss), after taxes, to evaluate segment performance.

 

181

----

 

| ** **                                                            | ** ** | **2002**                    | ** ** |
|-----------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                            | ** ** | **Cinergy  Business Units** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                            | ** ** | ** **                  | ** ** | ** ** | ** ** | **Power  Technology** | ** ** | ** ** | ** ** | ** ** | ** ** | **Reconciling  Eliminations(2)** | ** ** | ** ** | ** ** |
| ** **                                                            | ** ** | **Commercial**              | ** ** | **Regulated** | ** ** | **and  Infrastructure** | ** ** | **Total** | ** ** | **All  Other(1)** | ** ** | ** ** | **Consolidated** | ** ** |
| ** **                                                            |       | **(in  millions)**          |       |
| Operating revenues -                                                  |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| External customers                                                    |       | $                           | 1,592      |   | $ | 2,467 |   | $ | — |   | $ | 4,059 |   | $ | — |   | $ | — |   | $ | 4,059 |   |
| Intersegment revenues                                                 |       | 190                         |       | — |   | — |   | 190 |   | — |   | (190 | ) | — |   |
|                                                                  |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Gross margins                                                         |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Electric(3)                                                           |       | 735                         |       | 1,571 |   | — |   | 2,306 |   | — |   | — |   | 2,306 |   |
| Gas(4)                                                                |       | 77                          |       | 203 |   | — |   | 280 |   | — |   | — |   | 280 |   |
|                                                                  |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Depreciation                                                          |       | 150                         |       | 248 |   | 6 |   | 404 |   | — |   | — |   | 404 |   |
| Equity in earnings (losses) of unconsolidated subsidiaries            |       | 20                          |       | 5 |   | (10 | ) | 15 |   | — |   | — |   | 15 |   |
| Interest expense(5)                                                   |       | 102                         |       | 133 |   | 9 |   | 244 |   | — |   | — |   | 244 |   |
|                                                                  |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Income taxes                                                          |       | 23                          |       | 151 |   | (14 | ) | 160 |   | — |   | — |   | 160 |   |
|                                                                  |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Discontinued operations (net of tax)(6)                               |       | (25                         | )          | — |   | — |   | (25 | ) | — |   | — |   | (25 | ) |
| Cumulative effect of a change in accounting principle (net of tax)(7) |       | (11                         | )          | — |   | — |   | (11 | ) | — |   | — |   | (11 | ) |
|                                                                  |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Segment profit (loss)(8)                                              |       | 115                         |       | 270 |   | (24 | ) | 361 |   | — |   | — |   | 361 |   |
|                                                                  |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Segment assets from continuing operations                             |       | 5,691                       |       | 7,746 |   | 155 |   | 13,592 |   | 93 |   | — |   | 13,685 |   |
| Segment assets from discontinued operations                           |       | 147                         |       | — |   | — |   | 147 |   | — |   | — |   | 147 |   |
| Total segment assets                                                  |       | 5,838                       |       | 7,746 |   | 155 |   | 13,739 |   | 93 |   | — |   | 13,832 |   |
|                                                                  |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Investments in unconsolidated subsidiaries                            |       | 337                         |       | 10 |   | 70 |   | 417 |   | — |   | — |   | 417 |   |
|                                                                  |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total expenditures for long-lived assets from continuing operations   |       | 184                         |       | 681 |   | 1 |   | 866 |   | — |   | — |   | 866 |   |
| Total expenditures for long-lived assets from discontinued operations |       | 4                           |       | — |   | — |   | 4 |   | — |   | — |   | 4 |   |
| Total expenditures for long-lived assets                              |       | 188                         |       | 681 |   | 1 |   | 870 |   | — |   | — |   | 870 |   |
|                                                                       |            |                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

----

(1)   The All Other category representsmiscellaneous corporate items, which are not allocated to business units forpurposes of segment performance measurement.

(2)   The Reconciling Eliminations columneliminates the intersegment revenues of Commercial.

(3)   Electric gross margins are calculated as *Electric operating revenues* less *Fuel,emission allowances, and purchased power* expense from the Statementsof Income.

(4)   Gas gross margins are calculated as *Gas operating revenues* less *Gaspurchased* expense from the Statements of Income.

(5)   Interest income is deemed immaterial. 

(6)   For further information, see Note 14.

(7)   For further information, see Note 1(q)(iv).

(8)   Management utilizes segment profit (loss),after taxes, to evaluate segment performance.

 

182

----

 

**Productsand Services**

**(inmillions)**

* *

| ** ** | ** ** | **Revenues**            | ** ** |
|------------|------------|-------------------------|------------|
| ** ** | ** ** | **Traditional Utility** | ** ** | **Wholesale Commodity** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Year**   | ** ** | **Electric**            | ** ** | **Gas** | ** ** | **Total** | ** ** | **Electric** | ** ** | **Gas** | ** ** | **Total** | ** ** | **Other** | ** ** | **Consolidated** | ** ** |
| **2004**   | ** ** | **$**                   | **2,324**  | ** ** | **$** | **690** | ** ** | **$** | **3,014** | ** ** | **$** | **1,213** | ** ** | **$** | **93** | ** ** | **$** | **1,306** | ** ** | **$** | **368** | ** ** | **$** | **4,688** | ** ** |
| 2003       |       | 2,156                   |       | 626 |   | 2,782 |   | 1,164 |   | 210 |   | 1,374 |   | 260 |   | 4,416 |   |
| 2002       |       | 2,024                   |       | 436 |   | 2,460 |   | 1,232 |   | 155 |   | 1,387 |   | 212 |   | 4,059 |   |
|            |            |                         |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**GeographicAreas and Long-Lived Assets**

**Revenues**

**(inmillions)**

 

| **Year** | ** ** | **Domestic** | ** ** | **International** | ** ** | **Consolidated** | ** ** |
|----------|------------|--------------|------------|-------------------|------------|------------------|------------|
| **2004** | ** ** | **$**        | **4,637**  | ** **        | **$**      | **51**           | ** ** | **$** | **4,688** | ** ** |
| 2003     |       | 4,371        |       | 45                |       | 4,416            |       |
| 2002     |       | 4,011        |       | 48                |       | 4,059            |       |
|          |            |              |            |                   |            |                  |            |  |  |  |

 

 

| ** ** | ** ** | **Long-Lived Assets from   Continuing Operations** | ** ** | **Long-Lived Assets from   Discontinued Operations** | ** ** | **Total Long-Lived Assets** | ** ** |
|------------|------------|----------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------|------------|
| ** ** | ** ** | **(in millions)**                                  | ** ** | **(in millions)**                                    | ** ** | **(in millions)**           | ** ** |
| **Year**   | ** ** | **Domestic**                                       | ** ** | **International**                                    | ** ** | **Consolidated**            | ** ** | **Domestic** | ** ** | **International** | ** ** | **Consolidated** | ** ** | **Domestic** | ** ** | **International** | ** ** | **Consolidated** | ** ** |
|       |       |                                               |       |                                                 |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **2004**   | ** ** | **$**                                              | **12,162** | ** **                                           | **$**      | **284**                     | ** ** | **$** | **12,446** | ** ** | **$** | — | ** ** | **$** | — | ** ** | **$** | — | ** ** | **$** | **12,162** | ** ** | **$** | **284** | ** ** | **$** | **12,446** | ** ** |
| 2003       |       | 11,524                                             |       | 273                                                  |       | 11,797                      |       | — |   | — |   | — |   | 11,524 |   | 273 |   | 11,797 |   |
| 2002       |       | 10,801                                             |       | 296                                                  |       | 11,097                      |       | — |   | 97 |   | 97 |   | 10,801 |   | 393 |   | 11,194 |   |
|            |            |                                                    |            |                                                      |            |                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

183

----

 

**17.**       EarningsPer Common Share

A reconciliation of EPS - basic to EPS -diluted is presented below for the years ended December 31, 2004, 2003, and2002:

 
| ** **                                                                                       | ** ** | **Income**                                   | ** **  | **Shares** | ** **  | **EPS**    | ** ** |
|--------------------------------------------------------------------------------------------------|------------|----------------------------------------------|-------------|------------|-------------|------------|------------|
| ** **                                                                                       | ** ** | **(in thousands, except per share amounts)** | ** **  |
| * *                                                                                         | * *   | * *                                     | * *    | * *   | * *    | * *   | * *   |
| **Year ended December 31, 2004**                                                                 | ** ** | ** **                                   | ** **  | ** ** | ** **  | ** ** | ** ** |
| **EPS - basic:**                                                                                 | ** ** | ** **                                   | ** **  | ** ** | ** **  | ** ** | ** ** |
| **Net income**                                                                                   | ** ** | **$**                                        | **400,868** | ** ** | **180,965** | ** ** | **$**      | **2.22** | ** ** |
| ** **                                                                                       | ** ** | ** **                                   | ** **  | ** ** | ** **  | ** ** | ** ** |
| **Effect of dilutive securities:**                                                               | ** ** | ** **                                   | ** **  | ** ** | ** **  | ** ** | ** ** |
| **Common stock options**                                                                         | ** ** | ** **                                   | ** **  | **678**    | ** **  | ** ** | ** ** |
| **Directors’ compensation plans**                                                           | ** ** | ** **                                   | ** **  | **150**    | ** **  | ** ** | ** ** |
| **Contingently issuable common stock**                                                           | ** ** | ** **                                   | ** **  | **605**    | ** **  | ** ** | ** ** |
| **Stock purchase contracts**                                                                     | ** ** | ** **                                   | ** **  | **1,133**  | ** **  | ** ** | ** ** |
| ** **                                                                                       | ** ** | ** **                                   | ** **  | ** ** | ** **  | ** ** | ** ** |
| **EPS - diluted:**                                                                               | ** ** | ** **                                   | ** **  | ** ** | ** **  | ** ** | ** ** |
| **Net income plus assumed conversions**                                                          | ** ** | **$**                                        | **400,868** | ** ** | **183,531** | ** ** | **$**      | **2.18** | ** ** |
| ** **                                                                                       | ** ** | ** **                                   | ** **  | ** ** | ** **  | ** ** | ** ** |
| Year ended December 31, 2003                                                                     | ** ** | ** **                                   | ** **  | ** ** | ** **  | ** ** | ** ** |
| EPS - basic:                                                                                     | ** ** | ** **                                   | ** **  | ** ** | ** **  | ** ** | ** ** |
| Income before discontinued operations and cumulative effect of  changes in accounting principles | ** ** | $                                            | 434,424     |       |        |       | $          | 2.46 |   |
| Discontinued operations, net of tax                                                              |       | 8,886                                        |        |       |        | 0.05       |       |
| Cumulative effect of changes in accounting principles, net of tax                                |       | 26,462                                       |        |       |        | 0.15       |       |
| Net income                                                                                       |       | $                                            | 469,772     |       | 176,535     |       | $          | 2.66 |   |
|                                                                                             |       |                                         |        |       |        |       |       |
| Effect of dilutive securities:                                                                   |       |                                         |        |       |        |       |       |
| Common stock options                                                                             |       |                                         |        | 746        |        |       |       |
| Directors’ compensation plans                                                               |       |                                         |        | 152        |        |       |       |
| Contingently issuable common stock                                                               |       |                                         |        | 851        |        |       |       |
| Stock purchase contracts                                                                         |       |                                         |        | 189        |        |       |       |
|                                                                                             |       |                                         |        |       |        |       |       |
| EPS - diluted:                                                                                   |       |                                         |        |       |        |       |       |
| Net income plus assumed conversions                                                              |       | $                                            | 469,772     |       | 178,473     |       | $          | 2.63 |   |
|                                                                                             |       |                                         |        |       |        |       |       |
| Year ended December 31, 2002                                                                     |       |                                         |        |       |        |       |       |
| EPS - basic:                                                                                     |       |                                         |        |       |        |       |       |
| Income before discontinued operations and cumulative effect of a  change in accounting principle |       | $                                            | 396,636     |       |        |       | $          | 2.37 |   |
| Discontinued operations, net of tax                                                              |       | (25,161                                      | )           |       |        | (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 - diluted:                                                                                   |       |                                         |        |       |        |       |       |
| Net income plus assumed conversions                                                              |       | $                                            | 360,576     |       | 169,052     |       | $          | 2.13 |   |
|                                                                                                  |            |                                              |             |            |             |            |            |  |  |  |  |

 

Options to purchase shares of common stockare excluded from the calculation of EPS - diluted, if they are considered tobe anti-dilutive.  For the years endedDecember 31, 2004, 2003, and 2002, approximately 0.9 million, 1.6 million, and3.0 million shares, respectively, were excluded from the EPS - dilutedcalculation.

 

Also excluded from the EPS - dilutedcalculation for the years ended December 31, 2004, 2003, and 2002 are up to 9.7million, 10.6 million, and 10.8 million shares, respectively, issuable pursuantto the stock purchase contracts issued by **CinergyCorp.** in December 2001 associated with the preferred trustsecurities transaction.  In January 

 

184

----

 

and February 2005, the stock purchasecontracts were settled and holders purchased a total of 9.2 million shares of **Cinergy Corp.** common stock. Net proceeds of approximately $316 million were used to reduceshort-term debt.

 

**18.**       Comprehensive Income

Comprehensive income includes all changes inequity during a period except those resulting from investments by anddistributions to shareholders.  The majorcomponents include net income, foreign currency translation adjustments,minimum pension liability adjustments, unrealized gains and losses oninvestment trusts and the effects of certain hedging activities.

 

We translate the assets and liabilities offoreign subsidiaries, whose functional currency (generally, the local currencyof the country in which the subsidiary is located) is not the United Statesdollar, using the appropriate exchange rate as of the end of the year.  Foreign currency translation adjustments areunrealized gains and losses on the difference in foreign country currency comparedto the value of the United States dollar. The gains and losses are accumulated in comprehensive income.  When a foreign subsidiary is substantiallyliquidated, the cumulative translation gain or loss is removed fromcomprehensive income and is recognized as a component of the gain or loss onthe sale of the subsidiary in our Statements of Income.

 

We record a minimum pension liabilityadjustment associated with our defined benefit pension plans when the unfundedaccumulated benefit obligation is in excess of our accrued pension liabilitiesand the unrecognized prior service costs recorded as an intangible asset.  The corresponding offset is recorded on theBalance Sheets in *Accrued pension and otherpostretirement benefit costs*. Details of the pension plans’ assets and obligations are explainedfurther in Note 9.

 

We record unrealized gains and losses onequity investments in trusts we have established for our benefit plans,primarily by **PSI**.  See Note 9 for further details.

 

The changes in fair value of derivatives thatqualify as hedges, under Statement 133, are recorded in comprehensiveincome.  The specific hedge accountingand the derivatives that qualify are explained in greater detail in Note 7(a).

 

185

----

 

The elements of *Comprehensive income* and their related tax effects for theyears ended December 31, 2004, 2003, and 2002 are as follows:

 
| ** **                                    | ** **   | **Comprehensive Income**  | ** **   |
|-----------------------------------------------|--------------|---------------------------|--------------|
| ** **                                    | ** **   | **2004**                  | ** **   | **2003** | ** ** | **2002** | ** ** |
| ** **                                    | ** **   | **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 millions)** | *** *** |
| **Cinergy**(1)                                |         | ** **                | ** **   | ** ** | ** ** | ** ** | ** ** |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income                                    |         | **$**                     | **505**      | ** ** | **$** | **(104** | **)** | **$** | **401** | ** ** | $ | 626 |   | $ | (156 | ) | $ | 470 |   | $ | 519 |   | $ | (158 | ) | $ | 361 |   |
|                                          |         | ** **                | ** **   | ** ** | ** ** | ** ** | ** ** |   |   |   |   |   |   |   |   |   |   |   |   |
| Other comprehensive income (loss):            |         | ** **                | ** **   | ** ** | ** ** | ** ** | ** ** |   |   |   |   |   |   |   |   |   |   |   |   |
| Foreign currency translation adjustment       |         | **23**                    | ** **   | **(8** | **)** | **15** | ** ** | 25 |   | (8 | ) | 17 |   | 36 |   | (14 | ) | 22 |   |
| Reclassification adjustments                  |         | **—**                | ** **   | **—** | ** ** | **—** | ** ** | (9 | ) | 3 |   | (6 | ) | 4 |   | — |   | 4 |   |
| Total foreign currency translation adjustment |         | **23**                    | ** **   | **(8** | **)** | **15** | ** ** | 16 |   | (5 | ) | 11 |   | 40 |   | (14 | ) | 26 |   |
| Minimum pension liability adjustment          |         | **(53**                   | **)**        | **21** | ** ** | **(32** | **)** | (56 | ) | 22 |   | (34 | ) | (23 | ) | 9 |   | (14 | ) |
| Unrealized gain (loss) on investment trusts   |         | **4**                     | ** **   | **(2** | **)** | **2** | ** ** | 11 |   | (4 | ) | 7 |   | (8 | ) | 3 |   | (5 | ) |
| Cash flow hedges                              |         | **8**                     | ** **   | **(3** | **)** | **5** | ** ** | 2 |   | (1 | ) | 1 |   | (33 | ) | 13 |   | (20 | ) |
| Total other comprehensive income (loss)       |         | **(18**                   | **)**        | **8** | ** ** | **(10** | **)** | (27 | ) | 12 |   | (15 | ) | (24 | ) | 11 |   | (13 | ) |
|                                          |         | ** **                | ** **   | ** ** | ** ** | ** ** | ** ** |   |   |   |   |   |   |   |   |   |   |   |   |
| Total comprehensive income                    |         | **$**                     | **487**      | ** ** | **$** | **(96** | **)** | **$** | **391** | ** ** | $ | 599 |   | $ | (144 | ) | $ | 455 |   | $ | 495 |   | $ | (147 | ) | $ | 348 |   |
|                                          |         | ** **                | ** **   | ** ** | ** ** | ** ** | ** ** |   |   |   |   |   |   |   |   |   |   |   |   |
| **CG&E** and subsidiaries(2)              |         | ** **                | ** **   | ** ** | ** ** | ** ** | ** ** |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income                                    |         | **$**                     | **415**      | ** ** | **$** | **(158** | **)** | **$** | **257** | ** ** | $ | 529 |   | $ | (198 | ) | $ | 331 |   | $ | 419 |   | $ | (155 | ) | $ | 264 |   |
|                                          |         | ** **                | ** **   | ** ** | ** ** | ** ** | ** ** |   |   |   |   |   |   |   |   |   |   |   |   |
| Other comprehensive income (loss):            |         | ** **                | ** **   | ** ** | ** ** | ** ** | ** ** |   |   |   |   |   |   |   |   |   |   |   |   |
| Minimum pension liability adjustment          |         | **(16**                   | **)**        | **6** | ** ** | **(10** | **)** | (13 | ) | 5 |   | (8 | ) | (1 | ) | — |   | (1 | ) |
| Cash flow hedges                              |         | **7**                     | ** **   | **(3** | **)** | **4** | ** ** | 2 |   | (1 | ) | 1 |   | (32 | ) | 13 |   | (19 | ) |
| Total other comprehensive income (loss)       |         | **(9**                    | **)**        | **3** | ** ** | **(6** | **)** | (11 | ) | 4 |   | (7 | ) | (33 | ) | 13 |   | (20 | ) |
|                                          |         | ** **                | ** **   | ** ** | ** ** | ** ** | ** ** |   |   |   |   |   |   |   |   |   |   |   |   |
|                                               |              |                           |              |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| Total comprehensive income                  |   | **$**      | **406**    | ** ** | **$**      | **(155**   | **)**      | **$**  | **251** | ** ** | $      | 518    |   | $      | (194   | )      | $      | 324    |   | $ | 386 |   | $ | (142 | ) | $ | 244 |   |
|---------------------------------------------|--------|------------|------------|------------|------------|------------|------------|--------|---------|------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|---|-----|--------|---|------|---|---|-----|--------|
|                                        |   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   |    |       |   |   |   |   |   |   |   |   |   |
| **PSI**                                     |   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   |    |       |   |   |   |   |   |   |   |   |   |
| Net income                                  |   | **$**      | **277**    | ** ** | **$**      | **(112**   | **)**      | **$**  | **165** | ** ** | $      | 233    |   | $      | (100   | )      | $      | 133    |   | $ | 329 |   | $ | (115 | ) | $ | 214 |   |
|                                        |   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   |    |       |   |   |   |   |   |   |   |   |   |
| Other comprehensive income (loss):          |   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   |    |       |   |   |   |   |   |   |   |   |   |
| Minimum pension liability adjustment        |   | **(21**    | **)**      | **8**      | ** ** | **(13**    | **)**      | (18    | )       | 7          |   | (11    | )      | (3     | )      | 1      |   | (2     | )      |
| Unrealized gain (loss) on investment trusts |   | **3**      | ** ** | **(1**     | **)**      | **2**      | ** ** | 10     |    | (4         | )      | 6      |   | (7     | )      | 3      |   | (4     | )      |
| Total other comprehensive income (loss)     |   | **(18**    | **)**      | **7**      | ** ** | **(11**    | **)**      | (8     | )       | 3          |   | (5     | )      | (10    | )      | 4      |   | (6     | )      |
|                                        |   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   |    |       |   |   |   |   |   |   |   |   |   |
| Total comprehensive income                  |   | **$**      | **259**    | ** ** | **$**      | **(105**   | **)**      | **$**  | **154** |       | $      | 225    |   | $      | (97    | )      | $      | 128    |   | $ | 319 |   | $ | (111 | ) | $ | 208 |   |

----

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

(2)   Individualamounts for **ULH&P** areimmaterial.

 

186

----

 

The after-tax components of *Accumulated other comprehensive income (loss)*as of December 31, 2004, 2003, and 2002 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 millions)**                                        | *** *** |
| * *                         | * *     | * *                                                         | * *     | * * | * * | * * | * * | * * | * * | * * | * * |
| **Cinergy**(1)                   |         |                                                             |         |   |   |   |   |   |   |   |   |
|                             |         |                                                             |         |   |   |   |   |   |   |   |   |
| Balance at December 31, 2001     |         | $                                                                | (5           | ) | $ | (6 | ) | $ | (1 | ) | $ | (5 | ) | $ | (17 | ) |
| Current-period change            |         | 26                                                               |         | (14 | ) | (5 | ) | (20 | ) | (13 | ) |
|                             |         |                                                             |         |   |   |   |   |   |   |   |   |
| Balance at December 31, 2002     |         | $                                                                | 21           |   | $ | (20 | ) | $ | (6 | ) | $ | (25 | ) | $ | (30 | ) |
| Current-period change            |         | 11                                                               |         | (34 | ) | 7 |   | 1 |   | (15 | ) |
|                             |         |                                                             |         |   |   |   |   |   |   |   |   |
| Balance at December 31, 2003     |         | $                                                                | 32           |   | $ | (54 | ) | $ | 1 |   | $ | (24 | ) | $ | (45 | ) |
| **Current-period change**        | ** **   | **15**                                                           | ** **   | **(32** | **)** | **2** | ** ** | **5** | ** ** | **(10** | **)** |
|                             |         |                                                             |         |   |   |   |   |   |   |   |   |
| **Balance at December 31, 2004** | ** **   | **$**                                                            | **47**       | ** ** | **$** | **(86** | **)** | **$** | **3** | ** ** | **$** | **(19** | **)** | **$** | **(55** | **)** |
| ** **                       | ** **   | ** **                                                       | ** **   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **CG&E** and subsidiaries(2) |         |                                                             |         |   |   |   |   |   |   |   |   |
|                             |         |                                                             |         |   |   |   |   |   |   |   |   |
| Balance at December 31, 2001     |         | $                                                                | —       |   | $ | (1 | ) | $ | — |   | $ | (5 | ) | $ | (6 | ) |
| Current-period change            |         | —                                                           |         | (1 | ) | — |   | (19 | ) | (20 | ) |
|                             |         |                                                             |         |   |   |   |   |   |   |   |   |
| Balance at December 31, 2002     |         | $                                                                | —       |   | $ | (2 | ) | $ | — |   | $ | (24 | ) | $ | (26 | ) |
| Current-period change            |         | —                                                           |         | (8 | ) | — |   | 1 |   | (7 | ) |
|                             |         |                                                             |         |   |   |   |   |   |   |   |   |
| Balance at December 31, 2003     |         | $                                                                | —       |   | $ | (10 | ) | $ | — |   | $ | (23 | ) | $ | (33 | ) |
| **Current-period change**        | ** **   | **—**                                                       | ** **   | **(9** | **)** | **—** | ** ** | **4** | ** ** | **(5** | **)** |
|                             |         |                                                             |         |   |   |   |   |   |   |   |   |
| **Balance at December 31, 2004** | ** **   | **$**                                                            | **—**   | ** ** | **$** | **(19** | **)** | **$** | **—** | ** ** | **$** | **(19** | **)** | **$** | **(38** | **)** |
| ** **                       | ** **   | ** **                                                       | ** **   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **PSI**                          |         |                                                             |         |   |   |   |   |   |   |   |   |
|                             |         |                                                             |         |   |   |   |   |   |   |   |   |
| Balance at December 31, 2001     |         | $                                                                | —       |   | $ | (1 | ) | $ | (1 | ) | $ | — |   | $ | (2 | ) |
| Current-period change            |         | —                                                           |         | (2 | ) | (4 | ) | — |   | (6 | ) |
|                             |         |                                                             |         |   |   |   |   |   |   |   |   |
| Balance at December 31, 2002     |         | $                                                                | —       |   | $ | (3 | ) | $ | (5 | ) | $ | — |   | $ | (8 | ) |
| Current-period change            |         | —                                                           |         | (11 | ) | 6 |   | — |   | (5 | ) |
|                             |         |                                                             |         |   |   |   |   |   |   |   |   |
| Balance at December 31, 2003     |         | $                                                                | —       |   | $ | (14 | ) | $ | 1 |   | $ | — |   | $ | (13 | ) |
| **Current-period change**        | ** **   | **—**                                                       | ** **   | **(13** | **)** | **2** | ** ** | **—** | ** ** | **(11** | **)** |
| ** **                       | ** **   | ** **                                                       | ** **   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Balance at December 31, 2004** | ** **   | **$**                                                            | **—**   | ** ** | **$** | **(27** | **)** | **$** | **3** | ** ** | **$** | **—** | ** ** | **$** | **(24** | **)** |

 

----

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

(2)   Individual amounts for **ULH&P** are immaterial.

 

187

----

 

**19.**       Transfer of GeneratingAssets

In December 2002, the IURC approved asettlement agreement among **PSI**,the Indiana Office of the Utility Consumer Counselor, and the IURC Staffauthorizing **PSI’s** purchases of theHenry County, Indiana and Butler County, Ohio, gas-fired peaking plants fromtwo non-regulated affiliates.  InFebruary 2003, the FERC issued an order under Section 203 of the Federal PowerAct authorizing **PSI’s** acquisitionsof the plants, which occurred on February 5, 2003.  Subsequently, in April 2003, the FERC issueda tolling order allowing additional time to consider a request for rehearingfiled in response to the February 2003 FERC order.  In September 2004, FERC issued an orderdenying the request for rehearing and affirming the acquisition of the plants.

 

The KPSC hasconditionally approved **ULH&P’s**plannedacquisition of **CG&E’s** 68.9percent ownership interest in the East Bend Generating Station, located inBoone County, Kentucky, the Woodsdale Generating Station, located in ButlerCounty, Ohio, and one generating unit at the four-unit Miami Fort Stationlocated in Hamilton County, Ohio.  **ULH&P**is currently seeking approval for the transactionfrom the SEC, wherein the Ohio Consumers Counsel has intervened in opposition,and the FERC. The transfer, which will be paid for at net book value, will notaffect current electric rates for **ULH&P’s**customers, as power will be provided under the same terms as under the currentwholesale power contract with **CG&E**through December 31, 2006.  Assumingreceipt of regulatory approvals, we would anticipate the transfer to take placein the second quarter of 2005.

 

188

----

## ** **ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTSON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

 

## **ITEM 9A. CONTROLS AND PROCEDURES**

Disclosurecontrols and procedures are our controls and other procedures that are designedto provide reasonable assurance that information required to be disclosed by usin the reports that we file or submit under the Securities Exchange Act of 1934(Exchange Act) is recorded, processed, summarized, and reported, within thetime periods specified in the Securities and Exchange Commission’s (SEC) rulesand forms.  Disclosure controls andprocedures include, without limitation, controls and procedures designed toprovide reasonable assurance that information required to be disclosed by us inthe reports that we file under the Exchange Act is accumulated and communicatedto our management, including our chief executive officer and chief financialofficer, as appropriate to allow timely decisions regarding requireddisclosure.

 

Under thesupervision and with the participation of our management, including our chiefexecutive officer and chief financial officer, we have evaluated theeffectiveness of our disclosure controls and procedures as of December 31,2004, and, based upon this evaluation, our chief executive officer and chieffinancial officer have concluded that these controls and procedures areeffective in providing reasonable assurance that information requiringdisclosure is recorded, processed, summarized, and reported within thetimeframe specified by the SEC’s rules and forms.

 

Under the supervision and with the participation of our management,including our chief executive officer and chief financial officer, we haveevaluated any change in our internal control over financial reporting (as suchterm is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) duringthe fiscal quarter ended December 31, 2004 and found no change that hasmaterially affected, or is reasonably likely to materially affect, our internalcontrol over financial reporting.

 

**Management Report on InternalControl over Financial Reporting**

 

Management of Cinergy Corp. (the Company) is responsible forestablishing and maintaining adequate internal control over financialreporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act.  The Company’s internal control over financialreporting is designed to provide reasonable assurance regarding the reliabilityof financial reporting and the preparation of financial statements for externalpurposes, in accordance with generally accepted accounting principles.

 

Because of its inherent limitations, internal control over financialreporting may not prevent or detect misstatements.  Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls maybecome inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate.

 

The Company’s management assessed the effectiveness of the Company’sinternal control over financial reporting as of December 31, 2004.  In making this assessment, management usedthe criteria established in *InternalControl-Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission.

 

Based on our assessment and those criteria, management believes thatthe internal control over financial reporting maintained by the Company, as ofDecember 31, 2004, was effective.

 

The Company’s independent auditors have issued an attestation report onmanagement’s assessment of the Company’s internal control over financialreporting.  That report follows.

## ** **

189

----

 

## **REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

To the Board of Directors and Stockholders of Cinergy Corp.Cincinnati, Ohio

 

We have audited management’s assessment, included in the accompanyingManagement Report on Internal Control over Financial Reporting, that theCompany maintained effective internal control over financial reporting as ofDecember 31, 2004, based on criteria established in *Internal Control-Integrated Framework*issued by theCommittee of Sponsoring Organizations of the Treadway Commission.  TheCompany’s management is responsible for maintaining effective internal controlover financial reporting and for its assessment of the effectiveness ofinternal control over financial reporting.  Our responsibility is toexpress an opinion on management’s assessment and an opinion on theeffectiveness of the Company’s internal control over financial reporting basedon our audit.

 

We conducted our audit in accordance with the standards of the PublicCompany Accounting Oversight Board (United States).  Those standardsrequire that we plan and perform the audit to obtain reasonable assurance aboutwhether effective internal control over financial reporting was maintained inall material respects.  Our audit included obtaining an understanding ofinternal control over financial reporting, evaluating management’s assessment,testing and evaluating the design and operating effectiveness of internalcontrol, and performing such other procedures as we considered necessary in thecircumstances.  We believe that our audit provides a reasonable basis forour opinions.

 

A company’s internal control over financial reporting is a process designedby, or under the supervision of, the company’s principal executive andprincipal financial officers, or persons performing similar functions, andeffected by the company’s board of directors, management, and other personnelto provide reasonable assurance regarding the reliability of financialreporting and the preparation of financial statements for external purposes inaccordance with generally accepted accounting principles.  A company’sinternal control over financial reporting includes those policies andprocedures that (1) pertain to the maintenance of records that, in reasonabledetail, accurately and fairly reflect the transactions and dispositions of theassets of the company; (2) provide reasonable assurance that transactions arerecorded as necessary to permit preparation of financial statements inaccordance with generally accepted accounting principles, and that receipts andexpenditures of the company are being made only in accordance withauthorizations of management and directors of the company; and (3) providereasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use, or disposition of the company’s assets that could have amaterial effect on the financial statements.

 

Because of the inherent limitations of internal control over financialreporting, including the possibility of collusion or improper managementoverride of controls, material misstatements due to error or fraud may not beprevented or detected on a timely basis.  Also, projections of anyevaluation of the effectiveness of the internal control over financialreporting to future periods are subject to the risk that the controls maybecome inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate.

 

In our opinion, management’s assessment that the Company maintainedeffective internal control over financial reporting as of December 31, 2004, isfairly stated, in all material respects, based on the criteria established in *Internal Control-Integrated Framework*issuedby the Committee of Sponsoring Organizations of the Treadway Commission. Also in our opinion, the Company maintained, in all material respects,effective internal control over financial reporting as of December 31, 2004,based on the criteria established in *InternalControl-Integrated Framework*issued by the Committee of SponsoringOrganizations of the Treadway Commission.

 

We have also audited, in accordance with the standards of the PublicCompany Accounting Oversight Board (United States), * *the consolidatedfinancial statements and financial statement schedule as of and for the yearended December 31, 2004 of the Company and our report dated February 11, 2005expressed an unqualified opinion on those financial statements and financialstatement schedule and contained an explanatory paragraph regarding theCompany’s change in accounting in 2003, for asset retirement obligations,variable interest entities, and stock-based compensation.

 
| /s/ Deloitte & Touche LLP |   |
|-------------------------------|--------|
| Deloitte & Touche LLP     |   |
|                          |   |
| Cincinnati, Ohio              |   |
| February 11, 2005             |   |

 

190

----

 

## **ITEM 9B. OTHER INFORMATION**

None.

 

191

----

 

# **PARTIII**

## **ITEM 10.  DIRECTORSAND EXECUTIVE OFFICERS OF THE REGISTRANTS**

### **BOARD OF DIRECTORS**

Information regarding **Cinergy Corp.’s**directors is incorporated by reference from its definitive Proxy Statement forthe 2005 Annual Meeting of Shareholders.

 

The directors of The Cincinnati Gas & Electric Company (**CG&E**) at January 31, 2005, are asfollows:

 

•                  **Michael J. Cyrus**-****Mr.Cyrus, age 49, is Executive Vice President of **CG&E**,a position he has held since February 2001. He has served as director of **CG&E**since September 2001.  His current termas director expires May 4, 2005.

•                  **James E. Rogers** - Mr. Rogers, age 57, isChairman of the Board and Chief Executive Officer of **CG&E**.  He has servedas a director of **CG&E** since1994.  His current term as directorexpires May 4, 2005.

•                  **James L. Turner** - Mr. Turner, age 45, isExecutive Vice President and Chief Financial Officer of **CG&E**,a position he has held since September 2004.  Prior to that, Mr. Turnerserved as Executive Vice President of **CG&E** sinceJuly 2000.  He served as a director of **CG&E**from February 15, 1999 to April 30, 2001 and was re-elected, effective October1, 2001.  Mr. Turner’s current term as director expires May 4, 2005.

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** 2005 Information Statement.

 

192

----

 

### **EXECUTIVE OFFICERS**

The names and ages of the executive officers of **Cinergy**,**CG&E**, and**PSI**andthe positions they hold, held, or have been elected to (as of January 31,2005), and their business experience during the past five years is included inthe chart below.

 

| ** **          | ** ** | ** ** | ** ** | **Positions   and Length of Service**                                                                                                                                                                                                                                                                                          |
|---------------------|------------|------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Name**            | ** ** | **Age**    | ** ** | **Cinergy   Corp.**                                                                                                                                                                                                                                                                                                            | ** ** | **CG&E** | ** ** | **PSI** |
| Michael J. Cyrus    |       | 49         |       | **Executive Vice President**  2/01 - present**Chief Executive Officer, Regulated Business Unit**  9/04 - present**Chief Executive Officer, Commercial Business  Unit (formerly known as the Energy Merchant Business Unit)**2/01 - 9/04**President, Energy Commodities Business Unit**3/99 - 2/01**Vice President**4/98 - 2/01 | ** ** | **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(1) |       | 50         |       | **Executive Vice President**  2/01 - present**Chief Executive Officer, Commercial Business  Unit**9/04 - present**Chief Financial Officer**2/01 - 9/04                                                                                                                                                                         | ** ** | **Executive  Vice President**2/01 - present**Chief Financial Officer**  2/01 - 9/04 | ** ** | **Executive  Vice President**2/01 - present**Chief Financial Officer**  2/01 - 9/04 |
| Gregory C. Ficke    |       | 52         |       | **Vice President and Chief  Information Officer, Regulated 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                                                      | ** ** | **President**  10/01 - present |   |   |
| Lynn J. Good(2)     |       | 45         |       | **Vice President, Finance and  Controller**11/03 - present**Vice President, Financial  Project Strategy**  5/03 - 11/03                                                                                                                                                                                                        | ** ** | **Vice  President, Finance and Controller**  11/03 - present**Vice President, Financial  Project Strategy**  5/03 - 11/03 | ** ** | **Vice  President, Finance and Controller**  11/03 - present**Vice President, Financial  Project Strategy**  5/03 - 11/03 |
| William J. Grealis  |       | 59         |       | **Executive Vice President**  7/00 - present**Chief Executive Officer, Regulated 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                                                                                                 | ** ** | **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 | ** ** | **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 |
| Julia S. Janson     |       | 40         |       | **Chief Compliance Officer**  10/04 - present**Secretary**  7/00 - present**Senior Counsel**  7/98 - present                                                                                                                                                                                                                   | ** ** | **Chief  Compliance Officer**10/04 - present**Secretary**1/03 - present**Assistant Secretary**7/00 - 1/03**Senior Counsel**7/98 - present | ** ** | **Chief  Compliance Officer**10/04 - present**Secretary**7/00 - present**Senior Counsel**7/98 - present |

 

193

----

 

| ** **                  | ** ** | ** ** | ** ** | **Positions   and Length of Service**                                                                                                                                                                                                                                                                     |
|-----------------------------|------------|------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Name**                    | ** ** | **Age**    | ** ** | **Cinergy   Corp.**                                                                                                                                                                                                                                                                                       | ** ** | **CG&E** | ** ** | **PSI** |
| Marc E. Manly(3)            |       | 52         |       | **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(4)   |       | 47         |       | **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(5) |       | 49         |       | **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 |
| Kay E. Pashos               |       | 45         | ** ** | **Vice  President and General Counsel, Regulated Business Unit**  11/03 -12/04**Assistant General Counsel**  1/01 - 11/03**Senior Counsel**  1/95 - 1/01                                                                                                                                                  | ** ** | ** ** | ** ** | **President**12/04 - present**Vice President and General Counsel,  Regulated Business Unit**  11/03 -12/04**Assistant General Counsel**  1/01 - 11/03**Senior Counsel**  1/95 - 1/01 |
| Ronald R. Reising(6)        |       | 44         | ** ** | **Chief  Procurement Officer**10/04 - present**Vice President**6/02 - present                                                                                                                                                                                                                             | ** ** | **Chief  Procurement Officer**10/04 - present**Vice President**6/02 - present | ** ** | **Chief  Procurement Officer**10/04 - present**Vice President**6/02 - present |
| James E. Rogers             |       | 57         | ** ** | **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 |
| James L.  Turner(7)         |       | 45         | ** ** | **Executive  Vice President**  10/01 - present**Chief Financial Officer**9/04 - present**Chief Executive Officer**,**Regulated Business Unit**  12/01 - 9/04**President, Regulated Business Unit**  2/01 - 12/01**President, Energy Delivery Business Unit**  7/00 - 2/01**Vice President**  4/99 - 12/01 | ** ** | **Executive  Vice President**  7/00 - present**Chief Financial Officer**9/04 - present**President**  2/99 - 7/00 | ** ** | **Executive  Vice President**  7/00 - present**Chief Financial Officer**  9/04 - present |

 

None of the officers are related in any manner.  Our executive officers hold the offices setopposite their names until the next annual meeting of the Board of Directorsand until their successors have been elected and qualified.

----

| (1)    | 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.                                                                                                                                                                                                                                                                                                                                                                            |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| (2)    | Prior to joining **Cinergy**, Ms. Good was a partner with the  international accounting firm Deloitte & Touche LLP in Cincinnati, Ohio  since May 2002. Prior to that, she was a partner with the international  accounting firm Arthur Andersen LLP from 1992 to May 2002. While at Arthur  Andersen LLP, she had regional energy responsibilities for risk consulting  and internal audit practices.                                                                                                                                                                                        |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| (3)    | 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. |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| (4)    | 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 Corp. (a  non-affiliate of **Cinergy**) from  March 1997 to December 2000.                                                                                                                                                                                                                                                                               |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| (5)    | 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.                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |

 

194

----

 
| (6)    | 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. On December 19, 2002, Focal Communications filed a  petition for relief under Chapter 11 of The United States Bankruptcy Code. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| (7)    | Mr. Turner served as  Vice President of Customer Services from January 2000 until July 2000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |

 

**Cinergy Corp.** has adopted both a code of businessconduct and ethics applicable to all of its directors, officers, and employeesas well as corporate governance guidelines. Both of these documents are available on **Cinergy’s** website at www.cinergy.com.  In addition, any amendments to or waiversfrom the code of business conduct and ethics will be posted on thewebsite.  Any such amendment or waiverwould require the prior consent of the Board of Directors or an applicablecommittee thereof.

 

Information in response to Item 405 of Regulation S-K and regarding **Cinergy Corp.’s** audit committee required byItems 401(h) and 401(i) of Regulation S-K is incorporated by reference from itsdefinitive Proxy Statement for the 2005 Annual Meeting of Shareholders.

 

195

----

## **ITEM 11.  EXECUTIVECOMPENSATION**

Information in response to this item for **Cinergy Corp.** and **CG&E**is incorporated by reference from **CinergyCorp.’s** definitive Proxy Statement for the 2005 Annual Meeting ofShareholders.

 

All **CG&E** directorscurrently are employees of **Cinergy**andreceive no compensation for their services as directors.

 

Information in response to this item for **PSI** is incorporated by reference from **PSI’s** 2005 Information Statement.

 

## **ITEM 12.  SECURITYOWNERSHIP OF CERTAIN BENEFICIAL 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 2005 Annual Meeting of Shareholders.

 

**Cinergy Corp.** owns all outstanding shares of commonstock of **CG&E**, **CG&E’s** only voting security.

 

**CG&E’s** directors and executive officers did notbeneficially own any shares of any class of equity security of **CG&E** as of January 31, 2005.  The beneficial ownership of **Cinergy Corp.** common stock by each directorand named executive officer of **CG&E**as of January 31, 2005, is set forth in the following table:

 
| **Name of Beneficial Owner**                                  | ** ** | **Amount and Nature of  Beneficial Ownership(1)** | ** ** | **Percent of  Class** | ** ** |
|---------------------------------------------------------------|------------|---------------------------------------------------|------------|-----------------------|------------|
|                                                          |       |                                              |       |                  |       |
| Michael J. Cyrus                                              |       | 258,803  shares                                   |       |                  | *          |
| R. Foster Duncan                                              |       | 235,526  shares                                   |       |                  | *          |
| William J. Grealis                                            |       | 378,244  shares                                   |       |                  | *          |
| James L. Turner                                               |       | 132,828  shares                                   |       |                  | *          |
| James E. Rogers                                               |       | 1,699,317  shares                                 |       |                  | *          |
| All directors and  executive officers as a group (12 persons) |       | 2,874,140  shares                                 |       | 1.51                  | %          |

 

----

| *   | Less than 1 percent                                                                                                                                                                                                                                                                                                     |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (1) | Includes shares which  there is a right to acquire within 60 days pursuant to the exercise of stock  options in the following amounts: Mr. Cyrus - 141,799; Mr. Duncan - 213,500;  Mr. Grealis - 235,701; Mr. Turner - 101,626; Mr. Rogers - 970,300; and all  directors and executive officers as a group - 1,768,036. |

 

Information in response to this item for **PSI** is incorporated by reference from its 2005 InformationStatement.

 

196

----

The following tablereflects **Cinergy’s** equitycompensation plan information as of December 31, 2004:

** **

**Equity CompensationPlan 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 Compensation Plan        |       | 6,564,519                                                                                             |       | $                                                                                     | 33.25      |                                                                                                                                                  | 3,122,900  |   |
| Cinergy Corp. Stock Option Plan                                 |       | 628,400                                                                                               |       | $                                                                                     | 34.12      |                                                                                                                                                  | 1,318,500  |   |
| Cinergy Corp. Employee Stock Purchase and Savings Plan          |       | —                                                                                                |       | N/A                                                                                   |       | 1,482,664                                                                                                                                             |       |
| Cinergy Corp. Retirement Plan for Directors                     |       | 3,917                                                                                                 |       | N/A                                                                                   |       | —                                                                                                                                                |       |
| Cinergy Corp. Directors’ Equity Compensation Plan          |       | 26,843                                                                                                |       | N/A                                                                                   |       | 41,034                                                                                                                                                |       |
| Cinergy Corp. Directors’ Deferred Compensation Plan        |       | 48,564                                                                                                |       | N/A                                                                                   |       | 103,234                                                                                                                                               |       |
|                                                            |       |                                                                                                  |       |                                                                                  |       |                                                                                                                                                  |       |
| **Equity compensation plans not approved by  security holders** | ** ** | ** **                                                                                            | ** ** | ** **                                                                            | ** ** | ** **                                                                                                                                            | ** ** |
| Cinergy Corp. UK Sharesave Scheme                               |       | 436                                                                                                   |       | $                                                                                     | 25.14      |                                                                                                                                                  | 62,200     |   |
| Cinergy Corp. 401(k) Excess Plan                                |       | 77,558                                                                                                |       | N/A                                                                                   |       | —                                                                                                                                                |       |
| ** **                                                      | ** ** | ** **                                                                                            | ** ** | ** **                                                                            | ** ** | ** **                                                                                                                                            | ** ** |

 

The following information describes the equity compensation plans that havenot been approved by shareholders.

 

#### **CinergyCorp. UK Sharesave Scheme**

The Cinergy Corp. UK Sharesave Scheme allows essentially all full-time,regular United Kingdom employees working a minimum of 25 hours per week topurchase shares of common stock pursuant to a stock option feature.  Under the Cinergy Corp. UK Sharesave Scheme,after-tax funds are withheld from a participant’s compensation during a36-month or 60-month offering period, at the election of the participants, andare deposited in an account.  At the endof the offering period, participants may apply amounts deposited in the accounttoward the purchase of shares of common stock. 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 applied toward the purchase ofshares are returned to the participant. A participant may elect to terminate participation in the plan at anytime.  Participation also will terminateif the participant’s employment ceases. Upon termination of participation, all funds are returned to theparticipant without penalty although, in certain specified circumstances,options may be exercised early on a pro-rata basis.

 

#### **CinergyCorp. 401(k) Excess Plan**

The Cinergy Corp. 401(k) Excess Plan is a non-qualified deferredcompensation plan for a select group of **Cinergy**management and other highly compensated employees.  It is a means by which these employees candefer additional compensation, and receive additional company matchingcontributions, when they have already contributed the maximum amount (pursuantto the anti-discrimination rules for highly compensated employees) under the401(k) Plan.  All funds deferred are heldin a rabbi trust administered by an independent trustee.

 

## **ITEM 13.  CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS**

Information in response to this item for **Cinergy Corp.** and **CG&E**is incorporated by reference from **CinergyCorp.’s** definitive Proxy Statement for the 2005 Annual Meeting ofShareholders.

 

Information in response to this item for **PSI** is incorporated by reference from **PSI’s** 2005 Information Statement.

 

197

----

 

## **ITEM 14.  PRINCIPALACCOUNTANT FEES AND SERVICES**

Information in response to this item for **Cinergy**, **CG&E**and **PSI** is incorporated byreference from **Cinergy Corp.’s**definitive Proxy Statement for the 2005 Annual Meeting of Shareholders.

 

198

----

## **PART IV**

## **ITEM 15.  EXHIBITSAND FINANCIAL STATEMENT SCHEDULES**

### **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.

 

### **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 July 23,  2003.                                                                                                                               | ** ** | **Cinergy  Corp.**June 30,  2003, 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 on July 23, 2003.                                                                                                                                 | ** ** | **CG&E** June 30, 2003, 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.                                                                                    | ** ** | **PSI** 1997 Form 10-K                                                           |
| 3-g                                                               |       | **PSI**               |       | By-Laws of **PSI**, as amended on July 23, 2003.                                                                                                                                          | ** ** | **PSI** June 30, 2003, 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 July 23, 2003.                                                                                                                                    | ** ** | **ULH&P** June 30, 2003, Form 10-Q                                           |
| 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.               | ** ** | **ULH&P** 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 |
| 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                                                           |

 

199

----

| 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.                                | ** ** | **PSI** June 30, 2001, Form 10-Q                           |
| 4-o  |   | **Cinergy Corp. PSI**      |   | Fifty-fifth  Supplemental Indenture between **PSI**  and LaSalle National Bank dated February 15, 2003.                            | ** ** | **PSI** September 30, 2003, Form 10-Q                      |
| 4-p  |   | **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-q  |   | **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-r  |   | **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-s  |   | **Cinergy Corp. PSI**      |   | Loan Agreement between **PSI** and the City of Princeton, Indiana  dated as of February 1, 1997.                                   | ** ** | **PSI** 1996 Form 10-K                                     |
| 4-t  |   | **Cinergy Corp. PSI**      |   | Indenture dated  November 15, 1996, between **PSI**  and The Fifth Third Bank, as Trustee.                                         | ** ** | **PSI** 1996 Form 10-K                                     |
| 4-u  |   | **Cinergy Corp. PSI**      |   | First Supplemental  Indenture dated November 15, 1996, between **PSI**  and The Fifth Third Bank, as Trustee.                      | ** ** | **PSI** 1996 Form 10-K                                     |
| 4-v  |   | **Cinergy Corp. PSI**      |   | Third Supplemental  Indenture dated as of March 15, 1998, between **PSI** and The Fifth Third Bank, as Trustee.                    | ** ** | **PSI** 1997 Form 10-K                                     |
| 4-w  |   | **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-x  |   | **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-y  |   | **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-z  |   | **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-aa |   | **Cinergy Corp. PSI**      |   | Eighth  Supplemental Indenture dated as of September 23, 2003, between **PSI** and Fifth Third Bank, as Trustee.                   | ** ** | **PSI** September 30, 2003, Form 10-Q                      |
| 4-bb |   | **Cinergy Corp. PSI**      |   | Unsecured Promissory  Note dated October 14, 1998, between **PSI**  and the Rural Utilities Service.                               | ** ** | **PSI** 1998 Form 10-K                                     |
| 4-cc |   | **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-dd |   | **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-ee |   | **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-ff |   | **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-gg |   | **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-hh |   | **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                 |
| 4-ii |   | **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-jj |   | **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-kk |   | **Cinergy Corp. CG&E** |   | Thirty-seventh  Supplemental Indenture between **CG&E**  and The Bank of New York dated as of October 14, 1996.                | ** ** | **CG&E** 1996 Form 10-K                                |
| 4-ll |   | **Cinergy Corp. CG&E** |   | Thirty-eighth  Supplemental Indenture between **CG&E**  and The Bank of New York dated as of February 1, 2001.                 | ** ** | **CG&E**March 31, 2001,  Form 10-Q                     |
| 4-mm |   | **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-nn |   | **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-oo |   | **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-pp |   | **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-qq |   | **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-rr |   | **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                                |

 

200

----

 
| 4-ss  |   | **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-tt  |   | **CG&E**                           |   | Loan Agreement between **CG&E** and the State of Ohio Air  Quality Development Authority dated August 1, 2001.                                                                                                   | ** ** | **CG&E** September 30, 2001, Form 10-Q                                    |
| 4-uu  |   | **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-vv  |   | **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-ww  |   | **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-xx  |   | **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-yy  |   | **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-zz  |   | **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-aaa |   | **Cinergy Corp. CG&E**             |   | Seventh Supplemental  Indenture between **CG&E** and  The Fifth Third Bank dated as of June 15, 2003.                                                                                                            | ** ** | **CG&E** June 30, 2003, Form 10-Q                                         |
| 4-bbb |   | **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-ccc |   | **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-ddd |   | **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-eee |   | **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-fff |   | **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-ggg |   | **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-hhh |   | **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-iii |   | **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-jjj |   | **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                             |
| 4-kkk |   | **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-lll |   | **Cinergy Corp.**                      |   | Indenture dated as of  December 16, 1998, between **Cinergy Corp.**  and The Fifth Third Bank.                                                                                                                       | ** ** | **Cinergy  Corp.** 1998 Form  10-K                                            |
| 4-mmm |   | **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-nnn |   | **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-ooo |   | **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-ppp |   | **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-qqq |   | **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-rrr |   | **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-sss |   | **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                                |

 

201

----

 
| 4-ttt                   |   | **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-uuu                   |   | **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-vvv                   |   | **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-www                   |   | **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-xxx                   |   | **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-yyy                   |   | **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-zzz                   |   | **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 |
| 4-aaaa                  |   | **PSI**                            |   | Loan Agreement between **PSI** and the Indiana Development Finance  Authority dated as of February 15, 2003.                                                                                      | ** ** | **PSI** March 31, 2003, Form 10-Q                                        |
| 4-bbbb                  |   | **PSI**                            |   | 6.302% Subordinated  Note between **PSI** and **Cinergy Corp.**, dated February 5, 2003.                                                                                                          | ** ** | **PSI** March 31, 2003, Form 10-Q                                        |
| 4-cccc                  |   | **PSI**                            |   | 6.403% Subordinated  Note between **PSI** and **Cinergy Corp.**, dated February 5, 2003.                                                                                                          | ** ** | **PSI** March 31, 2003, Form 10-Q                                        |
| 4-dddd                  |   | **CG&E**                       |   | Loan Agreement between **CG&E** and the Ohio Air Quality Development Authority  dated as of November 1, 2004, relating to Series A                                                            | ** ** | **CG&E** Form 8-K,  filed November 19, 2004                          |
| 4-eeee                  |   | **CG&E**                       |   | Loan Agreement between **CG&E** and the Ohio Air Quality Development Authority  dated as of November 1, 2004, relating to Series B                                                            | ** ** | **CG&E** Form 8-K,  filed November 19, 2004                          |
| 4-ffff                  |   | **PSI**                            |   | Loan Agreement between **PSI** and the Indiana Development Finance Authority dated as  of December 1, 2004, relating to Series 2004B                                                              | ** ** | **PSI** Form 8-K, filed December 9, 2004                                 |
| 4-gggg                  |   | **PSI**                            |   | Loan Agreement between **PSI** and the Indiana Development Finance Authority dated as  of December 1, 2004, relating to Series 2004C                                                              | ** ** | **PSI** Form 8-K, filed December 9, 2004                                 |
| 4-hhhh                  |   | **Cinergy Corp.  PSI**             |   | Fifty-Sixth  Supplemental Indenture dated as of December 1, 2004, between **PSI** and LaSalle Bank National Association, as Trustee                                                               | ** ** | ** **                                                               |
| 4-iiii                  |   | **Cinergy Corp.  ULH&P**       |   | Indenture between  ULH&P and Deutsche Bank dated as of December 1, 2004, between ULH&P  and Deutsche Bank Trust Company Americas, as Trustee                                              | ** ** | ** **                                                               |
| **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**   |   | Employment Agreement  dated February 4, 2004, among **Cinergy Corp.**,  **CG&E**, and **PSI**, and James E. Rogers.                                                                           | ** ** | **Cinergy  Corp.** 2003 Form  10-K                                       |
| 10-c                    |   | **Cinergy Corp. CG&E   PSI**   |   | Amended and Restated  Employment Agreement dated October 11, 2002, among **Cinergy Corp.**, Cinergy Services, Inc. (Services), **CG&E**, and **PSI**, and William J. Grealis.                 | ** ** | **Cinergy  Corp.**2002 Form  10-K                                        |
| 10-d                    |   | **Cinergy Corp. CG&E   PSI**   |   | Amended Employment  Agreement effective December 17, 2003 to Employment Agreement dated October  11, 2002, among **Cinergy Corp.**,  Services, **CG&E**, and **PSI**, and William J. Grealis. | ** ** | **Cinergy  Corp.** 2003 Form  10-K                                       |
| 10-e                    |   | **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.                                        | ** ** | **Cinergy  Corp.**2002 Form  10-K                                        |
| 10-f                    |   | **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.                                          | ** ** | **Cinergy  Corp.**2002 Form  10-K                                        |
| 10-g                    |   | **Cinergy Corp.  CG&E   PSI**  |   | Amended Employment  Agreement effective December 17, 2003 to Employment Agreement dated September  12, 2002, among **Cinergy Corp.**,  Services, **CG&E**, and **PSI**, and Michael J. Cyrus. | ** ** | **Cinergy  Corp.** 2003 Form  10-K                                       |
| 10-h                    |   | **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.                                           | ** ** | **Cinergy  Corp.**2002 Form  10-K                                        |
| 10-i                    |   | **Cinergy Corp.   CG&E   PSI** |   | Amended Employment  Agreement effective December 17, 2003 to Employment Agreement dated September  24, 2002, among **Cinergy Corp.**,  Services, **CG&E**, and **PSI**, and James L. Turner.  | ** ** | **Cinergy  Corp.** 2003 Form  10-K                                       |
| 10-j                    |   | **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.                                            | ** ** | **Cinergy  Corp.**2002 Form  10-K                                        |
| 10-k                    |   | **Cinergy Corp.   CG&E  PSI**  |   | Amended Employment  Agreement effective December 17, 2003 to Employment Agreement dated January  1, 2002, among **Cinergy Corp.**,  Services, **CG&E**, and **PSI**, and R. Foster Duncan.    | ** ** | **Cinergy  Corp.** 2003 Form  10-K                                       |
| 10-l                    |   | **Cinergy Corp.   CG&E   PSI** |   | Employment Agreement  dated November 15, 2002, among **Cinergy  Corp.**, **CG&E**, and **PSI** and Marc E. Manly.                                                                             | ** ** | **Cinergy  Corp.** 2003 Form  10-K                                       |
| 10-m                    |   | **Cinergy Corp.   CG&E   PSI** |   | Amended Employment  Agreement effective December 17, 2003 to Employment Agreement dated November  15, 2002, among **Cinergy Corp.**, **CG&E**, and **PSI**, and Marc E. Manly.                | ** ** | **Cinergy  Corp.** 2003 Form  10-K                                       |
| 10-n                    |   | **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                                       |

 

202

----

 
| 10-o  |   | **Cinergy  Corp.**         |       | Separation and  Retirement Agreement and Waiver and Release of Liability dated October 8,  2002 between **Cinergy Corp.** and  Donald B. Ingle, Jr.                                                                                                                                                                                           | ** ** | **Cinergy  Corp.**2002 Form  10-K                                                          |
|-------|--------|----------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------|
| 10-p  |   | **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-q  |   | **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-r  |   | **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-s  |   | **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-t  |   | **Cinergy Corp. CG&E** |       | Split Dollar Insurance  Agreement, effective as of May 1, 1993, between **CG&E** and Jackson H. Randolph.                                                                                                                                                                                                                                 | ** ** | **CG&E** 1994 Form 10-K                                                                |
| 10-u  |   | **Cinergy Corp. CG&E** |       | Amended and Restated  Supplemental Retirement Income Agreement between **CG&E** and Jackson H. Randolph dated January 1, 1995.                                                                                                                                                                                                            | ** ** | **CG&E** 1995 Form 10-K                                                                |
| 10-v  |   | **Cinergy Corp. CG&E** |       | Amended and Restated  Supplemental Executive Retirement Income Agreement between **CG&E**and certain executive officers.                                                                                                                                                                                                                  | ** ** | **CG&E** 1997 Form 10-K                                                                |
| 10-w  |   | **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-x  |   | **Cinergy Corp.**          |       | Amendment to **Cinergy Corp.** Supplemental Executive  Retirement Plan, effective January 1, 2003, adopted October 10, 2003.                                                                                                                                                                                                                  | ** ** | **Cinergy  Corp.** 2003 Form  10-K                                                         |
| 10-y  |   | **Cinergy Corp.**          |       | Amendment to **Cinergy Corp.** Supplemental Executive  Retirement Plan, effective January 1, 2003, adopted December 15, 2003.                                                                                                                                                                                                                 | ** ** | **Cinergy  Corp.** 2003 Form  10-K                                                         |
| 10-z  |   | **Cinergy Corp.**          |       | 1997 Amendments to  Various Compensation and Benefit Plans of **Cinergy  Corp.**, adopted January 30, 1997.                                                                                                                                                                                                                                   | ** ** | **Cinergy  Corp.** 1997 Form  10-K                                                         |
| 10-aa |   | **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-bb |   | **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-cc |   | **Cinergy Corp.**          |       | Amended and Restated **Cinergy Corp.** Annual Incentive Plan, effective January 25,  2002.                                                                                                                                                                                                                                                    | ** ** | **Cinergy  Corp.**2001 Form  10-K                                                          |
| 10-dd |   | **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-ee |   | **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-ff |   | **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-gg |   | **Cinergy Corp.**          | ** ** | **Cinergy  Corp.** UK  Sharesave Scheme, adopted and effective December 16, 1999.                                                                                                                                                                                                                                                             | ** ** | **Cinergy  Corp.** 1999 Form  10-K                                                         |
| 10-hh |   | **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-ii |   | **Cinergy Corp.**          |       | Amendment to **Cinergy Corp.** Directors’ Deferred  Compensation Plan, adopted October 22, 1996.                                                                                                                                                                                                                                         | ** ** | **Cinergy  Corp.** September  30, 1996, Form 10-Q                                          |
| 10-jj |   | **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-kk |   | **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-ll |   | **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-mm |   | **Cinergy Corp.**          | ** ** | **Cinergy  Corp.** Executive  Life Insurance Plan, effective as of January 1, 2004, adopted December 18,  2003.                                                                                                                                                                                                                               | ** ** | **Cinergy  Corp.**2003 Form  10-K                                                          |
| 10-nn |   | **Cinergy Corp.**          |       | Amended and Restated **Cinergy Corp.** 1996 Long-term Incentive  Compensation Plan, effective January 25, 2002.                                                                                                                                                                                                                               | ** ** | **Cinergy  Corp.**2001 Form  10-K                                                          |
| 10-oo |   | **Cinergy Corp.**          | ** ** | **Cinergy  Corp.** 401(k)  Excess Plan, effective January 1, 1997, adopted December 17, 1996.                                                                                                                                                                                                                                                 | ** ** | **Cinergy  Corp.** 1996 Form  10-K                                                         |
| 10-pp |   | **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                                       |

 

203

----

| 10-qq  |   | **Cinergy Corp.**  |       | Amendment  to**Cinergy Corp.** 401(k) Excess  Plan, adopted December 18, 2002, effective January 1, 2003.                                                               | ** ** | **Cinergy Corp.**2002 Form 10-K              |
|--------|--------|--------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------|
| 10-rr  |   | **Cinergy Corp.**  |       | Amendment  to **Cinergy Corp.** 401(k) Excess Plan,  adopted March 31, 2004, effective January 1, 2004.                                                                 | ** ** | **Cinergy Corp.** March 31, 2004 Form 10-Q   |
| 10-ss  |   | **Cinergy  Corp.** | ** ** | **Cinergy  Corp.**  Nonqualified Deferred Incentive Compensation Plan, effective January 1, 1997,  adopted December 17, 1996.                                           | ** ** | **Cinergy  Corp.** 1996 Form  10-K           |
| 10-tt  |   | **Cinergy  Corp.** |       | Amendment to **Cinergy Corp.** Nonqualified Deferred  Incentive Compensation Plan, adopted December 18, 2002, effective January 1,  2002.                               | ** ** | **Cinergy  Corp.**2002 Form  10-K            |
| 10-uu  |   | **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-vv  |   | **Cinergy  Corp.** | ** ** | **Cinergy  Corp.** Non-Union  Employees’ Pension Plan adopted December 18, 2002, amended and restated  effective January 1, 2003.                                  | ** ** | **Cinergy  Corp.**2002 Form  10-K            |
| 10-ww  |   | **Cinergy  Corp.** |       | Amendment to **Cinergy Corp.**Non-Union Employees’  Pension Plan, effective May 1, 2003, adopted October 10, 2003.                                                 | ** ** | **Cinergy Corp.** 2003 Form 10-K             |
| 10-xx  |   | **Cinergy Corp.**  |       | Amendment to**Cinergy Corp.**Non-Union Employees’ Pension  Plan, effective December 1, 2003, adopted October 10, 2003.                                             | ** ** | **Cinergy  Corp.** 2003 Form  10-K           |
| 10-yy  |   | **Cinergy Corp.**  |       | Amendment to **Cinergy Corp.** Non-Union Employees’  Pension Plan, effective January 1, 2005, adopted December 17, 2004.                                           | ** ** | ** **                                   |
| 10-zz  |   | **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-aaa |   | **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-bbb |   | **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-ccc |   | **Cinergy Corp.**  |       | Amended and Restated **Cinergy Corp.** Non-Union Employees’ 401(k)  Plan, adopted December 18, 2002, effective January 1, 2003.                                    | ** ** | **Cinergy  Corp.**2002 Form  10-K            |
| 10-ddd |   | **Cinergy Corp.**  |       | Amendment to **Cinergy Corp.** Non-Union Employees’ 401(k)  Plan, effective December 1, 2003, adopted October 10, 2003.                                            | ** ** | **Cinergy  Corp.** 2003 Form  10-K           |
| 10-eee |   | **Cinergy Corp.**  |       | Amendment to **Cinergy Corp.** Non-Union Employees’ 401(k)  Plan, effective January 1, 2004, adopted December 16, 2003.                                            | ** ** | **Cinergy  Corp.** 2003 Form  10-K           |
| 10-fff |   | **Cinergy Corp.**  |       | Amendment to **Cinergy Corp.** Non-Union Employees’ 401(k) Plan, effective  January 1, 2005, adopted December 17, 2004.                                            | ** ** | ** **                                   |
| 10-ggg |   | **Cinergy Corp.**  | ** ** | **Cinergy  Corp.** Union  Employees’ 401(k) Plan as amended and restated effective January 1, 1998,  adopted December 18, 1997.                                    | ** ** | **Cinergy  Corp.** 1999 Form  10-K           |
| 10-hhh |   | **Cinergy Corp.**  |       | Amendment to **Cinergy Corp.** Union Employees’ 401(k)  Plan, adopted December 1, 1999, effective December 10, 1999.                                               | ** ** | **Cinergy  Corp.** 1999 Form  10-K           |
| 10-iii |   | **Cinergy Corp.**  |       | Amendment to **Cinergy Corp.** Union Employees’ 401(k)  Plan, effective January 1, 2004, adopted December 16, 2003.                                                | ** ** | **Cinergy  Corp.** 2003 Form  10-K           |
| 10-jjj |   | **Cinergy Corp.**  |       | Amendment to **Cinergy Corp.** Union Employees’ 401(k) Plan, effective  January 1, 2005, adopted December 17, 2004.                                                | ** ** | ** **                                   |
| 10-kkk |   | **Cinergy Corp.**  | ** ** | **Cinergy  Corp.** Union  Employees’ Savings Incentive Plan as amended and restated effective January  1, 1998, adopted December 18, 1997.                         | ** ** | **Cinergy  Corp.** 1999 Form  10-K           |
| 10-lll |   | **Cinergy Corp.**  |       | Amendment to **Cinergy Corp.** Union Employees’ Savings  Incentive Plan, effective December 1, 1999, adopted December 10, 1999.                                    | ** ** | **Cinergy  Corp.** 1999 Form  10-K           |
| 10-mmm |   | **Cinergy Corp.**  |       | Amendment to **Cinergy Corp.** Union Employees’ Savings  Incentive Plan, effective January 1, 2004, adopted December 16, 2003.                                     | ** ** | **Cinergy  Corp.** 2003 Form  10-K           |
| 10-nnn |   | **Cinergy Corp.**  |       | Amendment to **Cinergy Corp.**Union Employees’ Savings Incentive Plan,  effective January 1, 2005, adopted December 17, 2004.                                      | ** ** | ** **                                   |
| 10-ooo |   | **Cinergy Corp.**  | ** ** | **Cinergy  Corp.** Excess  Profit Sharing Plan, effective as of January 1, 2003, adopted December 20,  2002.                                                            | ** ** | **Cinergy  Corp.** 2003 Form  10-K           |
| 10-ppp |   | **Cinergy Corp.**  | ** ** | **Cinergy  Corp.** Excess  Pension Plan, as amended and restated, effective as of January 1, 1998.                                                                      | ** ** | **Cinergy  Corp.** 2003 Form  10-K           |
| 10-qqq |   | **Cinergy Corp.**  |       | Amendment to **Cinergy Corp.** Excess Pension Plan,  effective as of August 29, 2002.                                                                                   | ** ** | **Cinergy  Corp.** 2003 Form  10-K           |
| 10-rrr |   | **Cinergy Corp.**  |       | Amendment to **Cinergy Corp.**Excess Pension Plan,  effective as of January 1, 2003, adopted October 10, 2003.                                                          | ** ** | **Cinergy  Corp.** 2003 Form  10-K           |
| 10-sss |   | **Cinergy Corp.**  |       | Amendment to **Cinergy Corp.** Excess Pension Plan,  effective as of December 15, 2003.                                                                                 | ** ** | **Cinergy  Corp.** 2003 Form  10-K           |

 

204

----

 
| 10-ttt                             |       | **Cinergy Corp.**                             |       | Amendment to **Cinergy Corp.** Excess Pension Plan,  effective as of January 1, 2004, adopted December 16, 2003.                                                   | ** ** | **Cinergy  Corp.** 2003 Form  10-K                   |
|------------------------------------|------------|-----------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|
| 10-uuu                             |       | **Cinergy Corp.**                             |       | Amendment to **Cinergy Corp.** Excess Pension Plan,  effective as of January 1, 2005, adopted December 17, 2004.                                                   | ** ** | ** **                                           |
| 10-vvv                             |       | **PSI**                                       |       | Asset Purchase  Agreement by and among Cinergy Capital & Trading, Inc., CinCap Madison,  LLC and **PSI** dated as of February  5, 2003.                        | ** ** | **PSI** March 31, 2003 Form 10-Q                     |
| 10-www                             |       | **PSI**                                       |       | Asset Purchase  Agreement by and among Cinergy Capital & Trading, Inc., CinCap VII, LLC  and **PSI** dated as of February 5,  2003.                            | ** ** | **PSI** March 31, 2003 Form 10-Q                     |
|                               |       | ** **                                    |       |                                                                                                                                                               | ** ** | ** **                                           |
| 10-xxx                             |       | **Cinergy  Corp.**                            |       | Form of incentive stock  option grant agreement.                                                                                                                   | ** ** | **Cinergy  Corp.**September 30, 2004 Form 10-Q       |
|                               |       | ** **                                    |       |                                                                                                                                                               | ** ** | ** **                                           |
| 10-yyy                             |       | **Cinergy  Corp.**                            |       | Form of non-qualified  stock option grant agreement.                                                                                                               | ** ** | **Cinergy  Corp.**September 30, 2004 Form 10-Q       |
|                               |       | ** **                                    |       |                                                                                                                                                               | ** ** | ** **                                           |
| 10-zzz                             |       | **Cinergy  Corp.**                            |       | Form of restricted  stock grant agreement.                                                                                                                         | ** ** | **Cinergy  Corp.**September 30, 2004 Form 10-Q       |
|                               |       | ** **                                    |       |                                                                                                                                                               | ** ** | ** **                                           |
| 10-aaaa                            |       | **Cinergy  Corp.**                            |       | Form of performance  share grant agreement.                                                                                                                        | ** ** | **Cinergy  Corp.**September 30, 2004 Form 10-Q       |
|                               |       | ** **                                    |       |                                                                                                                                                               | ** ** | ** **                                           |
| 10-bbbb                            |       | **Cinergy  Corp.**                            |       | Form of phantom stock  grant agreement.                                                                                                                            | ** ** | **Cinergy  Corp.**September 30, 2004 Form 10-Q       |
|                               |       | ** **                                    |       |                                                                                                                                                               | ** ** | ** **                                           |
| 10-cccc                            |       | **Cinergy Corp.**                             |       | Summary Sheet of  Compensation Arrangement between **Cinergy Corp.**  and its Non-Employee Directors.                                                              | ** ** | ** **                                           |
|                               |       |                                          |       |                                                                                                                                                               |       |                                                 |
| 10-dddd                            |       | **Cinergy Corp.**                             |       | Form of Stock Award  Agreement by and between **Cinergy Corp.**  and its Directors                                                                                 | ** ** | **Cinergy  Corp.** Form 8-K, filed December 14, 2004 |
|                               |       |                                          |       |                                                                                                                                                               |       |                                                 |
| 10-eeee                            |       | **Cinergy Corp.**                             |       | Form of Deferred  Compensation Agreement by and between **Cinergy Corp.**  and its Directors                                                                       | ** ** | **Cinergy  Corp.** Form 8-K, filed December 14, 2004 |
| **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                                                                                                                                                 |       |                                                 |
| **Certifications**                 | ** ** | ** **                                    | ** ** | ** **                                                                                                                                                         | ** ** | ** **                                           |
| 31-a                               |       | **Cinergy Corp. CG&E   PSI   ULH&P**  |       | Certification by James  E. Rogers pursuant to Rule 13a-14(a)/15d-14(a) of the Exchange Act, as  adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ** ** | ** **                                           |
| 31-b                               |       | **Cinergy Corp. CG&E   PSI   ULH&P**  |       | Certification by James L.  Turner pursuant to Rule 13a-14(a)/15d-14(a) of the Exchange Act, as adopted  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ** ** | ** **                                           |
| 32-a                               |       | **Cinergy Corp. CG&E   PSI   ULH&P**  |       | Certification  by James E. Rogers pursuant to 18 U.S.C. Section 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002.                       | ** ** | ** **                                           |
| 32-b                               |       | **Cinergy Corp. CG&E   PSI   ULH&P**  |       | Certification by James  L. Turner pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section  906 of the Sarbanes-Oxley Act of 2002.                       | ** ** | ** **                                           |

----

|       |                                                                                                                                                                                                                                                                                                                                                         |
|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (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 previously listed.                                                                                                                                                                                                                        |

 

205

----

## **FINANCIALSTATEMENT SCHEDULES**

**SCHEDULE II****- VALUATIONAND QUALIFYING ACCOUNTS**

**FOR THE THREEYEARS ENDED DECEMBER 31, 2004**

*(in thousands)*

 
| **Col. A**                          | ** ** | **Col. B**                         | ** ** | **Col. C**              | ** ** | **Col. D**                    | ** ** | **Col. E**                                       | ** ** |
|-------------------------------------|------------|------------------------------------|------------|-------------------------|------------|-------------------------------|------------|--------------------------------------------------|------------|
| ** **                          | ** ** | ** **                         | ** ** | **Additions**           | ** ** | **Deductions**                | ** ** | ** **                                       | ** ** |
| **Description**                     | ** ** | **Balance at Beginning of Period** | ** ** | **Charged to Expenses** | ** ** | **Charged to Other Accounts** | ** ** | **For Purposes for Which Reserves Were Created** | ** ** | **Other** | ** ** | **Balance at Close of Period** | ** ** |
|                                |       |                               |       |                    |       |                          |       |                                             |       |   |   |   |   |
| **Cinergy  Corp.**and  subsidiaries |       |                               |       |                    |       |                          |       |                                             |       |   |   |   |   |
|                                |       |                               |       |                    |       |                          |       |                                             |       |   |   |   |   |
| **Accumulated Provisions**          | ** ** | ** **                         | ** ** | ** **              | ** ** | ** **                    | ** ** | ** **                                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Deducted from Applicable Assets** | ** ** | ** **                         | ** ** | ** **              | ** ** | ** **                    | ** ** | ** **                                       | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                |       |                               |       |                    |       |                          |       |                                             |       |   |   |   |   |
| Allowance for Doubtful Accounts     |       |                               |       |                    |       |                          |       |                                             |       |   |   |   |   |
|                                |       |                               |       |                    |       |                          |       |                                             |       |   |   |   |   |
| **2004**                            | ** ** | **$**                              | **7,884**  | ** **              | **$**      | **1,317**                     | ** ** | **$**                                            | **153**    | ** ** | **$** | **3,840** | ** ** | **$** | **—** | ** ** | **$** | **5,514** | ** ** |
|                                |       |                               |       |                    |       |                          |       |                                             |       |   |   |   |   |
| 2003                                |       | $                                  | 16,368     |                    | $          | 3,256                         |       | $                                                | 302        |   | $ | 12,042 |   | $ | — |   | $ | 7,884 |   |
|                                |       |                               |       |                    |       |                          |       |                                             |       |   |   |   |   |
| 2002                                |       | $                                  | 34,110     |                    | $          | 7,883                         |       | $                                                | 9,270      |   | $ | 34,873 |   | $ | 22 |   | $ | 16,368 |   |
|                                |       |                               |       |                    |       |                          |       |                                             |       |   |   |   |   |
| **CG&E**and subsidiaries        |       |                               |       |                    |       |                          |       |                                             |       |   |   |   |   |
|                                |       |                               |       |                    |       |                          |       |                                             |       |   |   |   |   |
| **Accumulated Provisions**          | ** ** | ** **                         | ** ** | ** **              | ** ** | ** **                    | ** ** | ** **                                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Deducted from Applicable Assets** | ** ** | ** **                         | ** ** | ** **              | ** ** | ** **                    | ** ** | ** **                                       | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                |       |                               |       |                    |       |                          |       |                                             |       |   |   |   |   |
| Allowance for Doubtful Accounts     |       |                               |       |                    |       |                          |       |                                             |       |   |   |   |   |
| ** **                          | ** ** | ** **                         | ** ** | ** **              | ** ** | ** **                    | ** ** | ** **                                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| **2004**                            | ** ** | **$**                              | **1,602**  | ** **              | **$**      | **570**                       | ** ** | **$**                                            | **114**    | ** ** | **$** | **1,564** | ** ** | **$** | **—** | ** ** | **$** | **722** | ** ** |
|                                |       |                               |       |                    |       |                          |       |                                             |       |   |   |   |   |
| 2003                                |       | $                                  | 5,942      |                    | $          | 2,900                         |       | $                                                | 256        |   | $ | 7,496 |   | $ | — |   | $ | 1,602 |   |
|                                |       |                               |       |                    |       |                          |       |                                             |       |   |   |   |   |
| 2002                                |       | $                                  | 25,874     |                    | $          | 2,029                         |       | $                                                | 6,096      |   | $ | 28,057 |   | $ | — |   | $ | 5,942 |   |
|                                |       |                               |       |                    |       |                          |       |                                             |       |   |   |   |   |
| **PSI**                             |       |                               |       |                    |       |                          |       |                                             |       |   |   |   |   |
|                                |       |                               |       |                    |       |                          |       |                                             |       |   |   |   |   |
| **Accumulated Provisions**          | ** ** | ** **                         | ** ** | ** **              | ** ** | ** **                    | ** ** | ** **                                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Deducted from Applicable Assets** | ** ** | ** **                         | ** ** | ** **              | ** ** | ** **                    | ** ** | ** **                                       | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                |       |                               |       |                    |       |                          |       |                                             |       |   |   |   |   |
| Allowance for Doubtful Accounts     |       |                               |       |                    |       |                          |       |                                             |       |   |   |   |   |
| ** **                          | ** ** | ** **                         | ** ** | ** **              | ** ** | ** **                    | ** ** | ** **                                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| **2004**                            | ** ** | **$**                              | **1,110**  | ** **              | **$**      | **21**                        | ** ** | **$**                                            | **—** | ** ** | **$** | **960** | ** ** | **$** | **—** | ** ** | **$** | **171** | ** ** |
|                                |       |                               |       |                    |       |                          |       |                                             |       |   |   |   |   |
| 2003                                |       | $                                  | 5,656      |                    | $          | —                        |       | $                                                | —     |   | $ | 4,546 |   | $ | — |   | $ | 1,110 |   |
|                                |       |                               |       |                    |       |                          |       |                                             |       |   |   |   |   |
| 2002                                |       | $                                  | 6,773      |                    | $          | 2,310                         |       | $                                                | 3,174      |   | $ | 6,579 |   | $ | 22 |   | $ | 5,656 |   |
|                                |       |                               |       |                    |       |                          |       |                                             |       |   |   |   |   |
| **ULH****&P**                   | ** ** | ** **                         | ** ** | ** **              | ** ** | ** **                    | ** ** | ** **                                       | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                |       |                               |       |                    |       |                          |       |                                             |       |   |   |   |   |
| **Accumulated Provisions**          | ** ** | ** **                         | ** ** | ** **              | ** ** | ** **                    | ** ** | ** **                                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Deducted from Applicable Assets** | ** ** | ** **                         | ** ** | ** **              | ** ** | ** **                    | ** ** | ** **                                       | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                |       |                               |       |                    |       |                          |       |                                             |       |   |   |   |   |
| Allowance for Doubtful Accounts     |       |                               |       |                    |       |                          |       |                                             |       |   |   |   |   |
| ** **                          | ** ** | ** **                         | ** ** | ** **              | ** ** | ** **                    | ** ** | ** **                                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| **2004**                            | ** ** | **$**                              | **192**    | ** **              | **$**      | **—**                    | ** ** | **$**                                            | **—** | ** ** | **$** | **179** | ** ** | **$** | **—** | ** ** | **$** | **13** | ** ** |
|                                |       |                               |       |                    |       |                          |       |                                             |       |   |   |   |   |
| 2003                                |       | $                                  | 84         |                    | $          | —                        |       | $                                                | 108        |   | $ | — |   | $ | — |   | $ | 192 |   |
|                                |       |                               |       |                    |       |                          |       |                                             |       |   |   |   |   |
| 2002                                |       | $                                  | 1,196      |                    | $          | 392                           |       | $                                                | 2,383      |   | $ | 3,887 |   | $ | — |   | $ | 84 |   |
|                                |       |                               |       |                    |       |                          |       |                                             |       |   |   |   |   |
|                                     |            |                                    |            |                         |            |                               |            |                                                  |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

206

----

## **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 has dulycaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.

 

 

CINERGY CORP.

THE CINCINNATI GAS & ELECTRIC COMPANY

PSI ENERGY, INC.

THE UNION LIGHT, HEAT AND POWER COMPANY

Registrants

 
| Date: February 25, 2004 |   |                    |
|-------------------------|--------|-------------------------|
|                    |   |                    |
|                    |   |                    |
|                    | By     | /s/ James E. Rogers     |   |
|                    |   | James E. Rogers         |   |
|                    |   | Chief Executive Officer |   |

 

207

----

 

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.** | ** **           | ** ** | ** ** | ** **                                                          | ** ** |
|              | Michael G. Browning* |       | Director   |                                                                | February 25, 2005 |
|              | Phillip R. Cox*      |       | Director   |                                                                | February 25, 2005 |
|              | George C. Juilfs*    |       | Director   |                                                                | February 25, 2005 |
|              | Thomas E. Petry*     |       | Director   |                                                                | February 25, 2005 |
|              |                 |       |       |                                                                |   |   |
|              | /s/ James E. Rogers  |       |       |                                                                |   |   |
|              | James E. Rogers      |       |       | Director and Chief  Executive Officer (principal executive officer) |   | February 25, 2005 |
|              | Mary L. Schapiro*    |       | Director   |                                                                | February 25, 2005 |
|              | John J. Schiff, Jr.* |       | Director   |                                                                | February 25, 2005 |
|              | Philip R. Sharp*     |       | Director   |                                                                | February 25, 2005 |
|              | Dudley S. Taft*      |       | Director   |                                                                | February 25, 2005 |
|              |                 |       |       |                                                                |   |   |
|              | /s/ James L. Turner  |       |       |                                                                |   |   |
|              | James L. Turner      |       |       | Chief Financial Officer  (principal financial officer)              |   | February 25, 2005 |
|              |                 |       |       |                                                                |   |   |
|              | /s/ Lynn J. Good     |       |       |                                                                |   |   |
|              | Lynn J. Good         |       |       | Vice President and  Controller (principal accounting officer)       |   | February 25, 2005 |
| ** **        | ** **           | ** ** | ** ** | ** **                                                          | ** ** | ** ** |
| **CG&E**      | ** **           | ** ** | ** ** | ** **                                                          | ** ** |
|              | Michael J. Cyrus*    |       | Director   |                                                                | February 25, 2005 |
|              |                 |       |       |                                                                |   |   |
|              | /s/ James E. Rogers  |       |       |                                                                |   |   |
|              | James E. Rogers      |       |       | Director and Chief  Executive Officer (principal executive officer) |   | February 25, 2005 |
|              |                 |       |       |                                                                |   |   |
|              | /s/ James L. Turner  |       |       |                                                                |   |   |
|              | James L. Turner      |       |       | Director and Chief  Financial Officer (principal financial officer) |   | February 25, 2005 |
|              |                 |       |       |                                                                |   |   |
|              | /s/ Lynn J. Good     |       |       |                                                                |   |   |
|              | Lynn J. Good         |       |       | Vice President and  Controller (principal accounting officer)       |   | February 25, 2005 |
|              |                 |       |       |                                                                |   |   |
| **PSI**           | ** **           | ** ** | ** ** | ** **                                                          | ** ** |
|              | Michael G. Browning* |       | Director   |                                                                | February 25, 2005 |
|              | Kay E. Pashos*       |       |       | Director                                                            |   | February 25, 2005 |
|              |                 |       |       |                                                                |   |   |
|              | /s/ James E. Rogers  |       |       |                                                                |   |   |
|              | James E. Rogers      |       |       | Director and Chief  Executive Officer (principal executive officer) |   | February 25, 2005 |
|              |                 |       |       |                                                                |   |   |
|              | /s/ James L. Turner  |       |       |                                                                |   |   |
|              | James L. Turner      |       |       | Chief Financial Officer  (principal financial officer)              |   | February 25, 2005 |
|              |                 |       |       |                                                                |   |   |
|              | /s/ Lynn J. Good     |       |       |                                                                |   |   |
|              | Lynn J. Good         |       |       | Vice President and  Controller (principal accounting officer)       |   | February 25, 2005 |
|              |                 |       |       |                                                                |   |   |
| **ULH&P**     | ** **           | ** ** | ** ** | ** **                                                          | ** ** |
|              |                 |       |       |                                                                |   |   |
|              | Michael J. Cyrus*    |       |       | Director                                                            |   | February 25, 2005 |
|              |                 |       |       |                                                                |   |   |
|              | /s/ James E. Rogers  |       |       |                                                                |   |   |
|              | James E. Rogers      |       |       | Director and Chief  Executive Officer (principal executive officer) |   | February 25, 2005 |
|              |                 |       |       |                                                                |   |   |
|              | /s/ James L. Turner  |       |       |                                                                |   |   |
|              | James L. Turner      |       |       | Director and Chief  Financial Officer (principal financial officer) |   | February 25, 2005 |
|              |                 |       |       |                                                                |   |   |
|              | /s/ Lynn J. Good     |       |       |                                                                |   |   |
|              | Lynn J. Good         |       |       | Vice President and  Controller (principal accounting officer)       |   | February 25, 2005 |
|              |                 |       |       |                                                                |   |   |
|                   |                      |            |            |                                                                     |  |  |  |  |  |  |  |  |  |  |  |  |  |

----

*                 Theundersigned, by signing his name hereto, does hereby execute this Form 10-K onbehalf of the officers and directors of the registrant previously indicated byasterisks, pursuant to powers of attorney duly executed by such officers anddirectors and incorporated by reference as an exhibit to this Form 10-K.

 

208

----

 
| /s/ James E. Rogers     |
|-------------------------|
| James E. Rogers         |
| *Attorney-In-Fact*      |
| February 25,  2005 |
|                    |
| /s/ James L.  Turner    |
| James L. Turner         |
| *Attorney-In-Fact*      |
| February 25,  2005 |

 

209

----