**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-K**

 

**(MarkOne)**

**ý****    ANNUALREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934**

 

**Forthe fiscal year ended December 31, 2003**

 

**or**

 

**o****    TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934**

 

**Forthe transition periodfrom                     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 toSection 12(b) of the Act is registered on the New York Stock Exchange:**

** **

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

 

 

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

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Indicate by check markwhether each registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that such registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

Yes ý   Noo

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Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of registrants’knowledge, in definitive proxy or information statements incorporated by referencein Part III of this Form 10-K or any amendment to this Form 10-K.  ý

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

 

**TheUnion Light, Heat and Power Company** meets the conditions setforth in General Instruction I (1)(a) and (b) of Form 10-K and is thereforefiling this Form 10-K with the reduced disclosure format specified in GeneralInstruction I (2) of Form 10-K.

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

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

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As of June 30, 2003,the aggregate market value of the common equity of **Cinergy Corp.** held by non-affiliates (shareholders who are notdirectors or executive officers) was $6.5 billion.  All of the common stock of **TheCincinnati Gas & Electric Company** and **PSI Energy, Inc.** is owned by **CinergyCorp.**, and all of the common stock of **The Union Light, Heat and Power Company** is owned by **The Cincinnati Gas & Electric Company**.  As of January 31, 2004, each registranthad the following shares of common stock outstanding:

 
| **Registrant**                                 |   | **Description**                                 |   | **Shares**  |
|------------------------------------------------|--------|-------------------------------------------------|--------|-------------|
|                                           |   |                                            |   |        |
| **Cinergy  Corp.**                             |   | Par value $.01 per  share                       |   | 178,653,273 |
|                                           |   |                                            |   |        |
| **The  Cincinnati Gas & Electric Company** |   | Par value $8.50 per  share                      |   | 89,663,086  |
|                                           |   |                                            |   |        |
| **PSI  Energy, Inc.**                          |   | Without par value,  stated value $.01 per share |   | 53,913,701  |
|                                           |   |                                            |   |        |
| **The  Union Light, Heat and Power Company**   |   | Par value $15.00 per  share                     |   | 585,333     |

 

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**DOCUMENTSINCORPORATED BY REFERENCE**

 

Portions of the ProxyStatement of **Cinergy Corp.** and theInformation Statement of **PSI Energy, Inc.**to be filed with the Securities and Exchange Commission in 2004 areincorporated by reference into Part III of this report.

 

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

 

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**TABLEOF CONTENTS**

 
| **Item  Number** |                                                                                            |                                     |
|------------------|-------------------------------------------------------------------------------------------------|------------------------------------------|
|             |                                                                                            |                                     |
|             | **Cautionary Statements Regarding Forward-Looking Information**                                 |                                     |
|             |                                                                                            |                                     |
|             | **PART I**                                                                                      |                                     |
| 1                | **Business**                                                                                    |                                     |
|             |                                                                                            | Website  Access to Reports               |   |
|             |                                                                                            | Organization                             |   |
|             |                                                                                            | Employees                                |   |
|             |                                                                                            | Current Trends                           |   |
|             |                                                                                            | Business Units                           |   |
|             |                                                                                            | Environmental  Matters                   |   |
|             |                                                                                            | Future Expectations/Trends               |   |
| 2                | **Properties**                                                                                  |                                     |
|             |                                                                                            | Commercial                               |   |
|             |                                                                                            | Regulated  Businesses                    |   |
| 3                | **Legal Proceedings**                                                                           |                                     |
|             |                                                                                            | Clean Air Act Lawsuit                    |   |
|             |                                                                                            | Manufactured Gas  Plant Sites (MGP)      |   |
|             |                                                                                            | Energy Market  Investigations            |   |
|             |                                                                                            | Patents                                  |   |
| 4                | **Submission  of Matters to a Vote of Security Holders**                                        |                                     |
|             |                                                                                            |                                     |
|             | **PART II**                                                                                     |                                     |
| 5                | **Market  for Registrant’s Common Equity and Related Stockholder Matters**                 |                                     |
| 6                | **Selected Financial Data**                                                                     |                                     |
| 7                | **Management’s  Discussion and Analysis of Financial Condition and Results of Operations** |                                     |
|             |                                                                                            | Introduction                             |   |
|             |                                                                                            | Liquidity and Capital  Resources         |   |
|             |                                                                                            | 2003 Results of  Operations - Historical |   |
|             |                                                                                            | 2002 Results of Operations - Historical  |   |
|             |                                                                                            | Results of Operations -  Future          |   |
| 7A               | **Quantitative and Qualitative  Disclosures About Market Risk**                                 |                                     |
|             | **Index  to Financial Statements and Financial Statement Schedules**                            |                                     |
| 8                | **Financial Statements and  Supplementary Data**                                                |                                     |
| 9                | **Changes in and Disagreements with  Accountants on Accounting and Financial Disclosure**       |                                     |
| 9A               | **Controls and Procedures**                                                                     |                                     |
|             |                                                                                            |                                     |
|             | **PART III**                                                                                    |                                     |
| 10               | **Directors and Executive Officers  of the Registrants**                                        |                                     |
|             |                                                                                            | Board of  Directors                      |   |

 

4

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

 

5

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**CAUTIONARYSTATEMENTS**

 

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

 

**CAUTIONARYSTATEMENTS REGARDING FORWARD-LOOKING INFORMATION**

 

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

 

Forward-lookingstatements involve risks and uncertainties that may cause actual results to bematerially different from the results predicted.  Factors that could cause actual results to differ materially fromthose indicated in any forward-looking statement include, but are not limitedto:

 

•                  Factorsaffecting operations, such as:

 

(1)          unanticipated weatherconditions;

(2)          unscheduled generationoutages;

(3)          unusual maintenance orrepairs;

(4)          unanticipated changes incosts;

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

(6)          electric transmission orgas pipeline system constraints.

 

•                  Legislativeand regulatory initiatives.

 

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

 

•                  Financialor regulatory accounting principles.

 

•                  Political,legal, and economic conditions and developments in the countries in which wehave a presence.

 

•                  Changingmarket conditions and other factors related to physical energy and financialtrading activities.

 

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

 

•                  Availabilityof, or cost of, capital.

 

•                  Employeeworkforce factors.

 

•                  Delaysand other obstacles associated with mergers, acquisitions, and investments injoint ventures.

 

6

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

 

We undertake noobligation to update the information contained herein.

 

7

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**BUSINESS**

 

## **PART I**

## ** **

## **ITEM 1.  BUSINESS**

## ** **

### **WEBSITE ACCESS TO REPORTS**

### ** **

We make our annual reporton Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, andamendments to those reports, filed or furnished pursuant to section 13(a)or 15(d) of the Securities Exchange Act of 1934 available free of charge on orthrough our internet website, www.cinergy.com, as soon as reasonablypracticable after we electronically file such material with, or furnish it to,the Securities and Exchange Commission (SEC).

 

### **ORGANIZATION**

### ** **

**CinergyCorp.**, a Delaware corporation organized in 1993, owns alloutstanding common stock of The Cincinnati Gas & Electric Company (**CG&E**) and PSI Energy, Inc. (**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 SEC under the Public Utility HoldingCompany Act of 1935, as amended.  Ourother principal subsidiaries are:

 

•                  CinergyServices, Inc. (Services);

•                  CinergyInvestments, Inc. (Investments); and

•                  CinergyWholesale Energy, Inc. (Wholesale Energy).

 

**CG&E**,an Ohio corporation organized in 1837, is a combination electric and gas publicutility company that provides service in the southwestern portion of Ohio and,through its subsidiaries, in nearby areas of Kentucky and Indiana.  **CG&E**is responsible for the majority of our power marketing and tradingactivity.  **CG&E’s** principal subsidiary, The Union Light, Heat andPower Company (**ULH&P**), is aKentucky corporation organized in 1901, that provides electric and gas servicein northern Kentucky.  **CG&E’s** other subsidiaries areinsignificant to its results of operations.

 

In 2001, **CG&E** began a transition to electricderegulation and customer choice. Currently, the competitive retail electric market in Ohio is in thedevelopment stage.  **CG&E** is recovering its Public UtilitiesCommission of Ohio (PUCO) approved costs and retail electric rates are frozenduring this market development period. In January 2003, **CG&E**filed an application with the PUCO for approval of a methodology to establishhow market-based rates for non-residential customers will be determined whenthe market development period ends.  InDecember 2003, the PUCO requested that **CG&E**propose a rate stabilization plan.  InJanuary 2004, **CG&E**complied with the PUCO request and filed an electric reliability and ratestabilization plan.  See the “RetailMarket Developments” section in “Item 7. Management’s Discussion and Analysis of Financial Condition and Resultsof Operations” for a discussion of key elements of Ohio deregulation.

 

**PSI**,an Indiana corporation organized in 1942, is a vertically integrated andregulated electric

 

8

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utility that providesservice in north central, central, and southern Indiana.

 

The following tablepresents further information related to the operations of our domestic utilitycompanies (our operating companies):

 
|                           |   | **Principal  Line(s) of Business**                                                                                                                                            |   | **Major Cities Served**                                                                               |   | **Approximate  Population  Served** |
|--------------------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------------------|--------|-------------------------------------|
|                           |   |                                                                                                                                                                          |   |                                                                                                  |   |                                |
| **CG&E**  and subsidiaries |   | •                  Generation, transmission,  distribution, and sale of electricity |   | Cincinnati, OH  Middletown, OH  Covington, KY  Florence, KY  Newport, KY  Lawrenceburg, IN            |   | 2,071,000                           |
|                           |   |                                                                                                                                                                          |   |                                                                                                  |   |                                |
|                           |   | •                  Sale and/or transportation of  natural gas                       |   |                                                                                                  |   |                                |
|                           |   | •                  Electric commodity marketing and  trading operations             |   |                                                                                                  |   |                                |
|                           |   |                                                                                                                                                                          |   |                                                                                                  |   |                                |
| **PSI**                        |   | •                  Generation, transmission,  distribution, and sale of electricity |   | Bloomington, IN  Carmel, IN  Columbus, IN  Kokomo, IN  Lafayette, IN  New Albany, IN  Terre Haute, IN |   | 2,269,000                           |
|                           |   |                                                                                                                                                                          |   |                                                                                                  |   |                                |
| **ULH&P**(1)               |   | •                  Transmission, distribution, and  sale of electricity             |   | Covington, KY  Florence, KY  Newport, KY                                                              |   | 345,000                             |
|                           |   | •                  Sale and transportation of natural  gas                          |   |                                                                                                  |   |                                |

 

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(1)          See Note 19 of the“Notes to Financial Statements” in “Item 8. Financial Statements andSupplementary Data” for further discussion of the possible transfer ofgeneration assets.

 

Services is a servicecompany that provides our subsidiaries with a variety of centralizedadministrative, management, and support services.  Investments holds most of our domestic non-regulated,energy-related businesses and investments, including natural gas marketing andtrading operations.

 

Wholesale Energy, througha wholly-owned subsidiary, Cinergy Power Generation Services, LLC (GenerationServices), provides electric production-related construction, operation, andmaintenance services to certain affiliates and non-affiliated third parties.

 

9

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**EMPLOYEES**

 

We have collective bargainingagreements with the International Brotherhood of Electrical Workers (IBEW), theUnited Steelworkers of America (USWA), the Utility Workers Union of America(UWUA), and various international union organizations.

 

The following tableindicates the number of employees by classification at December 31, 2003:

 
|                         |   | **Regulated**   |   | **Non-Regulated** |   |
|------------------------------|--------|-----------------|--------|-------------------|--------|
| **Classification**           |   | **CG&E(4)** |   | **PSI**           |   | **ULH&P** |   | **Total  Regulated** |   | **Domestic(5)(6)** |   | **International** |   | **Total Non-  Regulated** |   | **Cinergy  Total** |   |
|                         |   |            |   |              |   |   |   |   |   |   |   |   |   |   |   |   |   |
| IBEW(1)                      |   | 508             |   | 1,236             |   | 57 |   | 1,801 |   | 827 |   | — |   | 827 |   | 2,628 |   |
| USWA(2)                      |   | 274             |   | —            |   | 82 |   | 356 |   | 19 |   | — |   | 19 |   | 375 |   |
| UWUA(3)                      |   | 375             |   | —            |   | 59 |   | 434 |   | 347 |   | — |   | 347 |   | 781 |   |
| Various Union  Organizations |   | —          |   | —            |   | — |   | — |   | 133 |   | 224 |   | 357 |   | 357 |   |
| Non-Bargaining               |   | 193             |   | 347               |   | 20 |   | 560 |   | 2,829 |   | 163 |   | 2,992 |   | 3,552 |   |
|                         |   | 1,350           |   | 1,583             |   | 218 |   | 3,151 |   | 4,155 |   | 387 |   | 4,542 |   | 7,693 |   |

 

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

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

(3)          Contract will expire onMarch 31, 2005.

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

(5)          Includes 2,406 Services’employees, who provide services to both regulated and non-regulated operations.

(6)          Includes 1,267Generation Services’ employees who provide services to certain affiliates andnon-affiliated third parties.  EffectiveJanuary 1, 2004, Generation Services’ employees will be transferred toother affiliated corporations as follows: 524 to **CG&E**; 21 to **PSI**; 708 to Services; and 14 to othernon-regulated corporations.

 

**CURRENT TRENDS**

 

Two issues have beendiscussed prominently in regards to our industry during the past year.  Transmission system reliability has been asignificant focus, including participation in Regional TransmissionOrganizations (RTOs).  In addition,significant discussion has occurred regarding the ability to addressenvironmental issues for coal-fired generating units via a multi-pollutantapproach.

 

Transmission systemreliability has attracted a great deal of attention since the August 2003blackout.  Federal legislation has beenproposed requiring mandatory reliability standards developed by an independentreliability organization with enforcement authority given to Federal EnergyRegulatory Commission (FERC).  However,it is unclear at this point whether federal reliability legislation will beenacted in the near future.  Also, the NorthAmerican Reliability Council (NERC) and the FERC are moving ahead with theirown initiatives to introduce more stringent reliability standards with a focuson mandatory compliance.  In the past,compliance with NERC reliability standards and guidelines has largely beenvoluntary.  It is clear thattransmission owners and operators will be subjected to increasing pressure toimprove reliability and will incur additional costs as a result.

 

10

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RTOs oversee theoperation of multiple transmission systems and allow for improved coordinationof transmission flow and planning.  Theyprovide a single rate for transmission of power between any two points withinthe RTO footprint.  There are RTOs atvarious levels of development around the country, with the Midwest IndependentSystem Operator (Midwest ISO), of which we are a member, being thelargest.  The FERC is a strong proponentof transmission owners joining RTOs, but at this point is not requiringentities to do so, nor is it requiring entities in the same geographic area tonecessarily join the same RTO.  This isparticularly a concern in the Midwest, where some companies have yet to joinRTOs, and where proposed RTO boundaries between the Midwest ISO and its Easternneighbor, PJM Interconnection (PJM) are intermixed.  The FERC has ordered that the Midwest ISO and PJM work toeliminate potential operational issues created by the intermixed boundary, butat this point, concerns remain as to how these entities will work to achievethe FERC’s objective.  In addition, theMidwest ISO has indicated its intent to create a financial market, similar tothe market currently in place in PJM, before the end of 2004.  The development of this market couldsignificantly impact the way power is bought and sold within and outside theMidwest ISO.  Among other things, it isintended to increase market transparency and assign a market price to use ofcongested transmission facilities.  TheMidwest ISO had originally proposed a plan for such a market via a filing with theFERC in July 2003, but it was subsequently withdrawn in October 2003due to concerns expressed by the entities that would be affected by thatproposal.  The Midwest ISO is expectedto revise its model and proceed with a new filing in the near future, but atthis point it is not clear how this model would differ from what was originallyproposed, nor how it might affect participants in the Midwest ISO market.

 

The power sector,particularly coal-fired generation, has long been subject to a complex set ofair emission requirements, with often overlapping and unclear rules.  Many in the industry have expressed a viewthat a comprehensive, multi-pollutant approach to addressing emissions is themost reasonable and cost effective way to achieve increased emission reductiongoals across a broader group of pollutants. During 2003, President Bush’s “Clear Skies Initiative” (Clear Skies) wasa multi-pollutant, legislative proposal designed to achieve this goal.  At the same time, the EnvironmentalProtection Agency (EPA) was, under court order, drafting proposed regulationscontrolling mercury emissions via maximum achievable control technology(Mercury MACT) that were published in December 2003 and will becomeeffective December 15, 2004. Passage of Clear Skies in 2003 would have rendered EPA rulemaking onmercury unnecessary, since mercury controls were a part of the proposedlegislation.  Although several hearingswere held, Congress did not vote on the legislation in 2003 and its futureprospects are uncertain.  As part of theMercury MACT draft regulations published in December, alternate approaches wereproposed for dealing with mercury.  Onealternative would include a cap and trade approach to mercury (similar toproposals in Clear Skies).  The otherwould be a source specific reduction in emissions, without a cap and tradeapproach.  The cap and trade approachwould provide a longer compliance horizon and provide more flexible complianceoptions for coal-fired generators.

 

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The different alternativesproposed under the draft mercury regulations would result in substantiallydifferent requirements for compliance, both in terms of cost and timelines.

 

**BUSINESS UNITS**

 

We conduct operationsthrough our subsidiaries and manage our businesses through the following threereportable segments:

 

•                  CommercialBusiness Unit (Commercial), formerly named the Energy Merchant Business Unit;

•                  RegulatedBusinesses Business Unit (Regulated Businesses); and

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

 

The followingsection describes the activities of our business units as ofDecember 31, 2003.

See Note 15 of the “Notesto Financial Statements” in “Item 8. Financial Statements and SupplementaryData” for financial information by business segment.

 

#### **Commercial**

#### ** **

Commercial manages,operates and/or maintains our generation and the marketing and trading ofenergy commodities, primarily natural gas and electricity.  The marketing and trading of energycommodities includes energy risk management activities, trading activities, andcustomized energy solutions.  See the“Market Risk Sensitive Instruments and Positions” section of “Item 7.  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations” for information on risksassociated with these activities.  Inaddition, Commercial is also an on-site energy solutions and utility servicesprovider.

 

Commercial competes forwholesale contracts for the purchase and sale of electricity and naturalgas.  Commercial’s main competitorsinclude public utilities, power and natural gas marketers and traders, andindependent power producers.

 

##### ***Generation andFuel Supply***

##### *** ***

As of December 31,2003, the total winter electric capability (including our portion of the totalcapacity for the jointly-owned plants) of our domestic generating plants was13,331 megawatts (MW).  Approximately 73percent of this generation portfolio is coal-fired.  See “Item 2.  Properties”for a further discussion of the generating facilities.  Included in these generating plants areplants that are operated by Commercial on behalf of Regulated Businesses.  The results of operations of thesegenerating plants operated by Commercial are managed by and therefore reportedunder Regulated Businesses.

 

Each year, through **CG&E** and **PSI**, we purchase over 25 million tons of coal to generateelectricity, primarily from mines located in Indiana, West Virginia, Ohio,Kentucky, Pennsylvania, and Illinois. Our general practice is to procure a substantial portion of coal throughfixed-price contracts of varying tenors. We hold fixed price contracts that will source a substantial portion ofour expected 2004 coal requirements.  Weevaluate the appropriate amount of contract coal and length of contracts basedon market conditions, including pricing trends, volatility and supplierreliability.

 

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We receive our coalsupply primarily from mines located in Indiana, West Virginia, Ohio, Kentucky,Pennsylvania, and Illinois.

 

**Cinergy**has a fleet of natural gas-fired peaking plants that have a capacity of 3,029MW.  The fuel for these units isobtained 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“Market Risk Sensitive Instruments and Positions” section of “Item 7.  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations”.  For further information on these agreements with CinergyMarketing and Trading, LP (Marketing & Trading), see Note 1(s) of the“Notes to Financial Statements” in “Item 8. Financial Statements andSupplementary Data”.

 

Commercial monitorsalternative sources of coal and gas to assure a continuing availability ofeconomical fuel supplies.  As such, itwill maintain its practice of purchasing a portion of coal and gas requirementson the open market and will continue to investigate least-cost coal options tocomply with new and existing environmental requirements.  **Cinergy**,**CG&E**, and **PSI** believe that they can continue toobtain enough coal and gas to meet future needs.  However, future environmental requirements may significantlyimpact the availability and price of these fuels.

 

In addition, with thecontinuing emphasis on environmental regulation **Cinergy, CG&E,** and **PSI**maintain a portfolio of sulfur dioxide (SO2) and nitrogen oxide (NOX)****emission allowances.  These allowances permit us to continue toobtain and burn high sulfur coal in compliance with environmentalregulations.  **Cinergy, CG&E,** and **PSI**believe that they can obtain the necessary SO2 and NOXemission allowances to continue this practice.

 

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

##### *** ***

The energy marketing andtrading activities of Commercial principally consists of Marketing &Trading’s natural gas marketing and trading operations, **CG&E’s** power marketing and tradingoperations, and Cinergy Global Trading Limited’s (Global Trading) natural gasand power trading operations in the United Kingdom.  In April 2002, **CG&E**and **PSI** executed a new jointoperating agreement whereby new power marketing and trading contracts sinceApril 2002 are originated on behalf of **CG&E**only.  Historically, such contracts wereexecuted on behalf of **PSI** and **CG&E** jointly.

 

Our domestic operationsmarket and trade over-the-counter (an informal market where the buying/sellingof commodities occurs) contracts for the purchase and sale of electricity(primarily in the Midwest region of the United States), natural gas, and otherenergy-related products.  Our naturalgas domestic operations provide services that manage storage, transportation,gathering and processing activities.  Inaddition, our domestic operations also market and trade natural gas and otherenergy-related products on the New York Mercantile Exchange.  Global Trading’s operations tradeover-the-counter contracts for the purchase and sale of natural gas andelectricity (both primarily in the United Kingdom).  Global Trading also trades natural gas on the International PetroleumExchange.  See the “Market RiskSensitive Instruments and Positions”

 

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section of “Item7.  Management’s Discussion and Analysisof Financial Condition and Results of Operations” for information on risksassociated with these activities.

 

##### ***PurchasedPower***

##### *** ***

At times, we purchasepower to meet the energy needs of our wholesale customers and to meet therequirements of our retail native load customers (end-use customers within ouroperating companies’ franchise territory). Factors that could cause **Cinergy**to purchase power for retail native load customers include generating plantoutages, extreme weather conditions, summer reliability, and growth.  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.

 

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

##### *** ***

Commercial,through its Cinergy Solutions Holding Company, Inc. subsidiary, is an on-siteenergy solutions and utility services provider.  We provide operation and maintenance of utility systems, as wellas cogeneration.  Cogeneration isthe simultaneous production of two or more forms of useable energy from asingle fuel source.

 

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

##### *** ***

As of December 31,2003, we had ownership interests in energy-related assets located in fivedifferent countries.  These assets serveretail and wholesale customers by providing utility services includinggeneration of electricity and heat as well as the distribution of gas andelectric commodities.

 

##### ***Revenue Dataand Customer Base***

##### *** ***

Commercial’s operatingrevenue is derived primarily by providing and trading electricity in theMidwest region of the United States (U.S.). In addition, Commercial provides and trades natural gas primarily towholesale customers across the U.S.  Themajority of Commercial’s customers are public utilities, power and natural gasmarketers and traders, and independent power producers.

 

#### **Regulated Businesses**

#### ** **

Regulated Businessesconsists of **PSI’s** regulatedgeneration and transmission and distribution operations, and **CG&E** and its subsidiaries’ regulatedelectric and gas transmission and distribution systems.  Regulated Businesses plans, constructs,operates, and maintains **Cinergy’s**transmission and distribution systems and delivers gas and electric energy toconsumers.  Regulated Businesses alsoearns revenues from wholesale customers primarily by transmitting electricpower through **Cinergy’s**transmission system.  RegulatedBusinesses operated approximately 47,000 circuit miles (the total length inmiles of separate circuits) of electric lines to provide regulated transmissionand distribution service to approximately 1.5 million customers as ofDecember 31, 2003.

 

14

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Regulated Businessesoperated approximately 13,400 miles of gas mains (gas distribution lines thatserve as a common source of supply for more than one service line) and servicelines to provide domestic regulated transmission and distribution services toapproximately 500,000 customers as of December 31, 2003.  See “Item 2.  Properties” for a further discussion of the transmission anddistribution systems owned by our operating companies.

 

##### ***ElectricOperations***

##### *** ***

Regulated Businesses(through our operating companies) and other non-affiliated utilities in anine-state region are parties to the East Central Area Reliability CouncilAgreement (ECAR Agreement).  The ECARAgreement coordinates the planning and operation of generation and transmissionfacilities, which provides for reliability of regional bulk power supply.

 

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##### ***TransmissionSystem Interconnections***

##### *** ***

The following mapillustrates the interconnections between our electric systems and otherelectric systems.

 

##### ******

 

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***Midwest ISO***

##### *** ***

The Midwest ISO wasestablished as a non-profit organization to maintain functional control overthe combined transmission systems of its members.  For further information on the Midwest ISO, see the “FERC andMidwest ISO” section of “Item 7. Management’s Discussion and Analysis of Financial Condition and Resultsof Operations”.

 

##### ***ElectricitySupply***

##### *** ***

A joint operatingagreement, effective in April 2002, allows **Cinergy** to jointly dispatch the regulated generating assets of**PSI** in conjunction with thederegulated generating assets of **CG&E. **Under this agreement, transfersof power between **PSI** and **CG&E** are generally priced at marketrates.

 

With the implementationof electric deregulation in Ohio, effective January 1, 2001, RegulatedBusinesses continues, through a market development period, to acquire itselectricity requirements from Commercial for those retail customers who do notswitch suppliers.

 

**ULH&P**purchases energy from **CG&E**pursuant to a contract effective January 1, 2002, which was approved bythe FERC and the Kentucky Public Service Commission (KPSC).  This five-year agreement is a negotiatedfixed-rate contract with **CG&E**and replaces the previous cost of service based contract, which expired onDecember 31, 2001.

 

In December 2003,the KPSC conditionally approved a long-term electric supply plan for **ULH&P** that will replace the currentcontract with **CG&E** listedabove.  Under this new plan, **CG&E** will transfer ownership ofapproximately 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 described above.  **ULH&P**willalso seek regulatory approval for aspects of this transaction from the FERC andSEC.  At this time, **ULH&P** is unable to predict the outcomeof this matter.

 

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

 

##### ***Gas Supply***

##### *** ***

Regulated Businesses isresponsible for the purchase and the subsequent delivery of natural gas tonative load customers.  Regulated Businesses’natural gas procurement strategy is to buy firm natural gas supplies (naturalgas intended to be available at all times) and firm interstate pipelinetransportation capacity during the winter season (November through March)and during the non-heating season (April through October) through acombination of firm supply and transportation capacity along with spot supplyand interruptible transportation capacity. This strategy allows Regulated Businesses to assure reliable natural gassupply for its high priority (non-curtailable) firm customers during peakwinter conditions and provides Regulated Businesses the flexibility to reduceits contract commitments if firm customers choose alternate gas suppliers underthe

 

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Regulated Businesses’customer choice/gas transportation programs. In 2003, firm supply purchase commitment agreements providedapproximately 85 percent of the natural gas supply, with the remaining gaspurchased on the spot market.  These firmsupply agreements feature two levels of gas supply, specifically (1) base load,which is a continuous supply to meet normal demand requirements, and (2) swingload, which is gas available on a daily basis to accommodate changes in demanddue primarily to changing weather conditions.

 

Regulated Businessesmanages natural gas procurement-hedging 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 primarily fixed price forwardcontracts 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 ofFinancial Accounting Standards No. 133, *Accountingfor Derivative Instruments and Hedging Activity*.  As of December 31, 2003, **CG&E** and **ULH&P**, combined, had hedged approximately 66 percent oftheir winter 2003/2004 base load requirements. See the “Gas Industry” section of “Item 7.  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations” for further information.

 

Interstate pipelineseither (1) transport gas purchased directly to the distribution systems or (2)inject gas purchased into pipeline storage facilities for future withdrawal anddelivery.  The majority of the gassupply comes from the Gulf of Mexico coastal areas of Texas and Louisiana.

 

Regulated Businessesexpects the natural gas market will remain competitive in future years.  While natural gas prices spiked at thebeginning of 2003, prices moderated throughout the spring and summer but arestill expected to remain higher than previous years into 2004.  Price movement will be driven by the effectsof weather conditions, availability of supply, and changes in demand andstorage 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.

 

In November 2003, **CG&E** and **ULH&P** entered into a one-year asset management agreementwith Marketing & Trading, a non-regulated affiliate of **CG&E** and **ULH&P**, to manage their****interstatepipeline transportation and storage capacity and gas supply contracts.  Under the terms of this agreement, Marketing& Trading is obligated to deliver natural gas to meet **CG&E’s**and**ULH&P’s** firm requirements.  **ULH&P** receivedan order from the KPSC in October 2003, approving the affiliate assetmanagement agreement with Marketing & Trading.  No other regulatory approvals were required.

 

18

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##### ***Retail Revenue Data and Customer Base***

##### *** ***

The percent of retailoperating revenues derived from full service electricity and gas sales andtransportation from switched customers for each of the three years endedDecember 31 were as follows:

 
|                           |   | **Retail  Operating Revenues** |       |
|--------------------------------|--------|--------------------------------|------------|
| **Registrant**                 |   | **2003**                       |       | **2002** |   | **2001** |   |
|                           |   | **Electric %**                 |       | **Gas %** |   | **Electric %** |   | **Gas %** |   | **Electric %** |   | **Gas %** |   |
|                           |   |                           |       |   |   |   |   |   |   |   |   |   |   |
| **Cinergy**                    |   | **81**                         | ** ** | **19** |   | 87 |   | 13 |   | 82 |   | 18 |   |
| **CG&E** and  subsidiaries |   | **68**                         | ** ** | **32** |   | 77 |   | 23 |   | 71 |   | 29 |   |
| **PSI**                        |   | **100**                        | ** ** | **—** |   | 100 |   | — |   | 100 |   | — |   |
| **ULH&P**                  |   | **67**                         | ** ** | **33** |   | 73 |   | 27 |   | 68 |   | 32 |   |

 

Electric and gas salesare seasonal.  Electricity usage in ourservice territory peaks during the summer and gas usage peaks during thewinter.  Air conditioning increaseselectricity demand and 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. The territory served by **PSI**is composed of residential, agricultural, and widely diversified industrial customers.  No single retail customer provides more than10 percent of total operating revenues (electric or gas) for any of ouroperating companies.

 

Under the Ohio customerchoice program, **CG&E’s** retailcustomers may choose their electric supplier. As of December 31, 2003 and 2002, the percentage of customersswitching to other electric suppliers and the related volume by customer classwas as follows:

 
|                      |   | **MW**   |   | **AnnualMegawatt  Hours** |   | **SwitchingPercentage(1)** |   |
|---------------------------|--------|----------|--------|---------------------------|--------|----------------------------|--------|
| **Revenue Class**         |   | **2003** |   | **2002**                  |   | **2003**                   |   | **2002** |   | **2003** |   | **2002** |   |
|                      |   |     |   |                      |   |                       |   |   |   |   |   |   |   |
| Residential               |   | **92**   |   | 68                        |   | **283,477**                |   | 98,528 |   | **5.17** | **%** | 3.84 | % |
| Commercial                |   | **374**  |   | 347                       |   | **1,654,061**              |   | 1,235,077 |   | **21.55** | **%** | 21.54 | % |
| Industrial                |   | **295**  |   | 293                       |   | **1,591,345**              |   | 1,053,677 |   | **23.60** | **%** | 24.60 | % |
| Other  Public Authorities |   | **91**   |   | 84                        |   | **265,039**                |   | 204,855 |   | **19.95** | **%** | 21.51 | % |
| Total                     |   | **852**  |   | 792                       |   | **3,793,922**              |   | 2,592,137 |   |   |   |   |   |

 

----

(1)          Theresidential switching percentage is based on annual energy consumption and thenon-residential switching percentages are based on average monthly peak demand.

 

Customer switchingreduces retail revenues by the generation component of rates and shoppingincentives.  **CG&E** still collects transmission and distribution revenuesfrom the delivery of electricity to switched customers.  During the market development period, the reductionin revenues due to customer switching is mitigated by wholesale power salesfrom the freed-up

 

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generation capacity andrecoveries of lost revenues and shopping incentives through the RegulatoryTransition Charge (RTC).  The RTC is amechanism through which **CG&E**recovers its previous generation related regulatory assets and other transitioncosts.  For further discussion on Ohioderegulation see “Ohio” in “Item 7. Management’s Discussion and Analysis of Financial Condition and Resultsof Operations”.

 

#### **Power Technology**

#### ** **

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

 

##### ***ENVIRONMENTALMATTERS***

##### *** ***

**Cinergy**is currently affected by several different issues which involve compliance withfederal and state regulations regarding the protection of the environment.  See Note 11 of the “Notes to FinancialStatements” in “Item 8. Financial Statements and Supplementary Data” for adiscussion of these environmental issues and the estimated capitalexpenditures.

 

**FUTURE EXPECTATIONS/TRENDS**

### ** **

See the informationappearing under the same caption in “Item 7. Management’s Discussion and Analysis of Financial Condition and Resultsof Operations” for the following discussions:

 

•                  RetailMarket Developments;

•                  FERCand Midwest ISO;

•                  SignificantRate Developments;

•                  GasIndustry; and

•                  OtherMatters.

 

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**PROPERTIES**

 

## **ITEM 2.  PROPERTIES**

## ** **

### **COMMERCIAL**

### ** **

#### **Domestic Power Generation**

#### ** **

Our domestic powergenerating stations’ total winter electric capabilities, reflected in MW, as ofDecember 31, 2003, are shown in the table that follows.  Our electric generating plants, which areoperated by Commercial, are located in Ohio, Kentucky, and Indiana and arewholly-owned or jointly-owned facilities.

 
| **Subsidiary(1)**  |   | **Stations** |   | **Coal  MW** |   | **Natural  Gas  MW** |   | **Oil  MW** |   | **Hydro  MW** |   | **Total  MW** |   |
|--------------------|--------|--------------|--------|--------------|--------|----------------------|--------|-------------|--------|---------------|--------|---------------|--------|
|               |   |         |   |         |   |                 |   |        |   |          |   |          |   |
| **CG&E**       |   | 9            |   | 4,186        |   | 736                  |   | 324         |   | —        |   | 5,246         |   |
| **PSI**(2)         |   | 11           |   | 5,488        |   | 1,263                |   | 259         |   | 45            |   | 7,055         |   |
| **Investments**(3) |   | 2            |   | —       |   | 1,030                |   | —      |   | —        |   | 1,030         |   |
|               |   |         |   |         |   |                 |   |        |   |          |   |          |   |
| **Total**          |   | 22           |   | 9,674        |   | 3,029                |   | 583         |   | 45            |   | 13,331        |   |

 

----

|   | (1) | This table includes  only our portion of the total capacity for the jointly-owned plants.  Refer to Note 12  of the “Notes to Financial Statements” in “Item 8. Financial  Statements and Supplementary Data” for a discussion of the jointly-owned  plants. |
|--------|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | (2) | Represents stations  that are operated by Commercial on behalf of Regulated Businesses.                                                                                                                                                                                                    |
|   | (3) | Represents natural gas  peaking plants located in Tennessee and Mississippi, owned by Investments  that sell electricity on the wholesale market.                                                                                                                                          |

 

During 2003, electricgenerating plants, including those that we own but do not operate, performedreliably, as evidenced by our annual capacity factor of 71 percent and autilization factor of 84 percent (excluding natural gas and fuel oil peakingstations) and an****equivalentavailability factor of 86 percent.  Acapacity factor is a percentage that indicates how much of a power plant’scapacity is used over time.  Autilization factor is a percentage that indicates how much of a power plant’scapacity is used while being available. An equivalent availability factor is a percentage that indicates howmuch of a unit is available to generate compared to its potential maximumgeneration.

 

#### **International**

#### ** **

As of December 31,2003, we had ownership interests in five countries including generation assetslocated in three countries and approximately 1,200 miles of gas and electrictransmission and distribution systems through jointly-owned investments in twocountries.  We serve approximately 8,500transmission and distribution customers.

 

#### **Cogeneration**

#### ** **

#### **As ofDecember 31, 2003,**Cinergy had ownership interestsin and/or operated 19 domestic cogeneration facilities capable of producing 657MW of electricity, 3,521 MW equivalents of steam and 325 MW equivalents ofchilled water.  Cogeneration is thesimultaneous production of two or more forms of useable energy from a singlefuel source.  During 2004, Cinergy

 

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#### **anticipatescompletion of an expansion at one of our existing cogeneration facilities,which is expected to provide an additional 705 MW of electric capacity.**

#### ** **

#### **Other**

#### ** **

In the third quarter of2002, Cinergy Capital & Trading, Inc. completed an acquisition of acoal-based synthetic fuel production facility, which converts coal intosynthetic fuel for sale to a third party. The synthetic fuel replaces coal in the generation of electricity.  See the “Results of Operations - Future”section of “Item 7.  Management’sDiscussion and Analysis of Financial Condition and Results of Operations” foradditional information regarding this business initiative.

 

### **REGULATED BUSINESSES**

### ** **

#### **Electric**

#### ** **

Relevant information forour operating companies’ electric transmission and distribution systems locatedin Ohio, Kentucky, and Indiana is as follows:

 
| **Registrant**                 |   | **Electric  Transmission  Systems** |   | **Electric  Distribution  Systems** |   | **Substation  Combined  Capacity** |   |
|--------------------------------|--------|-------------------------------------|--------|-------------------------------------|--------|------------------------------------|--------|
|                           |   | **(circuit  miles)**                |   | **(circuit  miles)**                |   | **(kilovolt-amperes)(1)**          |   |
|                           |   |                                |   |                                |   |                               |   |
| **CG&E**                   |   | 1,662                               |   | 15,983                              |   | 21,132,488                         |   |
| **ULH&P**                  |   | 106                                 |   | 2,773                               |   | 1,384,198                          |   |
| Other subsidiaries             |   | 40                                  |   | —                              |   | —                             |   |
| **CG&E** and  subsidiaries |   | 1,808                               |   | 18,756                              |   | 22,516,686                         |   |
| **PSI**                        |   | 5,352                               |   | 21,058                              |   | 30,471,584                         |   |
|                           |   |                                |   |                                |   |                               |   |
| **Total**                      |   | 7,160                               |   | 39,814                              |   | 52,988,270                         |   |

 

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

 

At the end of 2003, ouroperating companies’ electric systems were interconnected with 15 otherutilities.

 

Our electric transmissionand distribution systems are designed and constructed to further the goal ofproviding reliable service to our customers. Every effort is made to ensure that sufficient facilities are in serviceto meet this goal without installing facilities beyond what is required tooperate reliably and within the design or designed parameters.  Through our ongoing review of these systems,enhancements are developed and constructed to meet our planning, loading, andreliability guidelines.  This processallows us to prudently invest in capacity additions only when and where theyare required.

 

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In August 2003, weexperienced peak loads of 11,077 MW, 5,104 MW, and 5,990 MW for**Cinergy**, **CG&E**,and **PSI**, respectively.  At times, we purchase power to meet theenergy needs of our wholesale customers and to meet the requirements of ourretail native load customers.  Factorsthat could cause **Cinergy** topurchase power for retail native load customers include outages, extremeweather conditions, growth, economics, and other factors associated withsupplying full requirements electricity. We believe we can obtain enough purchased power to meet future needs.

 

In February 2002,the Midwest ISO assumed functional control of Regulated Businesses’transmission systems.  Although theMidwest ISO continues to develop, modify, and change its various operatingpractices, it does handle substantially all transmission tariff administration.

 

In February 2003,the FERC issued an order approving **PSI’s**acquisitionof the Butler County, Ohio and the Henry County, Indiana peaking plants underthe terms and conditions contained in a settlement agreement with **PSI**, the Indiana Utility RegulatoryCommission Testimonial Staff and the Indiana Office of the Utility ConsumerCounselor.  This action was the finalregulatory approval needed for the transfer, which occurred inFebruary 2003.  Subsequently, inApril 2003, the FERC issued a tolling order allowing additional time toconsider a request for rehearing filed in response to the February 2003FERC order.  At this time, we cannotpredict the outcome of this matter.  See“Transfer of Generating Assets to **PSI**”in “Item 7.  Management’s Discussion andAnalysis of Financial Condition and Results of Operations” for additionalinformation.

 

In July 2003, **ULH&P** filed an application with theKPSC requesting a certificate of public convenience and necessity to acquire **CG&E’s** 68.9 percent ownership interestsin the East Bend Generating Station, located in Boone County, Kentucky, theWoodsdale Generating Station, located in Butler County, Ohio, and onegenerating unit at the four-unit Miami Fort Generating Station (Miami FortStation) located in Hamilton County, Ohio. In December 2003, the KPSC conditionally approved the order.  The transfer will be made at net bookvalue.  **ULH&P** will also seek regulatory approval for aspects ofthis transaction from the FERC and the SEC. At this time, **ULH&P** isunable to predict the outcome of this matter. See the “Electricity Supply” section of “Item 1. Business” forfurther information.

 

#### **Gas**

#### ** **

As of December 31,2003, the natural gas transmission and distribution systems of **Cinergy** and **CG&E** and its subsidiaries had approximately 13,400 milesof mains and service lines located in southwestern Ohio, southeastern Indiana,and northern Kentucky.  **Cinergy** and **CG&E** and its subsidiaries also jointly own threeunderground caverns with a total storage capacity of approximately 23 milliongallons 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, 2003, **Cinergy** had 16.1 million gallons of liquidpropane in storage (of which 15.0 million gallons belongs to **CG&E**, including 5.7 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 storepropane and, when needed, vaporize the propane and mix with natural gas tosupplement the natural gas supply during peak demand periods and emergencies.

 

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In November 2003, **CG&E** and **ULH&P** entered into a one-year asset management agreementwith Marketing & Trading, a non-regulated affiliate of **CG&E** and **ULH&P**, to manage their****interstatepipeline transportation and storage capacity and natural gas supplycontracts.  Under the terms of thisagreement, Marketing & Trading is obligated to deliver natural gas to meet **CG&E’s**and**ULH&P’s** firm requirements.  **ULH&P** receivedan order from the KPSC in October 2003, approving the affiliate assetmanagement agreement with Marketing & Trading.  No other regulatory approvals were required.

 

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**LEGALPROCEEDINGS**

 

## **ITEM 3.  LEGAL PROCEEDINGS**

## ** **

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

### ** **

In November 1999, and through subsequent amendments,the United States brought a lawsuit in the United States Federal District Court(District Court) for the Southern District of Indiana against **Cinergy**, **CG&E**,and **PSI** alleging variousviolations of the CAA.  Specifically,the lawsuit alleges that the Company violated the CAA by not obtainingPrevention of Significant Deterioration (PSD), Non-Attainment New Source Review(NSR) and Ohio and Indiana State Implementation Plan (SIP) permits for variousprojects at our owned or co-owned generating stations.  Additionally, the suit claims that theCompany has violated an Administrative Consent Order entered into in 1998between the EPA and **Cinergy**relating to alleged violations of Ohio’s SIP provisions governing particulatematter at Unit 1 at **CG&E’s**W.C. Beckjord Generating Station (Beckjord Station).  The suit seeks (1) injunctive relief 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 GeneratingStation, and Gibson Generating Station, and (2) civil penalties in amounts ofup to $27,500 per day for each violation. In addition, three northeast states and two environmental groups haveintervened in the case.  The case iscurrently in discovery, and the court has set the case for trial by jurycommencing in August 2005.

 

In March 2000, the United States also filed 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 the 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. This suit is being defended by CSP. In April 2001, the District Court in that case ruled that theGovernment and the intervening plaintiff environmental groups could seekinjunctive relief for alleged violations that occurred more than five yearsbefore the filing of the complaint only. Thus, if the plaintiffs prevail in their claims, any calculation forpenalties will not start on the date of the alleged violations, unless thosealleged violations occurred after November 3, 1994, but CSP would beforced to install the controls required under the CAA.  Neither party appealed that decision.

 

In addition, **Cinergy**and **CG&E** have been informed byDP&L that in June 2000, the EPA issued a Notice of Violation (NOV) toDP&L for alleged violations of PSD, NSR, and 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 SIP, or (2) bring a civil action seeking injunctive reliefand civil penalties of up to $27,500 per day for each violation.

 

In December 2000, **Cinergy**, **CG&E**,and **PSI** reached an agreement inprinciple with the plaintiffs regarding the above matters.  The complete resolution of these issues wascontingent upon establishing a final agreement with the EPA and otherparties.  Although we have continued tonegotiate with the plaintiffs to achieve a final agreement, the plaintiffs haveinsisted on commitments from us which go beyond those contained in theagreement in principle.  At this

 

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time we believe it isunlikely that a final settlement agreement will be reached on these terms.  If a final settlement agreement is notreached, we intend to defend against the allegations, discussed above, vigorouslyin court.  In such an event it is notpossible to predict whether resolution of these matters would have a materialeffect on our financial position or results of operations.

 

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

### ** **

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

 

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

 

In a combination oflawsuits (filed in November 1999 in Hendricks County in the state ofIndiana) and NOVs (brought by the U.S. EPA from November 1999 toJanuary 2000), the 22 sites are in the process of being studied and willbe remediated, if necessary.  In 1998NIPSCO, IGC, and **PSI** entered intoSite Participation and Cost Sharing Agreements to allocate liability andresponsibilities between them.  TheIndiana Department of Environmental Management (IDEM) oversees investigationand cleanup of all of these sites.  Thusfar, **PSI** has primary responsibilityfor investigating, monitoring and, if necessary, remediating nine of thesesites.  In December 2003, **PSI** entered into a voluntary remediationplan with the state of Indiana, providing a formal framework for theinvestigation and cleanup of the sites for which **PSI** has primary responsibility.

 

**PSI**notified its insurance carriers of the claims related to MGP sites raised byIDEM and costs included in the Site Participation and Cost SharingAgreements.  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 issueda variety of rulings with respect to the claims and defenses in thelitigation.  **PSI**appealed certain adverse rulings to the Indiana Court ofAppeals and the appellate court has remanded the case to the trial court.  A new trial date has yet to bescheduled.  At the present time, **PSI** cannot predict the outcome of thislitigation, including the outcome of the appeals.

 

**PSI**has accrued costs related to investigation, remediation, and groundwatermonitoring for those sites where such costs are probable and can be reasonablyestimated.  We will continue toinvestigate and remediate the sites as outlined in the voluntary remediationplan.  As additional facts become knownand investigation is completed, we will assess if the likelihood of incurringadditional costs becomes probable. Until all investigation and remediation is complete, we are unable todetermine the overall impact on our financial position or results ofoperations.

 

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**CG&E**has performed site assessments on its sites where we believe MGP activitieshave occurred at some point in the past and found no imminent risk to theenvironment.

 

**ENERGY MARKET INVESTIGATIONS**

### ** **

In August 2003,Cornerstone Propane Partners L.P. filed suit against **Cinergy** and 38 other companies in the Southern District of NewYork.  The suit is a purported classaction on behalf of all persons who purchased and/or sold New York MercantileExchange natural gas futures and options contracts between January 1, 2000and December 31, 2002.  Thecomplaint alleges that improper price reporting caused damages to theclass.  The plaintiffs are seeking unspecifieddamages.  Two similar lawsuits havesubsequently been filed, one naming **Cinergy**and one not.  These three lawsuits havebeen consolidated for pretrial purposes as In Re:  Natural Gas Commodity Litigation.  Plaintiffs filed a consolidated class action complaint inJanuary 2004.  We believe thisaction is without merit and intend to defend this lawsuit vigorously; however,we cannot predict the outcome of this matter at this time.

 

**PATENTS**

### ** **

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

 

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

 

See Note 11 ofthe “Notes to Financial Statements” in “Item 8. Financial Statements andSupplementary Data” for further information regarding our commitments andcontingencies.

 

27

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

 

**ITEM4.  SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS**

 

No matters were submittedto a vote of security holders of **Cinergy**,**CG&E**, or **PSI** during the fourth quarter of 2003.

 

28

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## **MARKET FORREGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS**

 

## **PART II**

## ** **

## **ITEM 5.  MARKET FOR REGISTRANT’SCOMMON EQUITY AND RELATED STOCKHOLDER MATTERS**

## ** **

**CinergyCorp.’s** common stock is listed on the New York StockExchange.  The high and low stock pricesfor each quarter for the past two years are indicated below:

 

|                |   | **High**  |       | **Low**    |       |
|---------------------|--------|-----------|------------|------------|------------|
| **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**  | ** ** |
|                |   |      |       |       |       |
| 2002                |   |      |       |       |       |
| First Quarter       |   | $         | 35.75      |       | $          | 31.00 |   |
| Second Quarter      |   | 37.19     |       | 34.25      |       |
| Third Quarter       |   | 36.21     |       | 25.40      |       |
| Fourth Quarter      |   | 34.19     |       | 28.25      |       |

 

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

 

As of January 31,2004, **Cinergy Corp.** had 52,506shareholders of record.

 

**CinergyCorp.** declared dividends on its common stock of $.46 and $.45per share for each quarter of 2003 and 2002, 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 asfollows:

 

| **Registrant** |   | **Quarter** |     | **2003**            |       | **2002** |     |
|----------------|--------|-------------|----------|---------------------|------------|----------|----------|
|           |   |        |     | **(in  thousands)** |       |
|           |   |        | * * |                | * *   |     | * * |
| **CG&E**   |   | First       |     | **$**               | **47,082** |     | $        | 44,787 |   |
|           |   | Second      |     | **63,100**          |       | 46,866   |     |
|           |   | Third       |     | **56,473**          |       | 47,059   |     |
|           |   | Fourth      |     | **61,208**          |       | 47,197   |     |
|           |   |        |     |                |       |     |     |
| **PSI**        |   | First       |     | **$**               | **30,503** |     | $        | 26,944 |   |
|           |   | Second      |     | **17,837**          |       | 28,194   |     |
|           |   | Third       |     | **24,984**          |       | 28,310   |     |
|           |   | Fourth      |     | **20,626**          |       | 28,394   |     |
|           |   |        |     |                |       |     |     |
| **ULH&P**  |   | First       |     | **$**               | **—** |     | $        | — |   |
|           |   | Second      |     | **6,305**           |       | 2,675    |     |
|           |   | Third       |     | **—**          |       | —   |     |
|           |   | Fourth      |     | **—**          |       | 6,995    |     |

 

On January 15, 2004,the Board of Directors of **Cinergy Corp.**declared dividends on its common stock of $.47 per share, payable February 15,2004, to shareholders of record at the close of business on January 30,2004.

 

See Note 2(b) of the“Notes to Financial Statements” in “Item 8. Financial Statements and

 

29

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**SELECTEDFINANCIAL DATA**

 

Supplementary Data” for abrief description of the registrants’ common stock dividend restrictions.

 

## **ITEM 6.  SELECTED FINANCIAL DATA**

 
|                                                                                             |   | **2003**                                      |      | **2002** |     | **2001** |     | **2000** |     | **1999** |     |
|--------------------------------------------------------------------------------------------------|--------|-----------------------------------------------|-----------|----------|----------|----------|----------|----------|----------|----------|----------|
|                                                                                             |   | ***(in millions, except per share amounts)*** |
|                                                                                             |   |                                          | * *  |     | * * |     | * * |     | * * |     | * * |
| **Cinergy(1)**                                                                                   |   |                                          |      |     |     |     |     |     |     |     |     |
| **Results  of Operations:**                                                                      |   |                                          |      |     |     |     |     |     |     |     |     |
| Operating revenues(2)                                                                            |   | **$**                                         | **4,416** |     | $        | 4,059    |     | $        | 3,950    |     | $        | 3,752 |   | $ | 3,427 |   |
| Income before discontinued  operations and cumulative effect of changes in accounting principles |   | **435**                                       |      | 397      |     | 457      |     | 400      |     | 402      |     |
| Discontinued operations,  net of tax(3)                                                          |   | **9**                                         |      | (25      | )        | (15      | )        | (1       | )        | 2        |     |
| Cumulative effect of  changes in accounting principles, net of tax(4)                            |   | **26**                                        |      | (11      | )        | —   |     | —   |     | —   |     |
| Net income                                                                                       |   | **470**                                       |      | 361      |     | 442      |     | 399      |     | 404      |     |
|                                                                                             |   |                                          |      |     |     |     |     |     |     |     |     |
| **Per Share  Data:**                                                                             |   |                                          |      |     |     |     |     |     |     |     |     |
| Earnings per common share  (EPS)                                                                 |   |                                          |      |     |     |     |     |     |     |     |     |
| Income before discontinued  operations and cumulative effect of changes in accounting principles |   | **2.46**                                      |      | 2.37     |     | 2.87     |     | 2.52     |     | 2.53     |     |
| Discontinued operations,  net of tax(3)                                                          |   | **0.05**                                      |      | (0.15    | )        | (0.09    | )        | (0.01    | )        | 0.01     |     |
| Cumulative effect of  changes in accounting principles, net of tax(4)                            |   | **0.15**                                      |      | (0.06    | )        | —   |     | —   |     | —   |     |
| Net income                                                                                       |   | **2.66**                                      |      | 2.16     |     | 2.78     |     | 2.51     |     | 2.54     |     |
| EPS - assuming dilution                                                                          |   |                                          |      |     |     |     |     |     |     |     |     |
| Income before discontinued  operations and cumulative effect of changes in accounting principles |   | **2.43**                                      |      | 2.34     |     | 2.84     |     | 2.51     |     | 2.52     |     |
| Discontinued operations,  net of tax(3)                                                          |   | **0.05**                                      |      | (0.15    | )        | (0.09    | )        | (0.01    | )        | 0.01     |     |
| Cumulative effect of  changes in accounting principles, net of tax(4)                            |   | **0.15**                                      |      | (0.06    | )        | —   |     | —   |     | —   |     |
| Net income                                                                                       |   | **2.63**                                      |      | 2.13     |     | 2.75     |     | 2.50     |     | 2.53     |     |
| Dividends declared per  share                                                                    |   | **1.84**                                      |      | 1.80     |     | 1.80     |     | 1.80     |     | 1.80     |     |
|                                                                                             |   |                                          |      |     |     |     |     |     |     |     |     |
| **Balance  Sheet Data (at end of period):**                                                      |   |                                          |      |     |     |     |     |     |     |     |     |
| Total assets from  continuing operations                                                         |   | **14,114**                                    |      | 13,685   |     | 12,558   |     | 12,604   |     | 9,963    |     |
| Total assets from  discontinued operations                                                       |   | **5**                                         |      | 147      |     | 234      |     | 197      |     | 88       |     |
|                                                                                             |   | **14,119**                                    |      | 13,832   |     | 12,792   |     | 12,801   |     | 10,051   |     |
| Long-term debt (including  amounts due in one year)                                              |   | **4,971**                                     |      | 4,188    |     | 3,656    |     | 2,868    |     | 2,998    |     |
|                                                                                             |   |                                          |      |     |     |     |     |     |     |     |     |
| **CG&E**                                                                                     |   |                                          |      |     |     |     |     |     |     |     |     |
| **Results  of Operations:**                                                                      |   |                                          |      |     |     |     |     |     |     |     |     |
| Operating revenues(2)                                                                            |   | **$**                                         | **2,382** |     | $        | 2,137    |     | $        | 2,247    |     | $        | 2,101 |   | $ | 1,914 |   |
| Income before cumulative  effect of changes in accounting principles                             |   | **300**                                       |      | 264      |     | 327      |     | 267      |     | 234      |     |
| Cumulative effect of  changes in accounting principles, net of tax(5)                            |   | **31**                                        |      | —   |     | —   |     | —   |     | —   |     |
| Net income                                                                                       |   | **331**                                       |      | 264      |     | 327      |     | 267      |     | 234      |     |
|                                                                                             |   |                                          |      |     |     |     |     |     |     |     |     |
| **Balance  Sheet Data (at end of period):**                                                      |   |                                          |      |     |     |     |     |     |     |     |     |
| Total assets                                                                                     |   | **5,809**                                     |      | 5,751    |     | 5,559    |     | 6,182    |     | 5,099    |     |
| Long-term debt (including  amounts due in one year)                                              |   | **1,569**                                     |      | 1,690    |     | 1,205    |     | 1,206    |     | 1,206    |     |
|                                                                                             |   |                                          |      |     |     |     |     |     |     |     |     |
| **PSI**                                                                                          |   |                                          |      |     |     |     |     |     |     |     |     |
| **Results of Operations:**                                                                       |   |                                          |      |     |     |     |     |     |     |     |     |
| Operating revenues(2)                                                                            |   | **$**                                         | **1,603** |     | $        | 1,611    |     | $        | 1,574    |     | $        | 1,512 |   | $ | 1,449 |   |
| Income before cumulative  effect of a change in accounting principle                             |   | **134**                                       |      | 214      |     | 162      |     | 135      |     | 117      |     |
| Cumulative effect of a  change in accounting principle, net of tax(6)                            |   | **(1**                                        | **)**     | —   |     | —   |     | —   |     | —   |     |
| Net income                                                                                       |   | **133**                                       |      | 214      |     | 162      |     | 135      |     | 117      |     |
|                                                                                             |   |                                          |      |     |     |     |     |     |     |     |     |
| **Balance Sheet Data (at end of period):**                                                       |   |                                          |      |     |     |     |     |     |     |     |     |
| Total assets                                                                                     |   | **5,140**                                     |      | 4,539    |     | 4,864    |     | 4,906    |     | 4,087    |     |
| Long-term debt (including  amounts due in one year)                                              |   | **1,720**                                     |      | 1,372    |     | 1,348    |     | 1,113    |     | 1,243    |     |

 

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

 

30

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(2)          Emerging Issues TaskForce Issue 02-3, *Accounting for ContractsInvolved in Energy Trading and Risk Management Activities*requiredthat all gains and losses on energy trading derivatives be presented on a netbasis beginning January 1, 2003. All periods presented have been reclassified for this change inaccounting principle.  This resulted insubstantial reductions in reported *OperatingRevenues*, *Fuel and purchased andexchanged power* expense, and *Gaspurchased*expense.  However, *Operating Income* and *Net Income* were not affected by thischange.  For further information seeNote 1(q)(*i*) of the “Notes toFinancial Statements” in “Item 8. Financial Statements and Supplementary Data”.

(3)          See Note 14 of the“Notes to Financial Statements” in “Item 8. Financial Statements andSupplementary Data” for further explanation.

(4)          In 2003, **Cinergy** recognized a gain/(loss) oncumulative effect of changes in accounting principles of $39 million (net oftax) and $(13) million (net of tax) as a result of the reversal of accrued costof removal for non-regulated generating assets and the change in accounting ofcertain energy related contracts from fair value to accrual.  In 2002, **Cinergy**recognized a cumulative effect of a change in accounting principle of $(11)million (net of tax) as a result of an impairment charge for goodwill relatedto certain of our international assets.

(5)          In 2003, **CG&E** recognized a gain/(loss) oncumulative effect of changes in accounting principles of $39 million (net of tax)and $(8) million (net of tax) as a result of the reversal of accrued cost ofremoval for non-regulated generating assets and the change in accounting ofcertain energy related contracts from fair value to accrual.

(6)          In 2003, **PSI** recognized a loss on cumulative effectof a change in accounting principle of $(1) million (net of tax) as a result ofa change in accounting of certain energy related contracts from fair value toaccrual.

 

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

## ** **

## **ITEM 7.  MANAGEMENT’S DISCUSSIONAND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

## ** **

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

 

The following discussionshould be read in conjunction with the accompanying financial statements andrelated notes included elsewhere in this report.  The results discussed below are not necessarily indicative of theresults to be expected in any future periods.

 

### **INTRODUCTION**

### ** **

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

 

•                  factorsaffecting current and future operations;

•                  potentialsources of cash for future capital expenditures;

•                  whyrevenues and expenses changed from period to period; and

•                  howthe above items affect our overall financial condition.

 

### **LIQUIDITY AND CAPITAL RESOURCES**

### ** **

#### **Comparative Cash Flow Analysis FromContinuing Operations**

#### ** **

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

##### *** ***

For each of the yearsended December 31, 2003, 2002, and 2001, our cash flows from operatingactivities from continuing operations were as follows:

 

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

 
|                                                                        |   | **2003**             |        | **2002** |     | **2001** |     |
|-----------------------------------------------------------------------------|--------|----------------------|-------------|----------|----------|----------|----------|
|                                                                        |   | ***(in thousands)*** |        |
|                                                                        |   |                 | * *    |     | * * |     | * * |
| **Cinergy(1)**                                                              |   | $                    | **945,673** |     | $        | 955,802  |     | $ | 723,690 |   |
| The Cincinnati Gas &  Electric Company (**CG&E**) and  subsidiaries |   | **557,761**          |        | 653,029  |     | 343,118  |     |
| PSI Energy, Inc. (**PSI**)                                                  |   | **246,735**          |        | 499,047  |     | 401,911  |     |
| The Union Light, Heat and  Power Company (**ULH&P**)                    |   | **33,061**           |        | 60,707   |     | 47,766   |     |
|                                                                             |        |                      |             |          |          |          |          |  |  |  |

 

----

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

 

The tariff-based grossmargins of our operating companies continue to be the principal source of cashfrom operating activities.  Thediversified retail customer mix of residential, commercial, and industrialclasses and a commodity mix of gas and electric services provide a reasonablypredictable gross cash flow.

 

For the year endedDecember 31, 2003, **CG&E’s**,**PSI’s**,****and**ULH&P’s**net cash provided by

 

32

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operating activities fromcontinuing operations decreased, as compared to 2002.  **CG&E’s** decreaseis primarily due to unfavorable working capital fluctuations.  **PSI’s**decrease is largely due to a decrease in net income after adjusting fornon-cash items such as depreciation and a decrease in receivables sold underthe receivables sale facility.  Asignificant portion of **ULH&P’s**decrease is due to unfavorable working capital fluctuations and an increase indeferred costs under the gas cost recovery mechanism.  **Cinergy’s** change innet cash provided by operating activities for the year ended December 31,2003 was comparable to 2002.

 

For the year endedDecember 31, 2002, **Cinergy’s**,**CG&E’s**, **PSI’s**, and **ULH&P’s** net cash provided by operating activities from continuingoperations increased, as compared to 2001, primarily due to increases in netincome after adjusting for non-cash items such as depreciation; favorableworking capital fluctuations; and deferred income taxes.  The increase in deferred income taxes, inpart, reflects a change in accounting methodology for tax purposes related tocapitalized costs, which increased current tax deductions.  **Cinergy’s**current tax obligations were also reduced by increases in tax creditsassociated with the production and sale of synthetic fuel.

 

##### ***Financing Activities from Continuing Operations***

##### *** ***

For each of the yearsended December 31, 2003, 2002, and 2001, our cash flows from financingactivities from continuing operations were as follows:

 

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

 
|                           |   | **2003**             |         | **2002** |     | **2001** |     |
|--------------------------------|--------|----------------------|--------------|----------|----------|----------|----------|
|                           |   | ***(in thousands)*** |         |
|                           |   |                 | * *     |     | * * |     | * * |
| **Cinergy(1)**                 |   | **$**                | **(245,128** | **)**    | $        | 42,689   |     | $ | 827,758 |   |
| **CG&E** and  subsidiaries |   | **(263,296**         | **)**        | (293,445 | )        | 16,841   |     |
| **PSI**                        |   | **90,070**           | ** **   | (43,817  | )        | 34,723   |     |
| **ULH&P**                  |   | **4,852**            | ** **   | (22,026  | )        | (14,678  | )        |
|                                |        |                      |              |          |          |          |          |  |  |  |

 

----

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

 

For the year endedDecember 31, 2003, **Cinergy’s**net cash used in financing activities from continuing operations increased, ascompared to 2002, primarily due to increases in redemptions of long-term debtand the establishment of funds on deposit from the issuance of debt securities.

 

**CG&E’s**net cash used in financing activities from continuing operations decreasedduring 2003, as compared to 2002, primarily due to a net increase in short-termdebt financing.

 

**PSI’s**and **ULH&P’s** net cash providedby financing activities from continuing operations increased during 2003, ascompared to 2002.  **PSI’s** increase was primarily due to capitalcontributions from **Cinergy Corp.**  **ULH&P’s**increase was primarily attributable to increases in short-term debt.

 

For the year endedDecember 31, 2002, **Cinergy’s**netcash provided by financing activities from continuing operations decreased, ascompared to 2001.  This decrease wasprimarily due to the

 

33

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net proceeds received in2001 from the issuance of *Preferred TrustSecurities* and from new debt issuances, which were used to fund thepurchase of new peaking generation facilities and environmental complianceexpenditures.  The repayment of bothlong-term and short-term debt reduced cash proceeds recognized in 2002 from theissuances of common stock and new long-term debt.

 

**CG&E’s**,**PSI’s**,****and**ULH&P’s** net cash used in financingactivities from continuing operations increased during 2002, as compared to2001.  **CG&E’s**increase reflects a net reduction in debt financing, partially offset by adecrease in dividends paid on common stock. **PSI’s** increase primarilyreflects the payment of approximately $112 million in common stock dividends in2002, as compared to 2001, when no common dividends were paid.  **ULH&P’s**increase primarily reflects the repayment of short-term debt in 2002.

 

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

 

For each of the yearsended December 31, 2003, 2002, and 2001, our cash flows used in investingactivities from continuing operations were as follows:

 

**Net Cash Provided by (Used in)Investing Activities from Continuing Operations**

 
|                           |   | **2003**            |         | **2002** |     | **2001** |     |
|--------------------------------|--------|---------------------|--------------|----------|----------|----------|----------|
|                           |   | **(in  thousands)** |         |
|                           |   |                | * *     |     | * * |     | * * |
| **Cinergy(1)**                 |   | **$**               | **(731,537** | **)**    | $        | (885,636 | )        | $ | (1,534,526 | ) |
| **CG&E** and  subsidiaries |   | **(323,959**        | **)**        | (323,322 | )        | (371,522 | )        |
| **PSI**                        |   | **(332,247**        | **)**        | (454,810 | )        | (436,358 | )        |
| **ULH&P**                  |   | **(39,940**         | **)**        | (38,854  | )        | (35,449  | )        |
|                                |        |                     |              |          |          |          |          |  |  |  |

 

----

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

 

For the year endedDecember 31, 2003, **Cinergy’s**net cash used in investing activities from continuing operations decreased ascompared to 2002, primarily due to decreases in capital expenditures related toenvironmental compliance programs, and other energy-related investments.  **Cinergy**also purchased a synthetic fuel production facility during 2002.

 

**PSI’s**decrease was primarily due to decreases in capital expenditures for ongoingenvironmental compliance programs and other construction projects.

 

**CG&E’s**and **ULH&P’s**net cash used in 2003 investing activities from continuing operations wascomparable to 2002, reflecting **CG&E’s**ongoing capital expenditures for environmental compliance programs, the gasmain replacement program, and normal construction activity, and **ULH&P’s** ongoing capital expendituresfor the gas main replacement program and normal construction activity.

 

For the year endedDecember 31, 2002, **Cinergy’s**net cash used in investing activities from continuing operations decreased, ascompared to 2001.  This decrease wasprimarily the result of **Cinergy’s**2001 acquisition of peaking generation facilities, increased capitalexpenditures related to environmental compliance programs, and other non-coreinvestments.

 

34

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**CG&E’s**,**PSI’s**, and **ULH&P’s**net cash used in 2002 investingactivities from continuing operations were comparable to 2001, reflectingongoing construction expenditures.

 

35

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#### **Capital Requirements**

 

Actual construction andother committed expenditures (including capitalized financing costs) for 2003and forecasted construction and other committed expenditures for the year 2004and for the five-year period 2004-2008 (in nominal dollars) are presented inthe table below:

 

**Capitaland Investment Expenditures**

 
|                           |   | **Actual  2003** |     | **Forecasted**     |     |
|--------------------------------|--------|------------------|----------|--------------------|----------|
| **2004**                       |   | **2004-2008**    |
|                           |   |             | * * | **(in  millions)** | * * |   | * * |
|                           |   |             |     |               |     |   |   |
| **Cinergy(1)**                 |   | $                | **800**  |               | $        | 756 |   | $ | 4,133 |   |
| **CG&E** and  subsidiaries |   | **327**          |     | 302                |     | 1,591 |   |
| **PSI****(2)**                 |   | **337**          |     | 336                |     | 1,978 |   |
| **ULH&P**                  |   | **40**           |     | 39                 |     | 212 |   |
|                                |        |                  |          |                    |          |  |  |  |  |  |

 

----

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

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

 

This forecast includes an estimate of expenditures to comply with draftregulations requiring reductions in mercury, NOx, and SO2emissions.  In 2003, we spent $160million for NOx and other environmental compliance projects.  Forecasted expenditures for environmentalcompliance projects (in nominal dollars) are approximately $168 million for2004 and $1.2 billion for the 2004-2008 period.  Approximately 75 percent of these estimated environmental costswould be incurred at regulated coal-fired plants.  See “Air Toxics and Ambient Air Standards” for furtherdiscussion.

 

##### ***EnvironmentalCommitment and Contingency Issues***

 

*ManufacturedGas Plant (MGP) Sites*

 

In November 1998, **PSI** entered into a Site Participation andCost Sharing Agreement with Northern Indiana Public Service Company and IndianaGas Company, Inc. related to contamination at MGP sites, which **PSI** or its predecessors previouslyowned.  Until investigation andremediation activities have been completed on the sites, we are unable toreasonably estimate the total cost and impact on our financial position orresults of operations.  In relation tothe MGP claims, **PSI** also filedsuit against its general liability insurance carriers.  Subsequently, **PSI** sought a declaratory judgment to obligate its insurancecarriers to (1) defend MGP claims against **PSI**,or (2) pay **PSI’s** costs of defenseand compensate **PSI** for its costsof investigating, preventing, mitigating, and remediating damage to propertyand paying claims related to MGP sites. At the present time, **PSI**cannot predict the outcome of this litigation. See Note 11(a)(*iii*) of the“Notes to Financial Statements” in “Item 8. Financial Statements andSupplementary Data” for further information on MGP Sites.

 

36

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*RegionalHaze*

 

The United States (U.S.)Environmental Protection Agency (EPA) published the final regional haze rule inJuly 1999.  This rule establishedplanning and emission reduction timelines for states to use to improvevisibility in national parks throughout the U.S.  The ultimate effect of the new regional haze rule could berequirements for (1) newer and cleaner technologies and additional controls onparticulates emissions, and (2) reductions in sulfur dioxide (SO2)and NOX emissions from utility sources.  If more utility emissions reductions are required, the compliancecost could be significant.  InAugust 1999, several industry groups (some of which we are a member) fileda challenge to the regional haze rules with the U.S. Circuit Court of Appealsfor the District of Columbia (Court of Appeals).  In May 2002, the Court of Appeals set aside a portion of theEPA’s rule, holding that the rule improperly forced states to require emissionscontrols without adequate consideration of an individual source’s impact onvisibility impairment.  We currentlycannot predict the timing or outcome of the EPA’s response to the Court ofAppeals’ ruling.

 

In July 2001, theEPA proposed guidance to implement portions of the regional haze rule.  This guidance recommends that states requirewidespread installation of scrubbers to reduce SO2 emissions.  We currently cannot determine whether or howthe EPA will modify the scope of this guidance, or whether the states in whichwe operate will adopt the EPA’s proposed guidance.

 

*Air Toxics and Ambient Air Standards*

 

In December 2003, the EPA issued draft regulations regarding requiredreductions in mercury emissions from coal-fired power plants.  The draft regulations include two possiblealternatives to address emissions reductions. One alternative would include a cap and trade approach to mercury.  The other would be a source specificreduction in emissions, without a cap and trade approach.  The cap and trade approach would provide alonger compliance horizon and provide more flexible compliance options for coal-firedgenerators.  The EPA is expected toissue final rules by December 2004.

 

In December 2003, the EPA also proposed Interstate Air Quality Rulesthat would require states to revise their State Implementation Plans to addressalleged contributions to downwind non-attainment with the revised NationalAmbient Air Quality Standards (NAAQS) for ozone and fine particulatematter.  The proposed rule wouldestablish a two-phase, regional cap and trade program for SO2 and NOx.  The proposed rule would affect approximately30 states, including Ohio, Indiana, and Kentucky.  The proposed rule would require SO2 emissions to becut approximately 70 percent by 2015 and NOx emissions to be cutapproximately 65 percent by 2015.  TheEPA is expected to issue final rules by December 2004.

 

We currently estimate costs associated with the cap and trade approachto mercury, SO2 and NOx emissions reductions to beapproximately $1.2 billion over the next five years.  These costs have been included in our forecasted capital expendituresdiscussed previously in “Capital Requirements”.  Approximately 75 percent of these estimated environmental costswould be incurred at regulated coal-fired plants, for which recovery would bepursued in accordance with regulatory statutes governing environmental costrecovery.  Costs associated with thesource specific approach to mercury emissions reductions may be higher,depending on the type of program the EPA finalizes and the stringency andtiming of the ultimate requirements. Due to these uncertainties, we are unable to predict the magnitude ofthose costs at this time.

 

In 1997, the EPA revised the NAAQS for ozone and fine particulatematter.  The EPA is under acourt-ordered deadline to make final state ozone non-attainment areadesignations by April 15, 2004, and fine particulate area designations byDecember 15, 2004.  Several counties inwhich we operate have been tentatively designated (by their respective states)as being in non-attainment with the new ozone standard, and several are likelyto be designated as non-attainment with the fine particulate standard.  **Cinergy**cannot predict the timing or effect of the ozone non-attainment designations atthis time.

 

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*GlobalClimate Change*

 

In September 2003, **Cinergy** announced an internal voluntarygreenhouse gas (GHG) management goal to reduce its GHG emissions by 2010.  **Cinergy**expects to spend $21 million between 2004 and 2010 on projects to reduce oroffset its GHG emissions.  **Cinergy’s** goal is to support thePresident’s voluntary initiative, to address shareholder interest in the issue,and to build internal expertise in GHG management and GHG markets.

 

Our plan for managing thepotential risk and uncertainty of regulations relating to climate changeincludes the following:

 

•                  implementingan internal voluntary goal to reduce **Cinergy’s**GHG emissions five percent below **Cinergy’s**2000 baseline emission levels by 2010 and maintaining those levels through2012;

•                  measuringand inventorying company related sources of GHG emissions;

•                  identifyingand pursuing cost-effective GHG emission reduction and offsetting activities;

•                  fundingresearch of more efficient and alternative electric generating technologies;

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

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

 

*AsbestosClaims Litigation*

* *

**CG&E**and **PSI** have been named asdefendants or co-defendants in lawsuits related to asbestos at their electricgenerating stations.  Currently, thereare approximately 80 pending lawsuits. In these lawsuits, plaintiffs claim to have been exposed toasbestos-containing products in the course of their work at the **CG&E** and **PSI** generating stations. The plaintiffs further claim that as the property owner of thegenerating stations,**CG&E** and **PSI**, should be held liable for theirinjuries and illnesses based on an alleged duty to warn and protect them fromany asbestos exposure.  A majority ofthe lawsuits to date have been brought against **PSI**.  The impact on **CG&E’s** and **PSI’s** financial position or results of operations of thesecases to date has not been material. See Note 11(a)(*iv*) of the“Notes to Financial Statements” in “Item 8. Financial Statements and SupplementaryData” for a discussion of asbestos claims and related cases.

 

##### ***Pension andOther Postretirement Benefits***

 

**Cinergy**maintains qualified defined benefit pension plans covering substantially allU.S.

 

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employees meeting certainminimum age and service requirements. Plan assets consist of investments in equity and debt securities.  Funding for the qualified defined benefit pensionplans is based on actuarially determined contributions, the maximum of which isgenerally the amount deductible for income tax purposes and the minimum beingthat required by the Employee Retirement Income Security Act of 1974, asamended (ERISA).  Although mitigated bystrong performance in 2003, ongoing retiree payments and the decline in marketvalue of the investment portfolio in 2002 have reduced assets held in trust tosatisfy plan obligations.  Additionally,decreases in long-term interest rates have had the effect of increasing theliability used for funding purposes.  Asa result of these events, our near term funding targets have increasedsubstantially.  **Cinergy** has adopted a five-year plan toreduce, or eliminate, the unfunded pension obligation initially measured as ofJanuary 1, 2003.  This unfundedobligation will be recalculated as of January 1 of each year in thefive-year plan.  Such unfundedobligation was calculated as the difference between the liability determinedactuarially on an ERISA basis and the market value of plan assets as ofJanuary 1, 2003.  The liabilityused in this calculation is different than the pension liability calculated foraccounting purposes reported on **Cinergy’s**Balance Sheets.  **Cinergy’s** minimum required contributions incalendar year 2003 were $11 million, as compared to $4 million in calendar year2002.  **Cinergy’s**minimum required contributions in calendar year 2004 are expected to beapproximately $16 million.  Actualcontributions during calendar year 2003 totaled $74 million reflectingadditional discretionary contributions of $63 million under the aforementionedfive-year plan.  Should **Cinergy** continue funding under thisfive-year plan, discretionary contributions in addition to the minimum fundingrequirements are expected to be $90 million in 2004.  **Cinergy** may considermaking discretionary contributions in 2005 and future periods, however at thistime, we are unable to determine the amount of those contributions.  Estimated contributions fluctuate based onchanges in market performance of plan assets and actuarial assumptions.  Absent the occurrence of interim events thatcould materially impact these targets, we will update our expected targetcontributions annually as the actuarial funding valuations are completed andmake decisions about future contributions at that time.

 

**Cinergy**sponsors non-qualified pension plans that cover officers, certain keyemployees, and non-employee directors.  **Cinergy’s** payments for these non-qualifiedpension plans are expected to be approximately $8 million in 2004.

 

We provide certain healthcare and life insurance benefits to retired U.S. employees and their eligibledependents.  **Cinergy’s** payments for these postretirement benefits in 2004are expected to be approximately $27 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.

 

##### ***Long-term DebtDue Within One Year***

 

*Long-termdebt due within one year*for **Cinergy**increased $663 million from December 31, 2002 toDecember 31, 2003.  The primarycause of the increase was the reclassification of **Cinergy Corp.’s**$200 million 6.125% Debentures dueApril 15, 2004 and $500 million 6.25% Debentures due September 1,2004 from *Long-term debt*to *Long-term debt due within one year.*

 

As discussed in Note 4 ofthe “Notes to Financial Statements” in “Item 8. Financial Statements andSupplementary Data”, in September 2003, **PSI**issued $400 million principal amount of its 5.00% Debentures largely using theproceeds from this issuance for the early redemption of two

 

39

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subordinated promissorynotes to **Cinergy Corp.**totaling$376 million.  **Cinergy Corp.**plans to use the proceeds topartially fund the maturity of the 6.125% and 6.25% debentures discussedabove.  In the interim, **Cinergy Corp.**has used the proceeds torepay short-term indebtedness.

 

**Cinergy** plans to meet its remaining future debt obligations from the issuanceof debt and/or equity securities and internally-generated funds.

 

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

 

Our ability to invest ingrowth initiatives is limited by certain legal and regulatory requirements,including the Public Utility Holding Company Act of 1935, as amended(PUHCA).  The PUHCA limits the types ofnon-utility businesses in which **Cinergy**and other registered holding companies under PUHCA can invest as well as theamount of capital that can be invested in permissible non-utilitybusinesses.  Also, the timing and amountof investments in the non-utility businesses is dependent on the developmentand favorable evaluations of opportunities. Under the PUHCA restrictions, we are allowed to invest or commit toinvest in certain non-utility businesses, including:

 

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

 

An EWG is 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 U.S. is limited to making onlywholesale sales of electricity.

 

A FUCO is a company allof whose utility assets and operations are located outside the U.S. and whichare used for the generation, transmission, or distribution of electric energyfor sale at retail or wholesale, or the distribution of gas at retail.  A FUCO may not derive any income, directlyor indirectly, from the generation, transmission or distribution of electricenergy for sale or the distribution of gas at retail within the U.S.  An entity claiming status as a FUCO mustprovide notification thereof to the Securities and Exchange Commission (SEC)under PUHCA.

 

**Cinergy**has been granted SEC authority under PUHCA to invest (including by way ofguarantees) an aggregate amount in EWGs and FUCOs equal to the sum of (1) ouraverage consolidated retained earnings from time to time plus (2) $2billion.  As of December 31, 2003,we had invested or committed to invest $0.8 billion in EWGs and FUCOs, leavingavailable investment capacity under the order of $2.7 billion.

 

•                  Qualifying  Facilities and Energy-Related Non-utility Entities

 

SEC regulations under thePUHCA permit **Cinergy** and otherregistered holding companies to invest and/or guarantee an amount equal to 15percent of consolidated capitalization (consolidated capitalization is the sumof *Notes payable and other*

 

40

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*short-termobligations*, *Long-termdebt* (including amounts due within one year), *Preferred Trust Securities*, *Cumulative Preferred Stock of Subsidiaries*,and total *Common Stock Equity*) indomestic qualifying cogeneration and small power production plants (qualifyingfacilities) and certain other domestic energy-related non-utilityentities.  At December 31, 2003, wehad invested and/or guaranteed approximately $0.9****billion of the $1.4 billion available.

 

•                  Energy-RelatedAssets

 

**Cinergy**has been granted SEC authority under PUHCA to invest up to $1 billion innon-utility Energy-Related Assets within the U.S., Canada, and Mexico.  Energy-Related Assets include natural gasexploration, development, production, gathering, processing, storage andtransportation facilities and equipment, liquid oil reserves and storagefacilities, and associated assets, facilities and equipment, but exclude anyassets, facilities or equipment that would cause the owner or operator thereofto be deemed a public utility company. As of December 31, 2003, we did not have any investments in theseEnergy-Related Assets.

 

•                  InfrastructureServices Companies

 

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

 

•                  Design,construction, retrofit and maintenance of utility transmission and distributionsystems;

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

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

 

At December 31,2003, we had invested approximately $26 million in these InfrastructureServices companies.

 

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##### *** ***

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

 

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

 
|                                                    |   | **Payments  Due**  |
|---------------------------------------------------------|--------|--------------------|
| **Contractual Cash Obligations**                        |   | **2004**           |   | **2005** |   | **2006** |   | **2007** |   | **2008** |   | **There-  after** |   | **Total** |   |
|                                                    |   | **(in  millions)** |
|                                                    |   |               | * * |   | * * |   | * * |   | * * |   | * * |   | * * |   | * * |
| **Cinergy(1)**                                          |   |               |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Capital leases                                          |   | $                  | 5 |   | $ | 6 |   | $ | 6 |   | $ | 6 |   | $ | 8 |   | $ | 24 |   | $ | 55 |   |
| Operating leases                                        |   | 41                 |   | 33 |   | 26 |   | 21 |   | 13 |   | 37 |   | 171 |   |
| Long-term debt (including  amounts due within one year) |   | 835                |   | 222 | (2)(3) | 354 |   | 727 |   | 550 |   | 2,333 |   | 5,021 |   |
| Fuel purchase  contracts(4)(7)                          |   | 671                |   | 569 |   | 471 |   | 465 |   | 336 |   | 1,374 |   | 3,886 |   |
| Other commodity purchase  contracts(5)                  |   | 21                 |   | 2 |   | — |   | — |   | — |   | — |   | 23 |   |
| Qualified Pension Plans(6)                              |   | 16                 |   | — |   | — |   | — |   | — |   | — |   | 16 |   |
| **Total  Cinergy**                                      |   | $                  | 1,589 |   | $ | 832 |   | $ | 857 |   | $ | 1,219 |   | $ | 907 |   | $ | 3,768 |   | $ | 9,172 |   |
|                                                    |   |               |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **CG&E** and  subsidiaries                          |   |               |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Capital leases                                          |   | $                  | 3 |   | $ | 3 |   | $ | 3 |   | $ | 4 |   | $ | 5 |   | $ | 15 |   | $ | 33 |   |
| Operating leases                                        |   | 9                  |   | 8 |   | 7 |   | 5 |   | 4 |   | 9 |   | 42 |   |
| Long-term debt (including  amounts due within one year) |   | 110                |   | 150 | (3) | — |   | 100 |   | 120 |   | 1,126 |   | 1,606 |   |
| Fuel purchase  contracts(4)(7)                          |   | 297                |   | 217 |   | 113 |   | 98 |   | — |   | — |   | 725 |   |
| Other commodity purchase  contracts(5)                  |   | 5                  |   | — |   | — |   | — |   | — |   | — |   | 5 |   |
| **Total  CG&E** and subsidiaries                    |   | $                  | 424 |   | $ | 378 |   | $ | 123 |   | $ | 207 |   | $ | 129 |   | $ | 1,150 |   | $ | 2,411 |   |
|                                                    |   |               |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **PSI**                                                 |   |               |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Capital leases                                          |   | $                  | 2 |   | $ | 2 |   | $ | 2 |   | $ | 3 |   | $ | 4 |   | $ | 9 |   | $ | 22 |   |
| Operating leases                                        |   | 10                 |   | 9 |   | 9 |   | 8 |   | 7 |   | 17 |   | 60 |   |
| Long-term debt (including  amounts due within one year) |   | —             |   | 52 | (2) | 326 |   | 266 |   | 44 |   | 1,043 |   | 1,731 |   |
| Fuel purchase  contracts(4)(7)                          |   | 356                |   | 352 |   | 358 |   | 367 |   | 336 |   | 1,374 |   | 3,143 |   |
| **Total PSI**                                           |   | $                  | 368 |   | $ | 415 |   | $ | 695 |   | $ | 644 |   | $ | 391 |   | $ | 2,443 |   | $ | 4,956 |   |
|                                                    |   |               |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **ULH&P**                                           |   |               |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Capital leases                                          |   | $                  | 1 |   | $ | 1 |   | $ | 1 |   | $ | 1 |   | $ | 1 |   | $ | 3 |   | $ | 8 |   |
| Long-term debt (including  amounts due within one year) |   | —             |   | — |   | — |   | — |   | 20 |   | 35 |   | 55 |   |
| **Total  ULH&P**                                    |   | $                  | 1 |   | $ | 1 |   | $ | 1 |   | $ | 1 |   | $ | 21 |   | $ | 38 |   | $ | 63 |   |
|                                                         |        |                    |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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| (1)    |   | Includes  amounts for non-registrants.                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| (2)    |   | Includes  **PSI’s** 6.50% Debentures due  August 1, 2026, reflected as maturing in 2005, as the interest rate is  due to reset on August 1, 2005.                                                                                                                                                                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| (3)    |   | Includes  **CG&E’s** 6.90% Debentures due  June 1, 2025, reflected as maturing in 2005, as the debentures are putable  to **CG&E**at the option****of the holders on June 1, 2005.                                                                                                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| (4)    |   | Some  fuel purchase contracts contain price re-opener provisions that may be  exercised upon mutual agreement of the parties or upon unilateral action by a  party.                                                                                                                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| (5)    |   | Includes  long term contracts accounted for on an accrual basis.  See the Changes in Fair Value table in  “Market Risk Sensitive Instruments and Positions” for disclosure of energy  trading contracts that are accounted for at fair value.                                                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| (6)    |   | Represents  only **Cinergy’s** minimum required  contributions.  Although not required,  **Cinergy** intends to contribute an  additional $90 million in 2004 to strengthen the funding status of the  plan.  Minimum required contributions  for future periods are not yet known.   See “Pension and Other Postretirement Benefits” for further details  regarding potential future cash payments under **Cinergy’s** pension and other postretirement benefit plans. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| (7)    |   | Subsequent  to the year ended December 31, 2003, **Cinergy**,  **CG&E**, and **PSI** executed fuel purchase contracts with  aggregate contractual cash obligations of the following:                                                                                                                                                                                                                                                                                                                   |

 
|         |   | **2004** |   | **2005** |   | **2006** |   | **2007** |   |
|--------------|--------|----------|--------|----------|--------|----------|--------|----------|--------|
| **CG&E** |   | 11       |   | 41       |   | 27       |   | 28       |   |
| **PSI**      |   | 22       |   | 20       |   | 19       |   | 20       |   |
| **Cinergy**  |   | 33       |   | 61       |   | 46       |   | 48       |   |

 

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

 

We are subject to an SECorder under the PUHCA, which limits the amounts **Cinergy Corp.** can have outstanding under guarantees at any onetime to $2 billion.  As ofDecember 31, 2003, we had $693 million outstanding under the guaranteesissued, of which approximately 90 percent represents guarantees of obligationsreflected on **Cinergy’s** BalanceSheets.  The amount outstandingrepresents **Cinergy Corp.’s**guarantees of liabilities and commitments of its consolidated subsidiaries,unconsolidated subsidiaries, and joint ventures.  See Note11(c)(*vii*) of the “Notes toFinancial Statements” in “Item 8. Financial Statements and Supplementary Data”for a discussion of guarantees in accordance with Financial AccountingStandards Board (FASB) Interpretation No. 45, *Guarantor’sAccounting and Disclosure Requirements for Guarantees, Including IndirectGuarantees of Indebtedness of Others* (Interpretation 45).  Interpretation 45 requires disclosure ofmaximum potential liabilities for guarantees issued on behalf of unconsolidatedsubsidiaries and joint ventures and under indemnification clauses in variouscontracts.  The Interpretation 45disclosure differs from the PUHCA restrictions in that it requires acalculation of maximum potential liability, rather than actual amounts outstanding;it excludes guarantees issued on behalf of consolidated subsidiaries; and itincludes potential liabilities under indemnification clauses.

 

##### ***CollateralRequirements***

 

**Cinergy**hascertain contracts in place, primarily with trading counterparties, that requirethe issuance of collateral in the event our debt ratings are downgraded belowinvestment grade.  Based upon ourDecember 31, 2003 trading portfolio, if such an event were to occur, **Cinergy** would be required to issue up toapproximately $73 million in collateral related to its gas and power tradingoperations, of which $32 million is related to **CG&E**.

 

#### **Capital Resources**

 

**Cinergy**,**CG&E**,**PSI**, and **ULH&P** meetcurrent and future capital requirements through:

 

•                  internally generated funds;

•                  cash and cashequivalents on hand;

•                  issuanceof debt and equity securities;

•                  bankfinancing under new and existing facilities; and

•                  monetizationof assets.

 

**Cinergy**,**CG&E**,**PSI**, and **ULH&P**believe that they have adequate financial resources to meet their future needs.

 

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##### ***Notes Payableand Other Short-term Obligations***

 

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

 
|                          |   | **Short-term  Regulatory Authority  December 31, 2003** |       |
|-------------------------------|--------|--------------------------------------------------------------|------------|
|                          |   | **(in  millions)**                                           |       |
|                          |   | **Authority**                                                | ** ** | **Outstanding** | ** ** |
|                          |   |                                                         |       |   |   |
| **Cinergy  Corp.**            |   | $                                                            | 5,000      | (1) | $ | 146 |   |
| **CG&E**and  subsidiaries |   | 671                                                          |       | 49 |   |
| **PSI**                       |   | 600                                                          |       | 188 |   |
| **ULH&P**                 |   | 65                                                           |       | 45 |   |
|                               |        |                                                              |            |  |  |  |  |

 

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(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.

 

For the purposes of quantifyingregulatory authority, short-term debt includes revolving credit borrowings,uncommitted credit line borrowings, intercompany money pool obligations, andcommercial paper.

 

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**CinergyCorp.’s**short-term borrowing consists primarily of unsecuredrevolving lines of credit and the sale of commercial paper.  **CinergyCorp.’s** $1 billion revolving credit facilities and $800 millioncommercial paper program also support the short-term borrowing needs of **CG&E**, **PSI**,and **ULH&P**.  In addition, **Cinergy Corp.**, **CG&E**,and **PSI** maintain uncommitted linesof credit.  These facilities are notfirm sources of capital but rather informal agreements to lend money, subjectto availability, 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, 2003** |       |
|-------------------------------|--------|----------------------------------------------------|------------|
|                          |   | **Established  Lines**                             | ** ** | **Outstanding** | ** ** | **Unused** |   | **Standby  Liquidity(3)** |   | **Available  Revolving  Lines of  Credit** | *** *** |
|                          |   |                                               | ** ** |   | ** ** | **(in  millions)** | ** ** |   | ** ** |   | ** ** |
|                          |   |                                               | * *   |   | * * |   | * * |   | * * |   | * * |
| **Cinergy**                   |   |                                               |       |   |   |   |   |   |   |   |   |
| **Cinergy  Corp.**            |   |                                               |       |   |   |   |   |   |   |   |   |
| Revolving lines               |   | $                                                  | 1,000      |   | $ | — |   | $ | 1,000 |   | $ | 159 |   | $ | 841 |   |
| Uncommitted lines(1)          |   | 40                                                 |       | — |   | 40 |   |   |   |   |   |
| Commercial paper(2)           |   |                                               |       | 146 |   | 654 |   |   |   |   |   |
|                          |   |                                               |       |   |   |   |   |   |   |   |   |
| Operating companies           |   |                                               |       |   |   |   |   |   |   |   |   |
| Uncommitted lines(1)          |   | 75                                                 |       | — |   | 75 |   |   |   |   |   |
| Pollution control notes       |   |                                               |       | 193 |   |   |   |   |   |   |   |
|                          |   |                                               |       |   |   |   |   |   |   |   |   |
| Non-regulated subsidiaries    |   |                                               |       |   |   |   |   |   |   |   |   |
| Revolving lines               |   | 19                                                 |       | 10 |   | 9 |   |   |   | 9 |   |
| Short-term debt               |   |                                               |       | 2 |   |   |   |   |   |   |   |
|                          |   |                                               |       |   |   |   |   |   |   |   |   |
| **Cinergy  Total**            |   |                                               |       | $ | 351 |   |   |   |   |   | $ | 850 |   |
|                          |   |                                               |       |   |   |   |   |   |   |   |   |
| **CG&E**and  subsidiaries |   |                                               |       |   |   |   |   |   |   |   |   |
| Uncommitted lines(1)          |   | $                                                  | 15         |   | $ | — |   | $ | 15 |   |   |   |   |   |
| Pollution control notes       |   |                                               |       | 112 |   |   |   |   |   |   |   |
| Money pool                    |   |                                               |       | 49 |   |   |   |   |   |   |   |
|                          |   |                                               |       |   |   |   |   |   |   |   |   |
| **CG&E  Total**           |   |                                               |       | $ | 161 |   |   |   |   |   |   |   |
|                          |   |                                               |       |   |   |   |   |   |   |   |   |
| **PSI**                       |   |                                               |       |   |   |   |   |   |   |   |   |
| Uncommitted lines(1)          |   | $                                                  | 60         |   | $ | — |   | $ | 60 |   |   |   |   |   |
| Pollution control notes       |   |                                               |       | 81 |   |   |   |   |   |   |   |
| Money pool                    |   |                                               |       | 188 |   |   |   |   |   |   |   |
|                          |   |                                               |       |   |   |   |   |   |   |   |   |
| **PSI Total**                 |   |                                               |       | $ | 269 |   |   |   |   |   |   |   |
|                          |   |                                               |       |   |   |   |   |   |   |   |   |
| **ULH&P**                 |   |                                               |       |   |   |   |   |   |   |   |   |
| Money pool                    |   |                                               |       | $ | 45 |   |   |   |   |   |   |   |
|                          |   |                                               |       |   |   |   |   |   |   |   |   |
| **ULH&P  Total**          |   |                                               |       | $ | 45 |   |   |   |   |   |   |   |
|                               |        |                                                    |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

45

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(1)          Outstanding amounts may begreater than established lines as uncommitted lenders are, at times, willing toloan funds in excess of the established lines.

(2)          The commercial paper programis limited to $800 million and is supported by **Cinergy Corp.’s** revolving lines of credit.

(3)          Standby liquidity isreserved against the revolving lines of credit to support the commercial paperprogram and outstanding letters of credit (currently $146 million and $13million, respectively).

 

46

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At December 31,2003, **Cinergy Corp.** had $841million remaining unused and available capacity relating to its $1 billionrevolving credit facilities.  Theserevolving credit facilities include the following:

 
| **Credit Facility**             |   | **Expiration**  |     | **Established  Lines** |     | **Outstanding  and  Committed** |     | **Unused and  Available** |     |
|---------------------------------|--------|-----------------|----------|------------------------|----------|---------------------------------|----------|---------------------------|----------|
|                            |   |            |     |                   |     | **(in  millions)**              |     |                      |     |
|                            |   |            | * * |                   | * * |                            | * * |                      | * * |
| 364-day senior  revolving(1)    |   | April 2004 |     |                   |     |                            |     |                      |     |
| Direct borrowing                |   |            |     | $                      |     |                            | $        | —                    |     | $ |   |   |
| Commercial paper support        |   |            |     |                   |     | 146                             |     |                      |     |
|                            |   |            |     |                   |     |                            |     |                      |     |
| Total 364-day facility          |   |            |     | 600                    |     | 146                             |     | 454                       |     |
|                            |   |            |     |                   |     |                            |     |                      |     |
| Three-year senior  revolving(1) |   | May 2004        |     |                   |     |                            |     |                      |     |
| Direct borrowing                |   |            |     |                   |     | —                          |     |                      |     |
| Commercial paper support        |   |            |     |                   |     | —                          |     |                      |     |
| Letter of credit support        |   |            |     |                   |     | 13                              |     |                      |     |
|                            |   |            |     |                   |     |                            |     |                      |     |
| Total Three-year facility       |   |            |     | 400                    |     | 13                              |     | 387                       |     |
|                            |   |            |     |                   |     |                            |     |                      |     |
| Total Credit Facilities         |   |            |     | $                      | 1,000    |                            | $        | 159                       |     | $ | 841 |   |
|                                 |        |                 |          |                        |          |                                 |          |                           |          |  |  |  |  |

 

----

(1)**         ****CinergyCorp.**has historically followed the practice of renewing its creditfacilities upon expiration.

 

In April 2003, **Cinergy Corp.** successfully placed a $600million, 364-day senior unsecured revolving credit facility.  This facility replaced the $600 million,364-day facility that expired April 30, 2003.

 

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

 

•                  aconsolidated net worth of $2 billion; and

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

 

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

 

•                  bankruptcy;

•                  defaultsin the payment of other indebtedness; and

•                  judgmentsagainst the company that are not paid or insured.

 

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

 

As discussed in Note1(q)(*iv*) of the “Notes toFinancial Statements” in “Item 8. Financial

 

47

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Statements andSupplementary Data”, long-term debt increased in 2003 resulting from theadoption of FASB Interpretation No. 46, *Consolidationof Variable Interest Entities* (Interpretation 46).  The debt which was recorded as a result ofthis new accounting pronouncement did not cause **Cinergy Corp.** to be in breach of any covenants.

 

48

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* *

*VariableRate Pollution Control Notes*

 

**CG&E**and **PSI** have issued certainvariable rate pollution control notes (tax-exempt notes obtained to financeequipment or land development for pollution control purposes).  Because the holders of these notes have theright to have their notes redeemed on a daily, weekly, or monthly basis, theyare reflected in *Notes payable and othershort-term obligations* on the Balance Sheets of **Cinergy**,**CG&E**, and **PSI**.  At December 31, 2003, **CG&E** and **PSI** had $112.1 million and $80.5 million, respectively,outstanding in variable rate pollution control notes, classified as short-termdebt.  **ULH&P**had no 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 6 of the “Notes to FinancialStatements” in “Item 8. Financial Statements and Supplementary Data” foradditional information regarding pollution control notes.

 

*MoneyPool*

 

**CinergyCorp.**, Cinergy Services, Inc., and our 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 moneypool arrangement are shown as a component of *Notesreceivable from affiliated companies* and/or *Notes payable to affiliated companies* onthe Balance Sheets of **CG&E**, **PSI**, and **ULH&P**.  Any money pool borrowings outstanding reducethe unused and available short-term debt regulatory authority of **CG&E**, **PSI**,and **ULH&P**.

 

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

 

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

 

##### ***Capital Leases***

 

##### ***Our operatingcompanies are able to enter into capital leases subject to the authorizationlimitations of the applicable state utility commissions.  New financing authority is subject to theapproval of the respective commissions. In May 2002,***ULH&P received approval from the KentuckyPublic Service Commission (KPSC) to enter into an additional $25 million ofcapital lease obligations for the period ending December 31, 2004.  In June 2002, PSIreceived approval from the Indiana Utility Regulatory Commission (IURC) toenter into an additional $100 million of capital lease obligations for theperiod ending December 31, 2003. In January 2004, PSI filed a petition for an additional $100 million ofcapital lease obligations.  InDecember 2002, CG&E received approval from the PUCO to enter into an additional$74 million of capital lease obligations for the period endingDecember 31, 2003.  InJanuary 2004, CG&E filed a petition for an extension of capital leaseobligations.  See Note 7(b) of the“Notes to Financial Statements” in “Item 8. Financial Statements andSupplementary Data” for additional

 

49

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information regarding capital leases.

 

50

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

 

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

 

A summary of ourlong-term debt authorizations at December 31, 2003, was as follows:

 
|                                 |   | **Authorized** |     | **Used**           |     | **Available** |     |
|--------------------------------------|--------|----------------|----------|--------------------|----------|---------------|----------|
|                                 |   |           |     | **(in  millions)** |     |          |     |
|                                 |   |           | * * |               | * * |          | * * |
| **Cinergy  Corp.**                   |   |           |     |               |     |          |     |
| PUHCA total  capitalization(1)       |   | $              | 5,000    |               | $        | 1,561         |     | $ | 3,439 |   |
|                                 |   |           |     |               |     |          |     |
| **CG&E** and  subsidiaries(2)(3) |   |           |     |               |     |          |     |
| State Public Utility  Commissions    |   | 575            |     | —             |     | 575           |     |
|                                 |   |           |     |               |     |          |     |
| **PSI**                              |   |           |     |               |     |          |     |
| State Public Utility  Commission(4)  |   | 500            |     | 483                | (5)      | 17            |     |
|                                 |   |           |     |               |     |          |     |
| **ULH&P**                        |   |           |     |               |     |          |     |
| State Public Utility  Commission     |   | 75             |     | —             |     | 75            |     |
|                                      |        |                |          |                    |          |               |          |  |  |  |

 

----

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

(2)          **CG&E** receivedauthority from the PUCO in December 2003 to issue additional long-termdebt up to $500 million.

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

(4)          In January 2004, **PSI** filed an application with the IURCrequesting additional long-term debt issuance authority of up to $500million.  An IURC decision is expectedin the first quarter of 2004.

(5)          Used amount representsissuances, net of redemptions, during the authorization period.

 

**CinergyCorp.** has an effective shelf registration statement with theSEC relating to the issuance of up to $750 million in any combination of commonstock, preferred stock, stock purchase contracts or unsecured debt securities,of which approximately $574 million remains available for issuance.  **CG&E**has an effective shelf registration statement with the SEC relating to theissuance of up to $500 million in any combination of unsecured debt securities,first mortgage bonds, or preferred stock, of which $100 million remainsavailable for issuance.  **PSI** has an effective shelf registrationstatement with the SEC relating to the issuance of up to $700 million in anycombination of unsecured debt securities, first mortgage bonds, or preferredstock, of which $300 million remains available for issuance.  In February 2004, **CG&E** and**PSI** filed with the SEC to increase the available capacityunder their shelf registration statements to $800 million for eachcompany.  **ULH&P** has effective shelf registration statements with theSEC relating to the issuance of up to $50 million in unsecured debt securitiesand up to $40 million in first mortgage bonds, of which $30 million inunsecured debt securities and $20 million in first mortgage bonds remainavailable for issuance.

 

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

 

**Cinergy**uses off-balance sheet arrangements from time to time to facilitate financingof various projects.  Off-balance sheetarrangements are often created for a single specified purpose, for

 

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example, to facilitatesecuritization, leasing, hedging, research and development, and reinsurance, orother transactions or arrangements.  Thefollowing describes our major off-balance sheet arrangements excluding theinvestments **Cinergy** holds invarious unconsolidated subsidiaries which are accounted for under the equitymethod (see Note 1(b) of the “Notes to Financial Statements” in “Item 8. FinancialStatements and Supplementary Data”).

 

*(i)*                                  Guarantees

 

**Cinergy**has entered into various contracts that are classified as guarantees underInterpretation 45.  For furtherinformation, see Note 11(c)(*vii*)of the “Notes to Financial Statements” in “Item 8. Financial Statements andSupplementary 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 Company, LLC (Cinergy Receivables)to purchase, on a revolving basis, nearly all of the retail accounts receivableand related collections of **CG&E**,**PSI**, and **ULH&P**. **Cinergy Corp.** does notconsolidate Cinergy Receivables since it meets the requirements to be accountedfor as a qualifying special purpose entity. **CG&E**, **PSI**, and **ULH&P**each retain an interest in the receivables transferred to CinergyReceivables.  The sales of receivablesare accounted for under Statement of Financial Accounting Standards No. 140, *Accounting for Transfers and Servicing of FinancialAssets and Extinguishments of Liabilities* (Statement 140).  For a more detailed discussion of our salesof accounts receivable, see Note 3(c) of the “Notes to Financial Statements” in“Item 8. Financial Statements and Supplementary Data”.

 

*(iii)*                          DerivativeInstruments that are Classified as Equity

* *

In 2001, **Cinergy Corp.** issued approximately $316million notional amounts of combined securities, a component of which was stockpurchase contracts.  These contractsobligate the holder to purchase common shares of **Cinergy Corp.** stock in February 2005.  Since the stock purchases contracts aredetachable and classified in equity the change in their fair value is notrecorded in equity or earnings.  Forfurther information see Note 3(b) of the “Notes to the Financial Statements” in“Item 8. Financial Statements and Supplementary Data”.

 

*(iv)*                            VariableInterest Entities (VIE)

* *

**Cinergy**holds interests in VIEs, consolidated and unconsolidated, as defined byInterpretation 46.  For furtherinformation, see Note 1(q)(*iv*)and Note 3(a) of the “Notes to Financial Statements” in “Item 8. FinancialStatements and Supplementary Data”.

 

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

 

As of January 31,2004, the major credit rating agencies rated our securities as follows:

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

 

----

(1)          Fitch Ratings (Fitch)

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

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

 

The highest investment gradecredit rating for Fitch is AAA, Moody’s is Aaal, and S&P is AAA.

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

 

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

 

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

##### *** ***

Under the SEC’sJune 2000 Order, **Cinergy Corp.**is permitted to increase its total capitalization by $5 billion (as previouslydiscussed).  The proceeds from any newissuances will be used for general corporate purposes.

 

**CinergyCorp.** issued approximately 4.6 million shares in 2003, andapproximately 3.2 million shares in 2002 to satisfy its obligations under itsvarious employee stock plans and the **CinergyCorp.** Direct Stock Purchase and Dividend Reinvestment Plan.

 

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

 

In January 2003, **Cinergy Corp.** filed a registrationstatement with the SEC with respect to the

 

53

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issuance of common stock,preferred stock, and other securities in an aggregate offering amount of $750million.  In February 2003, **Cinergy** sold 5.7 million shares of commonstock of **Cinergy Corp.** with netproceeds of approximately $175 million under this registration statement.

 

**CinergyCorp.** contributed $200 million in capital to **PSI** in two separate $100 million capitalcontributions in the second and third quarters of 2003, respectively.  These capital contributions were made tosupport **PSI’s** current creditratings.

 

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

 

**CinergyCorp.’s** ability to pay dividends to holders of its commonstock is principally dependent on the ability of **CG&E** and **PSI**to pay **Cinergy Corp.** common stockdividends.  **Cinergy Corp.**, **CG&E**,and **PSI** cannot pay dividends ontheir common stock if their respective preferred stock dividends or preferredtrust dividends are in arrears.  Theamount of common stock dividends that each company can pay is also limited bycertain capitalization and earnings requirements under **CG&E’s** and **PSI’s** credit instruments. Currently, these requirements do not impact the ability of eithercompany to pay dividends on its common stock.

 

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

 

Where subject to rateregulations, our operating companies have the ability to timely recover certaincash outlays through regulatory mechanisms such as fuel adjustment clause,purchased power tracker (Tracker), gas cost recovery, and construction work inprogress (CWIP) ratemaking.  For furtherdiscussion see “Electric Industry” and “Gas Industry”.

 

As opportunities arise,we will continue to monetize certain non-core investments, which would includeour international assets and other technology investments.

 

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

 

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

 

### **2003RESULTS OF OPERATIONS - HISTORICAL**

 

#### **Summary of Results**

 

Electric and gas grossmargins and net income for **Cinergy**,**CG&E**, and **PSI** for the years ended December 31,2003 and 2002 were as follows:

 
|                  |   | **Cinergy(1)**      |          | **CG&E and subsidiaries** |     | **PSI**     |     |
|-----------------------|--------|---------------------|---------------|-------------------------------|----------|-------------|----------|
|                  |   | **2003**            |          | **2002**                      |     | **2003**    |     | **2002** |   | **2003** |   | **2002** |   |
|                  |   | **(in  thousands)** |
|                  |   |                | * *      |                          | * * |        | * * |   | * * |   | * * |   | * * |
| Electric gross margin |   | **$**               | **2,224,936** |                          | $        | 2,348,369   |     | **$** | **1,214,960** |   | $ | 1,228,005 |   | **$** | **994,785** |   | $ | 1,083,218 |   |
| Gas gross margin      |   | **331,673**         |          | 280,488                       |     | **245,410** |     | 204,534 |   | **—** |   | — |   |
| Net income            |   | **469,772**         |          | 360,576                       |     | **331,050** |     | 263,696 |   | **133,381** |   | 214,249 |   |
|                       |        |                     |               |                               |          |             |          |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

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

 

**Cinergy’s**,**CG&E’s**, and **PSI’s** electric gross margins decreased forthe year ended December 31, 2003 as compared to the same period lastyear.  Milder weather in 2003 comparedto 2002 contributed the most to decreased retail electric margins.  In addition, electric gross marginsassociated with **Cinergy’s**naturalgas peaking assets decreased in 2003 as compared to 2002.  Partially offsetting these decreases werehigher margins from physical and financial trading for **Cinergy**and**CG&E** and an increase in rate tariff adjustmentsassociated with certain construction programs at **PSI**.

 

**Cinergy’s**and **CG&E’s** gas gross marginsincreased for the year ended December 31, 2003 as compared to the sameperiod last year.  **CG&E’s** increase resulted primarily froman increase in base rates, as approved by the PUCO in May 2002 and tariffadjustments associated with the gas main replacement program and Ohio excisetaxes.  The colder weather in the firstquarter of 2003 compared to 2002 also contributed to **CG&E’s** increased gas margins.  In addition, in the second quarter of 2002 Cinergy Marketing& Trading, LP (Marketing & Trading) began engaging in storage andtransportation activities.  Higher gastrading margins as discussed in “Gas Operating Revenues” also contributed tothe increase.

 

**Cinergy’s**and **CG&E’s** net incomeincreased for the year as a result of increases in gas gross margins asdiscussed above and lower *Operation andMaintenance Expense* primarily a result of the recognition of highercosts in 2002 associated with employee severance programs.  In addition, lower property taxes, primarilyresulting from the change in property value assessment in the state of Indianain 2003, contributed to **Cinergy’s**increase. Also contributing to **Cinergy’s**increase was the 2002 write-off of certain investments.  **Cinergy’s**and **CG&E’s** increased netincome reflects a net gain resulting from the implementation of certainaccounting changes which have been reflected as a cumulative effect of changesin accounting principles.  **Cinergy’s** increased net income alsoreflects gains realized in 2003 and losses incurred in 2002 from the disposalof discontinued operations and lower income taxes resulting primarily from taxcredits associated with the production of synthetic fuel, which began inJuly 2002.  Offsetting these

 

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increases were decreasesin the electric gross margins of **Cinergy**and **CG&E**.

 

**PSI’s**net income decreased as a result of decreases in electric gross margins discussedabove.  Offsetting the decrease inelectric gross margins was the recognition of higher costs in 2002 associatedwith employee severance programs. Partially offsetting **PSI’s**decrease in net income was lower property taxes as discussed above.

 

The explanations belowfollow the line items on the Statement of Income for **Cinergy**, **CG&E**,and **PSI**.  However, only the line items that varied significantly from priorperiods are discussed.

 

#### **Electric Operating Revenues**

 
|      |   | **Cinergy(1)**     |      | **CG&E  and subsidiaries** |     | **PSI**      |     |
|-----------|--------|--------------------|-----------|--------------------------------|----------|--------------|----------|
|      |   | **2003**           |      | **2002**                       |     | **% Change** |     | **2003** |   | **2002** |   | **% Change** |   | **2003** |   | **2002** |   | **% Change** |   |
|      |   | **(in  millions)** |      |
|      |   |               | * *  |                           | * * |         | * * |   | * * |   | * * |   | * * |   | * * |   | * * |   | * * |
| Retail    |   | **$**              | **2,702** |                           | $        | 2,785        |     | (3 | ) | **$** | **1,337** |   | $ | 1,425 |   | (6 | ) | **$** | **1,365** |   | $ | 1,360 |   | — |   |
| Wholesale |   | **560**            |      | 395                            |     | 42           |     | **310** |   | 150 |   | N/M |   | **209** |   | 211 |   | (1 | ) |
| Other     |   | **121**            |      | 158                            |     | (23          | )        | **107** |   | 125 |   | (14 | ) | **29** |   | 40 |   | (28 | ) |
| Total     |   | **$**              | **3,383** |                           | $        | 3,338        |     | 1 |   | **$** | **1,754** |   | $ | 1,700 |   | 3 |   | **$** | **1,603** |   | $ | 1,611 |   | — |   |

 

----

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

N/M  Not meaningful to an understanding of thechange.

 

Retail electric operatingrevenues decreased for **Cinergy**and**CG&E** mainly due to milderweather during the summer of 2003. Cooling degree days were down by 40 percent for **CG&E** compared to last year.  In addition, **Cinergy’s**and **CG&E’s**retail revenues decreased due to migration of customers to atransportation-only tariff, in connection with the Ohio electric customerchoice program.

 

**PSI’s**retail revenues were relatively flat for the year ended December 31, 2003,as compared to 2002.  The price permegawatt hour (MWh) increased mainly due to increases in rate tariffadjustments associated with the fuel cost recovery program and certainconstruction programs.  The cost of fuelfor **PSI’s** retail customers ispassed on dollar-for-dollar under the state mandated fuel cost recoverymechanism.  Offsetting this increase wasa decrease in MWh delivered due to a mild summer in 2003.  Cooling degree days were down 38 percent for**PSI** compared to last year.

 

Electric wholesalerevenues increased for **Cinergy** and**CG&E** primarily due to more **Cinergy** generation capacity that wasavailable for wholesale transactions and lower retail demand.  **CG&E’s**increase reflects the implementation of the joint operating agreement thatallows all new wholesale transactions entered into since April 2002 to beoriginated on behalf of **CG&E**.  In addition, **Cinergy’s** and **CG&E’s**increase reflects higher margins on physical and financial trading primarily inand around the Midwest.  **PSI’s** wholesale revenues remained relativelyflat mainly due to an increase in the amount of power sold to **CG&E** and a decline in wholesalethird-party transactions due to the implementation of the joint operatingagreement as discussed above.  For afurther explanation of the power transfers between **PSI** and **CG&E**,see Note 1(s)(*ii*) of the “Notesto Financial Statements” in “Item 8. Financial Statements and

 

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Supplementary Data”.

 

Other *Electric operating revenues* for **Cinergy**, **CG&E**,and **PSI** decreased for the yearended December 31, 2003, as compared to 2002.  **Cinergy’s**and **CG&E’s** decrease is due primarily to areduction in third party coal sales.**  Cinergy’s**, **CG&E’s**, and **PSI’s** decrease also reflects lower transmission revenuesprimarily as a result of changes in the Midwest Independent Transmission SystemOperator, Inc. (Midwest ISO) operations.

 

#### **Gas Operating Revenues**

 
|                       |   | **Cinergy(1)**     |     | **CG&E  and subsidiaries** |     |
|----------------------------|--------|--------------------|----------|--------------------------------|----------|
|                       |   | **2003**           |     | **2002**                       |     | **% Change** |   | **2003** |   | **2002** |   | **% Change** |   |
|                       |   | **(in  millions)** |
|                       |   |               | * * |                           | * * |   | * * |   | * * |   | * * |   | * * |
| Retail                     |   | **$**              | **623**  |                           | $        | 433 |   | 44 |   | **$** | **623** |   | $ | 433 |   | 44 |   |
| Wholesale                  |   | **71**             |     | 68                             |     | 4 |   | **—** |   | — |   | — |   |
| Storage and Transportation |   | **140**            |     | 86                             |     | 63 |   | **—** |   | — |   | — |   |
| Other                      |   | **2**              |     | 3                              |     | (33 | ) | **5** |   | 4 |   | 25 |   |
| Total                      |   | **$**              | **836**  |                           | $        | 590 |   | 42 |   | **$** | **628** |   | $ | 437 |   | 44 |   |

 

----

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

 

**Cinergy’s**and **CG&E’s** retail gasoperating revenues increased primarily due to a higher price received perthousand cubic feet (mcf) delivered. The increase in price was primarily the result of the colder weather inthe first quarter of 2003, as compared to the same period in 2002, which droveup the demand and the price of natural gas. **CG&E’s** wholesale gascommodity cost is passed directly to the retail customer dollar-for-dollarunder the gas cost recovery mechanism mandated by state law.  Additionally, the higher price per mcfreflects an increase in **CG&E’s**base rates, as approved by the PUCO in May 2002, and tariff adjustmentsassociated with the gas main replacement program, gas cost recovery mechanism,and Ohio excise taxes.  Additionally,the amount of mcf delivered to customers increased as a result of colderweather in the first quarter of 2003, as compared to 2002.

 

**Cinergy’s**wholesale gas operating revenues (which represent net gains and losses on energytrading derivatives) increased for the year ended December 31, 2003, ascompared to 2002, primarily due to an increase in the volatility of natural gasprices in the first quarter of 2003, as compared to the same period in 2002.

 

**Cinergy’s**gas storage and transportation operating revenues increasedfor the year ended December 31, 2003, as compared to 2002, primarily dueto an increase in natural gas sold out of storage in 2003.  Marketing & Trading began engaging insignificant storage activities at the end of the second quarter of 2002.

 

#### **Other Revenues**

#### ** **

*Otherrevenues* for **Cinergy**increasedfor the year ended December 31, 2003, as compared to 2002.  This increase was primarily due to the saleof synthetic fuel, which began in July 2002.

 

57

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#### **Operating Expenses**

 
|                            |   | **Cinergy(1)**     |      | **CG&E  and subsidiaries** |     | **PSI**      |     |
|---------------------------------|--------|--------------------|-----------|--------------------------------|----------|--------------|----------|
|                            |   | **2003**           |      | **2002**                       |     | **% Change** |     | **2003** |   | **2002** |   | **% Change** |   | **2003** |   | **2002** |   | **% Change** |   |
|                            |   | **(in  millions)** |
|                            |   |               | * *  |                           | * * |         | * * |   | * * |   | * * |   | * * |   | * * |   | * * |   | * * |
| Fuel                            |   | **$**              | **1,005** |                           | $        | 886          |     | 13 |   | **$** | **411** |   | $ | 410 |   | — |   | **$** | **547** |   | $ | 443 |   | 23 |   |
| Purchased and exchanged  power  |   | **153**            |      | 104                            |     | 47           |     | **128** |   | 62 |   | N/M |   | **61** |   | 84 |   | (27 | ) |
| Gas purchased                   |   | **383**            |      | 233                            |     | 64           |     | **382** |   | 233 |   | 64 |   | **—** |   | — |   | — |   |
| Gas storage and  transportation |   | **121**            |      | 77                             |     | 57           |     | **—** |   | — |   | — |   | **—** |   | — |   | — |   |
| Operation and maintenance       |   | **1,276**          |      | 1,292                          |     | (1           | )        | **511** |   | 533 |   | (4 | ) | **453** |   | 489 |   | (7 | ) |
| Depreciation                    |   | **419**            |      | 405                            |     | 3            |     | **187** |   | 196 |   | (5 | ) | **184** |   | 156 |   | 18 |   |
| Taxes other than income  taxes  |   | **250**            |      | 263                            |     | (5           | )        | **200** |   | 198 |   | 1 |   | **46** |   | 57 |   | (19 | ) |
| Total                           |   | **$**              | **3,607** |                           | $        | 3,260        |     | 11 |   | **$** | **1,819** |   | $ | 1,632 |   | 11 |   | **$** | **1,291** |   | $ | 1,229 |   | 5 |   |

 

----

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

N/M        Not meaningful to anunderstanding of the change.

 

##### ***Fuel***

 

*Fuel* primarily represents the cost ofcoal, natural gas, and oil that is used to generate electricity.  The following table details the changes tofuel expense from the year ended December 31, 2002, to the year endedDecember 31, 2003:

 
|                                            |   | **Cinergy(1)**     |       | **CG&E** |       | **PSI**    |       |
|-------------------------------------------------|--------|--------------------|------------|--------------|------------|------------|------------|
|                                            |   | **(in  millions)** |
|                                            |   |               | * *   |         | * *   |       | * *   |
| Fuel Expense –  December 31, 2002     |   | $                  | 886        |         | $          | 410        |       | $ | 443 |   |
|                                            |   |               |       |         |       |       |       |
| *Increase  (Decrease) due to changes in:*       |   |               |       |         |       |       | ** ** |
| Price of fuel                                   |   | **23**             | ** ** | **7**        | ** ** | **16**     |       |
| Deferred fuel cost                              |   | **70**             | ** ** | **—**   | ** ** | **70**     |       |
| Fuel consumption                                |   | **18**             | ** ** | **—**   | ** ** | **18**     |       |
| Other(2)                                        |   | **8**              | ** ** | **(6**       | **)**      | **—** |       |
|                                            |   |               | ** ** |         | ** ** |       |       |
| **Fuel  Expense – December 31, 2003** |   | **$**              | **1,005**  | ** **   | **$**      | **411**    | ** ** | **$** | **547** |   |

 

----

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

(2)          Includes costs of thirdparty coal sales.

 

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

 

##### ***Purchased andExchanged Power***

 

*Purchasedand exchanged power*expense increased**for **Cinergy**and **CG&E**, and decreased for

 

58

----

 

**PSI**for the year ended December 31, 2003, as compared to 2002.  The increases for **Cinergy** and **CG&E**were primarily the result of increases in price paid per MWh and a lower amountof deferred purchased power cost.  **PSI’s** decrease is a result of moregeneration being available to serve **PSI**native load customers due to the repowering of **PSI’s** Noblesville station and the addition of two peakingplants as discussed in Note 19 of the “Notes to Financial Statements” in “Item8. Financial Statements and Supplementary Data”.

 

##### ***Gas Purchased***

 

*Gaspurchased* expense increased for **Cinergy** and **CG&E**forthe year ended December 31, 2003, as compared to 2002, primarily due to anincreased average cost per mcf of gas purchased.  In addition, **CG&E’s**gas customer usage increased approximately ten percent due to colder weatherfor the year ended December 31, 2003, as compared to the same period lastyear.  **CG&E’s**wholesale commodity cost is passed directly to the retail customerdollar-for-dollar under the gas cost recovery mechanism mandated by state law.

 

##### ***Gas Storageand Transportation***

 

##### ***Gas storage andtransportation expense increased for***Cinergy for theyear ended December 31, 2003, as compared to 2002, primarily due to anincrease in natural gas sold out of storage in 2003.  Marketing & Trading began engaging in significant storageactivities at the end of the second quarter of 2002.  Gas storage expense is recognized on our Statements of Income asnatural gas is sold from inventory.

 

##### ***Operation andMaintenance***

 

*Operationand maintenance* expense decreased for **Cinergy**, **CG&E**,and **PSI** for the year endedDecember 31, 2003, as compared to 2002, primarily as a result of decreasedtransmission costs largely the result of changes in the Midwest ISO operations,the recognition of higher costs associated with employee severance programs in2002, and a decrease in employee incentive costs.  **Cinergy’s** decreasewas partially offset by costs associated with the production of synthetic fuel,which began in July 2002, and the charges associated with our resolutionof claims with respect to the bankruptcy of Enron Corp.  **Cinergy’s**,**CG&E’s**, and **PSI’s** decrease was partially offset by anincrease in maintenance expense for our generating units and overhead lines.

 

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

 

*Depreciation*expense increased for **Cinergy** and **PSI**, and decreased for **CG&E** for the year endedDecember 31, 2003, as compared to 2002. ** Cinergy’s** and **PSI’s** increase was primarily due to theaddition of depreciable plant.  Alsocontributing to **Cinergy’s** increasewas the addition of the depreciable equipment associated with the production ofsynthetic fuel.  **CG&E’s** decrease was primarilyattributable to an increase in the estimated useful lives of certain assetsresulting from a new depreciation study completed during the third quarter of2003.  Also contributing to **CG&E’s** decrease was the discontinuanceof accruing costs of removal for generating assets (which was previouslyincluded as part of *Depreciation*expense) as a result of the adoption of Statement of Financial AccountingStandards No. 143, *Accounting for Asset*

 

59

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*RetirementObligations* (Statement 143). See Note 1(q)(*iii*) 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.

 

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

 

*Taxesother than income taxes* expense decreased for **Cinergy**and **PSI** for the year ended December 31, 2003, as compared to2002, primarily resulting from lower property taxes partially offset byincreased excise taxes.  This decreaseis primarily a result of a change in property value assessments in the state ofIndiana in 2003.

 

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

 

*MiscellaneousIncome - Net* increased for **Cinergy**and **CG&E**,****and decreased for **PSI**for the year ended December 31,2003, as compared to 2002.  **Cinergy’s** increase primarily reflects the2002 write-offs of certain equipment and technology investments and costsaccrued related to the termination of a contract for the construction ofcombustion turbines.  Also contributingto the increase was the interest income on the notes receivable of two newly consolidatedsubsidiaries in 2003.  See Note 1(q)(*iv*) of the “Notes to Financial Statements”in “Item 8. Financial Statements and Supplementary Data” for furtherdetails.  Partially offsetting theseincreases were net gains realized in 2002 from the sale of equity investmentsin certain renewable energy projects.  **Cinergy’s**and**CG&E’s** increase also reflects a gain on the sale ofnon-utility property.  In addition, **CG&E’s** increase and **PSI’s** decrease was a result of a finalreconciliation between the two entities of a previous demutualization of a medicalinsurance carrier used by both companies which was recorded in 2003.

 

#### **Interest Expense**

 

*Interest**Expense* increased for **Cinergy**, **CG&E**,and **PSI**for the year endedDecember 31, 2003, as compared to 2002, primarily as a result of anincrease in average long-term debt outstanding during the year endedDecember 31, 2003.  **Cinergy’s**and**CG&E’s** increases also reflect charges during 2003associated with the re-financing of certain debt. **Cinergy’s**, **CG&E’s**,and **PSI’s**increases were partiallyoffset by a decrease in short-term interest rates.  **Cinergy’s** increasealso reflects the additional debt recorded with the consolidation of two newentities and the recognition of a note payable to a trust in accordance withthe adoption of Interpretation 46.  SeeNote 1(q)(*iv*) of the “Notes toFinancial Statements” in “Item 8. Financial Statements and Supplementary Data”.

 

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

 

*PreferredDividend Requirement of Subsidiary Trust* decreased for **Cinergy** for the year endedDecember 31, 2003, as compared to 2002, as a result of the implementationof Interpretation 46.  EffectiveJuly 1, 2003, the preferred trust securities and the related dividends areno longer reported in **Cinergy’s**financial statements.  However, interestexpense is still being incurred on a note payable to this trust as discussedabove.  See Note 1(q)(*iv*) of the “Notes to Financial Statements”in “Item 8. Financial Statements and Supplementary Data” for further details.

 

60

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#### **Income Taxes**

 

The effective income taxrate decreased for **Cinergy** andincreased for **PSI**for****the year ended December 31, 2003, ascompared to 2002.  **CG&E’s** effective income tax rateremained flat for the period.  **Cinergy’s** decrease was primarily a resultof the tax credits associated with the production and sale of synthetic fuel bya non-regulated subsidiary, which began in July 2002.  **Cinergy’s**effective tax rate for 2003 was approximately 25 percent.  **PSI’s**increase was primarily a result of the increase in the Indiana state income taxrate.

 

#### **Discontinued Operations**

 

In 2002,**Cinergy** sold and/or classified as held forsale, several non-core investments, including renewable and internationalinvestments.  During 2003, **Cinergy** completed the disposal of its gasdistribution operation in South Africa, sold its remaining wind assets in theU.S., and substantially sold or liquidated the assets of its energy marketingbusiness in the Czech Republic. Pursuant to Statement of Financial Accounting Standards No. 144, *Accounting for the Impairment of Long-lived Assets*(Statement 144), these investments have been classified as discontinuedoperations in our financial statements. See Note 14 of the “Notes to Financial Statements” in “Item 8. FinancialStatements and Supplementary Data” for additional information.

 

The increase indiscontinued operations in 2003 as compared to 2002 is due to the recognitionof losses on disposal of foreign investments in 2002 and the recognition ofgains on disposal in 2003.

 

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

 

In 2003, **Cinergy**,**CG&E**, and **PSI**recognized*Cumulative effect of changes in accountingprinciples, net of tax* gain/(loss) of approximately $26 million, $31million, and $(0.5) million, respectively. The cumulative effect of changes in accounting principles was a resultof the adoption of Statement 143, and the rescission of Emerging Issues TaskForce (EITF) Issue 98-10, *Accounting forContracts Involved in Energy Trading and Risk Management Activities*(EITF 98-10).

 

In 2002, **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*(Statement 142).  See Note 1(q)(*vi*) of the “Notes to Financial Statements”in “Item 8. Financial Statements and Supplementary Data” for furtherinformation.

 

61

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**ULH&P**

 

The Results of Operationsdiscussion for **ULH&P** ispresented only for the year ended December 31, 2003, in accordance withGeneral Instruction I(2)(a).

 

Electric and gas grossmargins and net income for **ULH&P**for the year ended December 31, 2003 and 2002, were as follows:

 

|                  |   | **ULH&P**       |
|-----------------------|--------|---------------------|
|                  |   | **2003**            |   | **2002** |   |
|                  |   | **(in  thousands)** |
|                  |   |                | * * |   | * * |
| Electric gross margin |   | **$**               | **67,509** |   | $ | 67,122 |   |
| Gas gross margin      |   | **40,298**          |   | 34,820 |   |
| Net income            |   | **19,029**          |   | 12,150 |   |
|                       |        |                     |  |  |  |  |  |

 

#### **Summary of Results**

 

Electric gross marginsfor **ULH&P** remained flat forthe twelve months ended December 31, 2003 compared to 2002.  Gas gross margins increased for the sameperiod.  The majority of the increase isdue to tariff adjustments associated with the gas main replacement program.  The colder weather in the first quarter of2003 also contributed to this increase.

 

The increase in netincome for the year was primarily due to increased gas gross margins (discussedabove).  Also contributing to theincrease in net income was the recognition of expenses in 2002 for previouslydeferred costs that were denied recovery in the final order on **ULH&P’s** gas rate case, decreases intransmission costs in 2003 (as a result of changes in Midwest ISO operations)and decreases in employee incentives in 2003. Partially offsetting this increase in net income was increased amortizationof demand-side management program costs and increased maintenance costs of **ULH&P’s** overhead lines.

 

62

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**MD&A - 2002 RESULTS OF OPERATIONS - HISTORICAL**

 

### **2002RESULTS OF OPERATIONS - HISTORICAL**

 

#### **Summary of Results**

 

Electric and gas grossmargins and net income for **Cinergy**,**CG&E**, and **PSI** for the years ended December 31,2002 and 2001 were as follows:

 
|                  |   | **Cinergy(1)**      |      | **CG&E and subsidiaries** |     | **PSI**   |     |
|-----------------------|--------|---------------------|-----------|-------------------------------|----------|-----------|----------|
|                  |   | **2002**            |      | **2001**                      |     | **2002**  |     | **2001** |   | **2002** |   | **2001** |   |
|                  |   | **(in  thousands)** |
|                  |   |                | * *  |                          | * * |      | * * |   | * * |   | * * |   | * * |
| Electric gross margin |   | $                   | 2,348,369 |                          | $        | 2,201,081 |     | $ | 1,228,005 |   | $ | 1,215,385 |   | $ | 1,083,218 |   | $ | 942,530 |   |
| Gas gross margin      |   | 280,488             |      | 258,368                       |     | 204,534   |     | 199,665 |   | — |   | — |   |
| Net income            |   | 360,576             |      | 442,279                       |     | 263,696   |     | 326,654 |   | 214,249 |   | 162,333 |   |
|                       |        |                     |           |                               |          |           |          |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

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

 

Increased gross marginswere offset by the recognition of costs associated with employee severanceprograms, charges related to the write-off of certain investments, and higheroperating costs.  Increased grossmargins were also offset by a cumulative effect of a change in accountingprinciple related to the implementation of Statement 142.

 

The explanations belowfollow the line items on the Statements of Income for **Cinergy**, **CG&E**,and **PSI**.  However, only the line items that varied significantly from priorperiods are discussed.

 

#### **Electric Operating Revenues**

 
|      |   | **Cinergy(1)**     |     | **CG&E  and subsidiaries** |     | **PSI**      |     |
|-----------|--------|--------------------|----------|--------------------------------|----------|--------------|----------|
|      |   | **2002**           |     | **2001**                       |     | **% Change** |     | **2002** |   | **2001** |   | **% Change** |   | **2002** |   | **2001** |   | **% Change** |   |
|      |   | **(in  millions)** |
|      |   |               | * * |                           | * * |         | * * |   | * * |   | * * |   | * * |   | * * |   | * * |   | * * |
| Retail    |   | $                  | 2,785    |                           | $        | 2,694        |     | 3 |   | $ | 1,425 |   | $ | 1,447 |   | (2 | ) | $ | 1,360 |   | $ | 1,247 |   | 9 |   |
| Wholesale |   | 395                |     | 442                            |     | (11          | )        | 150 |   | 140 |   | 7 |   | 211 |   | 301 |   | (30 | ) |
| Other     |   | 158                |     | 80                             |     | 98           |     | 125 |   | 64 |   | 95 |   | 40 |   | 26 |   | 54 |   |
| Total     |   | $                  | 3,338    |                           | $        | 3,216        |     | 4 |   | $ | 1,700 |   | $ | 1,651 |   | 3 |   | $ | 1,611 |   | $ | 1,574 |   | 2 |   |

 

----

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

 

63

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Retailelectric operating revenues increased for **Cinergy**and **PSI** reflecting anincreased price received per MWh sales due to the changes in rate tariffadjustments associated with demand-side management, Tracker, CWIP, and fuelcost recovery programs.  The cost offuel for **PSI’s** retail customers ispassed on dollar-for-dollar under the state mandated fuel cost recoverymechanism.  **PSI** also had increased MWh sales attributable to weather andincreased customer usage.  **CG&E’s**retail electric operatingrevenues decreased slightly for the year ended December 31, 2002, ascompared to 2001.  Increased residentialsales, primarily attributable to weather, were offset by decreases in pricereceived per MWh and revenue from commercial and industrial customers.  This decrease reflects the migration of suchcustomers to a transportation-only tariff, in connection with the Ohio electriccustomer choice program.

 

**Cinergy’s**wholesale electric operating revenues decrease primarily reflects a reductionin the average price per MWh realized on wholesale transactions related to **CG&E’s** and **PSI’s** energy marketing and trading activities.  Additionally, **CG&E’s** increase and **PSI’s**decrease in wholesale electric operating revenues reflect the implementation ofthe new joint operating agreement effective April 2002.  In connection with implementation of the newoperating agreement, new wholesale sales transactions entered into sinceApril 2002 were originated on behalf of **CG&E**.

 

Other electric operatingrevenues for **Cinergy**, **CG&E**, and **PSI** increased for the year ended December 31, 2002, ascompared to 2001.  **Cinergy’s**and **CG&E’s** increase is due primarily to third party coalsales.** Cinergy’s**, **CG&E’s**,and **PSI’s** increase also reflectstransmission revenues associated with the Midwest ISO which began operations inearly 2002.

 

#### **Gas Operating Revenues**

 
|                       |   | **Cinergy(1)**     |     | **CG&E  and subsidiaries** |     |
|----------------------------|--------|--------------------|----------|--------------------------------|----------|
|                       |   | **2002**           |     | **2001**                       |     | **% Change** |   | **2002** |   | **2001** |   | **% Change** |   |
|                       |   | **(in  millions)** |
|                       |   |               | * * |                           | * * |   | * * |   | * * |   | * * |   | * * |
| Retail                     |   | $                  | 433      |                           | $        | 587 |   | (26 | ) | $ | 433 |   | $ | 587 |   | (26 | ) |
| Wholesale                  |   | 68                 |     | 61                             |     | 11 |   | — |   | — |   | — |   |
| Storage and transportation |   | 86                 |     | —                         |     | N/M |   | — |   | — |   | — |   |
| Other                      |   | 3                  |     | 8                              |     | (63 | ) | 4 |   | 9 |   | (56 | ) |
| Total                      |   | $                  | 590      |                           | $        | 656 |   | (10 | ) | $ | 437 |   | $ | 596 |   | (27 | ) |

 

----

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

N/M                       Not meaningful to anunderstanding of this change.

 

**CG&E’s**retail gas operating revenues decreased primarily due to a lower price receivedper mcf delivered.  The lower pricereflects a substantial decrease in the wholesale gas commodity cost, which ispassed directly to the retail customer dollar-for-dollar under the gas costrecovery mechanism that is mandated by state law.  Partially offsetting this decrease in retail gas revenues was anincrease in **CG&E’s** base ratesapproved by the PUCO in May 2002 (See “**CG&E**Gas Rate Case” in “Results of Operations - Future”).

 

**Cinergy’s**wholesale gas operating revenues (which represent net gains and losses onenergy

 

64

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trading derivatives)increased for the year ended December 31, 2002 as compared to 2001,primarily due to an increase in basis trading and the volatility of natural gasprices.

 

Gas storage andtransportation operating revenues increased for the year endedDecember 31, 2002, as compared to 2001. Marketing & Trading began engaging in significant storage activitiesin the second quarter of 2002, resulting in increased revenues, which must bepresented on a gross revenue basis.

 

#### **Other Revenues**

 

*Otherrevenues* for **Cinergy**increasedfor the year ended December 31, 2002, as compared to 2001.  This increase is primarily due to the saleof synthetic fuel, which began in July 2002.

 

#### **Operating Expenses**

 
|                            |   | **Cinergy(1)**     |   | **CG&E  and subsidiaries** |   | **PSI**      |   |
|---------------------------------|--------|--------------------|--------|--------------------------------|--------|--------------|--------|
|                            |   | **2002**           |   | **2001**                       |   | **% Change** |   | **2002** |   | **2001** |   | **% Change** |   | **2002** |   | **2001** |   | **% Change** |   |
|                            |   | **(in  millions)** |
|                            |   |               |   |                           |   |         |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Fuel                            |   | $                  | 886    |                           | $      | 813          |   | 9 |   | $ | 410 |   | $ | 332 |   | 23 |   | $ | 443 |   | $ | 459 |   | (3 | ) |
| Purchased and exchanged  power  |   | 104                |   | 201                            |   | (48          | )      | 62 |   | 104 |   | (40 | ) | 84 |   | 173 |   | (51 | ) |
| Gas purchased                   |   | 233                |   | 397                            |   | (41          | )      | 233 |   | 397 |   | (41 | ) | — |   | — |   | — |   |
| Gas storage and  transportation |   | 77                 |   | —                         |   | N/M          |   | — |   | — |   | — |   | — |   | — |   | — |   |
| Operation and maintenance       |   | 1,292              |   | 1,008                          |   | 28           |   | 533 |   | 442 |   | 21 |   | 489 |   | 413 |   | 18 |   |
| Depreciation                    |   | 405                |   | 367                            |   | 10           |   | 196 |   | 187 |   | 5 |   | 156 |   | 149 |   | 5 |   |
| Taxes other than income  taxes  |   | 263                |   | 228                            |   | 15           |   | 198 |   | 174 |   | 14 |   | 57 |   | 50 |   | 14 |   |
| Total                           |   | $                  | 3,260  |                           | $      | 3,014        |   | 8 |   | $ | 1,632 |   | $ | 1,636 |   | — |   | $ | 1,229 |   | $ | 1,244 |   | (1 | ) |

 

----

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

N/M                       Not meaningfulto an understanding of this change.

 

65

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***Fuel***

##### *** ***

*Fuel* primarily represents the cost ofcoal, natural gas, and oil that is used to generate electricity. The followingtable details the changes to fuel expense from the year ended December 31,2001, to the year ended December 31, 2002:

 
|                                        |   | **Cinergy(1)**     |     | **CG&E** |     | **PSI** |     |
|---------------------------------------------|--------|--------------------|----------|--------------|----------|---------|----------|
|                                        |   | **(in  millions)** |
|                                        |   |               | * * |         | * * |    | * * |
| Fuel Expense –  December 31, 2001 |   | $                  | 813      |         | $        | 332     |     | $ | 459 |   |
|                                        |   |               |     |         |     |    |     |
| *Increase  (Decrease) due to changes in:*   |   |               |     |         |     |    |     |
| Price of fuel                               |   | (8                 | )        | (22          | )        | 14      |     |
| Deferred fuel cost                          |   | (23                | )        | —       |     | (23     | )        |
| Fuel consumption                            |   | 23                 |     | 30           |     | (7      | )        |
| Other(2)                                    |   | 81                 |     | 70           |     | —  |     |
|                                        |   |               |     |         |     |    |     |
| Fuel Expense –  December 31, 2002 |   | $                  | 886      |         | $        | 410     |     | $ | 443 |   |

 

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

(2)          Includes costs of thirdparty coal sales.

 

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

 

##### ***Purchased andExchanged Power***

 

*Purchasedand exchanged power*expense decreased**for **Cinergy**,**CG&E**, and **PSI** for the year ended December 31,2002, as compared to 2001.  **Cinergy’s**and **CG&E’s** decrease primarily reflects a reduction in theaverage price paid per MWh as wholesale electric on-peak commodity prices wereapproximately 23 percent lower, on average, as compared to 2001.  **CG&E’s**and**PSI’s***Purchased and exchanged power* expense alsoreflects the implementation of the new joint operating agreement which began inApril 2002, which reduced the amount of intercompany purchases between **CG&E** and **PSI**.

 

##### ***Gas Purchased***

 

*Gaspurchased* expense decreased for **Cinergy** and **CG&E**for the year ended December 31, 2002, as compared to 2001, primarily dueto a decrease in the average cost purchased per mcf for retail customerusage.  Wholesale natural gas commodityspot prices were 16 percent lower on average for the year endedDecember 31, 2002, as compared to 2001. **CG&E’s** wholesale gascommodity cost is passed directly to the retail customer dollar-for-dollar underthe gas cost recovery mechanism that is mandated by state law.

 

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##### ***Gas Storageand Transportation***

 

Gas storage andtransportation expense increased for **Cinergy**for the year ended December 31, 2002, as compared to 2001.  As previously discussed in “Gas OperatingRevenues”, Marketing & Trading began engaging in significant storageactivities at the end of the second quarter of 2002.  Gas storage expense is recognized on our Statements of Income asnatural gas is sold from inventory.

 

##### ***Operation andMaintenance***

 

*Operationand maintenance* expense increased for **Cinergy**, **CG&E**,and **PSI** for the year endedDecember 31, 2002, as compared to 2001. **Cinergy’s**, **CG&E’s**, and **PSI’s** increase reflects the recognition of costs associatedwith employee severance programs, which began in the second quarter of2002.  Also contributing to thisincrease were higher transmission costs, increased costs of employeecompensation and benefit programs, and expenditures related to processimprovement and performance measurement initiatives.  **Cinergy’s**and**PSI’s** increase also reflects increasedamortization of demand-side management expenditures.  Additionally, **Cinergy’s**increase includes costs associated with the production of synthetic fuel, whichbegan in July 2002 and increased operating costs for certain of ournon-regulated investments.

 

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

 

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

 

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

 

*Taxesother than income taxes* expense increased for **Cinergy**, **CG&E**,and **PSI** for the year endedDecember 31, 2002, as compared to 2001. This increase is primarily attributable to increased propertytaxes.  **Cinergy’s** and **CG&E’s**increase also reflects other tax changes associated with deregulation in Ohio.

 

#### **Equity in Earnings (Losses) of UnconsolidatedSubsidiaries**

 

*Equityin earnings (losses)**ofunconsolidated subsidiaries* increased for the year endedDecember 31, 2002, as compared to 2001, primarily due to changes in themarket valuation of certain investments and the dissolution and write-off ofsubsidiaries in 2001.

 

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

 

*MiscellaneousIncome - Net* decreased for **Cinergy**for the year ended December 31, 2002, as compared to 2001, primarilyreflecting the write-off of technology investments and costs accrued related tothe termination of a contract for the construction of combustion turbines.  Partially offsetting this decrease were netgains realized from the sale of equity investments in certain renewable energyprojects.

 

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#### **Interest Expense**

 

*Interest**Expense* decreased for **Cinergy**, **CG&E**,and **PSI** for the year endedDecember 31, 2002, as compared to 2001, primarily as a result of lowerinterest rates.

 

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

 

*Preferreddividend requirement of subsidiary trust* relates to quarterlypayments to be made to holders of **Cinergy’s**preferred trust securities, which were issued in December 2001.

 

#### **Income Taxes**

 

The effective income taxrate for **Cinergy** and **PSI**decreased****for the year ended December 31, 2002, as compared to2001.  **Cinergy’s**decrease was primarily a result of the tax credits associated with theproduction and sale of synthetic fuel, which began in July 2002.  **PSI’s**variability in effective income tax rates was primarily attributable to changesin state and local income taxes.  **CG&E’s** effective income tax rateremained relatively flat for the period.

 

#### **Discontinued Operations**

 

In 2002,**Cinergy** sold and/or classified as held forsale, several non-core investments. Pursuant to Statement 144, these investments have been classified asdiscontinued operations in our financial statements.  See Note 14 of the “Notes to Financial Statements” in “Item 8.Financial Statements and Supplementary Data” for further information.  The decrease in discontinued operations in2002 as compared to 2001 is a result of losses recognized on the disposition offoreign investments in 2002.

 

#### **Cumulative Effect of a Change in AccountingPrinciple**

 

**Cinergy**recognizeda*Cumulative effect of a change inaccounting principle* of approximately $11 million (net of tax) as aresult of an impairment charge for goodwill related to the implementation ofStatement 142.  See Note 1(q)(*vi*) of the “Notes to Financial Statements”in “Item 8. Financial Statements and Supplementary Data” for furtherinformation.

 

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

 

### **FUTUREEXPECTATIONS/TRENDS**

 

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

 

### **ELECTRICINDUSTRY**

 

#### **Retail Market Developments**

 

Currently, regulatory andlegislative initiatives shaping the transition to a competitive retail marketare the responsibilities of the individual states.  Many states, including Ohio, have enacted electric utility deregulationlegislation.  In general, theseinitiatives have sought to separate the electric utility service into its basiccomponents (generation, transmission, and distribution) and offer eachcomponent separately for sale.  Thisseparation is referred to as unbundling of the integrated services.  Under the customer choice initiative inOhio, we continue to transmit and distribute electricity; however, the customercan purchase electricity from any available supplier, and we are compensatedthrough a transportation charge.  Thefollowing sections further discuss the current status of federal and stateenergy policies and deregulation legislation in the states of Ohio, Indiana,and Kentucky, each of which includes a portion of our service territory.

##### *** ***

##### ***Federal Update***

 

*EnergyBill*

* *

The U.S. House ofRepresentatives (House) passed the Energy Policy Act in April 2003.  The legislation, as passed in the House,included the repeal of the PUHCA, as well as tax incentives for gas andelectric distribution lines, and combined heat and power and renewable energyprojects.  The U.S. Senate (Senate)Energy and Natural Resources Committee passed its version of comprehensiveenergy legislation in April 2003. A conference agreement which merged both the House and Senate versionspassed in the House in October 2003, but failed to pass in theSenate.  The legislation can beconsidered during this session of Congress, however many disputed issues remainand it is unclear whether or not legislation will pass this year.

 

*ClearSkies Legislation*

* *

President Bush hasproposed environmental legislation that would combine a series of Clean Air Actrequirements, including the recently proposed regulations for mercury andparticulate matter for coal-fired power plants with a legislative solution thatincludes trading and specific emissions reductions and timelines to meet thosereductions.  The President’s “ClearSkies Initiative” would seek an overall 70 percent reduction in emissions frompower plants over a phased-in reduction schedule beginning in 2010 andcontinuing through 2018.  The SenateEnvironment and Public Works Committee has held several hearings on the “ClearSkies Initiative” proposal.  It isunclear whether or not this legislation will be considered in 2004.

 

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

 

**CG&E**is in a market development period, transitioning to deregulation of electricgeneration and a competitive retail electric service market in the state ofOhio.  The transition period is governedby the Amended Substitute Senate Bill No. 3 (Electric Restructuring Bill) and astipulated transition plan adopted and approved by the PUCO.  The Electric Restructuring Bill provides fora market development period that began January 1, 2001, and ends no laterthan December 31, 2005.

 

The major features of **CG&E’s** transition plan include:

 

•                  Residentialcustomer rates are frozen through December 31, 2005;

•                  Residentialcustomers received a five-percent reduction in the generation portion of theirelectric rates, effective January 1, 2001;

•                  **CG&E**will provide $4 million from 2001to 2005 in support of energy efficiency and weatherization services for lowincome customers;

•                  **CG&E** will provide shopping credits toswitching customers;

•                  Thecreation of a Regulatory Transition Charge (RTC) designed to recover **CG&E’s** regulatory assets and othertransition costs over a ten-year period;

•                  Authorityfor **CG&E** to transfer itsgeneration assets to one or more, non-regulated affiliates to provideflexibility to manage its generation asset portfolio in a manner that enhancesopportunities in a competitive marketplace;

•                  Authorityfor **CG&E** to apply the proceedsof transition cost recovery to costs incurred during the transition period,including implementation costs and purchased power costs that may be incurredby **CG&E** to maintain anoperating reserve margin sufficient to provide reliable service to itscustomers;

•                  Authorityfor **CG&E** to adjust theamortization of its regulatory assets and other transition costs to reflect theeffects of any shopping incentives provided to customers; and

•                  **CG&E** will provide standard offerdefault supplier service (i.e., **CG&E**will be the supplier of last resort, so that no customer will be without anelectric supplier).

 

Under **CG&E’s** transition plan, retailcustomers continue to receive transmission and distribution services from **CG&E**, but may purchase electricity fromanother supplier.  Retail customers thatpurchase electricity from another supplier receive shopping credits from **CG&E**. The shopping credits generally reflect the costs of electric generationincluded in **CG&E’s** frozenrates.  However, shopping credits forthe first 20 percent of electricity usage in each customer class to switchsuppliers are higher than shopping credits for subsequent switchers in order tostimulate the development of the competitive retail electric service market.

 

**CG&E**recovers its generation-related regulatory assets and certainother deferred transition costs through an RTC paid by all retailcustomers.  As the RTC is collected fromcustomers, **CG&E** amortizes thedeferred balance of regulatory assets and other transition costs.  A portion of the RTC collected fromcustomers is recognized currently as a return on the deferred balance ofregulatory assets and other transition costs and as reimbursement for thedifference in the shopping credits provided to retail customers and thewholesale revenues from generation made available by switched customers.  The ability of **CG&E** to recover its regulatory assets and other transitioncosts is dependent on several factors, including, but not limited to, the levelof

 

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**CG&E’s**electric sales, prices in the wholesale power markets, and the amount ofcustomers switching to other electric suppliers.

 

In January 2003, **CG&E** filed an application with the PUCOfor approval of a methodology to establish how market-based rates fornon-residential customers will be determined when the market development periodends.  In the filing, **CG&E** seeks to establish a market-basedstandard service offer rate for non-residential customers that do not switchsuppliers and a process for establishing the competitively-bid generationservice option required by the Electric Restructuring Bill.  As of December 31, 2002, more than 20percent of the load of **CG&E’s**commercial and industrial customer classes had switched to other electricsuppliers, and the other public authorities group was at 19.95 percent atDecember 31, 2003.  Under itstransition plan, **CG&E** may end themarket development period for those classes of customers once 20 percentswitching has been achieved; however, PUCO approval of the standard serviceoffer rate and competitive bidding process is required before the marketdevelopment period can be ended.

 

In December 2003,the PUCO issued an order that the **CG&E**application filed in January 2003 would proceed to a hearing and beconsolidated with **CG&E’s**application to defer certain administrative transmission charges and theapplication to defer costs of capital investments made to their transmissionand distribution system during the market development period.  As part of this order, the PUCO requestedthat **CG&E** file a ratestabilization plan to mitigate the effects of market based pricing on retailcustomers while the competitive retail electric market continues tomature.  In response to this request, onJanuary 26, 2004, **CG&E**filed an offer of settlement, including an electric reliability and ratestabilization plan.  In this proposal, **CG&E** has also asked to end the marketdevelopment period for all customers effective December 31, 2004.

 

The major features of **CG&E’s** electric reliability and ratestabilization plan include:

 

•                  Themarket development period would end for all customers on December 31, 2004;

•                  **CG&E** would begin to collect anon-bypassable Provider of Last Resort (POLR) charge from all customerseffective January 1, 2005.  Thischarge could be increased by up to 10 percent of **CG&E’s** generation charge each year from 2005 through 2008;

•                  **CG&E** would offer its current generationrates as its market based rates until December 31, 2008;

•                  **CG&E** would request a transmission anddistribution rate increase effective January 1, 2005;

•                  **CG&E** would begin charging RTC as anexplicit wires charge;

•                  PUCOapproval of previously requested transmission and distribution deferrals andcost recovery riders (see “**CG&E**Transmission and Distribution Rate Filings”);

•                  The five percent generation rate reductionfor residential customers would continue through 2008;

•                  Extend recovery of residential RTC from 2008through 2010.

 

The POLR charge wouldallow for recovery of increased costs of fuel and purchased power, transmissioncongestion, environmental compliance, homeland security, taxes and maintaining

 

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an adequate reservemargin.

 

An evidentiary hearingaddressing the issues described above is scheduled for the second quarter of2004.  At the current time **CG&E** is unable to predict the outcomeof this proceeding or the effects it could have on its results of operations orfinancial condition.

 

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

 

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

 

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

 

Throughout 1999, aspecial Kentucky Electricity Restructuring Task Force (Task Force), convened bythe Kentucky legislature, studied the issues of electric deregulation.  In January 2000, the Task Force issueda final report to former Kentucky Governor Paul Patton recommending thatlawmakers wait until the 2002 General Assembly before considering any deregulationthat would open the state’s electric industry to competition.  The state legislature did not take anyaction in either 2002 or 2003 to move Kentucky towards electric deregulation. 

 

##### ***Other States***

 

At the end of 2000,approximately one half of the states and the District of Columbia had adoptedderegulation plans.  However, recentevents are significantly influencing political and legislative activity.  At the end of 2001, eight of the statesdecided to delay or suspend their deregulation activities.  No additional states adopted deregulationplans during 2002 or 2003, and two states repealed their deregulation statutesduring 2003.

 

##### ***RetailSupply-Side Actions***

 

In December 2002,the IURC approved a settlement agreement among **PSI**, the Indiana Office of the Utility Consumer Counselor, andthe IURC Testimonial Staff authorizing **PSI’s**purchases of the Henry County, Indiana and Butler County, Ohio, gas-firedpeaking plants from two non-regulated affiliates.  In February 2003, the FERC issued an order underSection 203 of the Federal Power Act authorizing **PSI’s** acquisitions of the plants, whichoccurred on February 5, 2003. Subsequently, in April 2003, the FERC issued a tolling orderallowing additional time to consider a request for rehearing filed in responseto the February 2003 FERC order. At this time, the rehearing request is still pending before the FERC,and **PSI** cannot predict the outcomeof this matter.

 

In July 2003, **ULH&P** filed an application with theKPSC requesting a certificate of public convenience and necessity to acquire **CG&E’s** 68.9 percent ownership interestin the East Bend Generating Station, located in Boone County, Kentucky, theWoodsdale Generating Station, located in Butler County, Ohio, and onegenerating unit at the four-unit Miami Fort Station located in Hamilton County,Ohio.  In December 2003, the KPSCconditionally approved this

 

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application.  The transfer, which will be made at net bookvalue, will not affect current electric rates for **ULH&P’s** customers, as power will be provided under thesame terms as under the current wholesale power contract with **CG&E** through at least December 31,2006.  **ULH&P**will also seek regulatory approval for aspects of this transaction from theFERC and SEC.  At this time, **ULH&P** is unable to predict the outcomeof this matter.

 

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

 

Under generally acceptedaccounting principles (GAAP), **CG&E**,**PSI**, and **ULH&P** apply the provisions of Statementof Financial Accounting Standards No. 71, *Accountingfor the Effects of Certain Types of Regulation*(Statement 71) to theapplicable rate-regulated portions of their businesses.  The provisions of Statement 71 allow **CG&E**, **PSI**,and **ULH&P** to capitalize(record as a deferred asset) costs that would normally be charged toexpense.  These costs are classified asregulatory assets in the accompanying financial statements, and the majorityhave been approved by regulators for future recovery from customers through ourrates.  As of December 31, 2003,our operating companies have approximately $1 billion of net regulatory assets,of which approximately 90 percent has been approved for recovery.

 

Except with respect tothe generation assets of **CG&E**,as of December 31, 2003, our operating companies continue to meet each ofthe criteria required for the application of Statement 71.  However, to the extent other statesimplement deregulation legislation, the application of Statement 71 will needto be reviewed.  Based on our operatingcompanies’ current regulatory orders and the regulatory environment in whichthey currently operate, management believes the future recovery of regulatoryassets recognized in the accompanying Balance Sheets as of December 31,2003, is probable.  See Note 1(c) of the“Notes to Financial Statements” in “Item 8. Financial Statements and SupplementaryData” for a further discussion of our regulatory assets.

 

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

 

##### ***Historical***

 

As part of the effort tocreate a competitive wholesale power marketplace, the FERC approved theformation of the Midwest ISO during 1998. In that same year, **Cinergy**agreed to join the Midwest ISO in preparation for meeting anticipated changesin the FERC regulations and future deregulation requirements.  The Midwest ISO was established as anon-profit organization to maintain functional control over the combinedtransmission systems of its members.

 

The FERC has alsoapproved the formation of the PJM Interconnection, LLC (PJM) and has orderedthe Midwest ISO, PJM, and various other parties to establish certain protocolsin an attempt to create a structured, connected market among all utilitycompanies.

 

##### ***Unbundled Adder Service Fees***

##### *** ***

The FERC issued an orderin December 2001, in response to protests of the Midwest ISO’s proposedmethodology related to the calculation of its administrative adder fees for theservices it provides.  **Cinergy** and a number of other parties filedprotests to the proposed methodology, suggesting, among other things, that themethodology was inconsistent with the transmission

 

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owners’ prior agreementwith the Midwest ISO and selectively allowed only independent transmissioncompanies to choose which unbundled administrative adder services they wishedto purchase from the Midwest ISO.  Apartial settlement was reached in the FERC proceeding, resolving the issuesaddressed by **Cinergy’s** protest ina manner satisfactory to **Cinergy**.  The settlement agreement was approved by theFERC in a February 2003 order with implementation initiated onMarch 1, 2003.  The settlementresulted in approximately $25 million of administrative adder credits to beshared among the Midwest ISO transmission owners and customers responsible foradministrative charges.  **Cinergy’s** share was approximately $3million. 

 

##### ***StandardElectricity Market Design (SMD)***

##### *** ***

The FERC issued a Noticeof Proposed Rulemaking (NOPR) in 2002 on “Remedying Undue Discriminationthrough Open Access Transmission Service and SMD”.  This NOPR would have required all public utilities with openaccess transmission tariffs to file modifications to their tariffs to implementFERC’s proposed standardized transmission services and standardized wholesaleelectric market design.  The FERC hasnot taken action on this NOPR.  Inaddition, because we are a member of the Midwest ISO and the Midwest ISO isactively moving forward in an attempt to create a structured market, it isunlikely that the FERC’s SMD NOPR will have a material, if any, effect on ourfinancial position or results of operations.

 

##### ***Day-Ahead andReal-Time Energy Markets***

##### *** ***

In response to prior FERCorders, in July 2003, the Midwest ISO filed with the FERC proposed changesto its existing transmission tariff to add terms and conditions to implementDay-Ahead and Real-Time Energy Markets and Financial Transmission Rights(Energy Markets Tariff).  InOctober 2003, the FERC approved a Midwest ISO filing to withdraw thisEnergy Markets Tariff.  **Cinergy** anticipates that the Midwest ISOwill file a new Energy Markets Tariff at sometime in the future; however, atthis time, **Cinergy** cannot predictthe effect any such filing will have on its results of operations.

 

#### **Significant Rate Developments**

#### ** **

##### ***PSI RetailElectric Rate Case***

##### *** ***

In December 2002, **PSI** filed a petition with the IURC seekingapproval of a base retail electric rate increase.  **PSI** has filed initialand rebuttal testimony in this case and the final set of hearings took place inNovember 2003.  **PSI** filed its proposed order inDecember 2003.  Based on updatedtestimony filed in October 2003 and the proposed order, **PSI** proposes an increase in annual revenuesof approximately $180 million, or an average increase of approximately 14percent over **PSI’s** retail electricrates in effect at the end of 2002.  AnIURC decision is anticipated by the end of the first quarter of 2004.

 

##### ***PSI FuelAdjustment Charge ***

##### *** ***

In June 2001, **PSI** filed a petition with the IURCrequesting authority to recover $16 million in under billed deferred fuel costsincurred from March 2001 through May 2001.  The IURC

 

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approved recovery ofthese costs subject to refund pending the findings of an investigativesub-docket.  The sub-docket was openedto investigate the reasonableness of, and underlying reasons for, the underbilled deferred fuel costs.  A hearingwas held in July 2002, and in March 2003 the IURC issued an ordergiving final approval to **PSI’s**recovery of the $16 million.

 

##### ***PSI CWIPRatemaking Treatment for NOX Equipment***

##### *** ***

In April 2003, **PSI** filed an application with the IURCrequesting that its CWIP rate adjustment mechanism be updated for expendituresthrough December 2002 related to NOX equipment currently beinginstalled at certain **PSI**generation facilities.  CWIP ratemakingtreatment allows for the recovery of carrying costs on certain pollutioncontrol equipment while and after the equipment is under construction.  A final order was issued inSeptember 2003.  The order grantedsubstantially all of **PSI’s**requested relief, leaving only the issue of whether certain specific equipmentqualified for CWIP ratemaking treatment to be decided in the first half of2004.  This CWIP rate mechanismadjustment resulted in less than a one percent increase in customer rates.

 

In October 2003, **PSI** filed an application with the IURCrequesting that its CWIP rate adjustment mechanism be updated for additionalexpenditures through September 30, 2003, related to NOXequipment currently being installed at certain **PSI** generation facilities. If the application is approved, it will result in the recovery of anadditional $7 million.  An order on thisthird CWIP update case is expected in the first half of 2004.

 

**PSI’s**initial CWIP rate mechanism adjustment (authorized in July 2002) resultedin an approximately one percent increase in customer rates.  Under the IURC’s CWIP rules, **PSI**may update its CWIP tracker atsix-month intervals.  The first suchupdate to **PSI’s** CWIP ratemechanism occurred in the first quarter of 2003.  The IURC’s July 2002 order also authorized **PSI** to defer, for subsequent recovery,post-in-service depreciation and to continue the accrual for allowance forfunds used during construction (AFUDC). Pursuant to Statement of Financial Accounting Standards No. 92, *Regulated Enterprises-Accounting for Phase-in Plans*,the equity component of AFUDC will not be deferred for financial reportingafter the related assets are placed in service.

 

##### ***PSIEnvironmental Compliance Cost Recovery***

 

In 2002, the IndianaGeneral Assembly passed legislation that, among other things, encourages thedeployment of advanced technologies that reduce regulated air emissions, whileallowing the continued use of high sulfur Midwest coal in existing electricgenerating plants.  The legislationauthorizes the IURC to provide financial incentives to utilities that deploy suchadvanced technologies.  **PSI**soughtIURC approval, under this new law, of a cost tracking mechanism for **PSI’s** NOX equipment-relateddepreciation and operation and maintenance costs, authority to use accelerated(18-year) depreciation for its NOX compliance equipment, andapproval of a NOX emission allowance purchase and salestracker.  In October 2003, **PSI** reached a settlement with the otherparties to this case that provides for the relief described above for most of **PSI’s** environmental complianceequipment.  In December 2003, theIURC approved the settlement agreement. Previously, the majority of these costs (the post-in-servicedepreciation costs) were being deferred pursuant to the July 2002 CWIPorder described above, and as a result, the settlement agreement did not have amaterial impact on **PSI’s** resultsof operations or financial

 

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condition.

 

##### ***PSI PurchasedPower Tracker***

 

The Tracker was designedto provide for the recovery of costs related to certain specified purchases ofpower necessary to meet native load customers’ summer peak demand requirementsto the extent such costs are not recovered through the existing fuel adjustmentclause.

 

**PSI**is authorized to seek recovery of 90 percent of its purchased power expensesthrough the Tracker (net of the displaced energy portion recovered through thefuel recovery process and net of the mitigation credit portion), with theremaining 10 percent deferred for subsequent recovery in **PSI’s**general retail electric ratecase.  In March 2002, **PSI** filed a petition with the IURC seekingapproval to extend the Tracker process beyond the summer of 2002.  A hearing was held in January 2003, andin June 2003 the IURC approved the extension for up to an additional twoyears with the ultimate determination concerning **PSI’s** continued use of the Tracker process to be made in **PSI’s** pending retail electric rate case.

 

In June 2002, **PSI** also filed a petition with the IURCseeking approval of the recovery through the Tracker of its actual summer 2002purchased power costs.  InMay 2003, the IURC approved **PSI’s**recovery of $18 million related to its summer 2002 purchased power costs, andalso authorized $2 million of deferred costs sought for recovery in **PSI’s** general retail electric rate case.

 

#### **CG&E Transmission and Distribution RateFilings**

 

In October 2003, **CG&E** filed an application with the PUCOseeking deferral of approximately $173 million, of which approximately $42million has been incurred as of December 31, 2003, in depreciation,property taxes and carrying costs related to net additions to transmission anddistribution utility plant in service from January 2001 throughDecember 2005.  Rates are frozen inOhio under the state’s electric restructuring law from 2001 through the end ofthe market development period.  **CG&E** has not deferred any of thesecosts as of December 31, 2003.

 

**CG&E**is proposing a mechanism to recover costs related to net additions totransmission and distribution utility plant in service after the end of themarket development period.  The mechanismwould work in a similar manner to the monthly customer charge the PUCO approvedfor **CG&E’s** accelerated naturalgas main replacement program, discussed belowin “**CG&E** Gas RateCase”, which is adjusted annually based on expenditures in the previous year. 

 

In the alternativeelectric reliability and rate stabilization proposal that **CG&E** filed in January 2004 withthe PUCO, which is described in more detail in “Ohio” above, **CG&E** made an alternative proposal toseek deferrals of transmission and distribution utility plant in service fromJanuary 2003 through December 2004, for the PUCO to declare an end tothe market development period effective December 31, 2004, and for **CG&E** to file a transmission anddistribution base rate case in 2004 to be effective January 1, 2005.  The alternative proposal also includestracking mechanisms as described in the preceding paragraph, which wouldrecover ongoing transmission and distribution costs.

 

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### **GASINDUSTRY**

 

#### **Significant Rate Developments**

 

#### **CG&E Gas Rate Case**

 

In the third quarter of2001, **CG&E** filed a retail gasrate case with the PUCO seeking to increase base rates for natural gasdistribution service and requesting recovery through a tracking mechanism ofthe costs of an accelerated gas main replacement program with an estimatedcapital cost of $716 million over 10 years. An order was issued in May 2002, in which the PUCO authorized abase rate increase of approximately $15 million, or 3.3 percent overall, effectiveMay 30, 2002.  In addition, thePUCO authorized **CG&E** toimplement the tracking mechanism to recover the costs of the accelerated gasmain replacement program, subject to certain rate caps that increase in amountannually through May 2007, through the effective date of new rates in **CG&E’s** next retail gas rate case.  In April 2003, **CG&E**received approval to increase itsrates under the tracking mechanism by $6.5 million.  This increase was effective in May 2003.  **CG&E**filed another application in January 2004 to increase its rates byapproximately $7 million under the tracking mechanism.  **CG&E**expects that the PUCO will rule on this application in the second quarter of2004.

 

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

 

Inthe second quarter of 2001, **ULH&P** filed a retail gas rate case with the KPSC seeking to increase baserates for natural gas distribution services and requesting recovery through atracking mechanism of the costs of an accelerated gas main replacement programwith an estimated capital cost of $112 million over 10 years.  Through December 31, 2003, **ULH&P** has recovered approximately $1.4 millionunder this tracking mechanism.  TheKentucky Attorney General has appealed to the Franklin Circuit Court the KPSC’sapproval of the tracking mechanism and the KPSC’s orders approving the newtracking mechanism rates.  At thepresent time, **ULH&P** cannot predict the timing or outcome of this litigation.

 

#### **Gas Distribution Plant**

 

In June 2003, thePUCO approved an amended settlement agreement between **CG&E** and the PUCO Staff in a gasdistribution safety case arising out of a gas leak at a service head-adapter(SHA) style riser on **CG&E’s**distribution system.  The amendedsettlement agreement required **CG&E**to expend a minimum of $700,000 to replace SHA risers by December 31,2003, and to file a comprehensive plan addressing all SHA risers on itsdistribution system.  **Cinergy** has an estimated 190,000 SHA riserson its distribution system, of which 155,000 are in **CG&E’s** service area and 31,000 are in **ULH&P’s** service area.  Further investigation as to whether anyadditional SHA risers will need maintenance or replacement is ongoing.  If **CG&E**and**ULH&P** determine thatreplacement of all SHA risers is appropriate, we currently estimate that thereplacement cost could be up to approximately $70 million.  **CG&E**and**ULH&P** would pursuerecovery of this cost through rates.  Atthis time, **Cinergy**, **CG&E**, and**ULH&P** cannot predict the outcome of this matter.

 

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#### **Gas Prices**

 

Natural gas prices escalated dramatically during thefourth quarter of 2002 and peaked midway through the first quarter of2003.  These higher natural gas pricesmoderated throughout the spring and summer of 2003 but for 2004 are expected toremain higher than previous years.  Pricemovement will be driven by the effects of weather conditions, availability ofsupply, and changes in demand and storage inventories.  Currently, neither **CG&E** nor **ULH&P** profit from changes in the cost of natural gas sincenatural gas purchase costs are passed directly to the customerdollar-for-dollar under the gas cost recovery mechanism that is mandated understate law.  These higher natural gasprices could lead to decreases in the purchase price obtained on receivablessold to Cinergy Receivables due to an increased concern regarding realizationof those receivables, however we believe the overall impact will be immaterial.

 

In July 2003, **CG&E**filed an application with the PUCO for approval to begin adjusting its gas costadjustment rates on a monthly basis commencing in September 2003.  In August 2003, the PUCO approved thechange from quarterly to monthly. In September 2003, **ULH&P** filed a similar application withthe KPSC for monthly gas cost adjustment rates.  The KPSC approved this change and **ULH&P** began billing on a monthly basis inDecember 2003.

 

In May 2003, **ULH&P**filed an application with the KPSC requesting approval of a gasprocurement-hedging program designed to mitigate the effects of gas pricevolatility on customers.  InJune 2003, the KPSC approved the hedging program through March 31,2005.  The program will allow 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 hedges its gasprocurement costs, however **CG&E’s**gas procurement-hedging program has not been pre-approved by the PUCO butrather it is subject to PUCO review as part of the normal gas cost recoveryprocess.

 

**CG&E**and **ULH&P**useprimarily fixed price forward contracts and contracts with a ceiling and flooron the price.  These contracts employthe normal purchases and sales scope exception, and do not involve hedges underStatement of Financial Accounting Standards No. 133, *Accounting for Derivative Instruments and Hedging Activities*(Statement 133).

 

**MARKET RISK SENSITIVE INSTRUMENTS ANDPOSITIONS**

 

#### **Energy Commodities Sensitivity**

 

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

 

Commercial’s energymarketing and trading activities principally consist of Marketing &Trading’s natural gas marketing and trading operations, Cinergy Global TradingLimited’s (Global Trading) European natural gas and power trading operations,and **CG&E’s** and **PSI’s** power marketing and tradingoperations.

 

78

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Our domestic operationsmarket and trade over-the-counter (an informal market where the buying/sellingof commodities occurs) contracts for the purchase and sale of electricity(primarily in the Midwest region of the U.S.), natural gas, and otherenergy-related products.  In addition,our domestic operations also market and trade natural gas and otherenergy-related products on the New York Mercantile Exchange.  Global Trading’s operations tradeover-the-counter contracts for the purchase and sale of natural gas andelectricity (both primarily in the United Kingdom).  Global Trading also trades natural gas on the InternationalPetroleum Exchange.

 

Many of the contracts inboth the accrual and trading portfolios commit us to purchase or sellelectricity, natural gas, and other energy-related products at fixed prices inthe future.  The majority of thecontracts in the natural gas and other energy-related product portfolios arefinancially settled contracts (i.e., there is no physical delivery related withthese items).  In addition, Commercialalso markets and trades over-the-counter option contracts.  The use of these types of commodity instrumentsis designed to allow Commercial to:

 

•                  manageand economically hedge contractual commitments;

•                  reduceexposure relative to the volatility of cash market prices; 

•                  takeadvantage of selected arbitrage opportunities; and

•                  originatecustomized transactions with municipalities and end-use customers.

 

Commercial structures andmodifies its net position to capture the following:

 

•                  expectedchanges in future demand;

•                  seasonalmarket pricing characteristics;

•                  overallmarket sentiment; and

•                  pricerelationships between different time periods and trading regions.

 

At times, a net openposition is created or is allowed to continue when Commercial believes futurechanges in prices and market conditions may possibly result in profitablepositions.  Position imbalances can alsooccur due to the basic 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 results ofoperations.  This potential adverse impactcould be realized if the market price of electric power does not react in themanner or direction expected.  **Cinergy’s** Risk Management Control Policycontains limits associated with the overall size of net open positions for eachtrading operation and for **Cinergy**in total.

 

*Valueat Risk* (VaR)

*** ***

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

 

79

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Any transaction, whethersettled physically or financially, that is accounted for at fair value isincluded in the VaR calculation.

 

Our VaR is reported basedon a 95 percent confidence interval, utilizing a one-day holding period.  This means that on a given day (one-dayholding period) there is a 95 percent chance (confidence level) that ourtrading portfolio will not change more than the stated amount.  Our VaR model uses the variance-covariancestatistical modeling technique and historical volatilities and correlationsover the past 21-trading day period. The average VaR was calculated using an average of trading days over theentire year and the high and low VaR were based on an entire year of tradingday calculations.  The market pricesused to calculate VaR are obtained from exchanges and over-the-counter marketswhen available, established pricing models and other factors including marketvolatility, the time value of money, and location differentials.  The VaR for **Cinergy’s** trading portfolio is presented in the table below: 

 

**VaRAssociated with Energy Trading Contracts**

 
|                                                      |   | **2003**                   |       | **2002**                              |       |
|-----------------------------------------------------------|--------|----------------------------|------------|---------------------------------------|------------|
|                                                      |   | **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                                          |   | **$**                      | **0.6**    | ** **                            | **0.1**    | **%** | $ | 1.6 |   | 0.2 | % |
| Average  for the twelve months ended December 31     |   | **1.3**                    | ** ** | **0.2**                               | ** ** | 2.1 |   | 0.3 |   |
| High  for the twelve months ended December 31        |   | **3.8**                    | ** ** | **0.7**                               | ** ** | 3.7 |   | 0.5 |   |
| Low  for the twelve months ended December 31         |   | **0.4**                    | ** ** | **0.1**                               | ** ** | 0.5 |   | 0.1 |   |
|                                                           |        |                            |            |                                       |            |  |  |  |  |  |  |

 

80

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*Changesin Fair Value*

 

The changes in fair valueof the energy risk management assets and liabilities for **Cinergy**, **CG&E**,and **PSI** for the years endedDecember 31, 2003 and 2002 are presented in the table below:

 
|                                                                                       |   | **Change in  Fair Value** |       |
|--------------------------------------------------------------------------------------------|--------|---------------------------|------------|
|                                                                                       |   | **2003**                  |       | **2002** |   |
|                                                                                       |   | **Cinergy(1)**            |       | **CG&E** |   | **PSI** |   | **Cinergy(1)** |   | **CG&E** |   | **PSI** |   |
|                                                                                       |   | **(in  millions)**        |       |
|                                                                                       |   |                      |       |   |   |   |   |   |   |   |   |   |   |
| Fair  value of contracts outstanding at the beginning of period                            |   | **$**                     | **75**     | ** ** | **$** | **42** | ** ** | **$** | **—** | ** ** | $ | 18 |   | $ | 28 |   | $ | (7 | ) |
|                                                                                       |   |                      | ** ** |   | ** ** |   | ** ** |   |   |   |   |   |   |
| Inception  value of new contracts when entered(2)                                          |   | **—**                | ** ** | **—** | ** ** | **—** | ** ** | 6 |   | 5 |   | 1 |   |
|                                                                                       |   |                      | ** ** |   | ** ** |   | ** ** |   |   |   |   |   |   |
| Changes  in fair value attributable to changes in valuation techniques and  assumptions(3) |   | **1**                     | ** ** | **1** | ** ** | **—** | ** ** | 14 |   | 6 |   | 9 |   |
|                                                                                       |   |                      | ** ** |   | ** ** |   | ** ** |   |   |   |   |   |   |
| Other  changes in fair value(4)                                                            |   | **127**                   | ** ** | **53** | ** ** | **2** | ** ** | 89 |   | 26 |   | 5 |   |
|                                                                                       |   |                      | ** ** |   | ** ** |   | ** ** |   |   |   |   |   |   |
| Option  premiums paid/(received)                                                           |   | **(3**                    | **)**      | **2** | ** ** | **—** | ** ** | 20 |   | 1 |   | — |   |
|                                                                                       |   |                      | ** ** |   | ** ** |   | ** ** |   |   |   |   |   |   |
| Accounting  Changes(5)                                                                     |   |                      | ** ** |   | ** ** |   | ** ** |   |   |   |   |   |   |
|                                                                                       |   |                      | ** ** |   | ** ** |   | ** ** |   |   |   |   |   |   |
| Cumulative  effect of changes in accounting principles                                     |   | **(20**                   | **)**      | **(13** | **)** | **(1** | **)** | — |   | — |   | — |   |
|                                                                                       |   |                      | ** ** |   | ** ** |   | ** ** |   |   |   |   |   |   |
| Consolidation  of previously unconsolidated entities                                       |   | **7**                     | ** ** | **—** | ** ** | **—** | ** ** | — |   | — |   | — |   |
|                                                                                       |   |                      | ** ** |   | ** ** |   | ** ** |   |   |   |   |   |   |
| Contract  reclassification(6)                                                              |   | **—**                | ** ** | **—** | ** ** | **—** | ** ** | 14 |   | 18 |   | 5 |   |
|                                                                                       |   |                      | ** ** |   | ** ** |   | ** ** |   |   |   |   |   |   |
| Contract  acquisitions(7)                                                                  |   | **—**                | ** ** | **—** | ** ** | **—** | ** ** | (16 | ) | — |   | — |   |
|                                                                                       |   |                      | ** ** |   | ** ** |   | ** ** |   |   |   |   |   |   |
| Contracts  settled                                                                         |   | **(146**                  | **)**      | **(65** | **)** | **(4** | **)** | (70 | ) | (42 | ) | (13 | ) |
|                                                                                       |   |                      | ** ** |   | ** ** |   | ** ** |   |   |   |   |   |   |
| Fair  value of contracts outstanding at end of period                                      |   | **$**                     | **41**     | ** ** | **$** | **20** | ** ** | **$** | **(3** | **)** | $ | 75 |   | $ | 42 |   | $ | — |   |

 

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

(2)               Represents fair value, recognizedin income, attributable to long-term, structured contracts, primarily in power,which is recorded on the date a deal is signed.  These contracts are primarily with end-use customers ormunicipalities that seek to limit their risk to power price volatility.  While caps and floors often exist in suchcontracts, the amount of power supplied can vary from hour to hour to mirrorthe customers’ load volatility.  SeeNote 1(q)(*i*) of the “Notes toFinancial Statements” in “Item 8. Financial Statements and Supplementary Data”for additional information regarding inception gains.

(3)               Represents changes in fair valuerecognized in income, caused by changes in assumptions used in calculating fairvalue or changes in modeling techniques.

(4)               Represents changes in fair valuerecognized in income, primarily attributable to fluctuations in price.  This amount includes both realized andunrealized gains on energy trading contracts.

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

(6)               Represents reclassifications ofthe settlement value of contracts that have been terminated as a result ofcounterparty non-performance to *Non-CurrentLiabilities-Other*.  Thesecontracts no longer have price risk and are therefore not considered energytrading contracts.

(7)               Cinergy Capital & Trading,Inc. (Capital & Trading) acquired a portfolio of gas contracts andinventory in July 2002.  Thisamount represents the fair value of net *Energyrisk management liabilities* assumed.  There was no inception gain or loss recognized at the date ofacquisition.

 

81

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The following are thebalances at December 31, 2003 and 2002 of our energy risk managementassets and liabilities:

 
|                                              |   | **2003**           |       | **2002**     |       |
|---------------------------------------------------|--------|--------------------|------------|--------------|------------|
|                                              |   | **Cinergy(1)**     |       | **CG&E** |       | **PSI** |   | **Cinergy(1)** |   | **CG&E** |   | **PSI** |   |
|                                              |   | **(in  millions)** |       |
|                                              |   |               |       |         |       |   |   |   |   |   |   |   |   |
| Energy  risk management assets - current          |   | **$**              | **305**    | ** **   | **$**      | **73** | ** ** | **$** | **8** | ** ** | $ | 464 |   | $ | 58 |   | $ | 9 |   |
| Energy  risk management assets - non-current      |   | **97**             | ** ** | **37**       | ** ** | **7** | ** ** | 163 |   | 65 |   | 16 |   |
|                                              |   |               | ** ** |         | ** ** |   | ** ** |   |   |   |   |   |   |
| Energy  risk management liabilities - current     |   | **(296**           | **)**      | **(78**      | **)**      | **(15** | **)** | (408 | ) | (49 | ) | (8 | ) |
| Energy  risk management liabilities - non-current |   | **(65**            | **)**      | **(12**      | **)**      | **(3** | **)** | (144 | ) | (32 | ) | (17 | ) |
|                                              |   |               | ** ** |         | ** ** |   | ** ** |   |   |   |   |   |   |
|                                              |   | **$**              | **41**     |         | **$**      | **20** | ** ** | **$** | **(3** | **)** | $ | 75 |   | $ | 42 |   | $ | — |   |

 

----

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

 

The following tablepresents the expected maturity of the energy risk management assets andliabilities as of December 31, 2003 for **Cinergy**,**CG&E**, and **PSI**:

 
|                                                   |   | **Fair Value  of Contracts at December 31, 2003** |   |
|--------------------------------------------------------|--------|--------------------------------------------------------|--------|
|                                                   |   | **Maturing**                                           |   | **Total  Fair Value** |   |
| **Source of Fair Value(1)**                            |   | **2004**                                               |   | **2005-2006** |   | **2007-2008** |   | **Thereafter** |   |   |
|                                                   |   | **(in  millions)**                                     |   |
|                                                   |   |                                                   |   |   |   |   |   |   |   |   |   |
| **Cinergy****(2)**                                     |   |                                                   |   |   |   |   |   |   |   |   |   |
| Prices  actively quoted                                |   | $                                                      | (2     | ) | $ | 18 |   | $ | — |   | $ | — |   | $ | 16 |   |
|                                                   |   |                                                   |   |   |   |   |   |   |   |   |   |
| Prices  based on models and other valuation methods(3) |   | 11                                                     |   | 15 |   | 4 |   | (5 | ) | 25 |   |
|                                                   |   |                                                   |   |   |   |   |   |   |   |   |   |
| Total                                                  |   | $                                                      | 9      |   | $ | 33 |   | $ | 4 |   | $ | (5 | ) | $ | 41 |   |
|                                                   |   |                                                   |   |   |   |   |   |   |   |   |   |
| **CG&E**                                           |   |                                                   |   |   |   |   |   |   |   |   |   |
| Prices  actively quoted                                |   | $                                                      | (12    | ) | $ | 9 |   | $ | — |   | $ | — |   | $ | (3 | ) |
|                                                   |   |                                                   |   |   |   |   |   |   |   |   |   |
| Prices  based on models and other valuation methods(3) |   | 7                                                      |   | 14 |   | 2 |   | — |   | 23 |   |
|                                                   |   |                                                   |   |   |   |   |   |   |   |   |   |
| Total                                                  |   | $                                                      | (5     | ) | $ | 23 |   | $ | 2 |   | $ | — |   | $ | 20 |   |
|                                                   |   |                                                   |   |   |   |   |   |   |   |   |   |
| **PSI**                                                |   |                                                   |   |   |   |   |   |   |   |   |   |
| Prices  actively quoted                                |   | $                                                      | (8     | ) | $ | 1 |   | $ | — |   | $ | — |   | $ | (7 | ) |
|                                                   |   |                                                   |   |   |   |   |   |   |   |   |   |
| Prices  based on models and other valuation methods(3) |   | 1                                                      |   | 2 |   | 1 |   | — |   | 4 |   |
|                                                   |   |                                                   |   |   |   |   |   |   |   |   |   |
| Total                                                  |   | $                                                      | (7     | ) | $ | 3 |   | $ | 1 |   | $ | — |   | $ | (3 | ) |

 

----

(1)               While liquidity varies by tradingregions, active quotes are generally available for two years for standardelectricity transactions and three years for standard gas transactions.  Non-standard transactions are classifiedbased on the extent, if any, of modeling used in determining fair value.  Long-term transactions can have portions inboth categories depending on the tenor.

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

 

82

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(3)               A substantial portion of theseamounts include option values.

 

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

 

Credit risk is theexposure to economic loss that would occur as a result of nonperformance bycounterparties, pursuant to the terms of their contractual obligations.  Specific components of credit risk includecounterparty default risk, collateral risk, concentration risk, and settlementrisk.

 

*Trade Receivables and Physical PowerPortfolio*

 

Our concentration ofcredit risk with respect to trade accounts receivable from electric and gasretail customers is limited.  The largenumber of customers and diversified customer base of residential, commercial,and industrial customers 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, 2003, we believe thelikelihood of significant losses associated with credit risk in our tradeaccounts receivable or physical power portfolio is remote.

 

*Energy Trading Credit Risk*

 

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

 

83

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The following tablesprovide information regarding **Cinergy’s**,**CG&E’s**, and **PSI’s** exposure on energy trading contractsas well as the expected maturities of those exposures.  The tables include accounts receivable andenergy risk management assets, which are net of accounts payable and energyrisk management liabilities with the same counterparties when we have the rightof offset.  The credit collateral shownin the following tables includes cash and letters of credit.

 

**Cinergy(1)**

 
| **Rating**                             |   | **Total  Exposure  Before  Credit  Collateral** |     | **Credit  Collateral** |     | **Net  Exposure** |     | **Percentage of  Total  Net Exposure** |     | **Net Exposure of  Counterparties  Greater than 10%** |     |
|----------------------------------------|--------|-------------------------------------------------|----------|------------------------|----------|-------------------|----------|----------------------------------------|----------|-------------------------------------------------------|----------|
|                                   |   | ***(in  thousands)***                           |     |
|                                   |   |                                            | * * |                   | * * |              | * * |                                   | * * |                                                  | * * |
| Investment Grade(2)                    |   | $                                               | 472,173  |                   | $        | 30,545            |     | $                                      | 441,628  |                                                  | 78       | % | $ | — |   |
| Internally Rated-Investment  Grade(3)  |   | 108,312                                         |     | 4,546                  |     | 103,766           |     | 19                                     |     | —                                                |     |
| Non-Investment Grade                   |   | 43,178                                          |     | 38,690                 |     | 4,488             |     | 1                                      |     | —                                                |     |
| Internally  Rated-Non-Investment Grade |   | 48,944                                          |     | 35,671                 |     | 13,273            |     | 2                                      |     | —                                                |     |
|                                   |   |                                            |     |                   |     |              |     |                                   |     |                                                  |     |
| Total                                  |   | $                                               | 672,607  |                   | $        | 109,452           |     | $                                      | 563,155  |                                                  | 100      | % | $ | — |   |

 
|                                  |   | **Maturity of Credit Risk Exposure** |    |
|---------------------------------------|--------|--------------------------------------|---------|
| **Rating**                            |   | **Less than  2 Years**               |    | **2-5 Years** |   | **Exposure  Greater than  5 Years** |   | **Total  Exposure  Before Credit  Collateral** |   |
|                                  |   | **(in thousands)**                   |    |
|                                  |   |                                 |    |   |   |   |   |   |   |
| Investment Grade(2)                   |   | $                                    | 425,675 |   | $ | 38,144 |   | $ | 8,354 |   | $ | 472,173 |   |
| Internally Rated-Investment Grade(3)  |   | 108,312                              |    | — |   | — |   | 108,312 |   |
| Non-Investment Grade                  |   | 43,178                               |    | — |   | — |   | 43,178 |   |
| Internally Rated-Non-Investment Grade |   | 48,796                               |    | 148 |   | — |   | 48,944 |   |
|                                  |   |                                 |    |   |   |   |   |   |   |
| Total                                 |   | $                                    | 625,961 |   | $ | 38,292 |   | $ | 8,354 |   | $ | 672,607 |   |

 

----

(1)     Includes amounts related to non-registrants.

(2)     Includes counterparties rated Investment Grade orthe counterparties’ obligations are guaranteed or secured by an InvestmentGrade entity.

(3)     Counterparties include a variety of entities,including investor-owned utilities, privately held companies, cities andmunicipalities.  **Cinergy** assigns internal credit ratings toall counterparties within our credit risk portfolio, applying fundamentalanalytical tools.  Included in thisanalysis is a review of (but not limited to) counterparty financial statementswith consideration given to off-balance sheet obligations and assets, specificbusiness environment, access to capital, and indicators from debt and equitycapital markets.

 

**CG&E**

 
| **Rating**                             |   | **Total  Exposure  Before Credit  Collateral** |     | **Credit  Collateral** |     | **Net  Exposure** |     | **Percentage of  Total  Net Exposure** |     | **Net Exposure of  Counterparties  Greater than 10%** |     |
|----------------------------------------|--------|------------------------------------------------|----------|------------------------|----------|-------------------|----------|----------------------------------------|----------|-------------------------------------------------------|----------|
|                                   |   | ***(in  thousands)***                          |     |
|                                   |   |                                           | * * |                   | * * |              | * * |                                   | * * |                                                  | * * |
| Investment Grade(1)                    |   | $                                              | 119,206  |                   | $        | 20,000            |     | $                                      | 99,206   |                                                  | 92       | % | $ | — |   |
| Internally  Rated-Investment Grade(2)  |   | 8,077                                          |     | —                 |     | 8,077             |     | 8                                      |     | —                                                |     |
| Non-Investment Grade                   |   | 11,640                                         |     | 11,457                 |     | 183               |     | —                                 |     | —                                                |     |
| Internally  Rated-Non-Investment Grade |   | 4,886                                          |     | 4,747                  |     | 139               |     | —                                 |     | —                                                |     |
|                                   |   |                                           |     |                   |     |              |     |                                   |     |                                                  |     |
| Total                                  |   | $                                              | 143,809  |                   | $        | 36,204            |     | $                                      | 107,605  |                                                  | 100      | % | $ | — |   |

 

84

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|                                   |   | **Maturity of Credit Risk  Exposure** | ** ** |
|----------------------------------------|--------|---------------------------------------|------------|
| **Rating**                             |   | **Less than  2 Years**                |       | **2-5 Years** |   | **Exposure  Greater than  5 Years** |   | **Total Exposure  Before Credit  Collateral** | *** *** |
|                                   |   | ***(in  thousands)***                 | * *   |
|                                   |   |                                  | * *   |   | * * |   | * * |   | * * |
| Investment Grade(1)                    |   | $                                     | 108,724    |   | $ | 10,482 |   | $ | — |   | $ | 119,206 |   |
| Internally  Rated-Investment Grade(2)  |   | 8,077                                 |       | — |   | — |   | 8,077 |   |
| Non-Investment Grade                   |   | 11,640                                |       | — |   | — |   | 11,640 |   |
| Internally  Rated-Non-Investment Grade |   | 4,886                                 |       | — |   | — |   | 4,886 |   |
|                                   |   |                                  |       |   |   |   |   |   |   |
| Total                                  |   | $                                     | 133,327    |   | $ | 10,482 |   | $ | — |   | $ | 143,809 |   |

 

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

(2)               Counterparties includevarious cities and municipalities.

 

**PSI**

 
| **Rating**                             |   | **Total  Exposure  Before  Credit  Collateral** |     | **Credit  Collateral** |     | **Net  Exposure** |     | **Percentage of  Total  Net Exposure** |     | **Net Exposure of  Counterparties  Greater than 10%** |     |
|----------------------------------------|--------|-------------------------------------------------|----------|------------------------|----------|-------------------|----------|----------------------------------------|----------|-------------------------------------------------------|----------|
|                                   |   | ***(in  thousands)***                           |     |
|                                   |   |                                            | * * |                   | * * |              | * * |                                   | * * |                                                  | * * |
| Investment Grade(1)                    |   | $                                               | 10,696   |                   | $        | —            |     | $                                      | 10,696   |                                                  | 95       | % | $ | — |   |
| Internally Rated-Investment  Grade(2)  |   | 3                                               |     | —                 |     | 3                 |     | —                                 |     | —                                                |     |
| Non-Investment Grade                   |   | 1,864                                           |     | 1,324                  |     | 540               |     | 5                                      |     | —                                                |     |
| Internally  Rated-Non-Investment Grade |   | —                                          |     | —                 |     | —            |     | —                                 |     | —                                                |     |
|                                   |   |                                            |     |                   |     |              |     |                                   |     |                                                  |     |
| Total                                  |   | $                                               | 12,563   |                   | $        | 1,324             |     | $                                      | 11,239   |                                                  | 100      | % | $ | — |   |

 
|                                   |   | **Maturity of Credit Risk  Exposure** |     |
|----------------------------------------|--------|---------------------------------------|----------|
| **Rating**                             |   | **Less than  2 Years**                |     | **2-5 Years** |   | **Exposure  Greater than  5 Years** |   | **Total Exposure  Before Credit  Collateral** |   |
|                                   |   | ***(in  thousands)***                 |     |
|                                   |   |                                  | * * |   | * * |   | * * |   | * * |
| Investment Grade(1)                    |   | $                                     | 7,983    |   | $ | 2,713 |   | $ | — |   | $ | 10,696 |   |
| Internally  Rated-Investment Grade(2)  |   | 3                                     |     | — |   | — |   | 3 |   |
| Non-Investment Grade                   |   | 1,864                                 |     | — |   | — |   | 1,864 |   |
| Internally  Rated-Non-Investment Grade |   | —                                |     | — |   | — |   | — |   |
|                                   |   |                                  |     |   |   |   |   |   |   |
| Total                                  |   | $                                     | 9,850    |   | $ | 2,713 |   | $ | — |   | $ | 12,563 |   |

 

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

(2)               Counterparties includevarious cities and municipalities.

 

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*Financial Derivatives*

 

Potential exposure tocredit risk also exists from our use of financial derivatives such as interestrate swaps and treasury locks.  Becausethese financial instruments are transacted with highly rated financialinstitutions, we do not anticipate nonperformance by any of the counterparties.

 

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

 

We manage, on a portfoliobasis, the market risks in our energy marketing and trading transactionssubject to parameters established by our Risk Policy Committee.  Our market and credit risks are monitored bythe Global Risk Management function to ensure compliance with stated riskmanagement policies and procedures.  TheGlobal Risk Management function operates independently from the business units,which originate and actively manage the market risk exposures.  Policies and procedures are periodicallyreviewed to assess their responsiveness to changing market and businessconditions.  Credit risk mitigationpractices include requiring parent company guarantees, various forms ofcollateral, and the use of mutual netting/closeout agreements.

 

#### **Exchange Rate Sensitivity**

 

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

 

#### **Interest Rate Sensitivity**

 

Our net exposure tochanges in interest rates primarily consists of short-term debt instruments(including net money pool borrowings) and certain pollution control debt.  The following table reflects the differentinstruments used and the method of benchmarking interest rates, as ofDecember 31, 2003:

 
| **Interest  Benchmark**                           |   | **2003**                                                                                                                       |         |
|---------------------------------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------|--------------|
|                                              |   |                                                                                                                           |         |   |   | ***(in  millions)*** |   |
|                                              |   |                                                                                                                           | *** *** |   | *** *** |   | *** *** |
| **Short-term Bank  Loans/Commercial Paper/Money** |   | **•    **Short-term Money Market                                                                      | ** **   | **Cinergy** | ** ** | **$** | **158** | ** ** |
| **Pool**                                          |   | **•**      Commercial  Paper                                                                     | ** **   | **CG&E**and  subsidiaries | ** ** | **49** | ** ** |
|                                              |   | **Composite Rate(2)**                                                                                                          |         | **PSI** |   | **188** |   |
|                                              |   | **•**                  LIBOR(1)      |         | **ULH&P** |   | **45** |   |
|                                              |   |                                                                                                                           | ** **   |   | ** ** |   | ** ** |
| **Pollution Control Debt**                        |   | **•**                  Daily Market  | ** **   | **Cinergy** | ** ** | **193** | ** ** |
|                                              |   | **•**                  Weekly Market |         | **CG&E**and  subsidiaries |   | **112** |   |
|                                              |   | **•**                  Auction Rate  | ** **   | **PSI** | ** ** | **81** | ** ** |
|                                                   |        |                                                                                                                                |              |  |  |  |  |  |

 

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(1)               London Inter-Bank OfferedRate (LIBOR)

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

 

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The weighted-averageinterest rates on the above instruments at December 31, were as follows:

 
|                                        |   | **2003** |
|---------------------------------------------|--------|----------|
|                                        |   |     | ** ** |
| **Short-term Bank  Loans/Commercial Paper** |   | **1.6**  | **%** |
| **Money Pool**                              |   | **1.1**  | **%** |
| **Pollution Control Debt**                  |   | **1.4**  | **%** |

 

At December 31,2003, forward yield curves project an increase in applicable short-terminterest rates over the next five years.

 

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The following tablepresents principal cash repayments, by maturity date and other selectedinformation, for each registrant’s long-term fixed-rate debt, other debt, andcapital lease obligations as of December 31, 2003: 

 
|                               |   | **Expected Maturity Date** |     |
|------------------------------------|--------|----------------------------|----------|
| **Liabilities**                    |   | **2004**                   |     | **2005** |   | **2006** |   | **2007** |   | **2008** |   | **There-  after** |   | **Total** |   | **Fair  Value** |   |
|                               |   | ***(in  millions)***       |     |
|                               |   |                       | * * |   | * * |   | * * |   | * * |   | * * |   | * * |   | * * |   | * * |
| **Cinergy**                        |   |                       |     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Long-term Debt(1)                  |   | $                          | 810      |   | $ | 202 | (4)(5) | $ | 326 |   | $ | 366 |   | $ | 364 |   | $ | 2,169 |   | $ | 4,237 |   | $ | 4,465 |   |
| Weighted-average interest  rate(2) |   | 6.3                        | %        | 6.8 | % | 6.7 | % | 7.6 | % | 6.5 | % | 5.5 | % | 6.0 | % |   |   |
|                               |   |                       |     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Other(3)                           |   | $                          | 25       |   | $ | 20 |   | $ | 28 |   | $ | 361 |   | $ | 186 |   | $ | 164 |   | $ | 784 |   | $ | 882 |   |
| Weighted-average interest  rate(2) |   | 6.9                        | %        | 7.9 | % | 7.0 | % | 6.9 | % | 6.4 | % | 7.1 | % | 6.8 | % |   |   |
|                               |   |                       |     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Capital Leases                     |   |                       |     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Fixed-rate leases                  |   | $                          | 5        |   | $ | 6 |   | $ | 6 |   | $ | 6 |   | $ | 8 |   | $ | 24 |   | $ | 55 |   | $ | 55 |   |
| Interest rate(2)                   |   | 5.5                        | %        | 5.5 | % | 5.4 | % | 5.4 | % | 5.3 | % | 4.9 | % | 5.2 | % |   |   |
|                               |   |                       |     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **CG&E** and  subsidiaries     |   |                       |     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Long-term Debt(1)                  |   | $                          | 110      |   | $ | 150 | (5) | $ | — |   | $ | 100 |   | $ | 120 |   | $ | 1,126 |   | $ | 1,606 |   | $ | 1,620 |   |
| Weighted-average interest  rate(2) |   | 6.5                        | %        | 6.9 | % |   |   | 6.9 | % | 6.4 | % | 5.3 | % | 5.7 | % |   |   |
|                               |   |                       |     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Capital Leases                     |   |                       |     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Fixed-rate leases                  |   | $                          | 3        |   | $ | 3 |   | $ | 3 |   | $ | 4 |   | $ | 5 |   | $ | 15 |   | $ | 33 |   | $ | 33 |   |
| Interest rate(2)                   |   | 5.4                        | %        | 5.4 | % | 5.4 | % | 5.3 | % | 5.3 | % | 4.9 | % | 5.2 | % |   |   |
|                               |   |                       |     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **PSI**                            |   |                       |     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Long-term Debt(1)                  |   | $                          | —   |   | $ | 52 | (4) | $ | 326 |   | $ | 266 |   | $ | 44 |   | $ | 1,043 |   | $ | 1,731 |   | $ | 1,871 |   |
| Weighted-average interest  rate(2) |   |                       |     | 6.5 | % | 6.7 | % | 7.8 | % | 6.4 | % | 5.6 | % | 6.2 | % |   |   |
|                               |   |                       |     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Capital Leases                     |   |                       |     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Fixed-rate leases                  |   | $                          | 2        |   | $ | 2 |   | $ | 2 |   | $ | 3 |   | $ | 4 |   | $ | 9 |   | $ | 22 |   | $ | 22 |   |
| Interest rate(2)                   |   | 5.6                        | %        | 5.5 | % | 5.5 | % | 5.5 | % | 5.4 | % | 4.9 | % | 5.3 | % |   |   |
|                               |   |                       |     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **ULH&P**                      |   |                       |     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Long-term Debt(1)                  |   | $                          | —   |   | $ | — |   | $ | — |   | $ | — |   | $ | 20 |   | $ | 35 |   | $ | 55 |   | $ | 61 |   |
| Weighted-average interest  rate(2) |   |                       |     |   |   |   |   |   |   | 6.5 | % | 7.8 | % | 7.3 | % |   |   |
|                               |   |                       |     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Capital Leases                     |   |                       |     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Fixed-rate leases                  |   | $                          | 1        |   | $ | 1 |   | $ | 1 |   | $ | 1 |   | $ | 1 |   | $ | 3 |   | $ | 8 |   | $ | 8 |   |
| Interest rate(2)                   |   | 5.6                        | %        | 5.6 | % | 5.5 | % | 5.5 | % | 5.4 | % | 5.0 | % | 5.3 | % |   |   |

 

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|   | (1) |   | Long-term Debt includes amounts reflected as *Long-term debt due within one year*.                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|--------|-----|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | (2) |   | The weighted-average interest rate is calculated as  follows:  (1) for Long-term Debt and  Other, the weighted-average interest rate is based on the interest rates at  December 31, 2003 of the debt that is maturing in the year reported and  includes the effects of interest rate swaps that fix or float the interest  payments differently from the stated rate; and (2) for Capital Leases, the  weighted-average interest rate is based on the average interest rate of the  lease payments made during the year reported. |
|   | (3) |   | Long-term Debt 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 Financial Statements” in “Item 8. Financial Statements and  Supplementary Data” for a discussion of the debt associated with this trust.                                                                                                                                                                                             |
|   | (4) |   | Includes **PSI’s**  6.50% Debentures due August 1, 2026, reflected as maturing in 2005, as  the interest rate is due to reset on August 1, 2005.                                                                                                                                                                                                                                                                                                                                                                               |
|   | (5) |   | Includes **CG&E’s**  6.90% Debentures due June 1, 2025, reflected as maturing in 2005, as the  debentures are putable to **CG&E**  at the option of the holders on June 1, 2005.                                                                                                                                                                                                                                                                                                                                       |

 

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Our current policy inmanaging exposure to fluctuations in interest rates is to maintainapproximately 30 percent of the total amount of outstanding debt in floatinginterest rate debt instruments.  Inmaintaining this level of exposure, we use interest rate swaps.  Under the swaps, we agree with other partiesto exchange, at specified intervals, the difference between fixed-rate andfloating-rate interest amounts calculated on an agreed upon notional amount.  **CG&E**has an outstanding interest rate swap agreement that decreased the percentageof floating-rate debt. 

 

Under the provisions ofthe swap, which has a notional amount of $100 million, **CG&E** pays a fixed-rate and receives afloating-rate through October 2007. This swap qualifies as a cash flow hedge under the provisions ofStatement 133.  As the terms of the swapagreement mirror the terms of the debt agreement that it is hedging, weanticipate that this swap will continue to be effective as a hedge.  Changes in fair value of this swap arerecorded in *Accumulated other comprehensiveincome (loss)*, beginning with our adoption of Statement 133 onJanuary 1, 2001.  **Cinergy Corp.** has three outstandinginterest rate swaps with a combined notional amount of $250 million.  Under the provisions of the swaps, **Cinergy Corp.** will receive fixed-rateinterest payments and pay floating-rate interest payments throughSeptember 2004.  These swapsqualify as fair value hedges under the provisions of Statement 133.  We anticipate that these swaps will continueto be effective as hedges.  See Note1(k) of the “Notes to Financial Statements” in “Item 8. Financial Statementsand Supplementary Data” for additional information on financial derivatives.  In the future, we will continually monitormarket conditions to evaluate whether to modify our level of exposure tofluctuations in interest rates.

 

### **INFLATION**

 

We believe that therecent inflation rates do not materially impact our financial condition.  However, under existing regulatory practicefor all of **PSI**, **ULH&P**, and the non-generating portionof **CG&E**, only the historicalcost of plant is recoverable from customers. As a result, cash flows designed to provide recovery of historical plantcosts may not be adequate to replace plant in future years.

 

### **ACCOUNTINGMATTERS**

 

#### **Critical Accounting Policies**

 

Preparation of financialstatements and related disclosures in compliance with GAAP requires the use ofassumptions and estimates.  In certaininstances, the application of GAAP requires judgments regarding future events,including the likelihood of success of particular initiatives, legal andregulatory challenges, and anticipated recovery of costs.  Therefore, the possibility exists formaterially different reported amounts under different conditions or assumptions.  The following discusses relevant accountingpolicies and should be read in conjunction with the “Notes to FinancialStatements” in “Item 8. Financial Statements and Supplementary Data”.

 

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

 

We use fair valueaccounting for energy trading contracts, which is required, with certainexceptions, by Statement 133.  Wedesignate these contracts as either trading or non-trading at the time they areoriginated in accordance with EITF Issue 02-3, *IssuesInvolved in Accounting for Derivative Contracts Held for Trading Purposes andContracts Involved in Energy Trading*

 

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*andRisk Management Activities* (EITF 02-3).  Short-term contracts used in our tradingactivities are generally priced using exchange based or over-the-counter pricequotes.  Long-term contracts typicallymust be valued using model pricing due to the lack of actively quoted prices.  The period for which actively quoted pricesare available varies by commodity and pricing point, but is generally shorterfor electricity than gas.  Use of modelpricing requires estimation surrounding factors such as volatility and futureprice expectations beyond the actively quoted portion of the price curve.  In addition, some contracts do not havefixed notional amounts and therefore must be valued using estimates of volumesto be consumed by the counterparty.  See“Changes in Fair Value” for additional information.

 

We measure these risks byusing complex valuation tools, both external and proprietary, which allow us tomodel prices for periods for which active quotes are unavailable.  These models are dynamic and arecontinuously updated with the most recent data to improve estimates of futureexpectations.  We measure risks forcontracts that do not contain fixed notional amounts by obtaining historicaldata and projecting expected consumption. These models incorporate expectations surrounding the impacts thatweather may play in future consumption. The results of these measures assist us in managing such risks withinour portfolio.  We also have a GlobalRisk Management function within **Cinergy**that is independent of the marketing and trading function and is under theoversight of a Risk Policy Committee comprised primarily of senior companyexecutives.  This group provides anindependent evaluation of both forward price curves and the valuation of energycontracts.  See “Value at Risk” foradditional information.

 

There is inherent risk invaluation modeling given the complexity and volatility of energy markets.  Fair value accounting has risk, includingits application to short-term contracts, as gains and losses recorded throughits use are not yet realized. Therefore, it is possible that results in future periods may bematerially different as contracts are ultimately settled.  However, we monitor potential losses usingVaR analysis.  Our one-day VaR atDecember 31, 2003 was approximately $0.6 million.

 

For financial reportingpurposes, assets and liabilities associated with energy trading transactionsaccounted for using fair value are reflected on the Balance Sheets as *Energy**riskmanagement assets current*and*non-current*and*Energy riskmanagement liabilities current*and*non-current*, classified as current or non-current pursuant to eachcontract’s tenor.  Net gains and lossesresulting from revaluation of contracts during the period are recognizedcurrently in the Statements of Income.

 

##### ***RetailCustomer Revenue Recognition***

 

Our retail revenuesinclude amounts that are not yet billed to customers.  Customers are billed throughout the month as both gas andelectric meters are read.  We recognizerevenues for retail energy sales that have not yet been billed, but where gasor electricity has been consumed.  Thisis termed “unbilled revenues” and is a widely recognized and accepted practicefor utilities.  In making our estimatesof unbilled revenues we use complex systems that consider various factors,including weather, in our calculation of retail customer consumption at the endof each month.  Given the use of thesesystems and the fact that customers are billed monthly, we believe it isunlikely that materially different results will occur in future periods whenrevenue is billed.  Related receivablesare sold under the accounts receivable sales agreement and therefore are not

 

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reflected on our BalanceSheets.  See Note 1(d)(*i*) of the “Notes to Financial Statements”in “Item 8. Financial Statements and Supplementary Data” for additionalinformation.

 

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The amount of unbilledrevenues for **Cinergy**, **CG&E**, **PSI**,and **ULH&P** as ofDecember 31, 2003, 2002, and 2001 were as follows:

 
|                          |   | **2003**             |     | **2002** |   | **2001** |   |
|-------------------------------|--------|----------------------|----------|----------|--------|----------|--------|
|                          |   | ***(in  millions)*** | * * |
|                          |   |                 |     |
| **Cinergy**                   |   | **$**                | **176**  |     | $      | 153      |   | $ | 172 |   |
| **CG&E** and subsidiaries |   | **112**              |     | 89       |   | 104      |   |
| **PSI**                       |   | **64**               |     | 64       |   | 68       |   |
| **ULH&P**                 |   | **20**               |     | 15       |   | 18       |   |
|                               |        |                      |          |          |        |          |        |  |  |  |

 

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

 

**CG&E**,**PSI**, and **ULH&P** are regulated utilitycompanies.  Except with respect to theelectric 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 longer deemed probable,related regulatory assets would be required to be recognized in current periodearnings.  Our deferrals under the fueladjustment clause recovery mechanism at **PSI**involve the use of estimates.  Fuelcosts, including purchased power when economically displacing fuel, must beallocated between **PSI’s** retailcustomers and wholesale customers, with the lowest costs allocated to retailcustomers.  This process is complex andinvolves the use of estimates that when finalized in future periods may resultin adjustments to amounts deferred and collected from customers.

 

At December 31,2003, regulatory assets totaled $595 million for **CG&E** (including $13 million for **ULH&P**) and $417 million for **PSI**.  Current ratesinclude the recovery of $587 million for **CG&E**(including $12 million for **ULH&P**)and $317 million for **PSI**.  Of the $100 million not yet approved forrecovery by **PSI**, $42 million relatesto reorganization costs incurred in connection with the merger with **CG&E**. Deferral of these costs for inclusion in **PSI’s** current rate case was previously authorized by theIURC.  **PSI**has requested recovery of these costs in its pending rate case and a decisionby the IURC is expected to be made in the first quarter of 2004.  Should the IURC deny recovery of thosecosts, a charge to current period earnings would be required.  In addition to the regulatory assets, **CG&E** and **PSI** have regulatory liabilities totaling $155 million(including $27 million for **ULH&P**)and $336 million at December 31, 2003, respectively.  See Note 1(c) of the “Notes to Financial Statements” in “Item 8.Financial Statements and Supplementary Data” for additional detail regarding regulatoryassets and regulatory liabilities.

 

##### ***Pension andOther Postretirement Benefits***

 

**Cinergy’s**reported costs of providing pension and other postretirement benefits (asdescribed in Note 9 of the “Notes to Financial Statements” in “Item 8.Financial Statements and Supplementary Data”) are dependent upon numerousfactors resulting from actual plan experience and assumptions of futureexperience.

 

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Pension costs associatedwith **Cinergy’s** defined benefitpension plans, for example, are impacted by employee demographics (includingage, compensation levels, and employment periods), the level of contributionswe make to the plan, and earnings on plan assets.  Changes made to the provisions of the plan may impact current andfuture pension costs.  Pension costs mayalso be significantly affected by changes in key actuarial assumptions,including anticipated rates of return on plan assets and the discount ratesused in determining the projected benefit obligation and pension costs.  

 

In accordance withStatement of Financial Accounting Standards No. 87, *Employers’ Accounting for Pensions* (Statement 87), changesin pension obligations associated with the above factors may not be immediatelyrecognized as pension costs on the Statements of Income, but may be deferredand amortized in the future over the average remaining service period of activeplan participants to the extent that Statement 87 recognition provisions aretriggered.  For the years endedDecember 31, 2003, 2002, and 2001, we recorded pension costs for ourdefined benefit pension plans (including early retirement program costsrecognized in accordance with Statement of Financial Accounting Standards No.88, *Employers’ Accounting for Settlementsand Curtailments of Defined Benefit Pension Plans and for Termination Benefits*(Statement88)) of approximately $62 million, $68 million, and $32 million, respectively. 

 

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

 

In selecting our discountrate assumption, we considered rates of return on high-quality corporate debtinstruments that are expected to be available through the maturity dates of thepension benefits.  Our expectedlong-term rate of return on plan assets is based on a calculation provided byan independent investment-consulting firm. Our expected long-term rate of return on pension plan assets is based onour targeted asset allocation assumption of 60 percent equity investments and40 percent debt investments.  Our 60percent equity investment target includes allocations to domestic, developedinternational, and emerging markets equities. Our asset allocation is designed to achieve a moderate level of overallportfolio risk in keeping with **Cinergy’s**desired risk objective.  We regularlyreview our asset allocation and periodically rebalance our investments to ourtargeted allocation as appropriate.  

 

We base our determinationof pension cost on a market-related valuation of assets that reducesyear-to-year volatility.  Thismarket-related valuation recognizes investment gains or losses over a five-yearperiod from the year in which they occur. Investment gains or losses for this purpose are the difference betweenthe expected return calculated using the market-related value of assets and theactual fair value of assets.

 

Based on our assumedlong-term rate of return of 8.5 percent, discount rate of 6.25 percent, andvarious other assumptions, we estimate that our pension costs associated withour defined benefit pension plans will increase from $53 million (excludingStatement 88 costs) in 2003 to approximately $66 million in 2004.  Modifying the expected long-term rate ofreturn on our pension plan assets by .25 percent, and holding all otherassumptions constant, would change

 

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2004 pension costs byapproximately $2 million.  Lowering thediscount rate assumption by .25 percent, and holding all other assumptionsconstant, would change 2004 pension costs by approximately $5 million.

 

Other postretirementbenefit costs are impacted by employee demographics, per capita claims costs,and health care cost trend rates.  Otherpostretirement benefit costs may also be significantly affected by changes inkey actuarial assumptions, including the discount rates used in determining theaccumulated postretirement benefit obligation and the postretirement benefitcosts.  In accordance with Statement ofFinancial Accounting Standards No. 106, *Employers’Accounting for Postretirement Benefits Other Than Pensions*(Statement106), changes in postretirement benefit obligations associated with thesefactors may not be immediately recognized as postretirement benefit costs butmay be deferred and amortized in the future over the average remaining serviceperiod of active plan participants to the extent that Statement 106 recognitionprovisions are triggered.  For the yearsended December 31, 2003, 2002, and 2001, we recorded other postretirementbenefit costs of approximately $35 million, $29 million, and $27 million,respectively, in accordance with the provisions of Statement 106.  Based upon a discount rate of 6.25 percent and variousother assumptions, we estimate that our other postretirement benefit costs willincrease from $35 million in 2003 to approximately $38 million in 2004.

 

See Note 9 of the “Notes to Financial Statements” in “Item8. Financial Statements and Supplementary Data” for information on the effectsof FASB Staff Position 106-1, *Accounting andDisclosure Requirements Related to the Medicare Prescription Drug, Improvementand Modernization Act of 2003*.

 

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

 

Management judgment isrequired in developing our provision for income taxes, including the determinationof deferred tax assets, liabilities and any valuation allowances recordedagainst the deferred tax assets.  We evaluate quarterly the realizabilityof our deferred tax assets by assessing our valuation allowance and adjustingthe amount of such allowance, if necessary.  The factors used to assessthe likelihood of realization are our forecast of future taxable income and theavailability of tax planning strategies that can be implemented to realizedeferred tax assets.  Failure to achieve forecasted taxable income mightaffect the ultimate realization of deferred tax assets.  

 

##### ***Legal andEnvironmental Contingencies***

 

When it is probable thatan environmental or other legal liability has been incurred, a loss isrecognized assuming the amount of the loss can be reasonably estimated.  Estimates of the probability and the amountof loss are often made based on currently available facts, present laws andregulations, and consultation with third-party experts.  Accounting for contingencies requiressignificant judgment by management regarding the estimated probabilities andranges of exposure to potential liability. Management’s assessment of **Cinergy’s**exposure to contingencies could change to the extent there are additionalfuture developments, administrative actions, or as more information becomesavailable.  If actual legal obligationsare materially different from our estimates, the recognition of the actualamounts may have a material impact on

 

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**Cinergy’s**results of operations and financial position. 

 

##### ***Impairment ofLong-lived Assets***

 

Current accountingstandards require long-lived assets be measured for impairment wheneverindicators of impairment exist.  Ifdeemed impaired under the standards, assets are written down to fair value witha charge to current period earnings.  Asa producer of electricity, **Cinergy**,**CG&E**, and **PSI** are owners of generating plants, whichare largely coal-fired.  AtDecember 31, 2003, the carrying value of these generating plants is $5billion for **Cinergy**, $2 billionfor **CG&E** and $2 billion for **PSI**. As a result of the various emissions and by-products of coalconsumption, the companies are subject to extensive environmental regulationsand are currently subject to a number of environmental contingencies.  See Note 1(i) of the “Notes to FinancialStatements” in “Item 8. Financial Statements and Supplementary Data” foradditional information.  While we cannotpredict the potential affect the resolution of these matters will have on ourfinancial position or results of operations, we believe that the carryingvalues of these assets are recoverable. In making this assessment, we consider such factors as the expectedability to recover additional investment in environmental complianceexpenditures, the relative pricing of wholesale electricity in the region, theanticipated demand, and the cost of fuel. We will continue to evaluate these assets for impairment when events orcircumstances indicate the carrying value may not be recoverable.

 

#### **Accounting Changes**

 

##### ***Energy Trading***

 

In October 2002, theEITF reached consensus in EITF 02-3, to (a) rescind EITF 98-10, (b) generallypreclude the recognition of gains at the inception of new derivatives, and (c)require all realized and unrealized gains and losses on energy tradingderivatives to be presented net in the Statements of Income, whether or notsettled physically.  

 

The consensus to rescindEITF 98-10 required all energy trading contracts that do not qualify asderivatives to be accounted for on an accrual basis, rather than at fairvalue.  The consensus was immediatelyeffective for all new contracts executed after October 25, 2002, andrequired a cumulative effect adjustment to income, net of tax, onJanuary 1, 2003, for all contracts executed on or prior toOctober 25, 2002.  The cumulativeeffect adjustment, on a net of tax basis, was a loss of approximately $13million for **Cinergy** and $8 millionfor **CG&E**, which primarilyincludes the impact of certain coal contracts, gas inventory, and certain gascontracts, which are accounted for at fair value.  We expect this rescission to have the largest ongoing impact onour gas trading business, which uses financial contracts, physical contracts,and gas inventory to take advantage of various arbitrage opportunities.  Prior to the rescission of EITF 98-10, allof these activities were accounted for at fair value.  Under the revised guidance, only certain items are accounted forat fair value, which could increase inter-period volatility in reported resultsof operations.  As a result, we beganapplying fair value hedge accounting in June 2003 to certain quantities ofgas inventory (more fully discussed in Note 1(k)(*i*) of the “Notes to Financial Statements” in “Item 8.Financial Statements and Supplementary Data”) and are further reviewingadditional applications for hedge accounting.

 

The consensus to requireall gains and losses on energy trading derivatives to be presented net in

 

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the Statements of Incomewas effective January 1, 2003, and required reclassification for allperiods presented.  This resulted insubstantial reductions in reported *OperatingRevenues, Fuel and purchased and exchanged power*expense, and*Gas purchased*expense.  However, *OperatingIncome* and *Net Income*were not affected by this change. 

 

##### ***Derivatives***

 

In May 2003, theFASB issued Statement of Financial Accounting Standards No. 149, *Amendment of Statement 133 on Derivative Instrumentsand Hedging Activities* (Statement 149).  Statement 149 primarily amends Statement 133 to incorporateimplementation conclusions previously cleared by the FASB staff, to clarify thedefinition of a derivative and to require derivative instruments that includeup-front cash payments to be classified as a financing activity in theStatements of Cash Flows. Implementation issues previously cleared by the FASB staff wereeffective at the time they were cleared and new guidance was effective in thethird quarter of 2003.  In connectionwith our adoption, we reviewed certain power purchase or sale contracts todetermine if they met the revised normal purchases and sales scope exceptioncriteria in Statement 149.  If thesecriteria were not met, the contract was adjusted to fair value.  The impact of adopting Statement 149 was notmaterial to our financial position or results of operations.

 

In June 2003, theFASB issued final guidance on the use of broad market indices (e.g., consumerprice index) in power purchases and sales contracts.  This guidance clarifies that the normal purchases and sales scopeexception is precluded if a contract contains a broad market index that is notclearly and closely related to the asset being sold or purchased (or a directfactor in the production of the asset sold or purchased).  The guidance provides criteria that must bemet for the index to be considered clearly and closely related.  This guidance, which was effective in thefourth quarter of 2003, was not material to our financial position or resultsof operations.

 

##### ***AssetRetirement Obligations***

 

In July 2001, theFASB issued Statement 143, which requires fair value recognition beginningJanuary 1, 2003, of legal obligations associated with the retirement orremoval of long-lived assets at the time the obligations are incurred.  Statement 143 prohibits the accrual ofestimated retirement and removal costs unless resulting from legalobligations.  Our accounting policy forsuch legal obligations and for accrued cost of removal for our rate regulatedlong-lived assets is described in Note 1 (j) of the “Notes to FinancialStatements” in “Item 8. Financial Statements and Supplementary Data”.

 

We adopted Statement 143on January 1, 2003, and **Cinergy**and **CG&E** both recognized again of $39 million (net of tax) for the cumulative effect of this change inaccounting principle.  Substantially allof this adjustment reflects the reversal of previously accrued cost of removalfor **CG&E’s** generating assets,which do not apply the provisions of Statement 71.  *Accrued cost of removal*at adoption included $316 million, $25 million, and $146 million of accumulatedcost of removal related to **PSI’s**, **ULH&P’s**, and **CG&E’s** utility plant in service assets, respectively,which represent regulatory liabilities after adoption and were not included aspart of the cumulative effect adjustment. The increases in assets and liabilities from adopting Statement 143 werenot material to our financial position.

 

Pro-forma results as ifStatement 143 was applied retroactively for the years ended December 31,2002 and 2001, are not materially different from reported results.

 

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***Consolidation ofVIEs***

 

In January 2003, theFASB issued Interpretation 46, which significantly changes the consolidationrequirements for traditional special purpose entities (SPE) and certain otherentities subject to its scope.  Thisinterpretation defines a VIE as (a) an entity that does not have sufficientequity to support its activities without additional financial support or (b) anentity that has equity investors that do not have voting rights or do notabsorb losses or receive returns.  Theseentities must be consolidated when certain criteria are met.  The interpretation was originally to beeffective as of July 1, 2003 for **Cinergy**;however, the FASB subsequently permitted deferral of the effective date toDecember 31, 2003 for traditional SPEs and to March 31, 2004 for allother entities subject to the scope of Interpretation 46.  During this deferral period, the FASB clarifiedand amended several provisions, much of which is intended to assist in theapplication of Interpretation 46 to operating entities.  Clarifications were not needed for mosttraditional SPEs and we therefore elected to implement Interpretation 46 for suchentities, as discussed below, in accordance with the original implementationdate of July 1, 2003.  Prior periodfinancial statements were not restated for these changes.

 

Interpretation 46required us to consolidate two SPEs that have individual power sale agreementsto Central Maine Power Company. 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.  Forfurther information on the accounting for these entities see Note 3 of the“Notes to Financial Statements” in “Item 8. Financial Statements andSupplementary Data”.

 

**Cinergy**has concluded that its accounts receivable sale facility, as discussed in Note3(c) of the “Notes to Financial Statements” in “Item 8. Financial Statementsand Supplementary Data”, will remain unconsolidated since it involves transfersof financial assets to a qualifying SPE, which is exempted from consolidationby Interpretation 46 and Statement 140.

 

**Cinergy**is continuing to evaluate the impact of Interpretation 46 on several operatingjoint ventures, primarily involved in cogeneration and energy efficiencyoperations, that we currently do not consolidate.  If all these entities were consolidated, their total assets ofapproximately $590 million (the majority of which is non-current) and totalliabilities of approximately $210 million (which includes long-term debt ofapproximately $90 million) would be recognized on our Balance Sheets.  **Cinergy’s**current investment in these entities is approximately $200 million.  We also guarantee certain performanceobligations of these entities with an estimated maximum potential exposure ofapproximately $40 million, as disclosed in Note 11(c)(*vii*) of the “Notes to FinancialStatements” in “Item 8. Financial Statements and Supplementary Data”.  If any of these entities are required to beconsolidated, they will be included in the March 31, 2004 consolidatedfinancial statements.

 

##### ***Financial Instrumentswith Characteristics of Both Liabilities and Equity***

 

In May 2003, theFASB issued Statement of Financial Accounting Standards No. 150, *Accounting for Certain Financial Instruments withCharacteristics of Both Liabilities and Equity*(Statement 150).  Statement 150 establishes standards for howan issuer classifies and measures

 

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certain financialinstruments with characteristics of both liabilities and equity.  This statement was effective for financialinstruments entered into or modified after May 31, 2003, and was effectiveon July 1, 2003, for financial instruments held prior to issuance of thisstatement.  Statement 150 would haverequired **Cinergy Corp.’s** preferredtrust securities to be reported as a liability; however, as described morefully in Note 3(b) of the “Notes to Financial Statements” in “Item 8. FinancialStatements and Supplementary Data”, the trust holding these securities is nolonger permitted to be consolidated and the preferred trust securities are nolonger reported on **Cinergy’s**BalanceSheets.  However, **Cinergy’s** note payable to the trust isrecorded on the Balance Sheets as *Long-termdebt*.  As a result, theimpact of adopting Statement 150 was not material to our financial position orresults of operations.

 

As discussed in Note 3(b)of the “Notes to Financial Statements” in “Item 8. Financial Statements andSupplementary Data”, **Cinergy Corp.**issued forward stock sale contracts that require purchase by the holder of acertain number of **Cinergy Corp.**shares in February 2005 (stock contracts).  The number of shares to be issued is contingent on the marketprice of **Cinergy Corp.** stock, butsubject to a predetermined ceiling and floor price.  In October 2003, the FASB staff released an interpretationof Statement 150 that requires an evaluation of these stock contracts todetermine whether they constitute a liability, with any changes in accountingrequired in January 2004.  Thisinterpretation did not have any impact on our current accounting.

 

#### **Other Matters**

 

##### ***VoluntaryEarly Retirement Programs***(VERP)

 

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

 

During 2003, **Cinergy** offered a VERP and other severancebenefits (Severance Programs) to certain non-union and union employees.  As a result of the employees electing theSeverance Programs, **Cinergy**recorded expenses of approximately $14 million during 2003. 

 

##### ***Synthetic Fuel Production***

 

In July 2002,Capital & Trading acquired a coal-based synthetic fuel productionfacility.  As of December 31, 2003,Capital & Trading’s net book value in this facility was approximately $60million.  The synthetic fuel produced atthis facility qualifies for tax credits in accordance with Section 29 ofthe Internal Revenue Code.  Eligibilityfor these credits expires after 2007.  **Cinergy** received a private letter rulingfrom the Internal Revenue Service (IRS) in connection with the acquisition ofthe facility.  To date, **Cinergy** has produced and sold approximately4.4 million tons of synthetic fuel at this facility, resulting in approximately$120 million in tax credits, including approximately $80 million in 2003.

 

In the second quarter of2003, the IRS announced, as a result of an audit of another taxpayer, that ithad reason to question and was reviewing the scientific validity of testprocedures and results that were presented as evidence the fuel underwent asignificant chemical change.  The IRSrecently announced that it has finished its review and has determined that testprocedures and

 

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results used by taxpayersmay be scientifically valid if the procedures are applied in a consistent andunbiased manner.  The IRS also announcedthat it plans to impose new testing and record-keeping requirements onsynthetic fuel producers and plans to issue guidance extending theserequirements to taxpayers already holding private letter rulings on the issueof significant chemical change.  **Cinergy** believes that any new testing orrecord-keeping requirements imposed by the IRS will not have a material effecton our financial position or results of operations.

 

##### ***Patents***

 

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

 

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

 

In October 2002, asthe result of financial problems experienced by certain public utilitycompanies and the existing state of the economy, the PUCO issued an orderinitiating a review of, and requesting comments with respect to, the financialcondition of the 19 large public utilities (gas, electric, andtelecommunication) serving Ohio customers, including **CG&E**.  The PUCOintends to identify available measures to ensure that the regulated operationsof the Ohio public utilities are not adversely impacted by the parent oraffiliate companies’ non-regulated operations. **CG&E** filed commentsstating that the PUCO has sufficient authority to adequately regulate thefinancial condition of public utilities. In January 2004, the PUCO staff filed their recommendations on themeasures to be used to address the PUCO’s concerns, focusing on such areas asdividend distributions, cost of capital, and restrictions on non-regulatedinvestments, loans, and guarantees.  **CG&E** cannot predict the outcome of thismatter at this time.

 

##### ***Energy MarketInvestigations***

 

In July 2003, **Cinergy** received a subpoena from theCommodity Futures Trading Commission (CFTC). As has been previously reported by the press, the CFTC has servedsubpoenas on numerous other energy companies. The CFTC request sought certain information regarding our tradingactivities, including price reporting to energy industry publications.  The CFTC sought particular informationconcerning these matters for the period May 2000 through January 2001as to one of **Cinergy’s**employees.  Based on an initial reviewof these matters, we placed that employee on administrative leave and havesubsequently terminated his employment. **Cinergy** is continuing aninvestigation of these matters, including whether price reportinginconsistencies occurred in our operations, and has been cooperating fully withthe CFTC.

 

In August 2003, **Cinergy**, along with 38 other companies, wasnamed as a defendant in civil litigation filed as a purported class action onbehalf of all persons who purchased and/or sold New York Mercantile Exchangenatural gas futures and options contracts between January 1, 2000 andDecember 31, 2002.  The complaintalleges that improper price reporting caused

 

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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.  We believe this action is without merit andintend to defend this lawsuit vigorously; however, we cannot predict theoutcome of this matter at this time.

 

In the second quarter of2003, **Cinergy** received initial andfollow-up third-party subpoenas from the SEC requesting information related toparticular trading activity with one of its counterparties who was the targetof an investigation by the SEC.  **Cinergy** has fully cooperated with the SECin connection with this matter.  InJanuary 2004, **Cinergy**received a grand jury subpoena from the Assistant United States Attorney in theSouthern District of Texas for information relating to the same tradingactivities being investigated by the SEC. Specifically, the Assistant United States Attorney has requestedinformation relating to communications between a former employee and anotherenergy company.  We understand that weare neither a target nor are we under investigation by the Department ofJustice in relation to these communications.

 

At this time, it is notpossible to predict the outcome of these investigations and litigation or theirimpact on **Cinergy’s** financialposition or results of operations; although, in the opinion of management, theyare not likely to have a material adverse effect on our financial position orresults of operations.

 

## **ITEM 7A**. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Reference is made to the“Market Risk Sensitive Instruments and Positions” section of “Item 7.Management’s Discussion and Analysis of Financial Condition and Results ofOperations”.

 

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**INDEXTO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES**

 
| **FINANCIAL  STATEMENTS**                                                                                    |   |
|--------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                         |   |
| **Independent Auditors’  Report**                                                                       |   |
|                                                                                                         |   |
| **Cinergy Corp.  and Subsidiaries**                                                                          |   |
| Consolidated  Statements of Income for the three years ended December 31, 2003                          |   |
| Consolidated Balance Sheets  at December 31, 2003 and 2002                                              |   |
| Consolidated  Statements of Changes in Common Stock Equity for the three years ended  December 31, 2003 |   |
| Consolidated  Statements of Cash Flows for the three years ended December 31, 2003                      |   |
| Consolidated Statements  of Capitalization at December 31, 2003 and 2002                                |   |
|                                                                                                         |   |
| **The  Cincinnati Gas & Electric Company and Subsidiaries**                                              |   |
| Consolidated  Statements of Income for the three years ended December 31, 2003                          |   |
| Consolidated  Balance Sheets at December 31, 2003 and 2002                                              |   |
| Consolidated  Statements of Changes in Common Stock Equity for the three years ended  December 31, 2003 |   |
| Consolidated  Statements of Cash Flows for the three years ended December 31, 2003                      |   |
| Consolidated  Statements of Capitalization at December 31, 2003 and 2002                                |   |
|                                                                                                         |   |
| **PSI Energy,  Inc. and Subsidiary**                                                                         |   |
| Consolidated  Statements of Income for the three years ended December 31, 2003                          |   |
| Consolidated  Balance Sheets at December 31, 2003 and 2002                                              |   |
| Consolidated  Statements of Changes in Common Stock Equity for the three years ended  December 31, 2003 |   |
| Consolidated  Statements of Cash Flows for the three years ended December 31, 2003                      |   |
| Consolidated  Statements of Capitalization at December 31, 2003 and 2002                                |   |
|                                                                                                         |   |
| **The Union  Light, Heat and Power Company**                                                                 |   |
| Statements  of Income for the three years ended December 31, 2003                                       |   |
| Balance Sheets at December 31, 2003  and 2002                                                           |   |
| Statements  of Changes in Common Stock Equity for the three years ended December 31,  2003              |   |
| Statements  of Cash Flows for the three years ended December 31, 2003                                   |   |
| Statements of  Capitalization at December 31, 2003 and 2002                                             |   |
|                                                                                                         |   |
| **Notes to Financial  Statements**                                                                           |   |
|                                                                                                         |   |
| **FINANCIAL STATEMENT  SCHEDULES**                                                                           |   |
|                                                                                                         |   |
| Schedule II - Valuation  and Qualifying Accounts                                                        |   |
| **Cinergy Corp. and  Subsidiaries**                                                                          |   |
| **The  Cincinnati Gas & Electric Company and Subsidiaries**                                              |   |
| **PSI Energy, Inc. and  Subsidiary**                                                                         |   |
| **The Union Light, Heat and Power Company**                                                                  |   |

 

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Theinformation required to be submitted in schedules other than those indicatedabove has been included in the Balance Sheets, the Statements of Income,related schedules, the notes thereto, or omitted as not required by the Rulesof Regulation S-X.

 

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## **ITEM 8**. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

## **INDEPENDENT AUDITORS’ REPORT**

 

To the Board of Directors of Cinergy Corp.:

 

We have audited the accompanying consolidated balance sheets andstatements of capitalization of Cinergy Corp. and subsidiaries as of December31, 2003 and 2002, and the related consolidated statements of income, changesin common stock equity, and cash flows for each of the three years in theperiod ended December 31, 2003.  Our audits also included the financialstatement schedule included in Item 15 of this Annual Report.  Thesefinancial statements and the financial statement schedule are theresponsibility of the Company’s management.  Our responsibility is toexpress an opinion on the financial statements and financial statement schedulebased on our audits.

 

We conducted our audits in accordance with auditing standards generallyaccepted in the United States of America.  Those standards require that weplan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement.  An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements.  An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well asevaluating the overall financial statement presentation.  We believe thatour audits provide a reasonable basis for our opinion.

 

In our opinion, such consolidated financial statements present fairly,in all material respects, the financial position of Cinergy Corp. andsubsidiaries as of December 31, 2003 and 2002 and the results of theiroperations and their cash flows for each of the three years in the period endedDecember 31, 2003, in conformity with accounting principles generally acceptedin the United States of America.  Also, in our opinion, the financialstatement schedule, when considered in relation to the basic consolidatedfinancial statements taken as a whole, presents fairly in all material respectsthe information set forth therein.

 

As discussed in Note 1 to the financial statements, in 2003 CinergyCorp. adopted Statement of Financial Accounting Standards (SFAS) No. 143,“Accounting for Asset Retirement Obligations;” Financial Accounting StandardsBoard Interpretation No. 46, “Consolidation of Variable Interest Entities;”Emerging Issues Task Force Issue 02-3, “Issues Involved in Accounting forDerivative Contracts Held for Trading Purposes and Contracts Involved in EnergyTrading and Risk Management Activities;” and the fair value recognitionprovisions of SFAS No. 123 “Accounting for Stock-Based Compensation.”  In 2002, Cinergy Corp. adopted SFAS No. 142,“Goodwill and Other Intangible Assets.”

 

Deloitte & Touche LLP

Cincinnati, Ohio

February 16, 2004

 

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INDEPENDENT AUDITORS’ REPORT

 

To the Board of Directors of The Cincinnati Gas & Electric Company:

 

We have audited the accompanying consolidated balance sheets andstatements of capitalization of The Cincinnati Gas & Electric Company andsubsidiaries as of December 31, 2003 and 2002, 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, 2003.  Our audits alsoincluded the financial statement schedule included in Item 15 of this AnnualReport.  These financial statements and the financial statement scheduleare the responsibility of the Company’s management.  Our responsibility isto express an opinion on the financial statements and financial statementschedule based on our audits.

 

We conducted our audits in accordance with auditing standards generallyaccepted in the United States of America.  Those standards require that weplan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement.  An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements.  An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well asevaluating the overall financial statement presentation.  We believe thatour audits provide a reasonable basis for our opinion.

 

In our opinion, such consolidated financial statements present fairly,in all material respects, the financial position of The Cincinnati Gas &Electric Company and subsidiaries as of December 31, 2003 and 2002 and theresults of their operations and their cash flows for each of the three years inthe period ended December 31, 2003, in conformity with accounting principlesgenerally accepted in the United States of America.  Also, in our opinion,the financial 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 financial statements, in 2003 TheCincinnati Gas & Electric Company adopted Statement of Financial AccountingStandards No. 143, “Accounting for Asset Retirement Obligations” and EmergingIssues Task Force Issue 02-3, “Issues Involved in Accounting for DerivativeContracts Held for Trading Purposes and Contracts Involved in Energy Tradingand Risk Management Activities.”

 

Deloitte & Touche LLP

Cincinnati, OhioFebruary 16, 2004

 

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INDEPENDENT AUDITORS’ REPORT

 

To the Board of Directors of PSI Energy, Inc.:

 

We have audited the accompanying consolidated balance sheets andstatements of capitalization of PSI Energy, Inc. and subsidiary as of December31, 2003 and 2002, and the related consolidated statements of income, changesin common stock equity, and cash flows for each of the three years in theperiod ended December 31, 2003.  Our audits also included the financialstatement schedule included in Item 15 of this Annual Report.  Thesefinancial statements and the financial statement schedule are theresponsibility of the Company’s management.  Our responsibility is to expressan opinion on the financial statements and financial statement schedule basedon our audits.

 

We conducted our audits in accordance with auditing standards generallyaccepted in the United States of America.  Those standards require that weplan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement.  An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements.  An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well asevaluating the overall financial statement presentation.  We believe thatour audits provide a reasonable basis for our opinion.

 

In our opinion, such consolidated financial statements present fairly,in all material respects, the financial position of PSI Energy, Inc. andsubsidiary as of December 31, 2003 and 2002 and the results of their operationsand their cash flows for each of the three years in the period ended December31, 2003, in conformity with accounting principles generally accepted in theUnited States of America.  Also, in our opinion, the financial statementschedule, when considered in relation to the basic consolidated financial statementstaken as a whole, presents fairly in all material respects the information setforth therein.

 

As discussed in Note 1 to the financial statements, in 2003 PSI Energy,Inc. adopted Statement of Financial Accounting Standards No. 143, “Accounting forAsset Retirement Obligations” and Emerging Issues Task Force Issue 02-3,“Issues Involved in Accounting for Derivative Contracts Held for TradingPurposes and Contracts Involved in Energy Trading and Risk ManagementActivities.”

 

Deloitte & Touche LLP

Cincinnati, OhioFebruary 16, 2004

 

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INDEPENDENT AUDITORS’ REPORT

 

To the Board of Directors of The Union Light, Heat and Power Company:

 

We have audited the accompanying balance sheets and statements ofcapitalization of The Union Light, Heat and Power Company as of December 31,2003 and 2002, and the related statements of income, changes in common stockequity, and cash flows for each of the three years in the period ended December31, 2003.  Our audits also included the financial statement scheduleincluded in Item 15 of this Annual Report.  These financial statements andthe financial statement schedule are the responsibility of the Company’smanagement.  Our responsibility is to express an opinion on the financialstatements and financial statement schedule based on our audits.

 

We conducted our audits in accordance with auditing standards generallyaccepted in the United States of America.  Those standards require that weplan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement.  An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements.  An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well asevaluating the overall financial statement presentation.  We believe thatour audits provide a reasonable basis for our opinion.

 

In our opinion, such financial statements present fairly, in allmaterial respects, the financial position of The Union Light, Heat and PowerCompany as of December 31, 2003 and 2002 and the results of its operations andits cash flows for each of the three years in the period ended December 31,2003, in conformity with accounting principles generally accepted in the UnitedStates 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 financial statements, in 2003 The UnionLight, Heat and Power Company adopted Statement of Financial AccountingStandards No. 143, “Accounting for Asset Retirement Obligations.”

 

Deloitte & Touche LLP

Cincinnati, OhioFebruary 16, 2004

 

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**CINERGYCORP.**

**ANDSUBSIDIARY COMPANIES**

 

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**CINERGY CORP.**

**CONSOLIDATED STATEMENTS OF INCOME**

 
|                                                                                                  |   | **2003**                                              |          | **2002**  |   | **2001**  |   |
|-------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------------|---------------|-----------|--------|-----------|--------|
|                                                                                                  |   | **(dollars  in thousands, except per share amounts)** |          |
|                                                                                                  |   |                                                  |          |      |   |      |   |
| **Operating  Revenues** (Note 1(q)(*i*))                                                              |   |                                                  |          |      |   |      |   |
| Electric                                                                                              |   | **$**                                                 | **3,383,132** |      | $      | 3,338,068 |   | $ | 3,215,652 |   |
| Gas                                                                                                   |   | **835,507**                                           |          | 590,471   |   | 655,678   |   |
| Other                                                                                                 |   | **197,238**                                           |          | 130,813   |   | 78,246    |   |
| **Total  Operating Revenues**                                                                         |   | **4,415,877**                                         |          | 4,059,352 |   | 3,949,576 |   |
|                                                                                                  |   |                                                  |          |      |   |      |   |
| **Operating  Expenses**                                                                               |   |                                                  |          |      |   |      |   |
| Fuel and  purchased and exchanged power (Note 1(q)(*i*))                                              |   | **1,158,196**                                         |          | 989,699   |   | 1,014,571 |   |
| Gas purchased  (Note 1(q)(*i*))                                                                       |   | **503,834**                                           |          | 309,983   |   | 397,310   |   |
| Operation and  maintenance                                                                            |   | **1,276,453**                                         |          | 1,291,589 |   | 1,008,133 |   |
| Depreciation                                                                                          |   | **419,098**                                           |          | 405,487   |   | 366,648   |   |
| Taxes other than  income taxes                                                                        |   | **249,746**                                           |          | 263,002   |   | 227,652   |   |
| **Total  Operating Expenses**                                                                         |   | **3,607,327**                                         |          | 3,259,760 |   | 3,014,314 |   |
|                                                                                                  |   |                                                  |          |      |   |      |   |
| **Operating  Income**                                                                                 |   | **808,550**                                           |          | 799,592   |   | 935,262   |   |
|                                                                                                  |   |                                                  |          |      |   |      |   |
| **Equity  in Earnings of Unconsolidated Subsidiaries**                                                |   | **15,201**                                            |          | 15,261    |   | 1,494     |   |
| **Miscellaneous  Income - Net**                                                                       |   | **38,156**                                            |          | 12,402    |   | 40,404    |   |
| **Interest  Expense**                                                                                 |   | **268,602**                                           |          | 243,099   |   | 258,723   |   |
| **Preferred  Dividend Requirement of Subsidiary Trust** (Note 3(b))                                   |   | **11,940**                                            |          | 23,832    |   | 1,067     |   |
|                                                                                                  |   |                                                  |          |      |   |      |   |
| **Income  Before Taxes**                                                                              |   | **581,365**                                           |          | 560,324   |   | 717,370   |   |
|                                                                                                  |   |                                                  |          |      |   |      |   |
| **Income  Taxes** (Note 10)                                                                           |   | **143,508**                                           |          | 160,255   |   | 257,308   |   |
| **Preferred  Dividend Requirements of Subsidiaries**                                                  |   | **3,433**                                             |          | 3,433     |   | 3,433     |   |
|                                                                                                  |   |                                                  |          |      |   |      |   |
| **Income  Before Discontinued Operations and Cumulative Effect of Changes in Accounting  Principles** |   | **434,424**                                           |          | 396,636   |   | 456,629   |   |
|                                                                                                  |   |                                                  |          |      |   |      |   |
| Discontinued  operations, net of tax (Note 14)                                                        |   | **8,886**                                             |          | (25,161   | )      | (14,350   | )      |
| Cumulative  effect of changes in accounting principles, net of tax (Note 1(q)(*vi*))                  |   | **26,462**                                            |          | (10,899   | )      | —    |   |
| **Net  Income**                                                                                       |   | **$**                                                 | **469,772**   |      | $      | 360,576   |   | $ | 442,279 |   |
|                                                                                                  |   |                                                  |          |      |   |      |   |
| **Average  Common Shares Outstanding**                                                                |   | **176,535**                                           |          | 167,047   |   | 159,110   |   |
|                                                                                                  |   |                                                  |          |      |   |      |   |
| **Earnings  Per Common Share** (Note 16)                                                              |   |                                                  |          |      |   |      |   |
| Income Before  Discontinued Operations and Cumulative Effect of Changes in Accounting  Principles     |   | **$**                                                 | **2.46**      |      | $      | 2.37      |   | $ | 2.87 |   |
| Discontinued  operations, net of tax                                                                  |   | **0.05**                                              |          | (0.15     | )      | (0.09     | )      |
| Cumulative  effect of changes in accounting principles, net of tax                                    |   | **0.15**                                              |          | (0.06     | )      | —    |   |
| Net Income                                                                                            |   | **$**                                                 | **2.66**      |      | $      | 2.16      |   | $ | 2.78 |   |
|                                                                                                  |   |                                                  |          |      |   |      |   |
| **Earnings  Per Common Share - Assuming Dilution** (Note 16)                                          |   |                                                  |          |      |   |      |   |
| Income Before  Discontinued Operations and Cumulative Effect of Changes in Accounting  Principles     |   | **$**                                                 | **2.43**      |      | $      | 2.34      |   | $ | 2.84 |   |
| Discontinued  operations, net of tax                                                                  |   | **0.05**                                              |          | (0.15     | )      | (0.09     | )      |
| Cumulative  effect of changes in accounting principles, net of tax                                    |   | **0.15**                                              |          | (0.06     | )      | —    |   |
| Net Income                                                                                            |   | **$**                                                 | **2.63**      |      | $      | 2.13      |   | $ | 2.75 |   |
|                                                                                                  |   |                                                  |          |      |   |      |   |
| **Dividends  Declared Per Common Share**                                                              |   | **$**                                                 | **1.84**      |      | $      | 1.80      |   | $ | 1.80 |   |

 

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

 

108

----

 

**CINERGYCORP.**

**CONSOLIDATED BALANCE SHEETS**

 

**ASSETS**

 
|                                                                                                                                                |   | **December  31**            |           |
|-----------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------|----------------|
|                                                                                                                                                |   | **2003**                    |           | **2002** |   |
|                                                                                                                                                |   | **(dollars  in thousands)** |           |
| **Current  Assets**                                                                                                                                 |   |                        |           |   |   |
| Cash and cash  equivalents                                                                                                                          |   | **$**                       | **169,120**    |   | $ | 200,112 |   |
| Restricted  deposits (Note 6)                                                                                                                       |   | **92,813**                  |           | 3,092 |   |
| Notes  receivable, current (Note 5)                                                                                                                 |   | **189,854**                 |           | 135,873 |   |
| Accounts  receivable less accumulated provision for doubtful accounts of $7,884 at  December 31, 2003, and $16,368 at December 31, 2002 (Note 3(c)) |   | **1,074,518**               |           | 1,280,810 |   |
| Materials,  supplies, and fuel (Note 1(g))                                                                                                          |   | **321,658**                 |           | 319,454 |   |
| Energy risk  management current assets (Note 1(k)(*i*))                                                                                             |   | **305,058**                 |           | 464,028 |   |
| Prepayments and  other                                                                                                                              |   | **89,576**                  |           | 107,086 |   |
| **Total  Current Assets**                                                                                                                           |   | **2,242,597**               |           | 2,510,455 |   |
|                                                                                                                                                |   |                        |           |   |   |
| **Property,  Plant, and Equipment - at Cost**                                                                                                       |   |                        |           |   |   |
| Utility plant in  service (Note 19)                                                                                                                 |   | **9,732,123**               |           | 8,669,045 |   |
| Construction  work in progress                                                                                                                      |   | **275,459**                 |           | 469,300 |   |
| **Total  Utility Plant**                                                                                                                            |   | **10,007,582**              |           | 9,138,345 |   |
| Non-regulated  property, plant, and equipment (Note 19)                                                                                             |   | **4,527,943**               |           | 4,667,940 |   |
| Accumulated  depreciation (Note 1(q)(*iii*))                                                                                                        |   | **4,908,019**               |           | 4,639,713 |   |
| **Net  Property, Plant, and Equipment**                                                                                                             |   | **9,627,506**               |           | 9,166,572 |   |
|                                                                                                                                                |   |                        |           |   |   |
| **Other  Assets**                                                                                                                                   |   |                        |           |   |   |
| Regulatory  assets (Note 1(c))                                                                                                                      |   | **1,012,151**               |           | 1,022,696 |   |
| Investments in  unconsolidated subsidiaries                                                                                                         |   | **494,520**                 |           | 417,188 |   |
| Energy risk  management non-current assets (Note 1(k)(*i*))                                                                                         |   | **97,334**                  |           | 162,773 |   |
| Notes  receivable, non-current (Note 5)                                                                                                             |   | **213,853**                 |           | — |   |
| Other  investments                                                                                                                                  |   | **184,044**                 |           | 163,851 |   |
| Goodwill                                                                                                                                            |   | **43,717**                  |           | 43,717 |   |
| Other intangible  assets                                                                                                                            |   | **1,632**                   |           | 2,059 |   |
| Other                                                                                                                                               |   | **197,351**                 |           | 195,867 |   |
| **Total  Other Assets**                                                                                                                             |   | **2,244,602**               |           | 2,008,151 |   |
|                                                                                                                                                |   |                        |           |   |   |
| **Assets  of Discontinued Operations** (Note 14)                                                                                                    |   | **4,501**                   |           | 147,265 |   |
|                                                                                                                                                |   |                        |           |   |   |
| **Total  Assets**                                                                                                                                   |   | **$**                       | **14,119,206** |   | $ | 13,832,443 |   |

 

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

 

109

----

 

**CINERGYCORP.**

**CONSOLIDATEDBALANCE SHEETS**

 

**LIABILITIES AND SHAREHOLDERS’ EQUITY**

 
|                                                                                                                                                                                                                                                              |   | **December  31**            |           |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------|----------------|
|                                                                                                                                                                                                                                                              |   | **2003**                    |           | **2002** |   |
|                                                                                                                                                                                                                                                              |   | **(dollars  in thousands)** |           |
| **Current  Liabilities**                                                                                                                                                                                                                                          |   |                        | ** **     |   |   |
| Accounts payable                                                                                                                                                                                                                                                  |   | **$**                       | **1,240,423**  | ** ** | $ | 1,318,379 |   |
| Accrued taxes                                                                                                                                                                                                                                                     |   | **217,993**                 | ** **     | 258,613 |   |
| Accrued interest                                                                                                                                                                                                                                                  |   | **68,952**                  | ** **     | 62,244 |   |
| Notes payable  and other short-term obligations (Note 6)                                                                                                                                                                                                          |   | **351,412**                 | ** **     | 667,973 |   |
| Long-term debt  due within one year                                                                                                                                                                                                                               |   | **839,103**                 | ** **     | 176,000 |   |
| Energy risk management  current liabilities (Note 1(k)(*i*))                                                                                                                                                                                                      |   | **296,122**                 | ** **     | 407,710 |   |
| Other                                                                                                                                                                                                                                                             |   | **107,438**                 | ** **     | 105,026 |   |
| **Total  Current Liabilities**                                                                                                                                                                                                                                    |   | **3,121,443**               | ** **     | 2,995,945 |   |
|                                                                                                                                                                                                                                                              |   |                        | ** **     |   |   |
| **Non-Current  Liabilities**                                                                                                                                                                                                                                      |   |                        | ** **     |   |   |
| Long-term debt  (Note 4)                                                                                                                                                                                                                                          |   | **4,131,909**               | ** **     | 4,011,568 |   |
| Deferred income  taxes (Note 10)                                                                                                                                                                                                                                  |   | **1,557,981**               | ** **     | 1,458,171 |   |
| Unamortized  investment tax credits                                                                                                                                                                                                                               |   | **108,884**                 | ** **     | 118,095 |   |
| Accrued pension  and other postretirement benefit costs (Note 9)                                                                                                                                                                                                  |   | **662,834**                 | ** **     | 626,167 |   |
| Accrued cost of  removal (Note 1(c))                                                                                                                                                                                                                              |   | **490,856**                 |           | 525,415 |   |
| Energy risk  management non-current liabilities (Note 1(k)(*i*))                                                                                                                                                                                                  |   | **64,861**                  | ** **     | 143,991 |   |
| Other                                                                                                                                                                                                                                                             |   | **205,344**                 | ** **     | 179,767 |   |
| **Total  Non-Current Liabilities**                                                                                                                                                                                                                                |   | **7,222,669**               | ** **     | 7,063,174 |   |
|                                                                                                                                                                                                                                                              |   |                        | ** **     |   |   |
| **Liabilities  of Discontinued Operations** (Note 14)                                                                                                                                                                                                             |   | **11,594**                  | ** **     | 108,833 |   |
|                                                                                                                                                                                                                                                              |   |                        | ** **     |   |   |
| **Commitments  and Contingencies** (Note 11)                                                                                                                                                                                                                      |   |                        | ** **     |   |   |
|                                                                                                                                                                                                                                                              |   |                        | ** **     |   |   |
| **Total  Liabilities**                                                                                                                                                                                                                                            |   | **10,355,706**              | ** **     | 10,167,952 |   |
|                                                                                                                                                                                                                                                              |   |                        | ** **     |   |   |
| **Preferred  Trust Securities** (Note 3(b))                                                                                                                                                                                                                       |   |                        | ** **     |   |   |
| Company  obligated, mandatorily redeemable, preferred trust securities of subsidiary,  holding solely debt securities of the company                                                                                                                              |   | **—**                  | ** **     | 308,187 |   |
|                                                                                                                                                                                                                                                              |   |                        | ** **     |   |   |
| **Cumulative  Preferred Stock of Subsidiaries**                                                                                                                                                                                                                   |   |                        | ** **     |   |   |
| Not subject to  mandatory redemption                                                                                                                                                                                                                              |   | **62,818**                  | ** **     | 62,828 |   |
|                                                                                                                                                                                                                                                              |   |                        | ** **     |   |   |
| **Common  Stock Equity** (Note 2)                                                                                                                                                                                                                                 |   |                        | ** **     |   |   |
| Common Stock -  $.01 par value; authorized shares - 600,000,000; issued shares – 178,438,369  at December 31, 2003, and 168,663,115 at December 31, 2002; outstanding  shares – 178,336,854 at December 31, 2003, and 168,663,115 at December 31,  2002 |   | **1,784**                   | ** **     | 1,687 |   |
| Paid-in capital                                                                                                                                                                                                                                                   |   | **2,195,985**               | ** **     | 1,918,136 |   |
| Retained earnings                                                                                                                                                                                                                                                 |   | **1,551,003**               | ** **     | 1,403,453 |   |
| Treasury shares  at cost – 101,515 shares at December 31, 2003                                                                                                                                                                                               |   | **(3,255**                  | **)**          | — |   |
| Accumulated  other comprehensive income (loss) (Note 18)                                                                                                                                                                                                          |   | **(44,835**                 | **)**          | (29,800 | ) |
| **Total  Common Stock Equity**                                                                                                                                                                                                                                    |   | **3,700,682**               | ** **     | 3,293,476 |   |
|                                                                                                                                                                                                                                                              |   |                        | ** **     |   |   |
| **Total  Liabilities and Shareholders’ Equity**                                                                                                                                                                                                              |   | **$**                       | **14,119,206** | ** ** | $ | 13,832,443 |   |

 

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

 

110

----

 

**CINERGY CORP.CONSOLIDATED STATEMENTS OF CHANGESIN COMMON STOCK EQUITY**

 
|                                                                                         |   | **Common  Stock**           |       | **Paid-in  Capital** |       | **Retained  Earnings** |       | **Treasury  Stock** |          | **Accumulated  Other  Comprehensive  Income (Loss)** |        | **Total  Common  Stock  Equity** |        |
|----------------------------------------------------------------------------------------------|--------|-----------------------------|------------|----------------------|------------|------------------------|------------|---------------------|---------------|------------------------------------------------------|-------------|----------------------------------|-------------|
|                                                                                         |   | **(dollars  in thousands)** |
|                                                                                         |   |                        |       |                 |       |                   |       |                |          |                                                 |        |                             |        |
| **2001**                                                                                     |   |                        |       |                 |       |                   |       |                |          |                                                 |        |                             |        |
| Beginning  balance (158,967,661 shares)                                                      |   | $                           | 1,590      |                 | $          | 1,619,153              |       | $                   | 1,179,113     |                                                 | $           | —                           |        | $ | (10,895 | ) | $ | 2,788,961 |   |
|                                                                                         |   |                        |       |                 |       |                   |       |                |          |                                                 |        |                             |        |
| Comprehensive  income:                                                                       |   |                        |       |                 |       |                   |       |                |          |                                                 |        |                             |        |
| Net income                                                                                   |   |                        |       |                 |       | 442,279                |       |                |          |                                                 |        | 442,279                          |        |
| Other  comprehensive income (loss), net of tax effect of $1,454 (Note 18)                    |   |                        |       |                 |       |                   |       |                |          |                                                 |        |                             |        |
| Foreign currency  translation adjustment (Note 1(r))                                         |   |                        |       |                 |       |                   |       |                |          | 1,641                                                |        | 1,641                            |        |
| Minimum pension  liability adjustment                                                        |   |                        |       |                 |       |                   |       |                |          | (1,555                                               | )           | (1,555                           | )           |
| Unrealized gain  (loss) on investment trusts                                                 |   |                        |       |                 |       |                   |       |                |          | (841                                                 | )           | (841                             | )           |
| Cumulative  effect of change in accounting principle                                         |   |                        |       |                 |       |                   |       |                |          | (2,500                                               | )           | (2,500                           | )           |
| Cash flow hedges  (Note 1(k)(*ii*))                                                          |   |                        |       |                 |       |                   |       |                |          | (2,779                                               | )           | (2,779                           | )           |
| Total  comprehensive income                                                                  |   |                        |       |                 |       |                   |       |                |          |                                                 |        | 436,245                          |        |
|                                                                                         |   |                        |       |                 |       |                   |       |                |          |                                                 |        |                             |        |
| Issuance of  common stock - net (435,178 shares)                                             |   | 4                           |       | 9,896                |       |                   |       |                |          |                                                 |        | 9,900                            |        |
| Treasury shares  purchased (344,034 shares)                                                  |   |                        |       | (10,015              | )          |                   |       |                |          |                                                 |        | (10,015                          | )           |
| Treasury shares  reissued (344,034 shares)                                                   |   |                        |       | 9,157                |       |                   |       |                |          |                                                 |        | 9,157                            |        |
| Dividends on  common stock ($1.80 per share)                                                 |   |                        |       |                 |       | (286,289               | )          |                |          |                                                 |        | (286,289                         | )           |
| Stock purchase  contracts (Note 2(e))                                                        |   |                        |       | (23,200              | )          |                   |       |                |          |                                                 |        | (23,200                          | )           |
| Other                                                                                        |   |                        |       | 14,668               |       | 2,032                  |       |                |          |                                                 |        | 16,700                           |        |
| Ending balance  (159,402,839 shares)                                                         |   | $                           | 1,594      |                 | $          | 1,619,659              |       | $                   | 1,337,135     |                                                 | $           | —                           |        | $ | (16,929 | ) | $ | 2,941,459 |   |
|                                                                                         |   |                        |       |                 |       |                   |       |                |          |                                                 |        |                             |        |
| **2002**                                                                                     |   |                        |       |                 |       |                   |       |                |          |                                                 |        |                             |        |
| Comprehensive  income:                                                                       |   |                        |       |                 |       |                   |       |                |          |                                                 |        |                             |        |
| Net income                                                                                   |   |                        |       |                 |       | 360,576                |       |                |          |                                                 |        | 360,576                          |        |
| Other comprehensive income (loss), net of tax effect of $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 gain (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 (loss) 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** | ** ** |

 

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

 

111

----

 

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

 
|                                                                                         |   | **2003**                    |         | **2002**   |     | **2001**   |     |
|----------------------------------------------------------------------------------------------|--------|-----------------------------|--------------|------------|----------|------------|----------|
|                                                                                         |   | **(dollars  in thousands)** |
|                                                                                         |   |                        | *** *** |       | * * |       | * * |
| **Cash Flows from Continuing  Operations**                                                   |   |                        | ** **   |       |     |       |     |
| **Operating Activities**                                                                     |   |                        | ** **   |       |     |       |     |
| Net income                                                                                   |   | **$**                       | **469,772**  | ** ** | $        | 360,576    |     | $ | 442,279 |   |
| Adjustments to  reconcile net income to net cash provided by (used in) operating activities: |   |                        | ** **   |       |     |       |     |
| Depreciation                                                                                 |   | **419,098**                 | ** **   | 405,487    |     | 366,648    |     |
| (Income) Loss of  discontinued operations, net of tax                                        |   | **(8,886**                  | **)**        | 25,161     |     | 14,350     |     |
| (Income) Loss on  sale of investment in unconsolidated subsidiaries                          |   | **(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                                 |   | **(11,723**                 | **)**        | (43,202    | )        | (96,850    | )        |
| Deferred income  taxes and investment tax credits - net                                      |   | **85,108**                  | ** **   | 148,069    |     | 118,544    |     |
| Equity in  (earnings) losses of unconsolidated subsidiaries                                  |   | **(15,201**                 | **)**        | (15,261    | )        | (1,494     | )        |
| Allowance for  equity funds used during construction                                         |   | **(7,532**                  | **)**        | (12,861    | )        | (8,628     | )        |
| Regulatory  assets deferrals                                                                 |   | **(83,228**                 | **)**        | (110,867   | )        | (141,324   | )        |
| Regulatory  assets amortization                                                              |   | **90,476**                  | ** **   | 116,512    |     | 119,344    |     |
| Accrued pension  and other postretirement benefit costs                                      |   | **36,667**                  | ** **   | 127,366    |     | 34,246     |     |
| Deferred cost  under gas recovery mechanism                                                  |   | **(19,335**                 | **)**        | (23,373    | )        | 53,374     |     |
| Cost of removal                                                                              |   | **(16,598**                 | **)**        | —     |     | —     |     |
| Changes in  current assets and current liabilities:                                          |   |                        | ** **   |       |     |       |     |
| Restricted  deposits                                                                         |   | **(9,382**                  | **)**        | 969        |     | (3,561     | )        |
| Accounts and  notes receivable                                                               |   | **123,504**                 | ** **   | (235,437   | )        | 495,295    |     |
| Materials,  supplies, and fuel                                                               |   | **(2,059**                  | **)**        | (83,585    | )        | (81,269    | )        |
| Prepayments                                                                                  |   | **8,859**                   | ** **   | (26,818    | )        | 13,507     |     |
| Accounts payable                                                                             |   | **(89,149**                 | **)**        | 311,339    |     | (465,034   | )        |
| Accrued taxes  and interest                                                                  |   | **(35,510**                 | **)**        | 65,019     |     | (40,345    | )        |
| Other assets                                                                                 |   | **(13,157**                 | **)**        | (49,259    | )        | (19,925    | )        |
| Other  liabilities                                                                           |   | **50,504**                  | ** **   | 1,586      |     | (75,467    | )        |
| **Net  cash provided by (used in) operating activities**                                     |   | **945,673**                 | ** **   | 955,802    |     | 723,690    |     |
|                                                                                         |   |                        | ** **   |       |     |       |     |
| **Financing Activities**                                                                     |   |                        | ** **   |       |     |       |     |
| Change in  short-term debt                                                                   |   | **(312,747**                | **)**        | (442,469   | )        | 15,339     |     |
| Issuance of  long-term debt                                                                  |   | **688,166**                 | ** **   | 628,170    |     | 872,930    |     |
| Issuance of  preferred trust securities                                                      |   | **—**                  | ** **   | —     |     | 306,327    |     |
| Redemption of  long-term debt                                                                |   | **(487,901**                | **)**        | (112,578   | )        | (90,448    | )        |
| Funds on deposit  from issuance of debt securities                                           |   | **(80,339**                 | **)**        | —     |     | —     |     |
| Retirement of  preferred stock of subsidiaries                                               |   | **(10**                     | **)**        | (3         | )        | (1         | )        |
| Issuance of  common stock                                                                    |   | **270,074**                 | ** **   | 267,861    |     | 9,900      |     |
| Dividends on  common stock                                                                   |   | **(322,371**                | **)**        | (298,292   | )        | (286,289   | )        |
| **Net  cash provided by (used in) financing activities**                                     |   | **(245,128**                | **)**        | 42,689     |     | 827,758    |     |
|                                                                                         |   |                        | ** **   |       |     |       |     |
| **Investing Activities**                                                                     |   |                        | ** **   |       |     |       |     |
| Construction  expenditures (less allowance for equity funds used during construction)        |   | **(704,117**                | **)**        | (853,332   | )        | (832,693   | )        |
| Proceeds from  notes receivable                                                              |   | **9,187**                   | ** **   | —     |     | —     |     |
| Acquisitions and  other investments                                                          |   | **(87,859**                 | **)**        | (118,375   | )        | (701,833   | )        |
| Proceeds from  sale of subsidiaries and equity investments                                   |   | **51,252**                  | ** **   | 86,071     |     | —     |     |
| **Net  cash provided by (used in) investing activities**                                     |   | **(731,537**                | **)**        | (885,636   | )        | (1,534,526 | )        |
|                                                                                         |   |                        | ** **   |       |     |       |     |
| **Net  increase (decrease) in cash and cash equivalents from continuing operations**         |   | **(30,992**                 | **)**        | 112,855    |     | 16,922     |     |
|                                                                                         |   |                        | ** **   |       |     |       |     |
| **Cash  and cash equivalents from continuing operations at beginning of period**             |   | **200,112**                 | ** **   | 87,257     |     | 70,335     |     |
|                                                                                         |   |                        | ** **   |       |     |       |     |
| **Cash and cash equivalents from  continuing operations at end of period**                   |   | **$**                       | **169,120**  | ** ** | $        | 200,112    |     | $ | 87,257 |   |
|                                                                                         |   |                        | ** **   |       |     |       |     |
| **Cash Flows from Discontinued  Operations**                                                 |   |                        | ** **   |       |     |       |     |
| Operating  activities                                                                        |   | **$**                       | **(5,871**   | **)**      | $        | 40,397     |     | $ | (5,841 | ) |
| Financing  activities                                                                        |   | **(14,898**                 | **)**        | (39,464    | )        | 39,505     |     |
| Investing  activities                                                                        |   | **(202**                    | **)**        | (3,772     | )        | (32,573    | )        |
|                                                                                         |   |                        | ** **   |       |     |       |     |
| **Net  increase (decrease) in cash and cash equivalents from discontinued operations**       |   | **(20,971**                 | **)**        | (2,839     | )        | 1,091      |     |
|                                                                                         |   |                        | ** **   |       |     |       |     |
| **Cash  and cash equivalents from discontinued operations at beginning of period**           |   | **20,971**                  | ** **   | 23,810     |     | 22,719     |     |
|                                                                                         |   |                        | ** **   |       |     |       |     |
| **Cash  and cash equivalents from discontinued operations at end of period**                 |   | **$**                       | **—**   | ** ** | $        | 20,971     |     | $ | 23,810 |   |
|                                                                                         |   |                        | ** **   |       |     |       |     |
| **Supplemental Disclosure of Cash  Flow Information**                                        |   |                        | ** **   |       |     |       |     |
| Cash paid during  the year for:                                                              |   |                        | ** **   |       |     |       |     |
| Interest (net of  amount capitalized)                                                        |   | **$**                       | **263,228**  | ** ** | $        | 253,266    |     | $ | 271,323 |   |
| Income taxes                                                                                 |   | **$**                       | **92,175**   | ** ** | $        | 57,739     |     | $ | 153,092 |   |

 

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

 

112

----

** **

**CINERGY CORP.CONSOLIDATED STATEMENTS OFCAPITALIZATION**

 
|                                                                                                                                                   |   | **December  31**            |          |
|--------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------|---------------|
|                                                                                                                                                   |   | **2003**                    |          | **2002** |   |
|                                                                                                                                                   |   | **(dollars  in thousands)** |          |
|                                                                                                                                                   |   |                        | *** ***  |   | * * |
| **Long-term Debt**(excludes  current portion)                                                                                                          |   |                        | ** **    |   |   |
| **Cinergy  Corp.**                                                                                                                                     |   |                        | ** **    |   |   |
| Other Long-term  Debt:                                                                                                                                 |   |                        | ** **    |   |   |
| 6.53% Debentures  due December 16, 2008                                                                                                                |   | **$**                       | **200,000**   | ** ** | $ | 200,000 |   |
| 6.125%  Debentures due April 15, 2004                                                                                                                  |   | **—**                  | ** **    | 200,000 |   |
| 6.25% Debentures  due September 1, 2004 (Executed interest rate swaps of $ 250 million set  at London Inter-Bank Offered Rate (LIBOR) plus 2.44%) |   | **—**                  | ** **    | 512,554 |   |
| 6.90% Note  Payable due February 16, 2007 (Note 4)                                                                                                     |   | **326,032**                 | ** **    | — |   |
| **Total  Other Long-term Debt**                                                                                                                        |   | **526,032**                 | ** **    | 912,554 |   |
| Unamortized  Premium and Discount - Net                                                                                                                |   | **(6,080**                  | **)**         | (165 | )  |
| **Total  - Cinergy Corp.**                                                                                                                             |   | **519,952**                 | ** **    | 912,389 |   |
|                                                                                                                                                   |   |                        | ** **    |   |   |
| **Cinergy  Global Resources, Inc.**                                                                                                                    |   |                        | ** **    |   |   |
| Other Long-term  Debt:                                                                                                                                 |   |                        | ** **    |   |   |
| 6.20% Debentures  due November 3, 2008                                                                                                                 |   | **150,000**                 | ** **    | 150,000 |   |
| Variable  interest rate of EURIBOR plus 1.2%, maturing November 2016                                                                                   |   | **79,104**                  | ** **    | 63,675 |   |
| **Total  Other Long-term Debt**                                                                                                                        |   | **229,104**                 | ** **    | 213,675 |   |
| Unamortized  Premium and Discount - Net                                                                                                                |   | **(160**                    | **)**         | (193 | )  |
| **Total  - Cinergy Global Resources, Inc.**                                                                                                            |   | **228,944**                 | ** **    | 213,482 |   |
|                                                                                                                                                   |   |                        | ** **    |   |   |
| **Cinergy  Investments, Inc.**                                                                                                                         |   |                        | ** **    |   |   |
| Other Long-term  Debt:                                                                                                                                 |   |                        | ** **    |   |   |
| 9.23% Notes  Payable, due November 5, 2016 (Note 4)                                                                                                    |   | **107,142**                 | ** **    | — |   |
| 7.81% Notes  Payable, due June 1, 2009 (Note 4)                                                                                                        |   | **93,041**                  | ** **    | — |   |
| Other                                                                                                                                                  |   | **3,547**                   | ** **    | — |   |
| **Total  - Cinergy Investments, Inc.**                                                                                                                 |   | **203,730**                 | ** **    | — |   |
|                                                                                                                                                   |   |                        | ** **    |   | ** ** |
| **Operating  Companies**                                                                                                                               |   |                        | ** **    |   | ** ** |
| The Cincinnati  Gas & Electric Company (**CG&E**)  and subsidiaries                                                                            |   |                        | ** **    |   |   |
| First Mortgage  Bonds                                                                                                                                  |   | **94,700**                  | ** **    | 470,200 |   |
| Other Long-term  Debt                                                                                                                                  |   | **1,401,721**               | ** **    | 1,101,721 |   |
| Unamortized  Premium and Discount - Net                                                                                                                |   | **(37,614**                 | **)**         | (2,208 | )  |
| **Total  Long-term Debt**                                                                                                                              |   | **1,458,807**               | ** **    | 1,569,713 |   |
| PSI Energy, Inc.  (**PSI**)                                                                                                                            |   |                        | ** **    |   |   |
| First Mortgage  Bonds                                                                                                                                  |   | **620,720**                 | ** **    | 620,720 |   |
| Secured  Medium-term Notes                                                                                                                             |   | **77,500**                  | ** **    | 104,300 |   |
| Other Long-term  Debt                                                                                                                                  |   | **1,032,663**               | ** **    | 598,700 |   |
| Unamortized  Premium and Discount - Net                                                                                                                |   | **(10,407**                 | **)**         | (7,736 | )  |
| **Total  Long-term Debt**                                                                                                                              |   | **1,720,476**               | ** **    | 1,315,984 |   |
|                                                                                                                                                   |   |                        | ** **    |   |   |
| **Total  Consolidated Long-term Debt**                                                                                                                 |   | **$**                       | **4,131,909** | ** ** | $ | 4,011,568 |   |

 

**The accompanying notes as they relate to Cinergy Corp.are an integral part of these consolidated financial statements.**

 

113

----

 
|                                                                                                                                                                                                                                                    |   | **December  31**            |          |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------|---------------|
|                                                                                                                                                                                                                                                    |   | **2003**                    |          | **2002** |   |
|                                                                                                                                                                                                                                                    |   | **(dollars in  thousands)** |          |
|                                                                                                                                                                                                                                                    |   |                        | * *      |   | * * |
| **Preferred Trust Securities**                                                                                                                                                                                                                          |   |                        |          |   |   |
| Company  obligated, mandatorily redeemable, preferred trust securities of subsidiary,  holding solely debt securities of the company                                                                                                                    |   | **$**                       | **—**    | ** ** | $ | 308,187 |   |
|                                                                                                                                                                                                                                                    |   |                        | ** **    |   | ** ** |
| **Cumulative Preferred Stock of  Subsidiaries**                                                                                                                                                                                                         |   |                        | ** **    |   | ** ** |
|                                                                                                                                                                                                                                                    |   |                        | ** **    |   | ** ** |
| **CG&E** and  subsidiaries                                                                                                                                                                                                                          |   | **$**                       | **20,485**    | ** ** | $ | 20,485 |   |
| **PSI**                                                                                                                                                                                                                                                 |   | **42,333**                  | ** **    | 42,343 |   |
| **Total  Cumulative Preferred Stock of Subsidiaries**                                                                                                                                                                                                   |   | **$**                       | **62,818**    | ** ** | $ | 62,828 |   |
|                                                                                                                                                                                                                                                    |   |                        | ** **    |   |   |
| **Common Stock Equity**                                                                                                                                                                                                                                 |   |                        | ** **    |   |   |
| Common Stock -  $0.01 par value; authorized shares - 600,000,000; issued shares - 178,438,369  at December 31, 2003, and 168,663,115 at December 31, 2002; outstanding  shares - 178,336,854 at December 31, 2003 and 168,663,115 at December 31,  2002 |   | **$**                       | **1,784**     | ** ** | $ | 1,687 |   |
| Paid-in capital                                                                                                                                                                                                                                         |   | **2,195,985**               | ** **    | 1,918,136 |   |
| Retained  earnings                                                                                                                                                                                                                                      |   | **1,551,003**               | ** **    | 1,403,453 |   |
| Treasury shares  at cost - 101,515 shares at December 31, 2003                                                                                                                                                                                          |   | **(3,255**                  | **)**         | — |   |
| Accumulated  other comprehensive income (loss)                                                                                                                                                                                                          |   | **(44,835**                 | **)**         | (29,800 | ) |
| **Total  Common Stock Equity**                                                                                                                                                                                                                          |   | **3,700,682**               | ** **    | 3,293,476 |   |
|                                                                                                                                                                                                                                                    |   |                        | ** **    |   |   |
| **Total  Consolidated Capitalization**                                                                                                                                                                                                                  |   | **$**                       | **7,895,409** | ** ** | $ | 7,676,059 |   |

 

**The accompanying notes as they relate toCinergy Corp. are an integral part of these consolidated financial statements.**

** **

**114**

----

 

**THE CINCINNATI GAS &****ELECTRIC COMPANYAND SUBSIDIARY COMPANIES**

 

115

----

 

**The cincinnati gas& electric companyconsolidated statements of income**

 
|                                                                                 |   | **2003**                     |          | **2002**  |     | **2001**  |     |
|--------------------------------------------------------------------------------------|--------|------------------------------|---------------|-----------|----------|-----------|----------|
|                                                                                 |   | ***(dollars in thousands)*** |          |
|                                                                                 |   |                         | * *      |      | * * |      | * * |
| **Operating  Revenues** (Note 1(q)(*i*))                                             |   |                         |          |      |     |      |     |
| Electric                                                                             |   | **$**                        | **1,754,229** |      | $        | 1,700,318 |     | $ | 1,651,041 |   |
| Gas                                                                                  |   | **627,720**                  |          | 437,092   |     | 596,429   |     |
| **Total Operating Revenues**                                                         |   | **2,381,949**                |          | 2,137,410 |     | 2,247,470 |     |
|                                                                                 |   |                         |          |      |     |      |     |
| **Operating Expenses**                                                               |   |                         |          |      |     |      |     |
| Fuel and purchased and exchanged power (Note 1(q)(*i*))                              |   | **539,269**                  |          | 472,313   |     | 435,656   |     |
| Gas purchased                                                                        |   | **382,310**                  |          | 232,558   |     | 396,764   |     |
| Operation and maintenance                                                            |   | **511,011**                  |          | 533,255   |     | 442,173   |     |
| Depreciation                                                                         |   | **186,819**                  |          | 196,539   |     | 186,986   |     |
| Taxes other than income taxes                                                        |   | **199,818**                  |          | 197,827   |     | 174,320   |     |
| **Total Operating Expenses**                                                         |   | **1,819,227**                |          | 1,632,492 |     | 1,635,899 |     |
|                                                                                 |   |                         |          |      |     |      |     |
| **Operating Income**                                                                 |   | **562,722**                  |          | 504,918   |     | 611,571   |     |
|                                                                                 |   |                         |          |      |     |      |     |
| **Miscellaneous Income - Net**                                                       |   | **30,660**                   |          | 9,742     |     | 4,657     |     |
| **Interest Expense**                                                                 |   | **115,193**                  |          | 95,623    |     | 103,047   |     |
|                                                                                 |   |                         |          |      |     |      |     |
| **Income Before Taxes**                                                              |   | **478,189**                  |          | 419,037   |     | 513,181   |     |
|                                                                                 |   |                         |          |      |     |      |     |
| **Income Taxes** (Note 10)                                                           |   | **178,077**                  |          | 155,341   |     | 186,527   |     |
|                                                                                 |   |                         |          |      |     |      |     |
| **Income Before Cumulative Effect of Changes in  Accounting Principles**             |   | **300,112**                  |          | 263,696   |     | 326,654   |     |
|                                                                                 |   |                         |          |      |     |      |     |
| Cumulative effect of changes in accounting principles, net of tax  (Note 1(q)(*vi*)) |   | **30,938**                   |          | —    |     | —    |     |
|                                                                                 |   |                         |          |      |     |      |     |
| **Net Income**                                                                       |   | **$**                        | **331,050**   |      | $        | 263,696   |     | $ | 326,654 |   |
|                                                                                 |   |                         |          |      |     |      |     |
| **Preferred Dividend Requirement**                                                   |   | **846**                      |          | 846       |     | 846       |     |
|                                                                                 |   |                         |          |      |     |      |     |
| **Net Income Applicable to Common Stock**                                            |   | **$**                        | **330,204**   |      | $        | 262,850   |     | $ | 325,808 |   |

 

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

 

116

----

 

**THECINCINNATI GAS & ELECTRIC COMPANYCONSOLIDATED BALANCE SHEETS**

**ASSETS**

 
|                                                                                                                                              |   | **December  31**           |          |
|---------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------|---------------|
|                                                                                                                                              |   | **2003**                   |          | **2002** |   |
|                                                                                                                                              |   | **(dollars in thousands)** |          |
| **Current  Assets**                                                                                                                               |   |                       |          |   |   |
| Cash and cash equivalents                                                                                                                         |   | **$**                      | **15,842**    |   | $ | 45,336 |   |
| Restricted deposits                                                                                                                               |   | **137**                    |          | 3,071 |   |
| Notes receivable from affiliated companies                                                                                                        |   | **110,149**                |          | 148,823 |   |
| Accounts receivable less accumulated provision for doubtful accounts  of $1,602 at December 31, 2003, and $5,942 at December 31, 2002 (Note 3(c)) |   | **107,733**                |          | 117,269 |   |
| Accounts receivable from affiliated companies                                                                                                     |   | **58,406**                 |          | 97,584 |   |
| Materials, supplies, and fuel                                                                                                                     |   | **123,910**                |          | 121,881 |   |
| Energy risk management current assets (Note 1(k)(*i*))                                                                                            |   | **72,830**                 |          | 57,912 |   |
| Prepayments and other                                                                                                                             |   | **27,087**                 |          | 8,560 |   |
| **Total Current Assets**                                                                                                                          |   | **516,094**                |          | 600,436 |   |
|                                                                                                                                              |   |                       |          |   |   |
| **Property, Plant, and Equipment - at Cost**                                                                                                      |   |                       |          |   |   |
| Utility plant in service (Note 19)                                                                                                                |   |                       |          |   |   |
| Electric                                                                                                                                          |   | **2,155,457**              |          | 2,073,133 |   |
| Gas                                                                                                                                               |   | **1,104,797**              |          | 1,003,870 |   |
| Common                                                                                                                                            |   | **288,394**                |          | 270,976 |   |
| **Total Utility Plant In Service**                                                                                                                |   | **3,548,648**              |          | 3,347,979 |   |
| Construction work in progress                                                                                                                     |   | **71,947**                 |          | 84,249 |   |
| **Total Utility Plant**                                                                                                                           |   | **3,620,595**              |          | 3,432,228 |   |
| Non-regulated property, plant, and equipment (Note 19)                                                                                            |   | **3,576,187**              |          | 3,496,242 |   |
| Accumulated depreciation (Note 1(q)(*iii*))                                                                                                       |   | **2,625,568**              |          | 2,510,088 |   |
| **Net Property, Plant, and Equipment**                                                                                                            |   | **4,571,214**              |          | 4,418,382 |   |
|                                                                                                                                              |   |                       |          |   |   |
| **Other Assets**                                                                                                                                  |   |                       |          |   |   |
| Regulatory assets (Note 1(c))                                                                                                                     |   | **594,764**                |          | 604,776 |   |
| Energy risk management non-current assets (Note 1(k)(*i*))                                                                                        |   | **36,583**                 |          | 64,762 |   |
| Other investments                                                                                                                                 |   | **1,083**                  |          | 1,082 |   |
| Other                                                                                                                                             |   | **89,741**                 |          | 61,764 |   |
| **Total Other Assets**                                                                                                                            |   | **722,171**                |          | 732,384 |   |
|                                                                                                                                              |   |                       |          |   |   |
| **Total Assets**                                                                                                                                  |   | **$**                      | **5,809,479** |   | $ | 5,751,202 |   |

 

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

 

117

----

 

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

 

**LIABILITIES AND SHAREHOLDER’S EQUITY**

 
|                                                                                                                                         |   | **December  31**             |          |
|----------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------|---------------|
|                                                                                                                                         |   | **2003**                     |          | **2002** |   |
|                                                                                                                                         |   | ***(dollars in thousands)*** |          |
| **Current  Liabilities**                                                                                                                     |   |                         |          |   |   |
| Accounts payable                                                                                                                             |   | **$**                        | **217,652**   |   | $ | 195,812 |   |
| Accounts payable to affiliated companies                                                                                                     |   | **136,470**                  |          | 146,558 |   |
| Accrued taxes                                                                                                                                |   | **146,216**                  |          | 159,199 |   |
| Accrued interest                                                                                                                             |   | **21,572**                   |          | 22,872 |   |
| Notes payable and other short-term obligations (Note 6)                                                                                      |   | **112,100**                  |          | 112,100 |   |
| Notes payable to affiliated companies (Note 6)                                                                                               |   | **49,126**                   |          | 8,947 |   |
| Long-term debt due within one year                                                                                                           |   | **110,000**                  |          | 120,000 |   |
| Energy risk management current liabilities (Note 1(k)(*i*))                                                                                  |   | **77,791**                   |          | 49,288 |   |
| Other                                                                                                                                        |   | **32,319**                   |          | 37,160 |   |
| **Total Current Liabilities**                                                                                                                |   | **903,246**                  |          | 851,936 |   |
|                                                                                                                                         |   |                         |          |   |   |
| **Non-Current Liabilities**                                                                                                                  |   |                         |          |   |   |
| Long-term debt (Note 4)                                                                                                                      |   | **1,458,807**                |          | 1,569,713 |   |
| Deferred income taxes (Note 10)                                                                                                              |   | **985,481**                  |          | 882,628 |   |
| Unamortized investment tax credits                                                                                                           |   | **79,186**                   |          | 85,198 |   |
| Accrued pension and other postretirement benefit costs (Note 9)                                                                              |   | **219,393**                  |          | 201,284 |   |
| Accrued cost of removal (Note 1 (c))                                                                                                         |   | **155,336**                  |          | 209,455 |   |
| Energy risk management non-current liabilities (Note 1(k)(*i*))                                                                              |   | **11,665**                   |          | 31,326 |   |
| Other                                                                                                                                        |   | **69,687**                   |          | 88,843 |   |
| **Total Non-Current Liabilities**                                                                                                            |   | **2,979,555**                |          | 3,068,447 |   |
|                                                                                                                                         |   |                         |          |   |   |
| **Commitments and Contingencies** (Note 11)                                                                                                  |   |                         |          |   |   |
|                                                                                                                                         |   |                         |          |   |   |
| **Total Liabilities**                                                                                                                        |   | **3,882,801**                |          | 3,920,383 |   |
|                                                                                                                                         |   |                         |          |   |   |
| **Cumulative Preferred Stock**                                                                                                               |   |                         |          |   |   |
| Not subject to mandatory redemption                                                                                                          |   | **20,485**                   |          | 20,485 |   |
|                                                                                                                                         |   |                         |          |   |   |
| **Common Stock Equity** (Note 2)                                                                                                             |   |                         |          |   |   |
| Common Stock - $8.50 par value; authorized shares - 120,000,000;  outstanding shares - 89,663,086 at December 31, 2003 and December 31, 2002 |   | **762,136**                  |          | 762,136 |   |
| Paid-in capital                                                                                                                              |   | **586,528**                  |          | 586,292 |   |
| Retained earnings                                                                                                                            |   | **589,993**                  |          | 487,652 |   |
| Accumulated other comprehensive income (loss) (Note 18)                                                                                      |   | **(32,464**                  | **)**         | (25,746 | ) |
| **Total Common Stock Equity**                                                                                                                |   | **1,906,193**                |          | 1,810,334 |   |
|                                                                                                                                         |   |                         |          |   |   |
| **Total Liabilities and Shareholder’s Equity**                                                                                          |   | **$**                        | **5,809,479** |   | $ | 5,751,202 |   |

 

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

118

----

 

**THECINCINNATI GAS & ELECTRIC COMPANYCONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCK EQUITY**

 
|                                                                         |   | **Common  Stock**           |        | **Paid-in  Capital** |       | **Retained  Earnings** |       | **Accumulated  Other  Comprehensive  Income (Loss)** |        | **Total  Common  Stock  Equity** |       |
|------------------------------------------------------------------------------|--------|-----------------------------|-------------|----------------------|------------|------------------------|------------|------------------------------------------------------|-------------|----------------------------------|------------|
|                                                                         |   | **(dollars  in thousands)** |        |
| **2001**                                                                     |   |                        |        |                 |       |                   |       |                                                 |        |                             |       |
| Beginning balance                                                            |   | $                           | 762,136     |                 | $          | 565,777                |       | $                                                    | 368,911     |                             | $          | (994 | ) | $ | 1,695,830 |   |
|                                                                         |   |                        |        |                 |       |                   |       |                                                 |        |                             |       |
| Comprehensive income:                                                        |   |                        |        |                 |       |                   |       |                                                 |        |                             |       |
| Net income                                                                   |   |                        |        |                 |       | 326,654                |       |                                                 |        | 326,654                          |       |
| Other comprehensive income  (loss), net of tax effect of $2,970 (Note 18)    |   |                        |        |                 |       |                   |       |                                                 |        |                             |       |
| Minimum pension liability  adjustment                                        |   |                        |        |                 |       |                   |       | 134                                                  |        | 134                              |       |
| Unrealized gain (loss) on  investment trust                                  |   |                        |        |                 |       |                   |       | 461                                                  |        | 461                              |       |
| Cumulative effect of  change in accounting principle                         |   |                        |        |                 |       |                   |       | (2,500                                               | )           | (2,500                           | )          |
| Cash flow hedges (Note  1(k)(*ii*))                                          |   |                        |        |                 |       |                   |       | (2,779                                               | )           | (2,779                           | )          |
| Total comprehensive income                                                   |   |                        |        |                 |       |                   |       |                                                 |        | 321,970                          |       |
|                                                                         |   |                        |        |                 |       |                   |       |                                                 |        |                             |       |
| Dividends on preferred  stock                                                |   |                        |        |                 |       | (846                   | )          |                                                 |        | (846                             | )          |
| Dividends on common stock                                                    |   |                        |        |                 |       | (286,269               | )          |                                                 |        | (286,269                         | )          |
| Contribution from parent  company for reallocation of taxes                  |   |                        |        | 6,149                |       |                   |       |                                                 |        | 6,149                            |       |
| Other                                                                        |   |                        |        |                 |       | 256                    |       |                                                 |        | 256                              |       |
| Ending balance                                                               |   | $                           | 762,136     |                 | $          | 571,926                |       | $                                                    | 408,706     |                             | $          | (5,678 | ) | $ | 1,737,090 |   |
|                                                                         |   |                        |        |                 |       |                   |       |                                                 |        |                             |       |
| **2002**                                                                     |   |                        |        |                 |       |                   |       |                                                 |        |                             |       |
| Comprehensive income:                                                        |   |                        |        |                 |       |                   |       |                                                 |        |                             |       |
| Net income                                                                   |   |                        |        |                 |       | 263,696                |       |                                                 |        | 263,696                          |       |
| Other comprehensive income  (loss), net of tax effect of $13,060 (Note 18)   |   |                        |        |                 |       |                   |       |                                                 |        |                             |       |
| Minimum pension liability  adjustment                                        |   |                        |        |                 |       |                   |       | (872                                                 | )           | (872                             | )          |
| Unrealized gain (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 (loss) 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** | ** ** |

 

**Theaccompanying notes as they relate to The Cincinnati Gas & Electric Companyare an integral part of these consolidated financial statements.**

 

119

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**THECINCINNATI GAS & ELECTRIC COMPANYCONSOLIDATED STATEMENTS OF CASH FLOWS**

 
|                                                                                         |   | **2003**                    |        | **2002**   |   | **2001** |   |
|----------------------------------------------------------------------------------------------|--------|-----------------------------|-------------|------------|--------|----------|--------|
|                                                                                         |   | **(dollars  in thousands)** |        |
| **Operating Activities**                                                                     |   |                        | ** **  |       |   |     |   |
| Net income                                                                                   |   | **$**                       | **331,050** | ** ** | $      | 263,696  |   | $ | 326,654 |   |
| Adjustments to reconcile  net income to net cash provided by (used in) operating activities: |   |                        | ** **  |       |   |     |   |
| Depreciation                                                                                 |   | **186,819**                 | ** **  | 196,539    |   | 186,986  |   |
| Deferred income taxes and  investment tax credits - net                                      |   | **82,228**                  | ** **  | 104,103    |   | 43,834   |   |
| Cumulative effect of  changes in accounting principles, net of tax                           |   | **(30,938**                 | **)**       | —     |   | —   |   |
| Change in net position of  energy risk management activities                                 |   | **(20,593**                 | **)**       | (7,061     | )      | (67,979  | )      |
| Allowance for equity funds  used during construction                                         |   | **(2,749**                  | **)**       | (356       | )      | (2,672   | )      |
| Regulatory assets  deferrals                                                                 |   | **(21,175**                 | **)**       | (61,321    | )      | (116,365 | )      |
| Regulatory assets  amortization                                                              |   | **36,824**                  | ** **  | 44,339     |   | 56,703   |   |
| Accrued pension and other  postretirement benefit costs                                      |   | **18,109**                  | ** **  | 20,559     |   | (632     | )      |
| Deferred costs under gas  cost recovery mechanism                                            |   | **(19,335**                 | **)**       | (23,373    | )      | 53,374   |   |
| Changes in current assets  and current liabilities:                                          |   |                        | ** **  |       |   |     |   |
| Restricted deposits                                                                          |   | **2,934**                   | ** **  | 469        |   | (3,380   | )      |
| Accounts and notes  receivable                                                               |   | **23,453**                  | ** **  | 84,193     |   | 174,385  |   |
| Materials, supplies, and  fuel                                                               |   | **(2,029**                  | **)**       | 16,238     |   | (39,058  | )      |
| Prepayments                                                                                  |   | **(6,393**                  | **)**       | 1,750      |   | 19,192   |   |
| Accounts payable                                                                             |   | **9,608**                   | ** **  | (38,441    | )      | (183,982 | )      |
| Accrued taxes and interest                                                                   |   | **(14,283**                 | **)**       | 48,885     |   | (37,209  | )      |
| Other assets                                                                                 |   | **5,348**                   | ** **  | 5,020      |   | 8,516    |   |
| Other liabilities                                                                            |   | **(21,117**                 | **)**       | (2,210     | )      | (75,249  | )      |
|                                                                                         |   |                        | ** **  |       |   |     |   |
| **Net cash  provided by (used in) operating activities**                                     |   | **557,761**                 | ** **  | 653,029    |   | 343,118  |   |
|                                                                                         |   |                        | ** **  |       |   |     |   |
| **Financing  Activities**                                                                    |   |                        | ** **  |       |   |     |   |
| Change in short-term debt,  including net affiliate notes                                    |   | **104,114**                 | ** **  | (587,260   | )      | 305,155  |   |
| Issuance of long-term debt                                                                   |   | **256,198**                 | ** **  | 580,570    |   | —   |   |
| Redemption of long-term  debt                                                                |   | **(394,899**                | **)**       | (100,000   | )      | (1,200   | )      |
| Dividends on preferred  stock                                                                |   | **(846**                    | **)**       | (846       | )      | (845     | )      |
| Dividends on common stock                                                                    |   | **(227,863**                | **)**       | (185,909   | )      | (286,269 | )      |
|                                                                                         |   |                        | ** **  |       |   |     |   |
| **Net cash  provided by (used in) financing activities**                                     |   | **(263,296**                | **)**       | (293,445   | )      | 16,841   |   |
|                                                                                         |   |                        | ** **  |       |   |     |   |
| **Investing  Activities**                                                                    |   |                        | ** **  |       |   |     |   |
| Construction expenditures  (less allowance for equity funds used during construction)        |   | **(323,959**                | **)**       | (323,320   | )      | (371,885 | )      |
| Other investments                                                                            |   | **—**                  | ** **  | (2         | )      | 363      |   |
|                                                                                         |   |                        | ** **  |       |   |     |   |
| **Net cash  provided by (used in) investing activities**                                     |   | **(323,959**                | **)**       | (323,322   | )      | (371,522 | )      |
|                                                                                         |   |                        | ** **  |       |   |     |   |
| **Net  increase (decrease) in cash and cash equivalents**                                    |   | **(29,494**                 | **)**       | 36,262     |   | (11,563  | )      |
|                                                                                         |   |                        | ** **  |       |   |     |   |
| **Cash and  cash equivalents at beginning of period**                                        |   | **45,336**                  | ** **  | 9,074      |   | 20,637   |   |
|                                                                                         |   |                        | ** **  |       |   |     |   |
| **Cash and  cash equivalents at end of period**                                              |   | **$**                       | **15,842**  | ** ** | $      | 45,336   |   | $ | 9,074 |   |
|                                                                                         |   |                        | ** **  |       |   |     |   |
| **Supplemental  Disclosure of Cash Flow Information**                                        |   |                        | ** **  |       |   |     |   |
| Cash paid during the year  for:                                                              |   |                        | ** **  |       |   |     |   |
| Interest (net of amount  capitalized)                                                        |   | **$**                       | **103,339** | ** ** | $      | 86,895   |   | $ | 101,579 |   |
| Income taxes                                                                                 |   | **$**                       | **45,937**  | ** ** | $      | 28,687   |   | $ | 147,471 |   |

 

**Theaccompanying notes as they relate to The Cincinnati Gas & Electric Companyare an integral part of these consolidated financial statements.**

 

120

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**THECINCINNATI GAS & ELECTRIC COMPANYCONSOLIDATED STATEMENTS OF CAPITALIZATION**

 
|                                                                                                                 |   | **December 31**        |          |
|----------------------------------------------------------------------------------------------------------------------|--------|-----------------------------|---------------|
|                                                                                                                 |   | **2003**                    |          | **2002** |   |
|                                                                                                                 |   | **(dollars  in thousands)** |          |
|                                                                                                                 |   |                        | *** ***  |   | * * |
| **Long-term Debt**(excludes current portion)                                                                         |   |                        | ** **    |   |   |
| **CG&E**                                                                                                         |   |                        | ** **    |   |   |
| First  Mortgage Bonds:                                                                                               |   |                        | ** **    |   |   |
| 6.45% Series due  February 15, 2004                                                                             |   | **$**                       | **—**    | ** ** | $ | 110,000 |   |
| 7.20% Series due  October 1, 2023                                                                               |   | **—**                  | ** **    | 265,500 |   |
| 5.45% Series due  January 1, 2024 (Pollution Control)                                                           |   | **46,700**                  | ** **    | 46,700 |   |
| 5 1/2%  Series due January 1, 2024 (Pollution Control)                                                          |   | **48,000**                  | ** **    | 48,000 |   |
| **Total  First Mortgage Bonds**                                                                                      |   | **94,700**                  | ** **    | 470,200 |   |
|                                                                                                                 |   |                        | ** **    |   |   |
| 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**                 | ** **    | 150,000 |   |
| 8.28% Junior Subordinated  Debentures due June 30, 2025                                                         |   | **—**                  | ** **    | 100,000 |   |
| 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**                 | ** **    | — |   |
| 5 3/8% Debentures due June 15,  2033                                                                            |   | **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 1992A, 6.50%  Collateralized Pollution Control Revenue Refunding Bonds, due  November 15, 2002           |   | **12,721**                  | ** **    | 12,721 |   |
| **Total  Other Long-term Debt**                                                                                      |   | **1,346,721**               | ** **    | 1,046,721 |   |
|                                                                                                                 |   |                        | ** **    |   |   |
| Unamortized Premium and  Discount - Net                                                                              |   | **(37,299**                 | **)**         | (1,861 | ) |
| **Total  Long-term Debt**                                                                                            |   | **1,404,122**               | ** **    | 1,515,060 |   |
|                                                                                                                 |   |                        | ** **    |   |   |
| The Union Light, Heat and  Power Company                                                                             |   |                        | ** **    |   |   |
| 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 |   |
| **Total  Other Long-term Debt**                                                                                      |   | **55,000**                  | ** **    | 55,000 |   |
|                                                                                                                 |   |                        | ** **    |   |   |
| Unamortized Premium and  Discount - Net                                                                              |   | **(315**                    | **)**         | (347 | ) |
| **Total  Long-term Debt**                                                                                            |   | **54,685**                  | ** **    | 54,653 |   |
|                                                                                                                 |   |                        | ** **    |   |   |
| **Total  Consolidated Long-term Debt**                                                                               |   | **$**                       | **1,458,807** | ** ** | $ | 1,569,713 |   |

 

**Theaccompanying notes as they relate to The Cincinnati Gas & Electric Companyare an integral part of these consolidated financial statements.**

 

121

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|                                                                                                                                                               |   |                   |          |                                               |   |           |   |                      |   | **December 31**        |       |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------|---------------|----------------------------------------------------|--------|----------------|--------|---------------------------|--------|-----------------------------|------------|
|                                                                                                                                                               |   |                   |          |                                               |   |           |   |                      |   | **2003**                    |       | **2002** |   |
|                                                                                                                                                               |   |                   |          |                                               |   |           |   |                      |   | **(dollars  in thousands)** |       |
| **Cumulative Preferred Stock**                                                                                                                                     |   |                   |          |                                               |   |
| **Par/Stated  Value**                                                                                                                                              |   | **Authorized  Shares** |          | **Shares  Outstanding at  December 31, 2003** |   | **Series**     |   | **Mandatory  Redemption** |   |                        |       |   |   |
| $100                                                                                                                                                               |   | 6,000,000              |          | 204,849                                            |   | 4 %- 4 3⁄4% |   | No                        |   | **$**                       | **20,485** | ** ** | $ | 20,485 |   |
|                                                                                                                                                               |   |                   |          |                                               |   |
| **Common  Stock Equity**                                                                                                                                           |   |                   | ** **    |                                               |   |
| Common Stock - $8.50 par  value; authorized shares - 120,000,000; outstanding shares - 89,663,086 at  December 31, 2003, and December 31, 2002** ** |   | **$**                  | **762,136**   | ** **                                         | $      | 762,136        |   |
| Paid-in capital                                                                                                                                                    |   | **586,528**            | ** **    | 586,292                                            |   |
| Retained earnings                                                                                                                                                  |   | **589,993**            | ** **    | 487,652                                            |   |
| Accumulated other  comprehensive income (loss)                                                                                                                     |   | **(32,464**            | **)**         | (25,746                                            | )      |
| **Total  Common Stock Equity**                                                                                                                                     |   | **1,906,193**          | ** **    | 1,810,334                                          |   |
|                                                                                                                                                               |   |                   | ** **    |                                               |   |
| **Total  Consolidated Capitalization**                                                                                                                             |   | **$**                  | **3,385,485** | ** **                                         | $      | 3,400,532      |   |
|                                                                                                                                                                    |        |                        |               |                                                    |        |                |        |                           |        |                             |            |  |  |  |  |  |  |  |

 

**Theaccompanying notes as they relate to The Cincinnati Gas & Electric Companyare an integral part of these consolidated financial statements.**

 

122

----

 

**PSIENERGY, INC.**

**ANDSUBSIDIARY COMPANY**

 

123

----

 

**PSI ENERGY, INC.**

**CONSOLIDATEDSTATEMENTS OF INCOME**

 
|                                                                                 |   | **2003**                    |          | **2002**   |     | **2001**  |     |
|--------------------------------------------------------------------------------------|--------|-----------------------------|---------------|------------|----------|-----------|----------|
|                                                                                 |   | **(dollars  in thousands)** |          |
|                                                                                 |   |                        | * *      |       | * * |      | * * |
| **Operating  Revenues** (Note  1(q)(*i*))                                            |   |                        |          |       |     |      |     |
| Electric                                                                             |   | **$**                       | **1,603,019** | ** ** | $        | 1,610,578 |     | $ | 1,573,691 |   |
|                                                                                 |   |                        | ** **    |       |     |      |     |
| **Operating Expenses**                                                               |   |                        | ** **    |       |     |      |     |
| Fuel and purchased and exchanged power (Note 1(q)(*i*))                              |   | **608,234**                 | ** **    | 527,360    |     | 631,161   |     |
| Operation and maintenance                                                            |   | **452,673**                 | ** **    | 488,903    |     | 413,275   |     |
| Depreciation                                                                         |   | **184,164**                 | ** **    | 156,102    |     | 149,467   |     |
| Taxes other than income taxes                                                        |   | **46,200**                  | ** **    | 56,695     |     | 49,955    |     |
| **Total Operating Expenses**                                                         |   | **1,291,271**               | ** **    | 1,229,060  |     | 1,243,858 |     |
|                                                                                 |   |                        | ** **    |       |     |      |     |
| **Operating Income**                                                                 |   | **311,748**                 | ** **    | 381,518    |     | 329,833   |     |
|                                                                                 |   |                        | ** **    |       |     |      |     |
| **Miscellaneous Income - Net**                                                       |   | **6,288**                   | ** **    | 20,582     |     | 19,541    |     |
| **Interest Expense**                                                                 |   | **83,594**                  | ** **    | 73,142     |     | 80,955    |     |
|                                                                                 |   |                        | ** **    |       |     |      |     |
| **Income Before Taxes**                                                              |   | **234,442**                 | ** **    | 328,958    |     | 268,419   |     |
|                                                                                 |   |                        | ** **    |       |     |      |     |
| **Income  Taxes**(Note 10)                                                           |   | **100,567**                 | ** **    | 114,709    |     | 106,086   |     |
|                                                                                 |   |                        | ** **    |       |     |      |     |
| **Income Before Cumulative Effect of a Change in  Accounting Principle**             |   | **133,875**                 | ** **    | 214,249    |     | 162,333   |     |
|                                                                                 |   |                        | ** **    |       |     |      |     |
| Cumulative effect of a change in accounting principle, net of tax  (Note 1(q)*(vi)*) |   | **(494**                    | **)**         | —     |     | —    |     |
|                                                                                 |   |                        | ** **    |       |     |      |     |
| **Net Income**                                                                       |   | **$**                       | **133,381**   | ** ** | $        | 214,249   |     | $ | 162,333 |   |
|                                                                                 |   |                        | ** **    |       |     |      |     |
| **Preferred Dividend Requirement**                                                   |   | **2,587**                   | ** **    | 2,587      |     | 2,587     |     |
|                                                                                 |   |                        | ** **    |       |     |      |     |
| **Net Income Applicable to Common Stock**                                            |   | **$**                       | **130,794**   | ** ** | $        | 211,662   |     | $ | 159,746 |   |

 

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

 

124

----

 

**psi energy, inc.**

**consolidated balance sheets**

 

**ASSETS**

 
|                                                                                                                                              |   | **December  31**            |          |
|---------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------|---------------|
|                                                                                                                                              |   | **2003**                    |          | **2002** |   |
|                                                                                                                                              |   | **(dollars  in thousands)** |          |
| **Current  Assets**                                                                                                                               |   |                        |          |   |   |
| Cash and cash equivalents                                                                                                                         |   | **$**                       | **6,565**     |   | $ | 2,007 |   |
| Restricted deposits (Note 6)                                                                                                                      |   | **92,675**                  |          | 20 |   |
| Notes receivable from affiliated companies (Note 5)                                                                                               |   | **65,715**                  |          | 53,755 |   |
| Accounts receivable less accumulated provision for doubtful accounts  of $1,110 at December 31, 2003, and $5,656 at December 31, 2002 (Note 3(c)) |   | **37,194**                  |          | 84,819 |   |
| Accounts receivable from affiliated companies                                                                                                     |   | **459**                     |          | 437 |   |
| Materials, supplies, and fuel                                                                                                                     |   | **125,463**                 |          | 137,292 |   |
| Energy risk management current assets (Note 1(k)(*i*))                                                                                            |   | **7,959**                   |          | 8,701 |   |
| Prepayments and other                                                                                                                             |   | **29,232**                  |          | 44,725 |   |
| **Total Current Assets**                                                                                                                          |   | **365,262**                 |          | 331,756 |   |
|                                                                                                                                              |   |                        |          |   |   |
| **Property, Plant, and Equipment - at Cost**                                                                                                      |   |                        |          |   |   |
| Utility plant in service                                                                                                                          |   | **6,183,475**               |          | 5,321,066 |   |
| Construction work in progress                                                                                                                     |   | **203,512**                 |          | 385,051 |   |
| **Total Utility Plant**                                                                                                                           |   | **6,386,987**               |          | 5,706,117 |   |
| Accumulated depreciation                                                                                                                          |   | **2,133,235**               |          | 2,018,847 |   |
| **Net Property, Plant, and Equipment**(Note 19)                                                                                                   |   | **4,253,752**               |          | 3,687,270 |   |
|                                                                                                                                              |   |                        |          |   |   |
| **Other Assets**                                                                                                                                  |   |                        |          |   |   |
| Regulatory assets (Note 1(c))                                                                                                                     |   | **417,387**                 |          | 417,920 |   |
| Energy risk management non-current assets (Note 1(k)(*i*))                                                                                        |   | **7,061**                   |          | 16,590 |   |
| Other investments                                                                                                                                 |   | **66,803**                  |          | 54,683 |   |
| Other                                                                                                                                             |   | **29,372**                  |          | 30,697 |   |
| **Total Other Assets**                                                                                                                            |   | **520,623**                 |          | 519,890 |   |
|                                                                                                                                              |   |                        |          |   |   |
| **Total Assets**                                                                                                                                  |   | **$**                       | **5,139,637** |   | $ | 4,538,916 |   |

 

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

 

125

----

 

**psi energy, inc.**

**consolidated balancesheets**

 

**LIABILITIES AND SHAREHOLDER’S EQUITY**

 
|                                                                                                                                                               |   | **December  31**            |          |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------|---------------|
|                                                                                                                                                               |   | **2003**                    |          | **2002** |   |
|                                                                                                                                                               |   | **(dollars  in thousands)** |          |
| **Current  Liabilities**                                                                                                                                           |   |                        |          |   |   |
| Accounts payable                                                                                                                                                   |   | **$**                       | **58,286**    | ** ** | $ | 113,563 |   |
| Accounts payable to affiliated companies                                                                                                                           |   | **69,746**                  | ** **    | 107,364 |   |
| Accrued taxes                                                                                                                                                      |   | **69,419**                  | ** **    | 105,960 |   |
| Accrued interest                                                                                                                                                   |   | **26,615**                  | ** **    | 23,078 |   |
| Notes payable and other short-term obligations (Note 6)                                                                                                            |   | **80,500**                  | ** **    | 35,000 |   |
| Notes payable to affiliated companies (Note 6)                                                                                                                     |   | **188,446**                 | ** **    | 138,055 |   |
| Long-term debt due within one year                                                                                                                                 |   | **—**                  | ** **    | 56,000 |   |
| Energy risk management current liabilities (Note 1(k)(*i*))                                                                                                        |   | **14,744**                  | ** **    | 8,000 |   |
| Other                                                                                                                                                              |   | **25,636**                  | ** **    | 22,335 |   |
| **Total Current Liabilities**                                                                                                                                      |   | **533,392**                 | ** **    | 609,355 |   |
|                                                                                                                                                               |   |                        | ** **    |   |   |
| **Non-Current Liabilities**                                                                                                                                        |   |                        | ** **    |   |   |
| Long-term debt (Note 4)                                                                                                                                            |   | **1,720,476**               | ** **    | 1,315,984 |   |
| Deferred income taxes (Note 10)                                                                                                                                    |   | **573,946**                 | ** **    | 538,745 |   |
| Unamortized investment tax credits                                                                                                                                 |   | **29,698**                  | ** **    | 32,897 |   |
| Accrued pension and other postretirement benefit costs (Note 9)                                                                                                    |   | **193,336**                 | ** **    | 184,299 |   |
| Accrued cost of removal (Note 1(c))                                                                                                                                |   | **335,520**                 |          | 315,960 |   |
| Energy risk management non-current liabilities (Note 1(k)(*i*))                                                                                                    |   | **2,796**                   | ** **    | 17,157 |   |
| Other                                                                                                                                                              |   | **74,958**                  | ** **    | 80,879 |   |
| **Total Non-Current Liabilities**                                                                                                                                  |   | **2,930,730**               | ** **    | 2,485,921 |   |
|                                                                                                                                                               |   |                        | ** **    |   |   |
| **Commitments and Contingencies** (Note 11)                                                                                                                        |   |                        | ** **    |   |   |
|                                                                                                                                                               |   |                        | ** **    |   |   |
| **Total Liabilities**                                                                                                                                              |   | **3,464,122**               | ** **    | 3,095,276 |   |
|                                                                                                                                                               |   |                        | ** **    |   |   |
| **Cumulative Preferred Stock**                                                                                                                                     |   |                        | ** **    |   |   |
| Not subject to mandatory redemption                                                                                                                                |   | **42,333**                  | ** **    | 42,343 |   |
|                                                                                                                                                               |   |                        | ** **    |   |   |
| **Common Stock Equity** (Note 2)                                                                                                                                   |   |                        | ** **    |   |   |
| Common Stock - without par value; $0.01 stated value; authorized  shares - 60,000,000; outstanding shares - 53,913,701 at December 31, 2003 and  December 31, 2002 |   | **539**                     | ** **    | 539 |   |
| Paid-in capital                                                                                                                                                    |   | **627,274**                 | ** **    | 426,931 |   |
| Retained earnings                                                                                                                                                  |   | **1,018,790**               | ** **    | 981,946 |   |
| Accumulated other comprehensive income (loss) (Note 18)                                                                                                            |   | **(13,421**                 | **)**         | (8,119 | ) |
| **Total Common Stock Equity**                                                                                                                                      |   | **1,633,182**               | ** **    | 1,401,297 |   |
|                                                                                                                                                               |   |                        | ** **    |   |   |
| **Total Liabilities and Shareholder’s Equity**                                                                                                                |   | **$**                       | **5,139,637** | ** ** | $ | 4,538,916 |   |

 

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

 

126

----

 

**psi energy, inc.**

**consolidated statements of changes in common stockequity**

 
|                                                                           |   | **Common  Stock**           |       | **Paid-in  Capital** |       | **Retained  Earnings** |       | **Accumulated  Other  Comprehensive  Income (Loss)** |          | **Total  Common  Stock  Equity** |       |
|--------------------------------------------------------------------------------|--------|-----------------------------|------------|----------------------|------------|------------------------|------------|------------------------------------------------------|---------------|----------------------------------|------------|
|                                                                           |   | **(dollars  in thousands)** |       |
|                                                                           |   |                        | * *   |                 | * *   |                   | * *   |                                                 | * *      |                             | * *   |
| **2001**                                                                       |   |                        |       |                 |       |                   |       |                                                 |          |                             |       |
| Beginning balance                                                              |   | $                           | 539        |                 | $          | 413,523                |       | $                                                    | 720,153       |                             | $          | (520 | ) | $ | 1,133,695 |   |
|                                                                           |   |                        |       |                 |       |                   |       |                                                 |          |                             |       |
| Comprehensive income:                                                          |   |                        |       |                 |       |                   |       |                                                 |          |                             |       |
| Net income                                                                     |   |                        |       |                 |       | 162,333                |       |                                                 |          | 162,333                          |       |
| Other comprehensive income (loss), net of tax effect of $538 (Note  18)        |   |                        |       |                 |       |                   |       |                                                 |          |                             |       |
| Minimum pension liability adjustment                                           |   |                        |       |                 |       |                   |       | (49                                                  | )             | (49                              | )          |
| Unrealized gain (loss) on investment trusts                                    |   |                        |       |                 |       |                   |       | (1,026                                               | )             | (1,026                           | )          |
| Total comprehensive income                                                     |   |                        |       |                 |       |                   |       |                                                 |          | 161,258                          |       |
|                                                                           |   |                        |       |                 |       |                   |       |                                                 |          |                             |       |
| Dividends on preferred stock                                                   |   |                        |       |                 |       | (2,587                 | )          |                                                 |          | (2,587                           | )          |
| Contribution from parent company for reallocation of taxes                     |   |                        |       | 2,894                |       |                   |       |                                                 |          | 2,894                            |       |
| Other                                                                          |   |                        |       | (3                   | )          | 230                    |       |                                                 |          | 227                              |       |
| Ending balance                                                                 |   | $                           | 539        |                 | $          | 416,414                |       | $                                                    | 880,129       |                             | $          | (1,595 | ) | $ | 1,295,487 |   |
|                                                                           |   |                        |       |                 |       |                   |       |                                                 |          |                             |       |
| **2002**                                                                       |   |                        |       |                 |       |                   |       |                                                 |          |                             |       |
| Comprehensive income:                                                          |   |                        |       |                 |       |                   |       |                                                 |          |                             |       |
| Net income                                                                     |   |                        |       |                 |       | 214,249                |       |                                                 |          | 214,249                          |       |
| Other comprehensive income (loss), net of tax effect of $4,189 (Note  18)      |   |                        |       |                 |       |                   |       |                                                 |          |                             |       |
| Minimum pension liability adjustment                                           |   |                        |       |                 |       |                   |       | (2,138                                               | )             | (2,138                           | )          |
| Unrealized gain (loss) on investment trusts                                    |   |                        |       |                 |       |                   |       | (4,386                                               | )             | (4,386                           | )          |
| Total comprehensive income                                                     |   |                        |       |                 |       |                   |       |                                                 |          | 207,725                          |       |
|                                                                           |   |                        |       |                 |       |                   |       |                                                 |          |                             |       |
| Dividends on preferred stock                                                   |   |                        |       |                 |       | (2,587                 | )          |                                                 |          | (2,587                           | )          |
| Dividends on common stock                                                      |   |                        |       |                 |       | (111,842               | )          |                                                 |          | (111,842                         | )          |
| Contribution from parent company for reallocation of taxes                     |   |                        |       | 10,519               |       |                   |       |                                                 |          | 10,519                           |       |
| Other                                                                          |   |                        |       | (2                   | )          | 1,997                  |       |                                                 |          | 1,995                            |       |
| Ending balance                                                                 |   | $                           | 539        |                 | $          | 426,931                |       | $                                                    | 981,946       |                             | $          | (8,119 | ) | $ | 1,401,297 |   |
|                                                                           |   |                        |       |                 |       |                   |       |                                                 |          |                             |       |
| **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 (loss) 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** | ** ** |

 

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

 

127

----

 

**PSI ENERGY, INC.**

**CONSOLIDATED STATEMENTS OF CASHFLOWS**

 
|                                                                                         |   | **2003**                    |        | **2002**   |     | **2001** |     |
|----------------------------------------------------------------------------------------------|--------|-----------------------------|-------------|------------|----------|----------|----------|
|                                                                                         |   | **(dollars  in thousands)** |        |
|                                                                                         |   |                        | * *    |       | * * |     | * * |
| **Operating  Activities**                                                                    |   |                        |        |       |     |     |     |
| Net income                                                                                   |   | **$**                       | **133,381** |       | $        | 214,249  |     | $ | 162,333 |   |
| Adjustments to reconcile net income to net cash provided by (used in)  operating activities: |   |                        |        |       |     |     |     |
| Depreciation                                                                                 |   | **184,164**                 | ** **  | 156,102    |     | 149,467  |     |
| Cumulative effect of a change in accounting principle, net of tax                            |   | **494**                     | ** **  | —     |     | —   |     |
| Deferred income taxes and investment tax credits - net                                       |   | **38,424**                  | ** **  | 33,908     |     | 41,543   |     |
| Change in net position of energy risk management activities                                  |   | **(1,133**                  | **)**       | 9,544      |     | (33,158  | )        |
| Allowance for equity funds used during construction                                          |   | **(4,783**                  | **)**       | (12,505    | )        | (5,956   | )        |
| Regulatory assets deferrals                                                                  |   | **(62,053**                 | **)**       | (49,546    | )        | (24,959  | )        |
| Regulatory assets amortization                                                               |   | **53,652**                  | ** **  | 72,173     |     | 62,641   |     |
| Accrued pension and other postretirement benefit costs                                       |   | **9,037**                   | ** **  | 24,130     |     | 10,597   |     |
| Cost of removal                                                                              |   | **(16,598**                 | **)**       | —     |     | —   |     |
| Changes in current assets and current liabilities:                                           |   |                        | ** **  |       |     |     |     |
| Restricted deposits                                                                          |   | **(12,316**                 | **)**       | 499        |     | (178     | )        |
| Accounts and notes receivable                                                                |   | **35,643**                  | ** **  | 233,040    |     | 119,311  |     |
| Materials, supplies, and fuel                                                                |   | **11,829**                  | ** **  | (49,631    | )        | (33,823  | )        |
| Prepayments                                                                                  |   | **686**                     | ** **  | (2,908     | )        | (120     | )        |
| Accounts payable                                                                             |   | **(104,515**                | **)**       | (119,032   | )        | (84,577  | )        |
| Accrued taxes and interest                                                                   |   | **(33,004**                 | **)**       | 2,961      |     | 21,374   |     |
| Other assets                                                                                 |   | **22,096**                  | ** **  | (22,161    | )        | 17,074   |     |
| Other liabilities                                                                            |   | **(8,269**                  | **)**       | 8,224      |     | 342      |     |
|                                                                                         |   |                        | ** **  |       |     |     |     |
| **Net cash provided by (used in) operating activities**                                      |   | **246,735**                 | ** **  | 499,047    |     | 401,911  |     |
|                                                                                         |   |                        | ** **  |       |     |     |     |
| **Financing Activities**                                                                     |   |                        | ** **  |       |     |     |     |
| Change in short-term debt, including net affiliate notes                                     |   | **95,891**                  | ** **  | 46,993     |     | (195,912 | )        |
| Issuance of long-term debt                                                                   |   | **431,968**                 | ** **  | 47,600     |     | 322,471  |     |
| Redemption of long-term debt                                                                 |   | **(460,903**                | **)**       | (23,979    | )        | (89,248  | )        |
| Contribution from parent                                                                     |   | **200,000**                 | ** **  | —     |     | —   |     |
| Funds on deposit from issuance of debt securities                                            |   | **(80,339**                 | **)**       | —     |     | —   |     |
| Retirement of preferred stock                                                                |   | **(10**                     | **)**       | (2         | )        | (1       | )        |
| Dividends on preferred stock                                                                 |   | **(2,587**                  | **)**       | (2,587     | )        | (2,587   | )        |
| Dividends on common stock                                                                    |   | **(93,950**                 | **)**       | (111,842   | )        | —   |     |
|                                                                                         |   |                        | ** **  |       |     |     |     |
| **Net cash provided by (used in) financing activities**                                      |   | **90,070**                  | ** **  | (43,817    | )        | 34,723   |     |
|                                                                                         |   |                        | ** **  |       |     |     |     |
| **Investing Activities**                                                                     |   |                        | ** **  |       |     |     |     |
| Construction expenditures (less allowance for equity funds used  during construction)        |   | **(330,362**                | **)**       | (451,326   | )        | (427,787 | )        |
| Other investments                                                                            |   | **(1,885**                  | **)**       | (3,484     | )        | (8,571   | )        |
|                                                                                         |   |                        | ** **  |       |     |     |     |
| **Net cash provided by (used in) investing activities**                                      |   | **(332,247**                | **)**       | (454,810   | )        | (436,358 | )        |
|                                                                                         |   |                        | ** **  |       |     |     |     |
| **Net increase (decrease) in cash and cash equivalents**                                     |   | **4,558**                   | ** **  | 420        |     | 276      |     |
|                                                                                         |   |                        | ** **  |       |     |     |     |
| **Cash and cash equivalents at beginning of period**                                         |   | **2,007**                   | ** **  | 1,587      |     | 1,311    |     |
|                                                                                         |   |                        | ** **  |       |     |     |     |
| **Cash and cash equivalents at end of period**                                               |   | **$**                       | **6,565**   | ** ** | $        | 2,007    |     | $ | 1,587 |   |
|                                                                                         |   |                        | ** **  |       |     |     |     |
| **Supplemental Disclosure of Cash Flow Information**                                         |   |                        | ** **  |       |     |     |     |
| Cash paid during the year for:                                                               |   |                        | ** **  |       |     |     |     |
| Interest (net of amount capitalized)                                                         |   | **$**                       | **95,733**  | ** ** | $        | 89,865   |     | $ | 97,917 |   |
| Income taxes                                                                                 |   | **$**                       | **65,564**  | ** ** | $        | 27,401   |     | $ | 41,419 |   |
|                                                                                         |   |                        | ** **  |       |     |     |     |
| Non-cash financing and investing activities:                                                 |   |                        | ** **  |       |     |     |     |
| Issuance of promissory notes to affiliated company for acquisition of  assets                |   | **$**                       | **375,969** | ** ** | $        | —   |     | $ | — |   |

 

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

 

128

----

 

**psi energy, inc.**

**consolidated statements of capitalization**

 
|                                                                                                                                                                                                                                                           |   | **December  31**            |          |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------|---------------|
|                                                                                                                                                                                                                                                           |   | **2003**                    |          | **2002** |   |
|                                                                                                                                                                                                                                                           |   | **(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, 2003;  8.37 % to 8.81 % as of December 31, 2002.  Due November 8, 2006 to June 1, 2022                                                                                                                       |   | **7,500**                   | ** **    | 34,300 |   |
| 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, 2003.  7.623% weighted average  interest rate as of December 31, 2002.   10.1 and 13.9 year weighted average remaining life at December 31,  2003 and 2002, respectively) |   |                        | ** **    |   |   |
| **Total Secured Medium-term Notes**                                                                                                                                                                                                                            |   | **77,500**                  | ** **    | 104,300 |   |
|                                                                                                                                                                                                                                                           |   |                        | ** **    |   |   |
| 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**                  | ** **    | 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                                                                                                                                                                                       |   | **80,988**                  | ** **    | 82,025 |   |
| 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**                 | ** **    | — |   |
| 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**                  | ** **    | — |   |
| **Total Other Long-term Debt**                                                                                                                                                                                                                                 |   | **1,032,663**               | ** **    | 598,700 |   |
|                                                                                                                                                                                                                                                           |   |                        | ** **    |   |   |
| Unamortized Premium and Discount - Net                                                                                                                                                                                                                         |   | **(10,407**                 | **)**         | (7,736 | ) |
| **Total Long-term Debt**                                                                                                                                                                                                                                       |   | **1,720,476**               | ** **    | 1,315,984 |   |
|                                                                                                                                                                                                                                                           |   |                        | ** **    |   |   |
| **Cumulative  Preferred Stock**                                                                                                                                                                                                                                |   |                        |          |   |   |   |   |   |   |   | ** ** |   |   |
| **Par/Stated  Value**                                                                                                                                                                                                                                          |   | **Authorized  Shares**      | ** **    | **Shares  Outstanding at  December 31,  2003** | ** ** | **Series** | ** ** | **Mandatory  Redemption** | ** ** |   | ** ** |   | ** ** |
| $                                                                                                                                                                                                                                                              | 100    |                        | 5,000,000     |   | 347,445 |   | 3 1/2% - 6 7/8% |   | No |   | **$** | **34,744** | ** ** | $ | 34,754 |   |
| $                                                                                                                                                                                                                                                              | 25     |                        | 5,000,000     |   | 303,544 |   | 4.16% - 4.32% |   | No |   | **7,589** | ** ** | 7,589 |   |
| **Total Preferred Stock**                                                                                                                                                                                                                                      |   |                        |          |   |   |   |   | **42,333** | ** ** | 42,343 |   |
|                                                                                                                                                                                                                                                           |   |                        |          |   |   |   |   |   |   |   | ** ** |   |   |
| **Common Stock Equity**                                                                                                                                                                                                                                        |   |                        |          |   |   |   |   |   |   |   | ** ** |   |   |
| Common Stock - without par value; $0.01 stated value; authorized  shares - 60,000,000; outstanding shares - 53,913,701 at December 31, 2003,  and December 31, 2002                                                                                            |   |                        |          |   |   | **$** | **539** | ** ** | $ | 539 |   |
| Paid-in capital                                                                                                                                                                                                                                                |   |                        |          |   |   | **627,274** | ** ** | 426,931 |   |
| Retained earnings                                                                                                                                                                                                                                              |   |                        |          |   |   | **1,018,790** | ** ** | 981,946 |   |
| Accumulated other comprehensive income (loss)                                                                                                                                                                                                                  |   |                        |          |   |   | **(13,421** | **)** | (8,119 | ) |
| **Total Common Stock Equity**                                                                                                                                                                                                                                  |   | **1,633,182**               | ** **    | 1,401,297 |   |
|                                                                                                                                                                                                                                                           |   |                        |          |   |   |   | ** ** |   |   |
| **Total Consolidated Capitalization**                                                                                                                                                                                                                          |   | **$**                       | **3,395,991** | ** ** | $ | 2,759,624 |   |
|                                                                                                                                                                                                                                                                |        |                             |               |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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

 

129

----

 

**the union light,heatand power company**

 

130

----

 

**the union light,heat and power company**

**statements of income**

 
|                                                                   |   | **2003**                    |        | **2002** |     | **2001** |     |
|------------------------------------------------------------------------|--------|-----------------------------|-------------|----------|----------|----------|----------|
|                                                                   |   | **(dollars  in thousands)** |        |
|                                                                   |   |                        | * *    |     | * * |     | * * |
| **Operating  Revenues**                                                |   |                        |        |     |     |     |     |
| Electric                                                               |   | **$**                       | **222,081** |     | $        | 226,856  |     | $ | 230,960 |   |
| Gas                                                                    |   | **110,072**                 |        | 81,706   |     | 109,333  |     |
| **Total Operating Revenues**                                           |   | **332,153**                 |        | 308,562  |     | 340,293  |     |
|                                                                   |   |                        |        |     |     |     |     |
| **Operating Expenses**                                                 |   |                        |        |     |     |     |     |
| Electricity purchased from parent company for resale (Note 1(s)(*ii*)) |   | **154,572**                 |        | 159,734  |     | 151,562  |     |
| Gas purchased                                                          |   | **69,774**                  |        | 46,886   |     | 72,593   |     |
| Operation and maintenance                                              |   | **53,704**                  |        | 50,223   |     | 39,501   |     |
| Depreciation                                                           |   | **18,315**                  |        | 17,350   |     | 17,039   |     |
| Taxes other than income taxes                                          |   | **4,412**                   |        | 4,598    |     | 3,901    |     |
| **Total Operating Expenses**                                           |   | **300,777**                 |        | 278,791  |     | 284,596  |     |
|                                                                   |   |                        |        |     |     |     |     |
| **Operating Income**                                                   |   | **31,376**                  |        | 29,771   |     | 55,697   |     |
|                                                                   |   |                        |        |     |     |     |     |
| **Miscellaneous Income - Net**                                         |   | **3,561**                   |        | 666      |     | 239      |     |
| **Interest Expense**                                                   |   | **6,127**                   |        | 5,938    |     | 6,313    |     |
|                                                                   |   |                        |        |     |     |     |     |
| **Income Before Taxes**                                                |   | **28,810**                  |        | 24,499   |     | 49,623   |     |
|                                                                   |   |                        |        |     |     |     |     |
| **Income Taxes** (Note 10)                                             |   | **9,781**                   |        | 12,349   |     | 13,699   |     |
|                                                                   |   |                        |        |     |     |     |     |
| **Net Income**                                                         |   | **$**                       | **19,029**  |     | $        | 12,150   |     | $ | 35,924 |   |

 

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

 

131

----

 

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

 

**ASSETS**

 
|                                                                                                                                         |   | **December  31**            |        |
|----------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------|-------------|
|                                                                                                                                         |   | **2003**                    |        | **2002** |   |
|                                                                                                                                         |   | **(dollars  in thousands)** |        |
| **Current  Assets**                                                                                                                          |   |                        |        |   |   |
| Cash and cash equivalents                                                                                                                    |   | **$**                       | **1,899**   |   | $ | 3,926 |   |
| Notes receivable from affiliated companies                                                                                                   |   | **17,906**                  |        | 13,337 |   |
| Accounts receivable less accumulated provision for doubtful accounts  of $192 at December 31, 2003, and $84 at December 31, 2002 (Note 3(c)) |   | **2,458**                   |        | 703 |   |
| Accounts receivable from affiliated companies                                                                                                |   | **4,407**                   |        | 1,671 |   |
| Materials, supplies, and fuel                                                                                                                |   | **7,936**                   |        | 8,182 |   |
| Prepayments and other                                                                                                                        |   | **279**                     |        | 316 |   |
| **Total Current Assets**                                                                                                                     |   | **34,885**                  |        | 28,135 |   |
|                                                                                                                                         |   |                        |        |   |   |
| **Property, Plant, and Equipment - at Cost**                                                                                                 |   |                        |        |   |   |
| Utility plant in service                                                                                                                     |   |                        |        |   |   |
| Electric                                                                                                                                     |   | **273,895**                 |        | 258,094 |   |
| Gas                                                                                                                                          |   | **239,670**                 |        | 215,505 |   |
| Common                                                                                                                                       |   | **53,297**                  |        | 50,271 |   |
| **Total Utility Plant In Service**                                                                                                           |   | **566,862**                 |        | 523,870 |   |
| Construction work in progress                                                                                                                |   | **6,165**                   |        | 14,745 |   |
| **Total Utility Plant**                                                                                                                      |   | **573,027**                 |        | 538,615 |   |
| Accumulated depreciation                                                                                                                     |   | **176,368**                 |        | 165,685 |   |
| **Net Property, Plant, and Equipment**(Note 19)                                                                                              |   | **396,659**                 |        | 372,930 |   |
|                                                                                                                                         |   |                        |        |   |   |
| **Other Assets**                                                                                                                             |   |                        |        |   |   |
| Regulatory assets (Note 1(c))                                                                                                                |   | **13,224**                  |        | 5,134 |   |
| Other                                                                                                                                        |   | **3,903**                   |        | 1,238 |   |
| **Total Other Assets**                                                                                                                       |   | **17,127**                  |        | 6,372 |   |
|                                                                                                                                         |   |                        |        |   |   |
| **Total Assets**                                                                                                                             |   | **$**                       | **448,671** |   | $ | 407,437 |   |

 

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

 

132

----

 

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

 

**LIABILITIES AND SHAREHOLDER’S EQUITY**

 
|                                                                                                                                     |   | **December  31**            |        |
|------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------|-------------|
|                                                                                                                                     |   | **2003**                    |        | **2002** |   |
|                                                                                                                                     |   | **(dollars  in thousands)** |        |
| **Current  Liabilities**                                                                                                                 |   |                        |        |   |   |
| Accounts payable                                                                                                                         |   | **$**                       | **13,431**  | ** ** | $ | 8,816 |   |
| Accounts payable to affiliated companies                                                                                                 |   | **21,131**                  | ** **  | 22,297 |   |
| Accrued taxes                                                                                                                            |   | **298**                     | ** **  | 1,487 |   |
| Accrued interest                                                                                                                         |   | **1,230**                   | ** **  | 1,226 |   |
| Long-term debt due within one year                                                                                                       |   | **—**                  | ** **  | 20,000 |   |
| Notes payable to affiliated companies (Note 6)                                                                                           |   | **45,233**                  | ** **  | 14,076 |   |
| Other                                                                                                                                    |   | **6,815**                   | ** **  | 6,368 |   |
| **Total Current Liabilities**                                                                                                            |   | **88,138**                  | ** **  | 74,270 |   |
|                                                                                                                                     |   |                        | ** **  |   |   |
| **Non-Current Liabilities**                                                                                                              |   |                        | ** **  |   |   |
| Long-term debt (Note 4)                                                                                                                  |   | **54,685**                  | ** **  | 54,653 |   |
| Deferred income taxes (Note 10)                                                                                                          |   | **55,488**                  | ** **  | 43,360 |   |
| Unamortized investment tax credits                                                                                                       |   | **2,879**                   | ** **  | 3,143 |   |
| Accrued pension and other postretirement benefit costs (Note 9)                                                                          |   | **16,953**                  | ** **  | 15,620 |   |
| Accrued cost of removal (Note 1(c))                                                                                                      |   | **27,443**                  |        | 25,210 |   |
| Other                                                                                                                                    |   | **13,729**                  | ** **  | 14,017 |   |
| **Total Non-Current Liabilities**                                                                                                        |   | **171,177**                 | ** **  | 156,003 |   |
|                                                                                                                                     |   |                        | ** **  |   |   |
| **Commitments and Contingencies** (Note 11)                                                                                              |   |                        | ** **  |   |   |
|                                                                                                                                     |   |                        | ** **  |   |   |
| **Total Liabilities**                                                                                                                    |   | **259,315**                 | ** **  | 230,273 |   |
|                                                                                                                                     |   |                        | ** **  |   |   |
| **Common Stock Equity** (Note 2)                                                                                                         |   |                        | ** **  |   |   |
| Common Stock - $15.00 par value; authorized shares - 1,000,000;  outstanding shares - 585,333 at December 31, 2003 and December 31, 2002 |   | **8,780**                   | ** **  | 8,780 |   |
| Paid-in capital                                                                                                                          |   | **23,541**                  | ** **  | 23,644 |   |
| Retained earnings                                                                                                                        |   | **157,524**                 | ** **  | 144,800 |   |
| Accumulated other comprehensive income (loss)                                                                                            |   | **(489**                    | **)**       | (60 | ) |
| **Total Common Stock Equity**                                                                                                            |   | **189,356**                 | ** **  | 177,164 |   |
|                                                                                                                                     |   |                        | ** **  |   |   |
| **Total Liabilities and Shareholder’s Equity**                                                                                      |   | **$**                       | **448,671** | ** ** | $ | 407,437 |   |

 

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

 

133

----

 

**THEUNION LIGHT, HEAT AND POWER COMPANY**

**STATEMENTSOF CHANGES IN COMMON STOCK EQUITY**

 
|                                                              |   | **Common  Stock**           |       | **Paid-in  Capital** |       | **Retained  Earnings** |       | **Accumulated  Other  Comprehensive  Income (Loss)** |        | **Total  Common  Stock  Equity** |       |
|-------------------------------------------------------------------|--------|-----------------------------|------------|----------------------|------------|------------------------|------------|------------------------------------------------------|-------------|----------------------------------|------------|
|                                                              |   | **(dollars  in thousands)** |       |
|                                                              |   |                        | * *   |                 | * *   |                   | * *   |                                                 | * *    |                             | * *   |
| **2001**                                                          |   |                        |       |                 |       |                   |       |                                                 |        |                             |       |
| Beginning balance                                                 |   | $                           | 8,780      |                 | $          | 20,305                 |       | $                                                    | 118,103     |                             | $          | — |   | $ | 147,188 |   |
|                                                              |   |                        | ** ** |                 | ** ** |                   | ** ** |                                                 | ** **  |                             | ** ** |
| **Comprehensive income:**                                         |   |                        | ** ** |                 | ** ** |                   | ** ** |                                                 | ** **  |                             | ** ** |
| Net income                                                        |   |                        |       |                 |       | 35,924                 |       |                                                 |        | 35,924                           |       |
| Other comprehensive income (loss), net of tax effect of $5        |   |                        |       |                 |       |                   |       |                                                 |        |                             |       |
| Minimum pension liability adjustment                              |   |                        |       |                 |       |                   |       | (8                                                   | )           | (8                               | )          |
| Total comprehensive income (loss)                                 |   |                        |       |                 |       |                   |       |                                                 |        | 35,916                           |       |
|                                                              |   |                        |       |                 |       |                   |       |                                                 |        |                             |       |
| Dividends on common stock                                         |   |                        |       |                 |       | (11,707                | )          |                                                 |        | (11,707                          | )          |
| Contribution from parent company for reallocation of taxes        |   |                        |       | 806                  |       |                   |       |                                                 |        | 806                              |       |
| Ending balance                                                    |   | $                           | 8,780      |                 | $          | 21,111                 |       | $                                                    | 142,320     |                             | $          | (8 | ) | $ | 172,203 |   |
|                                                              |   |                        | ** ** |                 | ** ** |                   | ** ** |                                                 | ** **  |                             | ** ** |
| **2002**                                                          |   |                        | ** ** |                 | ** ** |                   | ** ** |                                                 | ** **  |                             | ** ** |
| **Comprehensive income:**                                         |   |                        | ** ** |                 | ** ** |                   | ** ** |                                                 | ** **  |                             | ** ** |
| Net income                                                        |   |                        |       |                 |       | 12,150                 |       |                                                 |        | 12,150                           |       |
| Other comprehensive income (loss), net of tax effect of $36       |   |                        |       |                 |       |                   |       |                                                 |        |                             |       |
| Minimum pension liability adjustment                              |   |                        |       |                 |       |                   |       | (52                                                  | )           | (52                              | )          |
| Total comprehensive income (loss)                                 |   |                        |       |                 |       |                   |       |                                                 |        | 12,098                           |       |
|                                                              |   |                        |       |                 |       |                   |       |                                                 |        |                             |       |
| Dividends on common stock                                         |   |                        |       |                 |       | (9,670                 | )          |                                                 |        | (9,670                           | )          |
| Contribution from parent company for reallocation of taxes        |   |                        |       | 2,533                |       |                   |       |                                                 |        | 2,533                            |       |
| Ending balance                                                    |   | $                           | 8,780      |                 | $          | 23,644                 |       | $                                                    | 144,800     |                             | $          | (60 | ) | $ | 177,164 |   |
|                                                              |   |                        | ** ** |                 | ** ** |                   | ** ** |                                                 | ** **  |                             | ** ** |
| **2003**                                                          |   |                        | ** ** |                 | ** ** |                   | ** ** |                                                 | ** **  |                             | ** ** |
| **Comprehensive income:**                                         |   |                        | ** ** |                 | ** ** |                   | ** ** |                                                 | ** **  |                             | ** ** |
| **Net income**                                                    |   |                        | ** ** |                 |       | **19,029**             | ** ** |                                                 | ** **  | **19,029**                       | ** ** |
| **Other comprehensive income  (loss), net of tax effect of $291** |   |                        |       |                 |       |                   |       |                                                 |        |                             |       |
| **Minimum pension liability  adjustment**                         |   |                        |       |                 |       |                   | ** ** | **(429**                                             | **)**       | **(429**                         | **)**      |
| **Total comprehensive income  (loss)**                            |   |                        | ** ** |                 |       |                   | ** ** |                                                 | ** **  | **18,600**                       | ** ** |
|                                                              |   |                        | ** ** |                 |       |                   | ** ** |                                                 | ** **  |                             | ** ** |
| **Dividends on common stock**                                     |   |                        |       |                 |       | **(6,305**             | **)**      |                                                 | ** **  | **(6,305**                       | **)**      |
| **Contribution from parent  company for reallocation of taxes**   |   |                        |       | **(103**             | **)**      |                   | ** ** |                                                 | ** **  | **(103**                         | **)**      |
| **Ending balance**                                                |   | **$**                       | **8,780**  | ** **           | **$**      | **23,541**             | ** ** | **$**                                                | **157,524** | ** **                       | **$**      | **(489** | **)** | **$** | **189,356** | ** ** |

 

**The accompanying notes as they relate to The Union Light,Heat and Power Company are an integral part of these financial statements.**

 

134

----

 

**THEUNION LIGHT, HEAT AND POWER COMPANY**

**STATEMENTS OF CASH FLOWS**

 
|                                                                                         |   | **2003**                    |       | **2002**   |     | **2001** |     |
|----------------------------------------------------------------------------------------------|--------|-----------------------------|------------|------------|----------|----------|----------|
|                                                                                         |   | **(dollars  in thousands)** |       |
|                                                                                         |   |                        | * *   |       | * * |     | * * |
| **Operating  Activities**                                                                    |   |                        |       |       |     |     |     |
| Net income                                                                                   |   | **$**                       | **19,029** | ** ** | $        | 12,150   |     | $ | 35,924 |   |
| Adjustments to reconcile net income to net cash provided by (used in)  operating activities: |   |                        | ** ** |       |     |     |     |
| Depreciation                                                                                 |   | **18,315**                  | ** ** | 17,350     |     | 17,039   |     |
| Deferred income taxes and investment tax credits - net                                       |   | **7,808**                   | ** ** | 3,116      |     | (7,116   | )        |
| Allowance for equity funds used during construction                                          |   | **(183**                    | **)**      | (794       | )        | (143     | )        |
| Regulatory assets deferrals                                                                  |   | **(1,300**                  | **)**      | 3,954      |     | 1,098    |     |
| Regulatory assets amortization                                                               |   | **1,843**                   | ** ** | (1,452     | )        | 1,038    |     |
| Accrued pension and other postretirement benefit costs                                       |   | **1,333**                   | ** ** | 2,343      |     | 154      |     |
| Deferred costs under gas cost recovery mechanism                                             |   | **(6,838**                  | **)**      | 3,833      |     | 9,469    |     |
| Changes in current assets and current liabilities:                                           |   |                        | ** ** |       |     |     |     |
| Accounts and notes receivable                                                                |   | **(9,060**                  | **)**      | 8,997      |     | 12,112   |     |
| Materials, supplies, and fuel                                                                |   | **246**                     | ** ** | 2,653      |     | (4,535   | )        |
| Prepayments                                                                                  |   | **37**                      | ** ** | (16        | )        | (26      | )        |
| Accounts payable                                                                             |   | **3,449**                   | ** ** | 6,997      |     | (20,325  | )        |
| Accrued taxes and interest                                                                   |   | **(1,185**                  | **)**      | (4,981     | )        | 12,239   |     |
| Other assets                                                                                 |   | **(3,521**                  | **)**      | 2,852      |     | (1,838   | )        |
| Other liabilities                                                                            |   | **3,088**                   | ** ** | 3,705      |     | (7,324   | )        |
|                                                                                         |   |                        | ** ** |       |     |     |     |
| **Net cash provided by (used in) operating activities**                                      |   | **33,061**                  | ** ** | 60,707     |     | 47,766   |     |
|                                                                                         |   |                        | ** ** |       |     |     |     |
| **Financing Activities**                                                                     |   |                        | ** ** |       |     |     |     |
| Change in short-term debt, including net affiliate notes                                     |   | **31,157**                  | ** ** | (12,356    | )        | (2,971   | )        |
| Redemption of long-term debt                                                                 |   | **(20,000**                 | **)**      | —     |     | —   |     |
| Dividends on common stock                                                                    |   | **(6,305**                  | **)**      | (9,670     | )        | (11,707  | )        |
|                                                                                         |   |                        | ** ** |       |     |     |     |
| **Net cash provided by (used in) financing activities**                                      |   | **4,852**                   | ** ** | (22,026    | )        | (14,678  | )        |
|                                                                                         |   |                        | ** ** |       |     |     |     |
| **Investing Activities**                                                                     |   |                        | ** ** |       |     |     |     |
| Construction expenditures (less allowance for equity funds used  during construction)        |   | **(39,940**                 | **)**      | (38,854    | )        | (35,449  | )        |
|                                                                                         |   |                        | ** ** |       |     |     |     |
| **Net cash provided by (used in) investing activities**                                      |   | **(39,940**                 | **)**      | (38,854    | )        | (35,449  | )        |
|                                                                                         |   |                        | ** ** |       |     |     |     |
| **Net increase (decrease) in cash and cash equivalents**                                     |   | **(2,027**                  | **)**      | (173       | )        | (2,361   | )        |
|                                                                                         |   |                        | ** ** |       |     |     |     |
| **Cash and cash equivalents at beginning of period**                                         |   | **3,926**                   | ** ** | 4,099      |     | 6,460    |     |
|                                                                                         |   |                        | ** ** |       |     |     |     |
| **Cash and cash equivalents at end of period**                                               |   | **$**                       | **1,899**  | ** ** | $        | 3,926    |     | $ | 4,099 |   |
|                                                                                         |   |                        | ** ** |       |     |     |     |
| **Supplemental Disclosure of Cash Flow Information**                                         |   |                        | ** ** |       |     |     |     |
| Cash paid during the year for:                                                               |   |                        | ** ** |       |     |     |     |
| Interest (net of amount capitalized)                                                         |   | **$**                       | **5,842**  | ** ** | $        | 5,067    |     | $ | 6,594 |   |
| Income taxes                                                                                 |   | **$**                       | **3,001**  | ** ** | $        | 2,398    |     | $ | 10,848 |   |

 

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

 

135

----

 

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

 
|                                                                                                                                      |   | **December  31**            |        |
|-------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------|-------------|
|                                                                                                                                      |   | **2003**                    |        | **2002** |   |
|                                                                                                                                      |   | **(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 |   |
| **Total Other Long-term Debt**                                                                                                            |   | **55,000**                  | ** **  | 55,000 |   |
|                                                                                                                                      |   |                        | ** **  |   |   |
| Unamortized Premium and Discount - Net                                                                                                    |   | **(315**                    | **)**       | (347 | ) |
| **Total Long-term Debt**                                                                                                                  |   | **54,685**                  | ** **  | 54,653 |   |
|                                                                                                                                      |   |                        | ** **  |   | ** ** |
| **Common Stock Equity**                                                                                                                   |   |                        | ** **  |   | ** ** |
| Common Stock - $15.00 par value; authorized shares - 1,000,000;  outstanding shares - 585,333 at December 31, 2003, and December 31, 2002 |   | **$**                       | **8,780**   | ** ** | $ | 8,780 |   |
| Paid-in capital                                                                                                                           |   | **23,541**                  | ** **  | 23,644 |   |
| Retained earnings                                                                                                                         |   | **157,524**                 | ** **  | 144,800 |   |
| Accumulated other comprehensive income (loss)                                                                                             |   | **(489**                    | **)**       | (60 | ) |
| **Total Common Stock Equity**                                                                                                             |   | **189,356**                 | ** **  | 177,164 |   |
|                                                                                                                                      |   |                        | ** **  |   |   |
| **Total Capitalization**                                                                                                                  |   | **$**                       | **244,041** | ** ** | $ | 231,817 |   |

 

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

 

136

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**Notes To Financial Statements**

 

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

 

**1.****                                      Summaryof Significant Accounting Policies**

 

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

 

**Cinergy Corp.**, aDelaware corporation organized in 1993, owns all outstanding common stock of TheCincinnati Gas & Electric Company (**CG&E**)and PSI Energy, Inc. (**PSI**), bothof which are public utilities.  As aresult of this ownership, 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:

 

•                  CinergyServices, Inc. (Services);

•                  CinergyInvestments, Inc. (Investments); and

•                  CinergyWholesale Energy, Inc. (Wholesale Energy).

 

**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, throughits subsidiaries, in nearby areas of Kentucky and Indiana.  **CG&E**is responsible for the majority of our power marketing and tradingactivity.  **CG&E’s** principal subsidiary, The Union Light, Heat andPower Company (**ULH&P**), is aKentucky corporation organized in 1901, that provides electric and gas servicein northern Kentucky.  **CG&E’s** other subsidiaries areinsignificant to its results of operations.

 

In 2001, **CG&E** began atransition to electric deregulation and customer choice.  Currently, the competitive retail electricmarket in Ohio is in the development stage. **CG&E** is recovering itsPublic Utilities Commission of Ohio (PUCO) approved costs and retail electricrates are frozen during this market development period.  In January 2003, **CG&E** filed an application with the PUCO for approval of amethodology to establish how market-based rates for non-residential customerswill be determined when the market development period ends.  In December 2003, the PUCO requested that **CG&E** propose a rate stabilizationplan.  In January 2004, **CG&E** complied with the PUCO request andfiled an electric reliability and rate stabilization plan.  See Note 17 for a discussion of key elementsof Ohio deregulation.

 

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

 

137

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

 

138

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| **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 provides our subsidiaries with avariety of centralized administrative, management, and support services.  Investments holds most of our domesticnon-regulated, energy-related businesses and investments, including gasmarketing and trading operations.

 

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

 

We conduct operations through our subsidiaries and manage ourbusinesses through the following three reportable segments:

 

•                  CommercialBusiness Unit (Commercial), formerly named the Energy Merchant Business Unit;

•                  RegulatedBusinesses Business Unit (Regulated Businesses); and

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

 

For further discussion of our reportable segments see Note 15.

 

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

 

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

 

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

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

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

 

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

 

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

 

139

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*(i)*          Consolidation Method

* *

For traditional operatingentities, we use the consolidation method when we own a majority of the votingstock of or have the ability to control a subsidiary.  For variable interest entities (VIE) (discussed further in Note3), we use the consolidation method when we anticipate absorbing a majority ofthe losses or returns of an entity, should they occur.  We eliminate all significant intercompanytransactions when we consolidate these accounts.  Our consolidated financial statements include the accounts of **Cinergy**,**CG&E**,and **PSI**,and their wholly-owned subsidiaries.

 

*(ii)*      Equity Method

 

We use the equity methodto report investments, joint ventures, partnerships, subsidiaries, andaffiliated companies in which we do not have control, but have the ability toexercise influence over operating and financial policies (generally, 20 percentto 50 percent ownership).  Under theequity method we report:

 

•                  our investment in the entity as *Investmentsin unconsolidated subsidiaries* in our Balance Sheets; and

•                  our percentage share of the earningsfrom the entity as *Equity in earnings (losses) of unconsolidatedsubsidiaries* in our Statements of Income.

 

*(iii)*  Cost Method

 

We use the cost method toreport investments, joint ventures, partnerships, subsidiaries, and affiliatedcompanies in which we do not have control and are unable to exercisesignificant influence over operating and financial policies (generally, up to20 percent ownership).  Under the costmethod we report our investments in the entity as *Other investments* in our Balance Sheets.

 

***(c)***                                  Regulation

*** ***

Our operating companiesand certain of our non-utility subsidiaries must comply with the rulesprescribed by the SEC under the PUHCA. Our operating companies must also comply with the rules prescribed bythe Federal Energy Regulatory Commission (FERC) and the applicable stateutility commissions of Ohio, Indiana, and Kentucky.

 

Our operating companiesuse the same accounting policies and practices for financial reporting purposesas non-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, *Accounting for the Effects of Certain Types ofRegulation* (Statement71).  In accordance with Statement 71,we record regulatory assets and liabilities (expenses deferred for futurerecovery from customers or amounts provided in current rates to cover costs tobe incurred in the future, respectively) on our Balance Sheets.

 

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Comprehensive electricderegulation legislation was passed in Ohio in July 1999.  As required by the legislation, **CG&E**filed its Proposed Transition Plan for approval by the PUCO in December1999.  In August 2000, the PUCO approveda stipulation agreement relating to **CG&E’s** transition plan.  Thisplan created a Regulatory Transition Charge (RTC) designed to recover **CG&E’s**generation-related regulatory assets and transition costs over a ten-yearperiod which began January 1, 2001. Accordingly, Statement 71 was discontinued for the generation portion of**CG&E’s**business and Statement of Financial Accounting Standards No. 101, *RegulatedEnterprises - Accounting for the Discontinuation of Application of FASBStatement No. 71* was applied. The effect of this change on the financial statements wasimmaterial.  Except with respect to thegeneration-related assets and liabilities of **CG&E**, as of December 31,2003, **PSI**,**CG&E**,and **ULH&P**continue to meet the criteria of Statement 71. However, to the extent other states implement deregulation legislation,the application of Statement 71 will need to be reviewed.  Based on our operating companies’ currentregulatory orders and the regulatory environment in which they currently operate,the recovery of regulatory assets recognized in the accompanying Balance Sheetsas of December 31, 2003, is probable. For a further discussion of Ohio deregulation see Note 17.  For a further discussion on **PSI’s**pending retail rate case see Note 11(b)*(i)*.

 

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Our regulatory assets,liabilities, and amounts authorized for recovery through regulatory orders atDecember 31, 2003, and 2002, are as follows:

 
|                                                                 |   | **2003**            |       | **2002**   |       |
|----------------------------------------------------------------------|--------|---------------------|------------|------------|------------|
|                                                                 |   | **CG&E(1)**     |       | **PSI**    |       | **Cinergy** |   | **CG&E(1)** |   | **PSI** |   | **Cinergy** |   |
|                                                                 |   | ***(in millions)*** |       |
| Regulatory assets                                                    |   |                |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                 |   |                |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Amounts due from customers - income taxes(2)                         |   | **$**               | **53**     | ** ** | **$**      | **22** | ** ** | **$** | **75** |   | $ | 53 |   | $ | 25 |   | $ | 78 |   |
| Gasification services agreement buyout costs(3)(6)                   |   | —              | ** ** | **235**    | ** ** | **235** |   | — |   | 240 |   | 240 |   |
| Post-in-service carrying costs and deferred operating expenses(6)(7) |   | **2**               | ** ** | **70**     | ** ** | **72** |   | 1 |   | 42 |   | 43 |   |
| Coal contract buyout costs                                           |   | **—**          | ** ** | **—** | ** ** | **—** |   | — |   | 10 |   | 10 |   |
| Deferred merger costs                                                |   | **1**               | ** ** | **46**     | ** ** | **47** |   | 1 |   | 51 |   | 52 |   |
| Unamortized costs of reacquiring debt                                |   | **17**              | ** ** | **28**     | ** ** | **45** |   | 9 |   | 30 |   | 39 |   |
| Coal gasification services expenses(6)                               |   | **—**          | ** ** | **1**      | ** ** | **1** |   | — |   | 4 |   | 4 |   |
| RTC recoverable assets(4)(6)                                         |   | **517**             | ** ** | **—** | ** ** | **517** |   | 537 |   | — |   | 537 |   |
| Other                                                                |   | **5**               | ** ** | **15**     | ** ** | **20** |   | 4 |   | 16 |   | 20 |   |
|                                                                 |   |                |       |       |       |   |   |   |   |   |   |   |   |
| Total Regulatory assets                                              |   | **$**               | **595**    | ** ** | **$**      | **417** | ** ** | **$** | **1,012** |   | $ | 605 |   | $ | 418 |   | $ | 1,023 |   |
|                                                                 |   |                | ** ** |       | ** ** |   |   |   |   |   |   |   |   |
| Total Regulatory assets authorized for recovery(5)              |   | **$**               | **587**    | ** ** | **$**      | **317** | ** ** | **$** | **905** |   | $ | 598 |   | $ | 360 |   | $ | 958 |   |
|                                                                 |   |                |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Regulatory liabilities                                               |   |                |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                 |   |                |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Accrued cost of removal(8)                                           |   | **$**               | **(155**   | **)**      | **$**      | **(336** | **)** | **$** | **(491** | **)** | $ | — |   | $ | — |   | $ | — |   |

 

----

| (1) |   | Includes  $13 million at December 31, 2003, and $5 million at December 31, 2002,  related to **ULH&P’s** regulatory assets.  Of these amounts, $11.7 million at December 31, 2003, and $3.6  million at December 31, 2002, have been authorized for recovery.  Includes $(27) million of regulatory  liabilities at December 31, 2003 related to **ULH&P**.                                                                                                                                                                                |
|-----|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) |   | The  various regulatory commissions overseeing the regulated business operations  of our operating companies regulate income tax provisions reflected in  customer rates.  In accordance with  the provisions of Statement 71, we have recorded net regulatory assets for **CG&E,  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) |   | 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.               |
| (5) |   | At  December 31, 2003, these amounts were being recovered through rates charged  to customers over a period ranging from 1 to 49 years for **CG&E**,  1 to 30 years for **PSI**, and 1 to 17 years for **ULH&P**.                                                                                                                                                                                                                                                                                                                                         |
| (6) |   | Regulatory  assets earning a return at December 31, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| (7) |   | For  **PSI** amount includes $30 million  that is not yet authorized for recovery and currently is not earning a return  at December 31, 2003.  See Note 11(b)*(i)* for information on the **PSI** retail electric rate case.                                                                                                                                                                                                                                                                                                                                |
| (8) |   | Represents  amounts received for anticipated future removal and retirement costs of  regulated property, plant, and equipment.   These amounts were recharacterized as regulatory liabilities upon  adoption of Statement of Financial Accounting Standards No. 143, *Accounting for Asset Retirement Obligations*(Statement  143),which prohibits the accrual of such amounts unless removal (or other  retirement activity) is required pursuant to a legal obligation.  See (j) and  (q)(*iii*) below  for further discussion of Statement 143. |

 

***(d)***                                  Revenue Recognition

*** ***

*(i)*                                  Utility Revenues

* *

**CG&E,PSI, and ULH&P** record*OperatingRevenues* for electric and gas service when delivered tocustomers.  Customers are billedthroughout the month as both gas and electric meters are read.  We recognize revenues for retail energysales that have not yet been billed, but where gas or electricity has beenconsumed.  This is termed “unbilledrevenues” and is a widely

 

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recognized and accepted practice for utilities.  In making our estimates of unbilled revenues,we use complex systems that consider various factors, including weather, in ourcalculation of retail customer consumption at the end of each month.  Given the use of these systems and the factthat customers are billed monthly, we believe it is unlikely that materiallydifferent results will occur in future periods when revenue is subsequentlybilled.

 

The amount of unbilledrevenues for **Cinergy, CG&E, PSI**, and **ULH&P** as of December 31,2003, 2002, and 2001 were as follows:

 

|                         |   | **2003**            |     | **2002** |     | **2001** |     |
|------------------------------|--------|---------------------|----------|----------|----------|----------|----------|
|                         |   | ***(in millions)*** |     |
|                         |   |                | * * |     | * * |     | * * |
| **Cinergy**                  |   | **$**               | **176**  |     | $        | 153      |     | $ | 172 |   |
| **CG&E**and subsidiaries |   | **112**             |     | 89       |     | 104      |     |
| **PSI**                      |   | **64**              |     | 64       |     | 68       |     |
| **ULH&P**                |   | **20**              |     | 15       |     | 18       |     |
|                              |        |                     |          |          |          |          |          |  |  |  |

 

*(ii)*                              Energy Marketing and Trading Revenues

 

We market and tradeelectricity, natural gas, coal, and other energy-related products.  Many of the contracts associated with theseproducts qualify as derivatives in accordance with Statement of FinancialAccounting Standards No. 133, *Accounting for Derivative Instruments and HedgingActivities* (Statement 133), further discussed in (k)*(i)* below.  We designate derivative transactions as either trading ornon-trading at the time they are originated in accordance with Emerging IssuesTask Force (EITF) Issue 02-3, *Issues Involved in Accounting for DerivativeContracts Held for Trading Purposes and Contracts Involved in Energy Tradingand Risk Management Activities* (EITF 02-3).  Generally, trading contracts are reported ona net basis and non-trading contracts are reported on a gross basis.

 

1.               Gross Reporting

 

Gross reporting requirespresentation of sales contracts in *Operating Revenues* and purchase contractsin *Fueland purchased and exchanged 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 areclassified as non-trading only when (a) the contracts involve the purchase ofgas or electricity to serve our native load requirements (end-use customerswithin our public utility companies’ franchise service territory), or (b) thecontracts involve the sale of gas or electricity and we have the intent andprojected ability to fulfill substantially all obligations from company-ownedassets, which generally is limited to the sale of generation to third partieswhen it is not required to meet native load requirements.

 

Energy activities that donot principally involve derivatives (e.g., natural gas sales from storage) arepresented on a gross basis.

 

143

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2.               Net Reporting

 

Net reporting requirespresentation of realized and unrealized gains and losses on trading derivativeson a net basis in *Operating Revenues*. Prior to 2003, the realized results for trading contracts that werephysical in nature were presented on a gross basis.  In 2003, we began reflecting the results of trading derivativeson a net basis pursuant to the requirements of EITF 02-3, regardless of whetherthe transactions were settled physically. The presentation for 2002 and 2001 has been reclassified to conform tothe new presentation.  See (q)*(i)* below for further discussion.

 

Energy derivativesinvolving frequent buying and selling with the objective of generating profitsfrom differences in price are classified as trading and reported net.

 

***(e)***                                  Energy Purchases and Fuel Costs

*** ***

The expenses associatedwith electric and gas services include:

 

•                  fuelused to generate electricity;

•                  electricitypurchased from others;

•                  naturalgas purchased from others; and

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

 

These expenses are shown in the Statements of Income of **Cinergy**,**CG&E**,and **PSI**as *Fueland purchased and exchanged power* expense and *Gas purchased* expense.  These expenses are shown in **ULH&P’s** Statements of Income as *Electricitypurchased from parent for resale* expense and *Gas purchased*expense.

 

Indiana law limits the amount of fuel costs that **PSI** can recover to an amountthat will not result in earning a return in excess of that allowed by theIURC.  Due to deregulation in the stateof Ohio, we no longer have direct recovery of fuel costs.

 

**PSI**utilizes a purchased power tracking mechanism (Tracker) approved by the IURCfor the recovery of costs related to certain specified purchases of powernecessary to meet native load peak demand requirements to the extent such costsare not recovered through the existing fuel adjustment clause.  See Note 11(b)(*v*) for additional information.

 

***(f*)**                                    Cash and Cash Equivalents

 

We define *Cash andcash equivalents* on our Balance Sheets and Statements of Cash Flowsas investments with maturities of three months or less when acquired.

 

***(g)***                                 Inventory

*** ***

Prior to January 1, 2003,natural gas inventory for our gas trading operations was accounted for at fairvalue.  All other inventory wasaccounted for at the lower of cost or market, cost being determined through theweighted average method.  EffectiveJanuary 1, 2003, accounting for our gas trading operations’ gas inventory wasadjusted to the lower of cost or market method with a cumulative effectadjustment, as required by EITF 02-3. See (q)(*vi*) below for a summary of the cumulative effectadjustments.

 

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

*** ***

*Property, Plant, and Equipment* includesthe utility and non-regulated business property and equipment that is in use,being held for future use, or under construction.  We report our *Property, Plant, and Equipment* at itsoriginal cost, which includes:

 

•                  materials;

•                  contractorfees;

•                  salaries;

•                  payrolltaxes;

•                  fringebenefits;

•                  financingcosts of funds used during construction (described below in (*ii*)and (*iii*));and

•                  othermiscellaneous amounts.

 

We capitalize costs for regulated property, plant, and equipment thatare associated with the replacement or the addition of equipment that isconsidered a property unit.  Property units are intended to describe anitem or group of items.  The cost ofnormal repairs and maintenance is expensed as incurred.  On an annual basis, we perform major pre-plannedmaintenance activities on our generating units.  These pre-planned activities are accounted for whenincurred.  When regulated property,plant, and equipment is retired, **Cinergy** charges the original cost, lesssalvage, to *Accumulateddepreciation*and the costof removal to *Accrued cost of removal*, which isconsistent with the composite method of depreciation.  A gain or loss is recorded on the sale of regulated property,plant, and equipment if an entire operating unit, as defined by the FERC, issold.  A gain or loss is recorded onnon-regulated property, plant, and equipment whenever there is a related saleor retirement.

 

*(i)*                                  Depreciation

* *

We determine the provisions for depreciation expense using thestraight-line method.  The depreciationrates are based on periodic studies of the estimated useful lives and the netcost to remove the properties. Inclusion of cost of removal in depreciation rates was discontinued forall non-regulated property beginning in 2003 as a result of adopting Statement143.  See (q)(*iii*) below for additionaldiscussion of this change.  Ouroperating companies use composite depreciation rates.  These rates are approved by the respective state utilitycommissions with respect to regulated property.  The average depreciation rates for *Property, Plant, and Equipment*,excluding software, are presented in the table below.

 

|                           |   | **2003** |   | **2002** |   | **2001** |   |
|--------------------------------|--------|----------|--------|----------|--------|----------|--------|
|                           |   |     |   |     |   |     |   |
| **Cinergy(1)**                 |   | **2.8**  | **%**  | 3.0      | %      | 3.0      | %      |
|                           |   |     |   |     |   |     |   |
| **CG&E** and  subsidiaries |   | **2.6**  |   | 2.9      |   | 2.9      |   |
|                           |   |     |   |     |   |     |   |
| **PSI**                        |   | **3.1**  |   | 3.0      |   | 3.0      |   |
|                           |   |     |   |     |   |     |   |
| **ULH&P**                  |   | **3.2**  |   | 3.2      |   | 3.3      |   |

 

----

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

 

During the third quarter of 2003, **CG&E** implemented a new depreciationstudy of its non-regulated

 

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generating assetsresulting in an increase in the estimated useful lives of certain assets.  The impact of this change in accountingestimate on **Cinergy’s** and **CG&E’s** 2003 net income and Earnings PerCommon Share (EPS) - assuming dilution was an increase of $9 million (net oftax) or $0.05 per share, respectively. The prospective impact of this change in accounting estimate on annualnet income is expected to be $18 million (net of tax).

 

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

* *

Our operating companies finance construction projects with borrowedfunds and equity funds.  Regulatoryauthorities allow us to record the costs of these funds as part of the cost ofconstruction projects.  AFUDC iscalculated using a methodology authorized by the regulatory authorities.  These costs are credited on the Statementsof Income to *Miscellaneous Income - Net* and *Interest Expense* for theequity and borrowed funds, respectively.

 

The equity component of AFUDC for the years ended December 31, 2003,2002, and 2001, was as follows:

 

|                          |   | **2003**            |     | **2002** |     | **2001** |     |
|-------------------------------|--------|---------------------|----------|----------|----------|----------|----------|
|                          |   | ***(in millions)*** |     |
|                          |   |                | * * |     | * * |     | * * |
| **Cinergy**                   |   | **$**               | **7.5**  |     | $        | 12.9     |     | $ | 8.6 |   |
| **CG&E**and  subsidiaries |   | **2.7**             |     | 0.4      |     | 2.7      |     |
| **PSI**                       |   | **4.8**             |     | 12.5     |     | 5.9      |     |
| **ULH&P**                 |   | **0.2**             |     | 0.8      |     | 0.1      |     |
|                               |        |                     |          |          |          |          |          |  |  |  |

 

The borrowed funds component of AFUDC, which is recorded on a pre-taxbasis, for the years ended December 31, 2003, 2002, and 2001, was as follows:

 

|                           |   | **2003**            |     | **2002** |     | **2001** |     |
|--------------------------------|--------|---------------------|----------|----------|----------|----------|----------|
|                           |   | ***(in millions)*** |     |
|                           |   |                | * * |     | * * |     | * * |
| **Cinergy**                    |   | **$**               | **5.7**  |     | $        | 10.1     |     | $ | 8.4 |   |
| **CG&E** and  subsidiaries |   | **1.0**             |     | 1.0      |     | 1.0      |     |
| **PSI**                        |   | **4.7**             |     | 9.1      |     | 7.4      |     |
| **ULH&P**                  |   | **0.1**             |     | 0.2      |     | 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*)below for a discussion of capitalized interest.

 

*(iii)*                          Capitalized Interest

* *

**Cinergy**capitalizes interest costs for non-regulated construction projects inaccordance with Statement of Financial Accounting Standards No. 34, *Capitalizationof Interest Cost* (Statement 34). The primary differences from AFUDC are that the Statement 34 methodologydoes not include 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, 2003, 2002, and 2001, were as follows:

 

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|                          |   | **2003**            |     | **2002** |     | **2001** |     |
|-------------------------------|--------|---------------------|----------|----------|----------|----------|----------|
|                          |   | ***(in millions)*** |     |
|                          |   |                | * * |     | * * |     | * * |
| **Cinergy**                   |   | **$**               | **7.7**  |     | $        | 7.2      |     | $ | 7.1 (1 | ) |
| **CG&E**and  subsidiaries |   | **7.7**             |     | 7.2      |     | 5.5      |     |
|                               |        |                     |          |          |          |          |          |  |  |  |

 

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

 

**(i)**                                    ***Impairment 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 not held for sale, thedetermination of whether an impairment has occurred is based on an estimate ofundiscounted future cash flows attributable to the assets, as compared with thecarrying value of the assets.  If animpairment has occurred, the amount of the impairment recognized is determinedby estimating the fair value of the assets and recording a provision for animpairment loss if the carrying value is greater than the fair value.  Once assets are classified as held for sale,the comparison of undiscounted cash flows to carrying value is disregarded andan impairment loss is recognized for any amount by which the carrying valueexceeds the fair value of the assets less cost to sell.

 

***(j)***                                    Asset RetirementObligations and Accrued Cost of Removal

 

We recognize the fairvalue of legal obligations associated with the retirement or removal oflong-lived assets at the time the obligations are incurred and can bereasonably estimated.  The initialrecognition of this liability is accompanied by a corresponding increase inproperty, plant, and equipment. Subsequent to the initial recognition, the liability is adjusted for anyrevisions to the expected value of the retirement obligation (withcorresponding adjustments to property, plant, and equipment), and for accretionof the liability due to the passage of time (recognized as *Operation and maintenance*expense).  Additional depreciationexpense is recorded prospectively for any property, plant, and equipmentincreases.

 

We do not recognizeliabilities for asset retirement obligations for which the fair value cannot bereasonably estimated.  **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 herein.

 

**CG&E**'**s** transmission and distribution business, **PSI,**and **ULH&P**ratably accrue the estimated retirement and removal cost of rate regulatedproperty, plant, and equipment when removal of the asset is considered likely,in accordance with established regulatory practices.  The accrued, but not incurred, balance for these costs isclassified as *Accrued cost of removal*and represents a regulatory liability, under Statement 71, as disclosed in (c)above.  Effective with our adoption ofStatement 143, on January 1, 2003, we do not accrue the estimated cost ofremoval when no legal obligation associated with retirement or removal existsfor any of our non-regulated assets (including **CG&E**'**s**generation assets).  See (q)(*iii*) for additional information regardingthe adoption of Statement 143 and the related impacts to *Accrued cost of removal*.

 

***(k)***                                Derivatives

 

We account forderivatives under Statement 133, which requires all derivatives, subject tocertain

 

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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 offset ofinterest rate risks) and must be effective at reducing the risk associated withthe hedged item.  Accordingly, changesin the fair values or cash flows of instruments designated as hedges must behighly correlated with changes in the fair values or cash flows of the relatedhedged items.

 

*(i)*                                  Energy Marketing and Trading

 

We account for all energytrading derivatives at fair value. These derivatives are shown in our Balance Sheets as *Energy riskmanagement assets* and *Energy risk management liabilities*.  Changes in a derivative’s fair value representunrealized gains and losses and are recognized as revenues in our Statements ofIncome unless specific hedge accounting criteria are met.

 

Non-trading derivativesinvolve the physical delivery of energy and are therefore typically accountedfor as accrual contracts, unless the contract does not qualify for the normalpurchases and sales scope exception in Statement 133.

 

Although we intend tosettle accrual contracts with company-owned assets, occasionally we settlethese contracts with purchases on the open trading markets.  The cost of these purchases could be inexcess of the associated revenues.  Werecognize the gains or losses on these transactions as delivery occurs.  Open market purchases may occur for thefollowing reasons:

 

•                  generating station outages;

•                  least-cost alternative;

•                  native load requirements; and

•                  extreme weather.

 

We value derivativesusing end-of-the-period fair values, utilizing the following factors (asapplicable):

 

•                  closing exchange prices (that is,closing prices for standardized electricity and natural gas products traded onan organized exchange, such as the New York Mercantile Exchange);

•                  broker-dealer and over-the-counterprice quotations; and

•                  model pricing (which considers timevalue and historical volatility factors of electricity and natural gas).

 

In October 2002, theEITF reached a consensus in EITF 02-3 to rescind EITF Issue 98-10, *Accountingfor Contracts Involved in Energy Trading and Risk Management Activities* (EITF 98-10).  EITF 98-10 permitted non-derivativecontracts to be accounted for at fair value if certain criteria were met.  Effective with the adoption of EITF 02-3 onJanuary 1, 2003, non-derivative contracts and natural gas inventorypreviously accounted for at fair value were required to be accounted for on anaccrual basis, with gains and losses on the transactions being recognized atthe time the contract was settled.  See(q)(*vi*)below for a summary of cumulative effect 

 

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adjustments.

 

As a response to thisdiscontinuance of fair value accounting, in June 2003, **Cinergy**began designating derivatives as fair value hedges for certain volumes of ournatural gas inventory.  Under thisaccounting election, changes in the fair value of both the derivative as wellas the hedged item (the specified inventory) are included in the Statements ofIncome.  We assess the effectiveness ofthe derivatives in offsetting the change in fair value of the inventory on aquarterly basis.  For the year ended,December 31, 2003, the hedges’ ineffectiveness was not material.

 

*(ii)*                              Financial

 

In addition to energymarketing and trading, we use derivative financial instruments to manageexposure to fluctuations in interest rates. We use interest rate swaps (an agreement by two parties to exchangefixed-interest rate cash flows for floating-interest rate cash flows) andtreasury locks (an agreement that fixes the yield or price on a specifictreasury security for a specific period, which we sometimes use in connectionwith the issuance of fixed rate debt). We account for such derivatives at fair value and assess theeffectiveness of any such derivative used in hedging activities.

 

At December 31,2003, the ineffectiveness of instruments that we have classified as cash flowhedges of variable-rate debt instruments was not material.  Reclassification of unrealized gains orlosses on cash flow hedges of debt instruments from *Accumulated other comprehensive income*(*loss*)occurs as interest is accrued on the debt instrument.  The unrealized losses that will be reclassified as a charge to *InterestExpense* during the twelve-month period ending December 31,2004, are not expected to be material.

 

***(l)***                                    IntangibleAssets

 

We adopted Statement ofFinancial Accounting Standards No. 142, *Goodwill and Other Intangible Assets*(Statement 142) in the first quarter of 2002. With the adoption of Statement 142, goodwill and other intangibles withindefinite lives are no longer amortized. Prior to adoption, we amortized goodwill on a straight-line basis overits estimated useful life, not to exceed 40 years.  The discontinuance of this amortization was not material to ourfinancial position or results of operations. Statement 142 requires that goodwill is assessed annually, or whencircumstances indicate that the fair value of a reporting unit has declinedsignificantly, by applying a fair-value-based test.  This test is applied at the “reporting unit” level, which is notbroader than the current business segments discussed in Note 15.  Acquired intangible assets are separatelyrecognized if the benefit of the intangible asset is obtained throughcontractual or other legal rights, or if the intangible asset can be sold,transferred, licensed, rented, or exchanged, regardless of intent to do so.

 

We finalized ourtransition impairment test in the fourth quarter of 2002 and recognized anon-cash impairment charge of approximately $11 million (net of tax) forgoodwill related to certain of our international assets.  This amount is reflected in **Cinergy’s**Statements of Income as a cumulative effect adjustment, net of tax.  See (q)*(vi)*below for a summary of the cumulative effect adjustments.

 

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***(m)***                              Income Taxes

 

**Cinergy** and its subsidiaries file a consolidatedfederal income tax return and combined/consolidated state and local tax returnsin certain jurisdictions.  **Cinergy**and its subsidiaries have an income tax allocation agreement, which conforms tothe requirements of the PUHCA.  Thecorporate taxable income method is used to allocate tax benefits to thesubsidiaries whose investments or results of operations provide those taxbenefits.  Any tax liability notdirectly attributable to a specific subsidiary is allocated proportionatelyamong the subsidiaries as required by the agreement.

 

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

 

Investment tax credits,which have been used to reduce our federal income taxes payable, have beendeferred for financial reporting purposes. These deferred investment tax credits are being amortized over theuseful lives of the property to which they are related.  For a further discussion of income taxes,see Note 10.

 

***(n)***                                 Environmentaland Legal Contingencies

 

In the normal course ofbusiness, **Cinergy**,**CG&E**,**PSI**,and **ULH&P**are subject to variousregulatory actions, proceedings, lawsuits and other matters, including actionsunder laws and regulations related to the environment.  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, see Note 11.

 

***(o)***                                  Pension andOther Postretirement Benefits

 

**Cinergy** provides benefits to retirees in the form of pension and otherpostretirement benefits.  Our reportedcosts of providing these pension and other postretirement benefits aredeveloped by actuarial valuations and are dependent upon numerous factorsresulting from actual plan experience and assumptions of futureexperience.  Changes made to theprovisions of the plans may impact current and future pension costs.  Pension costs associated with **Cinergy’s** defined benefit plans are impacted byemployee demographics, the level of contributions we make to the plan, andearnings on plan assets.  These pensioncosts may also be significantly affected by changes in key actuarialassumptions, including anticipated rates of return on plan assets and thediscount rates used in determining the projected benefit obligation.  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.  **Cinergy** reviews and updates its actuarialassumptions on an annual basis, unless plan amendments or other significantevents require earlier remeasurement at an interim period.  For additional information on pension

 

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and other postretirementbenefits, see Note 9.

 

***(p)***                                  Stock-BasedCompensation

 

In 2003, we prospectivelyadopted accounting for our stock-based compensation plans using the fair valuerecognition provisions of Statement of Financial Accounting Standards No. 123, *Accountingfor Stock-Based Compensation* (Statement 123), as amended byStatement of Financial Accounting Standards No. 148, *Accounting for Stock-BasedCompensation-Transition and Disclosure* (Statement 148), for all employee awards granted or with termsmodified on or after January 1, 2003. Prior to 2003, we had accounted for our stock-based compensation plansusing the intrinsic value method under Accounting Principles Board Opinion No.25, *Accountingfor Stock Issued to Employees* (APB 25).  See Note 2(c) for further information on our stock-basedcompensation plans.  The following tableillustrates the effect on our *Net Income* and EPS if the fair value basedmethod had been applied to all outstanding and unvested awards in each period.

 

|                                 |                                                                                                                            | **Year  Ended December 31**               |       |
|--------------------------------------|---------------------------------------------------------------------------------------------------------------------------------|------------------------------------------------|------------|
|                                 |                                                                                                                            | ***(in millions, except per share  amounts)*** |       |
|                                 |                                                                                                                            |                                           |       |   |   |   |   |
|                                 |                                                                                                                            | **2003**                                       |       | **2002** |   | **2001** |   |
|                                 |                                                                                                                            |                                           |       |   |   |   |   |
| Net income,  as reported             |                                                                                                                            | **$**                                          | **470**    | ** ** | $ | 361 |   | $ | 442 |   |
|                                 |                                                                                                                            |                                           | ** ** |   |   |   |   |
| Add:                                 | Stock-based employee compensation expense included in reported net  income, net of related tax effects.                         |                                           | **17**     | ** ** | 24 |   | 13 |   |
|                                 |                                                                                                                            |                                           |       | ** ** |   |   |   |   |
| Deduct:                              | Stock-based employee compensation expense determined under fair value  based method for all awards, net of related tax effects. |                                           | **18**     | ** ** | 23 |   | 13 |   |
|                                 |                                                                                                                            |                                           | ** ** |   |   |   |   |
| Pro-forma net  income                |                                                                                                                            | **$**                                          | **469**    | ** ** | $ | 362 |   | $ | 442 |   |
|                                 |                                                                                                                            |                                           | ** ** |   |   |   |   |
| EPS  - as reported                   |                                                                                                                            | **$**                                          | **2.66**   | ** ** | $ | 2.16 |   | $ | 2.78 |   |
| EPS  - pro-forma                     |                                                                                                                            | **$**                                          | **2.66**   | ** ** | $ | 2.17 |   | $ | 2.78 |   |
|                                 |                                                                                                                            |                                           | ** ** |   |   |   |   |
| EPS  assuming dilution - as reported |                                                                                                                            | **$**                                          | **2.63**   | ** ** | $ | 2.13 |   | $ | 2.75 |   |
| EPS  assuming dilution - pro-forma   |                                                                                                                            | **$**                                          | **2.63**   | ** ** | $ | 2.14 |   | $ | 2.75 |   |

 

The pro-forma amountsreflect certain assumptions used in estimating fair values.  As a result of this and other factors whichmay affect the timing and amounts of stock-based compensation, the pro-formaeffect on *NetIncome* and EPS may not be representative of future periods.  See Note 2(c) for further description of thefair value assumptions.

 

***(q)***                                  AccountingChanges

 

*(i)*                                  Energy Trading

 

In October 2002, theEITF reached consensus in EITF 02-3, to (a) rescind EITF 98-10,

 

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(b) generally precludethe recognition of gains at the inception of new derivatives, and (c) requireall realized and unrealized gains and losses on energy trading derivatives tobe presented net in the Statements of Income, whether or not settledphysically.

 

The consensus to rescindEITF 98-10 required all energy trading contracts that do not qualify asderivatives to be accounted for on an accrual basis, rather than at fairvalue.  The consensus was immediately effectivefor all new contracts executed after October 25, 2002, and required acumulative effect adjustment to income, net of tax, on January 1, 2003,for all contracts executed on or prior to October 25, 2002.  The cumulative effect adjustment, on a net oftax basis, was a loss of approximately $13 million for **Cinergy** and $8 million for **CG&E**,which primarily includes the impact of certain coal contracts, gas inventory,and certain gas contracts, which are accounted for at fair value.  We expect this rescission to have thelargest ongoing impact on our gas trading business, which uses financialcontracts, physical contracts, and gas inventory to take advantage of variousarbitrage opportunities.  Prior to therescission of EITF 98-10, all of these activities were accounted for at fairvalue.  Under the revised guidance, onlycertain items are accounted for at fair value, which could increaseinter-period volatility in reported results of operations.  As a result, we began applying fair valuehedge accounting in June 2003 to certain quantities of gas inventory (morefully discussed in (k)*(i)* above)and are further reviewing additional applications for hedge accounting.

 

The consensus to requireall gains and losses on energy trading derivatives to be presented net in theStatements of Income was effective January 1, 2003, and requiredreclassification for all periods presented. This resulted in substantial reductions in reported *Operating Revenues, Fuel and purchasedand exchanged power* expense,and Gas purchased expense.  However, *Operating Income*and *Net Incom*e were not affected by this change.

 

*(ii)*                              Derivatives

 

In May 2003, theFASB issued Statement of Financial Accounting Standards No. 149, *Amendment ofStatement 133 on Derivative Instruments and Hedging Activities*(Statement 149).  Statement 149primarily amends Statement 133 to incorporate implementation conclusionspreviously cleared by the FASB staff, to clarify the definition of a derivativeand to require derivative instruments that include up-front cash payments to beclassified as a financing activity in the Statements of Cash Flows.  Implementation issues previously cleared bythe FASB staff were effective at the time they were cleared and new guidancewas effective in the third quarter of 2003. In connection with our adoption, we reviewed certain power purchase orsale contracts to determine if they met the revised normal purchases and salesscope exception criteria in Statement 149. If these criteria were not met, the contract was adjusted to fairvalue.  The impact of adopting Statement149 was not material to our financial position or results of operations.

 

In June 2003, theFASB issued final guidance on the use of broad market indices (e.g., consumerprice index) in power purchases and sales contracts.  This guidance clarifies that the normal purchases and sales scopeexception is precluded if a contract contains a broad market index that is notclearly and closely related to the asset being sold or purchased (or a directfactor in the production of the asset sold or purchased).  The guidance provides criteria that must bemet for the index to be considered clearly and closely related.  This guidance, which was effective in thefourth quarter of 2003, was not material to our financial position or resultsof operations.

 

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*(iii)*                          Asset Retirement Obligations

 

In July 2001, theFASB issued Statement 143, which requires fair value recognition beginningJanuary 1, 2003, of legal obligations associated with the retirement orremoval of long-lived assets at the time the obligations are incurred.   Statement 143 prohibits the accrual ofestimated retirement and removal costs unless resulting from legal obligations.  Our accounting policy for such legal obligationsand for accrued cost of removal for our rate regulated long-lived assets isdescribed in (j) above.

 

We adopted Statement 143on January 1, 2003, and **Cinergy** and **CG&E** both recognized again of $39 million (net of tax) for the cumulative effect of this change inaccounting principle.  Substantially allof this adjustment reflects the reversal of previously accrued cost of removalfor **CG&E’s**generating assets, which do not apply the provisions of Statement 71.  *Accrued cost of removal* at adoption included$316 million, $25 million, and $146 million of accumulated cost of removalrelated to **PSI’s**, **ULH&P’s**, and **CG&E’s** utility plant inservice assets, respectively, which represent regulatory liabilities afteradoption and were not included as part of the cumulative effectadjustment.  The increases in assets andliabilities from adopting Statement 143 were not material to our financialposition.

 

Pro-forma results as ifStatement 143 was applied retroactively for the years ended December 31,2002 and 2001, are not materially different from reported results.

 

*(iv)*                            Consolidation of VIEs

 

In January 2003, theFASB issued Interpretation No. 46, *Consolidation of Variable Interest Entities*(Interpretation 46), which significantly changes the consolidation requirementsfor traditional special purpose entities (SPE) and certain other entitiessubject to its scope.  Thisinterpretation defines a VIE as (a) an entity that does not have sufficientequity to support its activities without additional financial support or (b) anentity that has equity investors that do not have voting rights or do notabsorb losses or receive returns.  Theseentities must be consolidated when certain criteria are met.  The interpretation was originally to beeffective as of July 1, 2003 for **Cinergy**; however, the FASB subsequentlypermitted deferral of the effective date to December 31, 2003 fortraditional SPEs and to March 31, 2004 for all other entities subject tothe scope of Interpretation 46.  Duringthis deferral period, the FASB clarified and amended several provisions, muchof which is intended to assist in the application of Interpretation 46 tooperating entities.  Clarifications werenot needed for most traditional SPEs and we therefore elected to implementInterpretation 46 for such entities, as discussed below, in accordance with theoriginal implementation date of July 1, 2003.  Prior period financial statements were not restated for thesechanges.

 

Interpretation 46required us to consolidate two SPEs that have individual power sale agreementsto Central Maine Power Company (CMP). Further, we were no longer permitted to consolidate a trust that wasestablished by **Cinergy Corp.** in 2001 to issue approximately $316 million ofcombined preferred trust securities and stock purchase contracts.  For further information on the accountingfor these entities see Note 3.

 

**Cinergy** has concluded that its accountsreceivable sale facility, as discussed in Note 3(c), will remain unconsolidatedsince it involves transfers of financial assets to a qualifying SPE, which is

 

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exempted fromconsolidation by Interpretation 46 and Statement of Financial AccountingStandards No. 140, *Accounting for Transfers and Servicing of FinancialAssets and Extinguishments of Liabilities* (Statement 140).

 

**Cinergy** is continuing to evaluate theimpact of Interpretation 46 on several operating joint ventures, primarilyinvolved in cogeneration and energy efficiency operations, that we currently donot consolidate.  If all these entitieswere consolidated, their total assets of approximately $590 million (themajority of which is non-current) and total liabilities of approximately $210million (which includes long-term debt of approximately $90 million) would berecognized on our Balance Sheets.  **Cinergy’s**current investment in these entities is approximately $200 million.  We also guarantee certain performanceobligations of these entities with an estimated maximum potential exposure ofapproximately $40 million, as disclosed in Note 11(c)(vii).  If any of theseentities are required to be consolidated, they will be included in theMarch 31, 2004 consolidated financial statements.

 

*(v)*                                Financial Instruments with Characteristicsof Both Liabilities and Equity

 

In May 2003, theFASB issued Statement of Financial Accounting Standards No. 150, *Accountingfor Certain Financial Instruments with Characteristics of Both Liabilities andEquity* (Statement150).  Statement 150 establishesstandards for how an issuer classifies and measures certain financialinstruments with characteristics of both liabilities and equity.  This statement was effective for financialinstruments entered into or modified after May 31, 2003, and was effectiveon July 1, 2003, for financial instruments held prior to issuance of thisstatement.  Statement 150 would haverequired **CinergyCorp.’s** preferred trust securities to be reported as a liability;however, as described more fully in Note 3(b), the trust holding thesesecurities is no longer permitted to be consolidated and the preferred trustsecurities are no longer reported on **Cinergy’s** Balance Sheets.  However, **Cinergy’s**note payable to the trust is recorded on the Balance Sheets as *Long-termdebt*.  As a result, theimpact of adopting Statement 150 was not material to our financial position orresults of operations.

 

As discussed in Note3(b), **CinergyCorp.** issued forward stock sale contracts that require purchase bythe holder of a certain number of **Cinergy Corp.** shares in February 2005(stock contracts).  The number of sharesto be issued is contingent on the market price of **Cinergy Corp.** stock, butsubject to a predetermined ceiling and floor price.  In October 2003, the FASB staff released an interpretationof Statement 150 that requires an evaluation of these stock contracts todetermine whether they constitute a liability, with any changes in accountingrequired in January 2004.  Thisinterpretation did not have any impact on our current accounting.

 

*(vi)*                            Cumulative Effect of Changes in AccountingPrinciples, Net of Tax

 

The following tablesummarizes the various cumulative effect adjustments and their related taxeffects discussed above for the rescission of EITF 98-10 and the adoption ofStatement 142 and Statement 143:

 

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|                                                  |   | **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 thousands)**                 | * *    |
| **Cinergy(1)**                                        |   |                               |        |   |   |   |   |   |   |   |   |   |   |
| Goodwill  impairment (Statement 142 adoption)         |   | **$**                              | **—**  | ** ** | **$** | **—** | ** ** | **$** | **—** | ** ** | $ | (10,899 | ) | $ | — |   | $ | (10,899 | ) |
| Rescission of  EITF 98-10 (EITF 02-3 adoption)        |   | **(20,163**                        | **)**       | **7,651** | ** ** | **(12,512** | **)** | — |   | — |   | — |   |
| Asset  retirement obligation (Statement 143 adoption) |   | **64,070**                         | ** **  | **(25,096** | **)** | **38,974** | ** ** | — |   | — |   | — |   |
|                                                  |   | **$**                              | **43,907**  |   | **$** | **(17,445** | **)** | **$** | **26,462** | ** ** | $ | (10,899 | ) | $ | — |   | $ | (10,899 | ) |
| **CG&E**                                          |   |                               | ** **  |   | ** ** |   | ** ** |   |   |   |   |   |   |
| Rescission of  EITF 98-10 (EITF 02-3 adoption)        |   | **$**                              | **(13,540** | **)** | **$** | **5,301** | ** ** | **$** | **(8,239** | **)** | $ | — |   | $ | — |   | $ | — |   |
| Asset  retirement obligation (Statement 143 adoption) |   | **64,383**                         | ** **  | **(25,206** | **)** | **39,177** | ** ** | — |   | — |   | — |   |
|                                                  |   | **$**                              | **50,843**  |   | **$** | **(19,905** | **)** | **$** | **30,938** | ** ** | $ | — |   | $ | — |   | $ | — |   |
| **PSI**                                               |   |                               | ** **  |   | ** ** |   | ** ** |   |   |   |   |   |   |
| Rescission of  EITF 98-10 (EITF 02-3 adoption)        |   | **$**                              | **(810**    | **)** | **$** | **316** | ** ** | **$** | **(494** | **)** | $ | — |   | $ | — |   | $ | — |   |
|                                                  |   | **$**                              | **(810**    | **)** | **$** | **316** | ** ** | **$** | **(494** | **)** | $ | — |   | $ | — |   | $ | — |   |

 

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

 

***(r)***                                  Translation ofForeign Currency

 

We translate the assetsand liabilities of foreign subsidiaries, whose functional currency (generally,the local currency of the country in which the subsidiary is located) is notthe United States (U.S.) dollar, using the appropriate exchange rate as of theend of the year.  We translate incomeand expense items using the average exchange rate prevailing during the monththe respective transaction occurs.  Werecord translation gains and losses in *Accumulated other comprehensive income (loss)*,which is a component of common stock equity. When a foreign subsidiary is sold, the cumulative translation gain orloss as of the date of sale is removed from *Accumulated other comprehensive income (loss)*and is recognized as a component of the gain or loss on the sale of thesubsidiary in our Statements of Income.

 

***(s)***                                  Related PartyTransactions

 

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

 

*(i)*                                  Services

 

Services provides ourregulated and non-regulated subsidiaries with a variety of centralizedadministrative, management, and support services in accordance with agreementsapproved by the SEC under the PUHCA. The cost of these services are charged to our companies on a directbasis, or for general costs which cannot be directly attributed, based onpredetermined allocation factors, including the following ratios:

 

•     sales;

•     electric peak load;

•     number of employees;

 

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•     number of customers;

•                  construction expenditures; and

•                  other statistical information.

 

These costs were as follows for the years ended December 31, 2003,2002, and 2001:

 

|                          |   | **2003**          |       | **2002**   |     | **2001** |     |
|-------------------------------|--------|-------------------|------------|------------|----------|----------|----------|
|                          |   | **(in millions)** |       |
|                          |   |              | * *   |       | * * |     | * * |
| **CG&E** and subsidiaries |   | **$**             | **219**    | ** ** | $        | 206      |     | $ | 240 |   |
| **PSI**                       |   | **193**           | ** ** | 190        |     | 196      |     |
| **ULH&P**                 |   | **22**            | ** ** | 23         |     | 24       |     |
|                               |        |                   |            |            |          |          |          |  |  |  |

 

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Generation Services supplies electric production-related construction,operation and maintenance services to certain of our subsidiaries pursuant toagreements approved by the SEC under the PUHCA.  The cost of these services were as follows for the years endedDecember 31, 2003, 2002, and 2001:

 
|                           |   | **2003**          |     | **2002****(1)** |     | **2001** |     |
|--------------------------------|--------|-------------------|----------|-----------------|----------|----------|----------|
|                           |   | **(in millions)** |     |
|                           |   |              | * * |            | * * |     | * * |
| **CG&E** and  subsidiaries |   | **$**             | **96**   |            | $        | 104      |     | $ | 67 |   |
| **PSI**                        |   | **55**            |     | 58              |     | 21       |     |
|                                |        |                   |          |                 |          |          |          |  |  |  |

 

----

(1) Increasereflects movement of Services’ employees to Generation Services. 

 

*(ii)*                              Purchased Energy

* *

**ULH&P**purchases energy from **CG&E**pursuant to a contract effectiveJanuary 1, 2002, which was approved by the FERC and the Kentucky Public ServiceCommission (KPSC).  This five-yearagreement is a negotiated fixed-rate contract with **CG&E**and replaces theprevious cost-of-service based contract, which expired on December 31,2001.  **ULH&P** purchased energyfrom **CG&E**for resale in the amounts of $155 million, $160 million, and $152 million forthe years ended December 31, 2003, 2002, and 2001, respectively.  These amounts are reflected in theStatements of Income for **ULH&P**as *Electricity purchased from parentcompany for resale*.  Forinformation on the potential transfer of generating assets to **ULH&P**and the effect it will have on purchased energy see Note 19.

 

**PSI**and**CG&E**purchaseenergy from each other under a federal and state approved joint operatingagreement.  These sales and purchasesare reflected in the Statements of Income of **PSI**and **CG&E**as *Electricoperating revenues and Fuel and purchased and exchanged power*expense and were as follows for the years ended December 31, 2003, 2002, and2001:

 

|                         |   | **2003**          |     | **2002** |     | **2001** |     |
|------------------------------|--------|-------------------|----------|----------|----------|----------|----------|
|                         |   | **(in millions)** |     |
|                         |   |              | * * |     | * * |     | * * |
| **CG&E**                 |   |              |     |     |     |     |     |
| Electric  operating revenues |   | **$**             | **63**   |     | $        | 59       |     | $ | 90 |   |
| Purchased  power(1)          |   | **74**            |     | 43       |     | 92       |     |
| **PSI**                      |   |              |     |     |     |     |     |
| Electric  operating revenues |   | **74**            |     | 43       |     | 92       |     |
| Purchased  power(1)          |   | **63**            |     | 59       |     | 90       |     |
|                              |        |                   |          |          |          |          |          |  |  |  |

 

----

| (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 **Cinergy Corp**. under the terms of a wholesalemarket-based tariff.  For the year endedDecember 31, 2003, payments under this contract totaled approximately $5million for **CG&E**.  For the yearended December 31, 2002, payments under these contracts for both **CG&E**and**PSI**totaledapproximately $27 million and $28 million, respectively.  For **PSI,**certain of these amounts have been deferred for future recovery as approved bythe IURC.

 

157

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**CG&E**and **PSI**have an agreement with CinergyMarketing & Trading, LP (Marketing & Trading) to purchase gas forcertain gas-fired peaking plants. Purchases under this agreement were approximately $6 million, $9million, and $12 million for **CG&E**and $20 million, $5 million, and$4 million for **PSI**for the years ended December 31, 2003, 2002, and 2001,respectively.  The amounts are reflectedin the Statements of Income of **CG&E**and **PSI**as *Fuel and purchased and exchanged power*expense.

 

*(iii)*                          Other

 

In November 2002, **CG&E**and **ULH&P**entered intoagreements with Marketing & Trading to manage their interstate pipeline transportation, storage capacity, and gassupply contracts.  Under the terms ofthese agreements, Marketing & Trading is obligated to deliver natural gas tomeet **CG&E’s**and **ULH&P’s**firmrequirements.  These agreements expiredin October 2003.  In November 2003, **CG&E**andits subsidiaries, including **ULH&P**, entered into new one-yearcontracts with Marketing & Trading. Payments under these agreements for the years ended December 31, 2003and 2002 were approximately $413 million and $40 million for **CG&E**and subsidiaries, and $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.

 

In February 2003, **PSI**acquired gas-fired peaking plants inHenry County, Indiana and Butler County, Ohio from two non-regulatedaffiliates.  For a further discussion onthe transfer of these generating assets see Note 19.

 

**CinergyCorp**.,Services, and our operating companies participate in a money pool arrangementto better manage cash and working capital requirements.  These amounts are reflected in *Notespayable to affiliated companies*and *Notes receivable from affiliatedcompanies*on the Balance Sheets of our operating companies.  For a further discussion on the money poolagreement see Note 6.

 

158

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**2.**              CommonStock

** **

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

*** ***

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

 
|                                                                  |   | **Shares  Authorized for  Issuance under  Plan** |   | **Number of  Shares  Available  for Future  Issuance****(3)** |       | **Shares Used to Grant or  Settle Awards** |   |
|-----------------------------------------------------------------------|--------|--------------------------------------------------|--------|---------------------------------------------------------------|------------|--------------------------------------------|--------|
| **2003**                                                              |   | **2002**                                         |   | **2001**                                                      |       |
|                                                                  |   |                                             |   |                                                          |       |                                       |   |   |   |   |   |
| Cinergy Corp. 1996 Long-Term Incentive Compensation Plan (LTIP)       |   | 14,500,000                                       |   | 4,346,877                                                     | ** ** | **1,742,046**                              |   | 674,005 |   | 72,225 |   |
|                                                                  |   |                                             |   |                                                          |       |                                       |   |   |   |   |   |
| Cinergy Corp. Stock Option Plan (SOP)                                 |   | 5,000,000                                        |   | 1,318,500                                                     | ** ** | **421,611**                                |   | 870,867 |   | 263,070 |   |
|                                                                  |   |                                             |   |                                                          |       |                                       |   |   |   |   |   |
| Cinergy Corp. Employee Stock Purchase and Savings Plan                |   | 2,000,000                                        |   | 1,482,664                                                     | ** ** | **168,756**                                |   | 4,912 |   | 227,847 |   |
|                                                                  |   |                                             |   |                                                          |       |                                       |   |   |   |   |   |
| Cinergy Corp. UK Sharesave Scheme                                     |   | 75,000                                           |   | 62,637                                                        | ** ** | **3,364**                                  |   | 8,878 |   | 121 |   |
|                                                                  |   |                                             |   |                                                          |       |                                       |   |   |   |   |   |
| Cinergy Corp. Retirement Plan for Directors                           |   | 175,000                                          | (1)    | —                                                        | ** ** | **5,602**                                  |   | 1,768 |   | 29,135 |   |
|                                                                  |   |                                             |   |                                                          |       |                                       |   |   |   |   |   |
| Cinergy Corp. Directors’ Equity Compensation Plan                |   | 75,000                                           |   | 46,771                                                        | ** ** | **3,824**                                  |   | 196 |   | 1,858 |   |
|                                                                  |   |                                             |   |                                                          |       |                                       |   |   |   |   |   |
| Cinergy Corp. Directors’ Deferred Compensation Plan              |   | 200,000                                          |   | 108,547                                                       | ** ** | **25,826**                                 |   | — |   | 14,211 |   |
|                                                                  |   |                                             |   |                                                          |       |                                       |   |   |   |   |   |
| Cinergy Corp. 401(k) Plans                                            |   | 6,469,373                                        | (1)    | 3,890,358                                                     | ** ** | **1,544,900**                              |   | 964,615 |   | 69,500 |   |
|                                                                  |   |                                             |   |                                                          |       |                                       |   |   |   |   |   |
| Cinergy Corp. Direct Stock Purchase and Dividend Reinvestment Plan(2) |   | 3,000,000                                        | (1)    | 689,820                                                       | ** ** | **679,301**                                |   | 657,943 |   | 649,834 |   |
|                                                                  |   |                                             |   |                                                          |       |                                       |   |   |   |   |   |
| 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,  2003. |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | Shares issued prior to  April 2001 were for the previous Cinergy Corp. Dividend Reinvestment and  Stock Purchase Plan, which is no longer active.       |
| (3) | Shares available exclude  the number of shares to be issued upon exercise of outstanding options,  warrants, and rights.                                |

 

We retired 519,976 shares of common stock in 2003, 422,908 shares in2002, and 72,739 shares in 2001, mainly representing shares tendered as paymentfor the exercise of previously granted stock options.

 

In April 2001, **Cinergy** adopted the Cinergy Corp. DirectStock Purchase and Dividend Reinvestment Plan, a plan designed to provideinvestors with a convenient method to purchase shares of **Cinergy Corp**. common stock and to reinvest cashdividends in the purchase of additional shares.  This plan replaced the Cinergy Corp. Dividend Reinvestment andStock Purchase Plan.

 

159

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In November 2001, **Cinergy** chose to reinstitute the practiceof issuing new **Cinergy Corp**.common shares to satisfy obligations under certain of its employee stock plansand the Cinergy Corp. Direct Stock Purchase and Dividend ReinvestmentPlan.  This replaced our previouspractice of purchasing shares in the open market to fulfill certain planobligations.

 

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

 

In January 2003, **Cinergy Corp.** filed a registrationstatement with the SEC with respect to the issuance of common stock, preferredstock, and other securities in an aggregate offering amount of $750million.  In February 2003, **Cinergy**sold 5.7 million shares of **Cinergy Corp.** common stock with netproceeds of approximately $175 million under this registration statement.  The net proceeds from the transaction wereused to reduce short-term debt of **Cinergy Corp.** and for other generalcorporate purposes.

 

**CinergyCorp.** owns all of the common stock of **CG&E**and **PSI**.  All of **ULH&P’s**common stock is held by **CG&E**.

 

***(b)***                                  Dividend Restrictions

*** ***

**CinergyCorp.’s** ability to pay dividends to holders of its commonstock is principally dependent on the ability of **CG&E**and **PSI**topay **CinergyCorp.** common stock dividends. **CinergyCorp.**,**CG&E**, and **PSI**cannot pay dividends ontheir common stock if their respective preferred stock dividends or preferredtrust dividends are in arrears.  Theamount of common stock dividends that each company can pay is also limited bycertain capitalization and earnings requirements under **CG&E’s**and **PSI’s**creditinstruments.  Currently, theserequirements do not impact the ability of either company to pay dividends onits common stock.

 

***(c)***                                  Stock-basedCompensation Plans

*** ***

We currently have the following stock-based compensation plans:

 

•                  LTIP;

•                  SOP;

•                  Employee Stock Purchase and SavingsPlan;

•     UKSharesave Scheme;

•                  Retirement Plan for Directors;

•                  Directors’ Equity Compensation Plan;

•                  Directors’ Deferred CompensationPlan; and

•                  401(k) Excess Plan.

 

The LTIP, the SOP, the Employee Stock Purchase and Savings Plan, andthe 401(k) Excess Plan are discussed below. The activity in 2003, 2002, and 2001 for the remaining stock-basedcompensation plans was not significant.

 

In 2003, we prospectively adopted accounting for our stock-basedcompensation plans using the fair value recognition provisions of Statement123, as amended by Statement 148, for all employee awards granted or with termsmodified on or after January 1, 2003. Prior to 2003, we had

 

160

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accounted for our stock-based compensation plans using the intrinsicvalue method under APB 25.  See“Stock-Based Compensation” in Note 1(p) for additional information on costs werecognized in 2003, 2002, and 2001, related to stock-based compensation plans,and for our pro-forma disclosure assuming compensation costs for these planshad been determined at fair value, consistent with Statement 123, as amended byStatement 148.

 

*(i)*                                  LTIP

* *

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

 

Historically, the performance-based shares have been paid 100 percentin the form of common stock.  In orderto maintain market competitiveness with respect to the form of LTIP awards andto ensure continued compliance with internal guidelines on common sharedilution, the Compensation Committee of the **Cinergy Corp.** Board ofDirectors approved the future payment of performance-based share awards 50percent in common stock and 50 percent in cash.  As a result, we have reclassified the expected cash payoutportion of the performance shares from *Paid-in capital to Current Liabilities - Other andNon-Current Liabilities - Other.*

 

Entitlement to performance-based shares is based on **Cinergy’s**totalshareholder return (TSR) over designated Cycles as measured against apre-defined peer group.  Target grantsof performance-based shares were made for the following Cycles:

 

| **Cycle** |   | **Grant  Date** |     | **Performance  Period** |     | **Target  Grant of Shares** |     |
|-----------|--------|-----------------|----------|-------------------------|----------|-----------------------------|----------|
|      |   |            |     |                    |     | ***(in thousands)***        |     |
|      |   |            | * * |                    | * * |                        | * * |
| VI        |   | 1/2002          |     | 2002-2004               |     | 357                         |     |
| VII       |   | 1/2003          |     | 2003-2005               |     | 411                         |     |
| VIII      |   | 1/2004          |     | 2004-2006               |     | 404                         |     |

 

Participants may earn additional performance shares if **Cinergy’s**TSRexceeds that of the peer group.  For thethree-year performance period ended December 31, 2003 (Cycle V), approximately567,000 shares (including dividend equivalent shares) were earned, based on ourrelative TSR.

 

*(ii)*                              SOP

* *

The SOP is designed to align executive compensation with shareholderinterests.  Under the SOP, incentive andnon-qualified stock options, SARs, and SARs in tandem with stock options may begranted to key employees, officers, and outside directors.  The activity under this plan haspredominantly consisted of the issuance of stock options.  Options are granted with an option

 

161

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price equal to the fair market value of the shares on the grantdate.  Options generally vest over fiveyears at a rate of 20 percent per year, beginning on the grant date, and expire10 years from the grant date.  The totalnumber of shares of common stock issuable under the SOP may not exceed5,000,000 shares.  No incentive stockoptions may be granted under the plan after October 24, 2004.

 

*(iii)*                          Employee Stock Purchase and Savings Plan

 

The Employee Stock Purchase and Savings Plan allows essentially allfull-time, regular employees to purchase shares of common stock pursuant to astock option feature.  Under theEmployee Stock Purchase and Savings Plan, after-tax funds are withheld from aparticipant’s compensation during a 26-month offering period and are depositedin an interest-bearing account.  At theend of the offering period, participants may apply amounts deposited in theaccount, plus interest, toward the purchase of shares of common stock.  The purchase price is equal to 95 percent ofthe fair market value of a share of common stock on the first date of theoffering period.  Any funds not appliedtoward the purchase of shares are returned to the participant.  A participant may elect to terminateparticipation in the plan at any time. Participation also will terminate if the participant’s employmentceases.  Upon termination ofparticipation, all funds, including interest, are returned to the participant withoutpenalty.  The sixth offering periodbegan May 1, 2001, and ended June 30, 2003, with 168,101 shares purchased andthe remaining cash distributed to the respective participants.  The purchase price for all shares under thisoffering was $32.78.  The total numberof shares of common stock issuable under the Employee Stock Purchase andSavings Plan may not exceed 2,000,000.

 

162

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Activity for 2003, 2002, and 2001 for the LTIP, SOP, and Employee StockPurchase and Savings Plan is summarized as follows:

 
|                             |   | **LTIP and SOP**              |       | **Employee Stock Purchase and  Savings Plan** |       |
|----------------------------------|--------|-------------------------------|------------|-----------------------------------------------|------------|
|                             |   | **Shares Subject  to Option** |       | **Weighted Average  Exercise Price**          |       | **Shares  Subject  to Option** |   | **Weighted Average  Exercise Price** |   |
| Balance at December 31, 2000     |   | 6,990,871                     |       | $                                             | 26.77      |   | 280,326 |   | $ | 27.73 |   |
|                             |   |                          | ** ** |                                          | ** ** |   | ** ** |   | ** ** |
| Options granted                  |   | 811,700                       |       | 33.90                                         |       | 299,793 |   | 32.78 |   |
| Options exercised                |   | (275,393                      | )          | 24.39                                         |       | (227,968 | ) | 27.73 |   |
| Options forfeited                |   | (79,400                       | )          | 27.29                                         |       | (73,826 | ) | 29.20 |   |
|                             |   |                          | ** ** |                                          | ** ** |   | ** ** |   | ** ** |
| Balance at December 31, 2001     |   | 7,447,778                     |       | 27.63                                         |       | 278,325 |   | 32.78 |   |
|                             |   |                          | ** ** |                                          | ** ** |   | ** ** |   | ** ** |
| Options granted                  |   | 1,241,200                     | (2)        | 32.27                                         |       | — |   | — |   |
| Options exercised                |   | (1,308,738                    | )          | 23.96                                         |       | (4,912 | ) | 32.78 |   |
| Options forfeited                |   | (18,540                       | )          | 31.57                                         |       | (55,243 | ) | 32.78 |   |
|                             |   |                          |       |                                          |       |   |   |   |   |
| Balance at December 31, 2002     |   | 7,361,700                     |       | 29.06                                         |       | 218,170 |   | 32.78 |   |
|                             |   |                          |       |                                          |       |   |   |   |   |
| **Options granted**              |   | **897,100**                   | (2)        | **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 Exercisable**(1):      |   |                          | ** ** |                                          | ** ** |   | ** ** |   | ** ** |
| At December 31, 2001             |   | 3,763,558                     |       | $                                             | 27.32      |   |   |   |   |   |
| At December 31, 2002             |   | 3,744,420                     |       | $                                             | 28.98      | ** ** |   | ** ** |   | ** ** |
| **At December 31, 2003**         |   | **3,700,346**                 | ** ** | **$**                                         | **29.52**  | ** ** |   | ** ** |   | ** ** |

 

----

(1)          The options under the Employee Stock Purchaseand Savings Plan are generally only exercisable at the end of the offeringperiod.

(2)          Options were not granted under the SOP during2003 or 2002.

 

The weighted average fair value of options granted under the combinedLTIP and the SOP plans was $4.96 in 2003, $4.95 in 2002, and $5.42 in2001.  The weighted average fair valueof options granted under the Employee Stock Purchase and Savings Plan was $5.85in 2001 (no options were granted in 2003 or 2002).  The fair values of options granted were estimated as of the grantdate using the Black-Scholes option-pricing model and the followingassumptions:

 

|                    |   | **LTIP  and SOP**(1) |       | **Employee  Stock  Purchase and Savings  Plan**(2) |       |
|-------------------------|--------|----------------------|------------|----------------------------------------------------|------------|
|                    |   | **2003**             |       | **2002**                                           |       | **2001** |   | **2001** |   |
|                    |   |                 | ** ** |                                               | ** ** |   | ** ** |   | ** ** |
| Risk-free interest rate |   | **3.02**             | **%**      | 3.92                                               | %          | 4.78 | % | 4.22 | % |
| Expected dividend yield |   | **5.34**             | **%**      | 5.66                                               | %          | 5.42 | % | 5.26 | % |
| Expected lives          |   | **5.35**             | **yrs.**   | 5.42                                               | yrs.       | 5.37 | yrs. | 2.17 | yrs. |
| Expected volatility     |   | **26.15**            | **%**      | 26.45                                              | %          | 25.01 | % | 30.67 | % |

 

----

| (1)          Options were not granted  under the SOP in 2003 or 2002.                                      |   |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
| (2)          Options were not granted  under the Employee Stock Purchase and Savings Plan in 2003 or 2002. |   |

 

163

----

 

Price ranges, along with certain other information, for optionsoutstanding under the combined LTIP and SOP plans at December 31, 2003, were asfollows:

 

|                      |   |                  |   |                                   |   | **Outstanding**                                     |   | **Exercisable**       |   |
|---------------------------|--------|-----------------------|--------|----------------------------------------|--------|-----------------------------------------------------|--------|-----------------------|--------|
| **Exercise  Price Range** |   | **Number  of Shares** |   | **Weighted  Average  Exercise  Price** |   | **Weighted  Average  Remaining  Contractual  Life** |   | **Number  of Shares** |   | **Weighted  Average  Exercise  Price** |   |
|                      |   |                  |   |                                   |   |                                                |   |                  |   |   |   |   |   |   |   |
| $                         | 22.88  |                  | -      |                                   | $      | 24.38                                               |   | 2,134,724             |   | $ | 24.00 |   | 5.27 yrs. |   | 1,830,644 |   | $ | 24.03 |   |
| $                         | 24.63  |                  | -      |                                   | $      | 33.87                                               |   | 1,851,164             |   | $ | 32.05 |   | 7.20 yrs. |   | 611,236 |   | $ | 31.93 |   |
| $                         | 33.88  |                  | -      |                                   | $      | 38.59                                               |   | 2,583,566             |   | $ | 35.51 |   | 6.48 yrs. |   | 1,258,466 |   | $ | 36.32 |   |

 

*(iv)*                            401(k) Excess Plan

 

The 401(k) Excess Plan is a non-qualified deferred compensation planfor a select group of **Cinergy**management and other highlycompensated employees.  It is a means bywhich these employees can defer additional compensation provided they havealready contributed the maximum amount (pursuant to the anti-discriminationrules for highly compensated employees) under the qualified 401(k) Plan.  All funds deferred are held in a rabbi trustadministered by an independent trustee.

 

***(d)***                                  401(k) Plans

 

We sponsor 401(k) employee retirement plans that cover substantiallyall U.S. employees.  Employees cancontribute up to 50 percent of pre-tax base salary (subject to Internal RevenueService (IRS) limits) and up to 15 percent of after-tax base salary.  We make matching contributions to theseplans in the form of **Cinergy Corp**. common stock, contributing 100 percent of the first threepercent of an employee’s pre-tax contributions plus 50 percent of the next twopercent of an employee’s pre-tax contributions.  Employees are immediately vested in both their contributions andour matching contributions.

 

**Cinergy’s,CG&E’s**, and **PSI’s**matching contributions for the yearsended December 31, 2003, 2002, and 2001 were as follows:

 

|                          |   | **2003**            |     | **2002** |     | **2001** |     |
|-------------------------------|--------|---------------------|----------|----------|----------|----------|----------|
|                          |   | ***(in millions)*** |     |
|                          |   |                | * * |     | * * |     | * * |
| **Cinergy**(1)                |   | **$**               | **18**   |     | $        | 19       |     | $ | 17 |   |
| **CG&E**and  subsidiaries |   | **3**               |     | 3        |     | 3        |     |
| **PSI**                       |   | **4**               |     | 3        |     | 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 pay.  The deferred profitsharing contribution

 

164

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made by **Cinergy** is based on our performance level for the year, and ismade to the 401(k) plans in the form of **Cinergy Corp**. common stock.  Eachyear’s contribution must remain invested in **Cinergy Corp**. common stock for a minimum of threeyears, or until an employee reaches age 50. Employees age 50 or older may transfer their benefit from **Cinergy Corp**. common stock into another investmentoption offered under our 401(k) plans.  Employeesvest in their benefit upon reaching three years of service, or immediately uponreaching age 65 while employed.  **Cinergy**hasrecorded approximately $1.5 million of profit sharing contribution costs forthe year ended December 31, 2003.

 

**(e)****                                  *Stock Purchase Contracts***

*** ***

In December 2001, **Cinergy Corp**. issued approximately $316 million notional amount of combinedsecurities, a component of which was stock purchase contracts.  These contracts obligate the holder topurchase common shares of **Cinergy Corp**. stock in, and/or before, February 2005.  The number of shares to be issued iscontingent upon the market price of **Cinergy Corp**. stock, but subject to predetermined ceiling and floorprices.  See Note 3(b) for furtherdiscussion of these combined securities.

 

**3.****                                      VariableInterest Entities**

** **

***(a)***                                  Power Sale SPEs

 

As discussed in Note 1(q)*(iv)*,in accordance with Interpretation 46, we were required to consolidate two SPEsthat have individual power sale agreements to CMP for approximately 45megawatts (MW) of capacity, ending in 2009, and 35 MW of capacity, ending in2016.  In addition, these SPEs haveindividual power purchase agreements with Capital & Trading to supply thepower.  Capital & Trading alsoprovides various services, including certain credit support facilities.  Upon the initial consolidation of these twoSPEs on July 1, 2003, approximately $239 million of notes receivable, $225million of non-recourse debt, and miscellaneous other assets and liabilities wereincluded on Cinergy’s BalanceSheets.  The debt was incurred by theSPEs to finance the buyout of the existing power contracts that CMP held withthe former suppliers.  The cash flowsfrom the notes receivable are designed to repay the debt.  Notes 4 and 5 provide additional informationregarding the debt and the notes receivable, respectively.

 

***(b)***                                  Preferred TrustSecurities

*** ***

In December 2001, **Cinergy Corp**. issued approximately $316 million notional amount of combinedsecurities consisting of (a) 6.9 percent preferred trust securities, due February2007, and (b) stock purchase contracts obligating the holders to purchasebetween 9.2 and 10.8 million shares of **Cinergy Corp**. common stock in February 2005. A $50 preferred trust security and stock purchase contract were soldtogether as a single security unit (Unit). The preferred trust securities were issued through a trust whose commonstock is 100 percent owned by **Cinergy Corp**. The stock purchase contractswere issued directly by **Cinergy Corp**.  The trust loaned theproceeds from the issuance of the securities to **Cinergy Corp**. in exchange for a note payable tothe trust that was eliminated in consolidation.  The proceeds of $306 million, which is net of approximately $10million of issuance costs, were used to pay down **Cinergy Corp.’s** short-term

 

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indebtedness.  In February 2005,the preferred trust securities will be remarketed and the dividend rate reset,no lower than 6.9 percent, to yield $316 million in the remarketing.  The holders will use the proceeds from thisremarketing to fund their obligation to purchase shares of **Cinergy Corp**. common stock under the stockpurchase contract.  The holders will paythe market price for the stock at that time, subject to a ceiling of $34.40 pershare and a floor of $29.15 per share. The number of shares to be issued will vary according to the stockprice, subject to the total proceeds equaling $316 million.

 

Each Unit will receive quarterly cash payments of 9.5 percent per annumof the notional amount, which includes the preferred trust security dividend of6.9 percent and payment of 2.6 percent, which represents principal and intereston the stock purchase contracts.  Upondelivery of the shares, these stock purchase contract payments will cease.  The trust’s ability to pay dividends on thepreferred trust securities is solely dependent on its receipt of interestpayments from **Cinergy Corp**. onthe note payable.  However, **Cinergy Corp**. has fully and unconditionally guaranteed the preferred trustsecurities.

 

As of July 1, 2003, we no longer consolidate the trust that wasestablished to issue the preferred trust securities.  The preferred trust securities (previously recorded as *Companyobligated, mandatorily redeemable, preferred trust securities of subsidiary,holding solely debt securities of the company)* are no longerincluded in **Cinergy Corp**.**’s**BalanceSheets.  In addition, the note payableowed to the trust, which has a current carrying value of $319 million, isincluded in *Long-termdebt.*

 

**(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 Receivables Company,LLC (Cinergy Receivables) to purchase, on a revolving basis, nearly all of theretail accounts receivable and related collections of **CG&E, PSI,** and **ULH&P.  Cinergy Corp.** does notconsolidate Cinergy Receivables since it meets the requirements to be accountedfor as a qualifying SPE.  The transfersof receivables are accounted for as sales, pursuant to Statement 140.

 

The proceeds obtained from the sales of receivables are largely cashbut do include a subordinated note from Cinergy Receivables for a portion ofthe purchase price (typically approximates 25 percent of the totalproceeds).  The note is subordinate tosenior loans that Cinergy Receivables obtains from commercial paper conduitscontrolled by unrelated financial institutions.  Cinergy Receivables provides credit enhancement related to seniorloans in the form of over-collateralization of the purchased receivables.  However, the over-collateralization iscalculated monthly and does not extend to the entire pool of receivables heldby Cinergy Receivables at any point in time. As such, these senior loans do not have recourse to all assets ofCinergy Receivables.  These loansprovide the cash portion of the proceeds paid to **CG&E, PSI,** and **ULH&P**.

 

This subordinated note is a retained interest (right to receive aspecified portion of cash flows from the sold assets) under Statement 140 andis classified within *Notes receivable from*

 

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*affiliatedcompanies*in the accompanying Balance Sheets of **CG&E,PSI,** and **ULH&P**andis classified within *Notes receivable*on **Cinergy Corp.’s** Balance Sheets.  In addition, **Cinergy Corp.’s** investment inCinergy Receivables constitutes a purchased beneficial interest (purchasedright to receive specified cash flows, in our case residual cash flows), whichis subordinate to the retained interests held by **CG&E, PSI**, and **ULH&P**. The carrying values of the retained interests are determined byallocating the carrying value of the receivables between the assets sold andthe interests retained based on relative fair value.  The key assumptions in estimating fair value are credit lossesand selection of discount rates. Because (a) the receivables generally turn in less than two months, (b)credit losses are reasonably predictable due to each company’s broad customerbase and lack of significant concentration, and (c) the purchased beneficialinterest is subordinate to all retained interests and thus would absorb lossesfirst, the allocated bases of the subordinated notes are not materiallydifferent than their 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 incomefrom Cinergy Receivables in a similar manner. We record an impairment charge against the carrying value of both theretained interests and purchased beneficial interest whenever we determine thatan other-than-temporary impairment has occurred (which is unlikely unlesscredit losses on the receivables far exceed the anticipated level).

 

The key assumptions used in measuring the retained interests for salessince the inception of the new agreement are as follows (all amounts areaverages of the assumptions used in sales during the period):

 

|                                 |   | **Cinergy** |   | **CG&E  and  subsidiaries** |   | **PSI**  |   | **ULH&P** |   |
|--------------------------------------|--------|-------------|--------|---------------------------------|--------|----------|--------|---------------|--------|
|                                 |   |        |   |                            |   |     |   |          |   |   |   |   |   |   |   |   |   |
|                                 |   | **2003**    |   | **2002**                        |   | **2003** |   | **2002**      |   | **2003** |   | **2002** |   | **2003** |   | **2002** |   |
| Anticipated credit loss rate         |   | **0.6**     | **%**  | 0.6                             | %      | **0.8**  | **%**  | 0.6           | %      | **0.5** | **%** | 0.5 | % | **1.0** | **%** | 1.0 | % |
| Discount rate on expected cash flows |   | **4.4**     | **%**  | 5.0                             | %      | **4.4**  | **%**  | 5.0           | %      | **4.4** | **%** | 5.0 | % | **4.4** | **%** | 5.0 | % |
| Receivables turnover rate(1)         |   | **12.8**    | **%**  | 12.9                            | %      | **13.6** | **%**  | 13.7          | %      | **11.8** | **%** | 11.8 | % | **13.2** | **%** | 13.5 | % |

 

----

| (1)                                  Receivables  at each month-end divided by annualized sales for the month. |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|

 

The hypothetical effect on the fair value of the retained interestsassuming both a 10 percent and 20 percent unfavorable variation in creditlosses or discount rates is not material due to the short turnover ofreceivables and historically low credit loss history.

 

**CG&E**retains servicing responsibilities for itsrole as a collection agent on the amounts due on the sold receivables.  However, Cinergy Receivables assumes therisk of collection on the purchased receivables without recourse to **CG&E, PSI,**and **ULH&P**in the event of a loss.  While no direct recourse to **CG&E, PSI,**and **ULH&P**exists, these entities risk lossin the event collections are not sufficient to allow for full recovery of theirretained interests.  No servicing assetor liability is recorded since the servicing fee paid to **CG&E**approximates a market rate.

 

167

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The following table shows the gross and netreceivables sold, retained interests, purchased beneficial interest, sales, andcash flows during the periods ending December 31, 2003 and 2002.

 
|                                  |   | **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 interests        |   | **$**               | **14**     | ** ** | **$** | **—** | ** ** | **$** | **—** | ** ** | **$** | **—** |   |
|                                  |   |                | ** ** |   | ** ** |   | ** ** |   |   |
| **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**               | ** ** | **1** | ** ** | **1** | ** ** | **—** |   |
| Return received on retained interests |   | **16**              | ** ** | **9** | ** ** | **7** | ** ** | **2** |   |

 
|                                  |   | **2002**            |     |
|---------------------------------------|--------|---------------------|----------|
|                                  |   | **Cinergy**         |     | **CG&E  and  subsidiaries** |   | **PSI** |   | **ULH&P** |   |
|                                  |   | ***(in millions)*** |     |
|                                  |   |                | * * |   | * * |   | * * |   | * * |
| Receivables sold as of period end     |   | $                   | 483      |   | $ | 299 |   | $ | 184 |   | $ | 45 |   |
| Less:  Retained interests        |   | 135                 |     | 81 |   | 54 |   | 13 |   |
|                                  |   |                |     |   |   |   |   |   |   |
| Net receivables sold as of period end |   | $                   | 348      |   | $ | 218 |   | $ | 130 |   | $ | 32 |   |
|                                  |   |                |     |   |   |   |   |   |   |
| Purchased beneficial interests        |   | $                   | 10       |   | $ | — |   | $ | — |   | $ | — |   |
|                                  |   |                |     |   |   |   |   |   |   |
| **Sales  during period**              |   |                |     |   |   |   |   |   |   |
| Receivables sold                      |   | $                   | 3,233    |   | $ | 1,840 |   | $ | 1,392 |   | $ | 287 |   |
| Loss recognized on sale               |   | 32                  |     | 19 |   | 13 |   | 3 |   |
|                                  |   |                |     |   |   |   |   |   |   |
| **Cash  flows during period**         |   |                |     |   |   |   |   |   |   |
| Cash proceeds from sold receivables   |   | $                   | 3,184    |   | $ | 1,813 |   | $ | 1,371 |   | $ | 283 |   |
| Collection fees received              |   | 2                   |     | 1 |   | 1 |   | — |   |
| Return received on retained interests |   | 16                  |     | 9 |   | 7 |   | 1 |   |

 

A decline in the long-term senior unsecured credit ratings of**CG&E, PSI**, or **ULH&P** below investmentgrade would result in a termination of the sale program and discontinuance offuture sales of receivables, and could prevent Cinergy Receivables fromborrowing additional funds from commercial paper conduits.

 

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**4.****              Long-Term Debt**

 

Refer to the Statements of Capitalization for detailed information for **Cinergy’s,CG&E’s, PSI’s,** and **ULH&P’s**long-term debt.

 

In January 2002, **PSI**repaid at maturity $23 millionprincipal amount of its Medium-term Notes, Series A.  The securities were not replaced by new issues of long-term debt.

 

In September 2002, **CG&E**repaid at maturity $100 millionprincipal amount of its First Mortgage Bonds, 7 1⁄4% Series.

 

Also in September 2002, **CG&E**borrowed the proceeds from theissuance by the Ohio Air Quality Development Authority of $84 million principalamount of its State of Ohio Air Quality Development Revenue Refunding Bonds2002 Series A, due September 1, 2037. The issuance consists of two $42 million tranches, with the interestrate on one tranche being reset every 35 days by auction and the interest rateon the other tranche being reset every 7 days by auction.  The initial interest rates for the 35-dayand 7-day tranches were 1.40 percent and 1.35 percent, respectively.  Proceeds from the borrowing were used inOctober 2002 to redeem, at par, two $42 million Series 1985 A&B Air QualityDevelopment Authority State of Ohio Customized Purchase Revenue Bonds, dueDecember 1, 2015.  The redeemed bondshad been classified in *Notes payable and other short-term obligations.*

 

Additionally in September 2002, **PSI**borrowed the proceeds from the issuanceby the Indiana Development Finance Authority of $23 million principal amount ofits Environmental Refunding Revenue Bonds Series 2002A, due March 1, 2031.  The initial interest rate for the bonds was1.40 percent and resets every 35 days by auction.  Proceeds from the borrowing were used in October 2002 to redeem,at par, the $23 million principal amount of Indiana Development FinanceAuthority Environmental Refunding Revenue Bonds Series 1998, due August 1,2028.  The redeemed bonds had beenclassified in *Notes payable and other short-term obligations.*

 

Later in September 2002, **PSI** borrowed the proceeds from the issuanceby the Indiana Development Finance Authority of $24.6 million principal amountof its Environmental Refunding Revenue Bonds Series 2002B, due March 1,2019.  The initial interest rate for thebonds was 1.35 percent and resets every 7 days by auction.  Proceeds from the issuance were used inOctober 2002 to redeem, at par, the $24.6 million principal amount of City ofPrinceton, Indiana Pollution Control Revenue Refunding Bonds 1996 Series, dueMarch 1, 2019.  The redeemed bonds hadbeen classified in *Notes payable and other short-term obligations.*

 

The holders of the Ohio Air Quality Development Authority and IndianaDevelopment Finance Authority bonds mentioned above have the benefit of afinancial guaranty insurance policy that insures the payment of principal of,and interest on, the bonds when due.  **CG&E**and**PSI**have each entered into an insurance agreement with the bond insurer and havepledged first mortgage bonds to secure their respective reimbursementobligations under such agreements.

 

Finally in September 2002, **CG&E** issued $500 million principalamount of its 5.70% Debentures due September 15, 2012.  Proceeds from the offering were used torepay short-term indebtedness incurred in connection with general corporatepurposes including capital

 

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expenditures related to environmental compliance construction, and therepayment at maturity of $100 million principal amount of **CG&E’s** First Mortgage Bonds, 7(1)/4%Series.  In July 2002, **CG&E** executed a treasury lock with anotional amount of $250 million, which was designated as a cash flow hedge of50 percent of the forecasted interest payments on this debt offering.  With the issuance of the debt, the treasurylock was settled.  See Note 8(a) foradditional information on this treasury lock.

 

In October 2002, **PSI** filed a petition with the IURC for thepurpose of securing authorization and approval to issue two subordinatedpromissory notes to **Cinergy Corp.**for the acquisition of the Butler County, Ohio and Henry County, Indianapeaking plants.  In January 2003, theIURC granted this request, and in February 2003, **PSI** issued the notes. One subordinated note was for the principal amount of $200 million withan annual interest rate of 6.30 percent scheduled to mature on April 15,2004.  The second subordinated note wasfor $176 million with an annual interest rate of 6.40 percent scheduled tomature on September 1, 2004.

 

In March 2003, **PSI**borrowed the proceeds from the issuance by the Indiana Development FinanceAuthority of $35 million of its Environmental Refunding Revenue Bonds Series2003, due April 1, 2022.  Interestwas initially set at 1.05 percent and resets every 35 days byauction.  The bonds are not putable bythe holders; therefore, **PSI****’s**debt obligation is classified as Long-termdebt.  Later in March 2003, theproceeds from this borrowing plus the interest income earned wereused to cause the refunding of the $35 million principal amount outstandingof the City of Princeton, Indiana Pollution Control Revenue RefundingBonds, 1997 Series.  Similar to theIndiana Development Finance Authority bonds discussed above, **PSI** has entered into an insurance agreementwith the bond insurer and has pledged first mortgage bonds to secure itsreimbursement obligations under the agreement.

 

In April 2003, **PSI**redeemed $26.8 million 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% 2003Series B Debentures due June 15, 2033 (effective interest rate of 5.66 percent).  Proceeds from this issuance were used forgeneral corporate purposes, including the funding of capital expendituresrelated to construction projects and environmental compliance initiatives, andthe repayment of outstanding indebtedness.

 

Also, in June 2003, **CG&E**modified existing debt resulting in a $200 million principal amount 5.40% 2003Series A Debenture with a 30 year maturity. The effective interest rate is 6.90 percent.

 

In June 2003, **CG&E**also redeemed its $100 million 8.28% Junior Subordinated Debentures due

 

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July 1, 2025.

 

**Cinergy**adopted Interpretation 46 on July 1, 2003, as discussed in Note 1(q)(iv). The adoption of this new accounting principle had the following effectson long-term debt:

 

**•****                                          Cinergy**no longer consolidates the trust that held *Companyobligated, mandatorily redeemable, preferred trust securities of subsidiary,holding solely debt securities of the company*.  This resulted in the removal of thesesecurities from our 2003 Balance Sheet and the addition to long-term debt of a$319 million (net of discount) note payable that **Cinergy Corp.** owes to thetrust.

 

**•****                                          Cinergy**consolidated two SPEs effective July 1, 2003. As a result, **Cinergy** hasapproximately $217 million of additional non-recourse debt as of December 31,2003, comprised of two separate notes.

 

The first note, with a December 31, 2003 balance of $110 million bearsan interest rate of 7.81 percent and matures in June 2009.  The second note, with a December 31, 2003 balanceof $107 million, bears an interest rate of 9.23 percent and matures in November2016.

 

In September 2003, **PSI**redeemed $56 million of its 5.93% Series B, Medium-term Notes at maturity.

 

In September 2003, **PSI**issued $400 million principal amount of its 5.00% Debentures due September 15,2013 (effective interest rate of 5.20 percent).  Proceeds from this issuance were used for the early redemption atpar of two subordinated promissory notes to **CinergyCorp.**, as discussed above, totaling $376 million.  The remaining proceeds were used to reduceshort-term indebtedness associated with general corporate purposes includingfunding capital expenditures related to construction projects and environmentalcompliance initiatives.

 

In October 2003, **CG&E**redeemed its $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 Debentures at maturity.

 

In February 2004, **CG&E**redeemed $110 million of its 6.45% First Mortgage Bonds at maturity.

 

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The following table reflects the long-term debt maturities excludingany redemptions due to the exercise of call provisions or capital leaseobligations.  Callable means the issuerhas the right to buy back a given security from the holder at a specified pricebefore maturity.  Putable means theholder has the right to sell a given security back to the issuer at a specifiedprice before maturity.

 

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**Long-termDebt Maturities**

 
|       |   | **Cinergy(1)**      |     | **CG&E** and  subsidiaries |     | **PSI** |     |
|------------|--------|---------------------|----------|--------------------------------|----------|---------|----------|
|       |   | ***(in millions)*** |     |
|       |   |                | * * |                           | * * |    | * * |
| 2004       |   | $                   | 835      |                           | $        | 110     |     | $ | — |   |
|       |   |                |     |                           |     |    |     |
| 2005(2)    |   | 222                 |     | 150                            |     | 52      |     |
|       |   |                |     |                           |     |    |     |
| 2006       |   | 354                 |     | —                         |     | 326     |     |
|       |   |                |     |                           |     |    |     |
| 2007       |   | 727                 |     | 100                            |     | 266     |     |
|       |   |                |     |                           |     |    |     |
| 2008       |   | 550                 |     | 120(3                          | )        | 44      |     |
|       |   |                |     |                           |     |    |     |
| Thereafter |   | 2,333               |     | 1,126(4                        | )        | 1,043   |     |
|       |   |                |     |                           |     |    |     |
| Total      |   | $                   | 5,021    |                           | $        | 1,606   |     | $ | 1,731 |   |

 

----

 

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

(2)          **CG&E** and subsidiaries includes long-term debt with put provisionsof $150 million in 2005.  **PSI** includes long-term debt with putprovisions of $50 million in 2005.

(3)          Includes **ULH&P’s**$20 million of long-term debt.

(4)          Includes **ULH&P’s**$35 million of long-term debt.

 

Maintenance and replacement fund provisions contained in **PSI’s**firstmortgage bond indenture require:  (1)cash payments, (2) bond retirements, or (3) pledges of unfunded propertyadditions each year based on an amount related to **PSI****’s** net revenues.

 

In August 2000, the generation assets of **CG&E** were released from the first mortgage indenturelien.  **CG&E’s**remaining assets, consisting primarily of transmission and distribution assets,of approximately $2.6 billion are subject to the lien of its first mortgagebond indenture.  The utility property of**PSI**isalso subject to the lien of its first mortgage bond indenture.

 

**5.**              Notes Receivable

** **

As discussed in Note 1(q)*(iv)*,**Cinergy** consolidated twopreviously unconsolidated SPEs effective July 1, 2003.  As a result, **Cinergy** has approximately $231 million of additional notesreceivable as of December 31, 2003, comprised of two separate notes.

 

The first note, with 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 December 31, 2003balance of $113 million, bears an effective interest rate of 9.23 percent andmatures in December 2016.

 

The following table reflects the maturities of these notes.

 

**Notes ReceivableMaturities**

 
|       |   | **Cinergy**         |   |
|------------|--------|---------------------|--------|
|       |   | ***(in millions)*** |   |
|       |   |                |   |
| 2004       |   | $                   | 17     |   |
| 2005       |   | 20                  |   |
| 2006       |   | 23                  |   |
| 2007       |   | 25                  |   |
| 2008       |   | 29                  |   |
| Thereafter |   | 117                 |   |
|       |   |                |   |
| Total      |   | $                   | 231    |   |

 

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

** **

Short-term obligations may include:

 

•                  short-termnotes;

•                  commercialpaper;

•                  variablerate pollution control notes; and

•                  moneypool.

 

##### ***Short-termNotes***

##### *** ***

Short-term borrowings mature within one year from the date ofissuance.  We primarily use unsecuredrevolving lines of credit and the sale of commercial paper for short-termborrowings.  A portion of **Cinergy Corp.**’s revolving lines is used to provide credit support forcommercial paper and letters of credit. When revolving lines are reserved for commercial paper or backingletters of credit, they are not available for additional borrowings.  The fees paid to secure short-termborrowings were immaterial during each of the years ended December 31, 2003,2002, and 2001.

 

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At December 31, 2003, **Cinergy Corp.**had $841 million remaining unused and available capacity relating to its $1billion revolving credit facilities. These revolving credit facilities include the following:

 
| **Credit Facility**            |   | **Expiration**      |     | **EstablishedLines** |     | **OutstandingandCommitted** |     | **Unused andAvailable** |     |
|--------------------------------|--------|---------------------|----------|----------------------|----------|-----------------------------|----------|-------------------------|----------|
|                           |   | ***(in millions)*** |     |
|                           |   |                | * * |                 | * * |                        | * * |                    | * * |
| 364-day senior revolving(1)    |   | April 2004          |     |                 |     |                        |     |                    |     |
| Direct borrowing               |   |                |     | $                    |     |                        | $        | —                  |     | $ |   |   |
| Commercial paper support       |   |                |     |                 |     | 146                         |     |                    |     |
|                           |   |                |     |                 |     |                        |     |                    |     |
| Total 364-day facility         |   |                |     | 600                  |     | 146                         |     | 454                     |     |
|                           |   |                |     |                 |     |                        |     |                    |     |
| Three-year senior revolving(1) |   | May 2004            |     |                 |     |                        |     |                    |     |
| Direct borrowing               |   |                |     |                 |     | —                      |     |                    |     |
| Commercial paper support       |   |                |     |                 |     | —                      |     |                    |     |
| Letter of credit support       |   |                |     |                 |     | 13                          |     |                    |     |
|                           |   |                |     |                 |     |                        |     |                    |     |
| Total Three-year facility      |   |                |     | 400                  |     | 13                          |     | 387                     |     |
|                           |   |                |     |                 |     |                        |     |                    |     |
| Total Credit Facilities        |   |                |     | $                    | 1,000    |                        | $        | 159                     |     | $ | 841 |   |
|                                |        |                     |          |                      |          |                             |          |                         |          |  |  |  |  |

 

----

(1)       **CinergyCorp.**has historically followedthe practice of renewing its credit facilities upon expiration.

 

In April 2003, **Cinergy Corp.**successfully placed a $600 million, 364-day senior unsecured revolving creditfacility.  This facility replaced the$600 million, 364-day facility that expired April 30, 2003.

 

In addition to revolving credit facilities, **Cinergy Corp.**, **CG&E**,and **PSI** also maintain uncommitted lines of credit.  These facilities are not guaranteed sourcesof capital and represent an informal agreement to lend money, subject toavailability, with pricing to be determined at the time of advance.  **CinergyCorp.**, **CG&E**, and **PSI** have established uncommitted lines of$40 million, $15 million, and $60 million, respectively, all of which remainedunused as of December 31, 2003.

 

##### ***CommercialPaper***

##### *** ***

**Cinergy Corp.****’s**$800million commercial paper program is supported by **Cinergy Corp.’s** $1 billion revolving credit facilities.  The commercial paper program at the **Cinergy Corp.** level supports, in part, theshort-term borrowing needs of **CG&E**and **PSI** and eliminates their needfor separate commercial paper programs. As of December 31, 2003, **Cinergy Corp.** had $146 million in commercial paperoutstanding.

 

##### ***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

 

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holders of these notes have the right to have their notes redeemed on adaily, 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 31,2003, **CG&E** and**PSI** had $112.1 million and $80.5 million,respectively, outstanding in variable rate pollution control notes, classifiedas short-term debt.  **ULH&P**had no outstanding short-termpollution control notes.  Any short-termpollution control note borrowings outstanding do not reduce the unused andavailable short-term debt regulatory authority of **CG&E**, **PSI**,and **ULH&P**.

 

In August 2003, **CG&E**caused the remarketing by the Ohio Air Quality Development Authority of $84million of its State of Ohio Air Quality Development Revenue Refunding Bonds,due September 1, 2030.  The issuanceconsists of a $42 million 1995 Series A and a $42 million 1995 Series B.  The remarketing effected the conversion froma daily interest rate reset mode supported by a letter of credit to anunsecured weekly interest rate mode. The interest rate for both series was initially set at 1.30 percent andwill reset every seven days going forward. Because the holders of these notes have the right to have their notesredeemed on a weekly basis, they are reflected in *Notes payable and other short-term obligations* on theBalance Sheets of **Cinergy** and **CG&E**.

 

Also in August 2003, **CG&E**caused the remarketing by the Ohio Air Quality Development Authority of $12.1million of its State of Ohio Air Quality Development Revenue Bonds 2001 SeriesA due August 1, 2033.  The remarketingeffected the conversion from an unsecured one-year interest rate reset mode toa daily interest rate reset mode supported by a letter of credit.  The interest rate was initially set at 0.95percent and will be reset daily going forward. Because the holders of these notes have the right to have their notesredeemed on a daily basis, they are reflected in *Notes payable and other short-term obligations* on theBalance Sheets of **Cinergy** and **CG&E**.

 

In December 2003, **PSI**borrowed the proceeds from the issuance by the Indiana Development FinanceAuthority of $80.5 million of its Indiana Development Finance AuthorityEnvironmental Revenue Bonds due December 1, 2038.  The issuance consists of two $40.25 million tranches designatedSeries 2003A and Series 2003B.  Theinitial interest rate for both tranches was 1.27 percent and is resetweekly.  Proceeds from the borrowingwill be used for the acquisition and construction of various solid waste disposalfacilities located at various generating stations in Indiana.  The $80.5 million is being held in escrow byan independent trustee and will be drawn down as the facilities are built.  Because the holders of these notes have theright to have their notes redeemed on a weekly basis, they are reflected in *Notes payable and other short-term obligations*on the Balance Sheets of **Cinergy**and **PSI**.

 

***Money Pool***

 

**Cinergy Corp.**,Services, and our operating companies participate in a money pool arrangementto better manage cash and working capital requirements.  Under this arrangement, those companies withsurplus short-term funds provide short-term loans to affiliates (other than **Cinergy Corp.**) participating under thisarrangement.  This surplus cash may befrom internal or external sources.  Theamounts outstanding under this money pool arrangement are shown as a componentof *Notes receivable from affiliatedcompanies* and/or *Notes payable toaffiliated*

 

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*companies* on theBalance 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**.

 

The following table summarizes our *Notespayable and other short-term obligations* and *Notes payable to affiliated companies*.

 
|                           |   | **December  31, 2003** |       | **December  31, 2002** |       |
|--------------------------------|--------|------------------------|------------|------------------------|------------|
|                           |   | **Established  Lines** |       | **Outstanding**        |       | **Weighted  Average  Rate** |   | **Established  Lines** |   | **Outstanding** |   | **Weighted  Average  Rate** |   |
|                           |   | **(in  millions)**     |       |
|                           |   |                   | * *   |                   | * *   |   | * * |   | * * |   | * * |   | * * |
| **Cinergy**                    |   |                   |       |                   |       |   |   |   |   |   |   |   |   |
| **Cinergy Corp.**              |   |                   |       |                   |       |   |   |   |   |   |   |   |   |
| Revolving lines                |   | **$**                  | **1,000**  | ** **             | **$**      | **—** | ** ** | **—** | **%** | $ | 1,000 |   | $ | 25 |   | 2.02 | % |
| Uncommitted  lines(1)          |   | **40**                 | ** ** | **—**             | ** ** | **—** | ** ** | 65 |   | — |   | — |   |
| Commercial  paper(2)           |   |                   |       | **146**                | ** ** | **1.18** |   |   |   | 473 |   | 1.81 |   |
|                           |   |                   | ** ** |                   | ** ** |   | ** ** |   |   |   |   |   |   |
| Operating companies            |   |                   | ** ** |                   | ** ** |   | ** ** |   |   |   |   |   |   |
| Uncommitted  lines(1)          |   | **75**                 | ** ** | **—**             | ** ** | **—** | ** ** | 75 |   | — |   | — |   |
| Pollution  control notes       |   |                   |       | **193**                | ** ** | **1.37** | ** ** |   |   | 147 |   | 1.82 |   |
|                           |   |                   | ** ** |                   | ** ** |   | ** ** |   |   |   |   |   |   |
| Non-regulated  subsidiaries    |   |                   | ** ** |                   | ** ** |   | ** ** |   |   |   |   |   |   |
| Revolving lines                |   | **19**                 | ** ** | **10**                 | ** ** | **5.90** | ** ** | 7 |   | 1 |   | 3.28 |   |
| Short-term debt                |   |                   |       | **2**                  | ** ** | **4.80** | ** ** | 22 |   | 22 |   | 2.93 |   |
|                           |   |                   | ** ** |                   | ** ** |   | ** ** |   |   |   |   |   |   |
| **Cinergy  Total**             |   |                   | ** ** | **$**                  | **351**    |   | **1.45** | **%** |   |   | $ | 668 |   | 1.86 | % |
|                           |   |                   | ** ** |                   | ** ** |   | ** ** |   |   |   |   |   |   |
| **CG&E**  and subsidiaries |   |                   | ** ** |                   | ** ** |   | ** ** |   |   |   |   |   |   |
| Uncommitted  lines(1)          |   | **$**                  | **15**     | ** **             | **$**      | **—** | ** ** | **—** | **%** | $ | 15 |   | $ | — |   | — | % |
| Pollution  control notes       |   |                   | ** ** | **112**                | ** ** | **1.28** |   |   |   | 112 |   | 1.87 |   |
| Money Pool                     |   |                   | ** ** | **49**                 | ** ** | **1.11** |   |   |   | 9 |   | 1.29 |   |
|                           |   |                   | ** ** |                   | ** ** |   | ** ** |   |   |   |   |   |   |
| **CG&E  Total**            |   |                   | ** ** | **$**                  | **161**    | ** ** |   | ** ** |   |   | $ | 121 |   |   |   |
|                           |   |                   | ** ** |                   | ** ** |   | ** ** |   |   |   |   |   |   |
| **PSI**                        |   |                   | ** ** |                   | ** ** |   | ** ** |   |   |   |   |   |   |
| Uncommitted  lines(1)          |   | **$**                  | **60**     | ** **             | **$**      | **—** | ** ** | **—** | **%** | $ | 60 |   | $ | — |   | — | % |
| Pollution  control notes       |   |                   |       | **81**                 | ** ** | **1.48** | ** ** |   |   | 35 |   | 1.65 |   |
| Money Pool                     |   |                   |       | **188**                | ** ** | **1.11** | ** ** |   |   | 138 |   | 1.29 |   |
|                           |   |                   | ** ** |                   | ** ** |   | ** ** |   |   |   |   |   |   |
| **PSI  Total**                 |   |                   | ** ** | **$**                  | **269**    | ** ** |   | ** ** |   |   | $ | 173 |   |   |   |
|                           |   |                   | ** ** |                   | ** ** |   | ** ** |   |   |   |   |   |   |
| **ULH&P**                  |   |                   | ** ** |                   | ** ** |   | ** ** |   |   |   |   |   |   |
| Money Pool                     |   |                   |       | **$**                  | **45**     | ** ** | **1.11** | **%** |   |   | $ | 14 |   | 1.29 | % |
|                           |   |                   |       |                   |       |   |   |   |   |   |   |   |   |
| **ULH&P  Total**           |   |                   |       | **$**                  | **45**     |   |   |   |   |   | $ | 14 |   |   |   |

 

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

(2)          The commercial paperprogram is limited to $800 million and is supported by **Cinergy Corp.’s** revolving lines of credit.

 

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

 

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•                  aconsolidated net worth of $2 billion; and

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

 

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

 

•                  bankruptcy;

•                  defaultsin the payment of other indebtedness; and

•                  judgmentsagainst the company that are not paid or insured.

 

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

 

As discussed in Note 1(q)(*iv*),long-term debt increased in 2003 resulting from the adoption of Interpretation 46.  The debt which was recorded as a result ofthis new accounting pronouncement did not cause **Cinergy Corp.** to be in breach of any covenants.

 

**7.****              Leases**

 

***(a)***                                  OperatingLeases

 

We have entered into operating lease agreements for various facilitiesand properties such as computer, communication and transportation equipment,and office space.  Total rental paymentson operating leases for each of the past three years are detailed in the tablebelow.  This table also shows futureminimum lease payments required for operating leases with remainingnon-cancelable lease terms in excess of one year as of December 31, 2003:

 
|                          |   | **Lease Expense**  |     | **Estimated Minimum Lease Payments** |     |
|-------------------------------|--------|--------------------|----------|--------------------------------------|----------|
|                          |   | **2001**           |     | **2002**                             |     | **2003** |   | **2004** |   | **2005** |   | **2006** |   | **2007** |   | **2008** |   | **Thereafter** |   | **Total** |   |
|                          |   | **(in  millions)** |     |
|                          |   |               | * * |                                 | * * |   | * * |   | * * |   | * * |   | * * |   | * * |   | * * |   | * * |   | * * |
| **Cinergy**(1)                |   | $                  | 61       |                                 | $        | 64 |   | **$** | **72** |   | $ | 41 |   | $ | 33 |   | $ | 26 |   | $ | 21 |   | $ | 13 |   | $ | 37 |   | $ | 171 |   |
| **CG&E** and subsidiaries |   | 33                 |     | 30                                   |     | **34** |   | 9 |   | 8 |   | 7 |   | 5 |   | 4 |   | 9 |   | 42 |   |
| **PSI**                       |   | 21                 |     | 23                                   |     | **31** |   | 10 |   | 9 |   | 9 |   | 8 |   | 7 |   | 17 |   | 60 |   |
| **ULH&P**                 |   | 5                  |     | 4                                    |     | **4** |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
|                               |        |                    |          |                                      |          |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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

 

***(b)***                                  CapitalLeases

 

In each of the years 1999 through 2003, **CG&E**, **PSI**,and **ULH&P** entered into capitallease agreements to fund the purchase of gas and electric meters.  The lease terms are for 120 monthscommencing with the date of purchase and contain various buyout options rangingfrom 48 to 105 months.  It is ourobjective to own the meters indefinitely and the operating companies plan toexercise the buyout option at month 105. As of December 31, 2003, **Cinergy’s**effective interest rate on capital lease obligations outstanding was 5.2percent.  The meters are depreciated atthe same rate as if owned by the operating companies.  **CG&E**, **PSI**, and **ULH&P**each recorded a capital lease obligation, included in *Non-Current Liabilities-Other*.

 

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The total minimum lease payments and the present values for thesecapital lease items are shown below:

 
|                                    |   | **Total Minimum Lease Payments** |     |
|-----------------------------------------|--------|----------------------------------|----------|
|                                    |   | **Cinergy**                      |     | **CG&E****and  subsidiaries** |   | **PSI** |   | **ULH&P** |   |
|                                    |   | **(in  millions)**               |     |
|                                    |   |                             | * * |   | * * |   | * * |   | * * |
| Total minimum lease payments(1)         |   | $                                | 68       |   | $ | 41 |   | $ | 27 |   | $ | 10 |   |
| Less: amount representing interest      |   | (13                              | )        | (8 | ) | (5 | ) | (2 | ) |
|                                    |   |                             |     |   |   |   |   |   |   |
| Present value of minimum lease payments |   | $                                | 55       |   | $ | 33 |   | $ | 22 |   | $ | 8 |   |

 

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(1)          Annual minimum leasepayments are immaterial.

 

**8.**                    FinancialInstruments

 

***(a)***                                  FinancialDerivatives

 

We have entered into financial derivative contracts for the purpose ofmanaging financial instrument risk.

 

Our current policy of managing exposure to fluctuations in interestrates is to maintain approximately 30 percent of the total amount ofoutstanding debt in floating interest rate debt instruments.  In maintaining this level of exposure, weuse interest rate swaps.  Under theswaps, we agree with other parties to exchange, at specified intervals, thedifference between fixed-rate and floating-rate interest amounts calculated onan agreed notional amount.  **CG&E** has an outstanding interest rateswap agreement that decreased the percentage of floating-rate debt.  Under the provisions of the swap, which hasa notional amount of $100 million, **CG&E**pays a fixed-rate and receives a floating-rate through October 2007.  This swap qualifies as a cash flow hedgeunder the provisions of Statement 133. As the terms of the swap agreement mirror the terms of the debtagreement that it is hedging, we anticipate that this swap will continue to beeffective as a hedge.  Changes in fairvalue of this swap are recorded in *Accumulated other comprehensive income (loss)*.  **CinergyCorp.** has three outstanding interest rate swaps with a combinednotional amount of $250 million.  Underthe provisions of the swaps, **Cinergy Corp.**receives fixed-rate interest payments and pays floating-rate interest paymentsthrough September 2004.  These swapsqualify as fair value hedges under the provisions of Statement 133.  We anticipate that these swaps will continueto be effective as hedges.

 

Treasury locks are agreements that fix the yield or price on aspecified treasury security for a specified period, which we sometimes use inconnection with the issuance of fixed-rate debt.  On September 23, 2002, **CG&E**issued $500 million principal amount senior unsecured debentures due September15, 2012, with an interest rate of 5.70 percent.  In July 2002, **CG&E**executed a treasury lock with a notional amount of $250 million, which wasdesignated as a cash flow hedge of 50 percent of the forecasted interestpayments on this debt offering.  Thetreasury lock effectively fixed the benchmark interest rate (i.e., the treasurycomponent of the interest rate, but not the credit spread) for 50 percent ofthe offering from July 2002 through the issuance date in order to reduce theexposure associated with treasury rate volatility.  With the issuance of the

 

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debt, the treasury lock was settled. Given the use of hedge accounting, this settlement was reflected inother comprehensive income (loss) on an after-tax basis in the amount of $13million, rather than a charge to net income. This amount will be reclassified to*Interest**Expense* overthe 10-year life of the related debt as interest is accrued.

 

See Note 1(k) for additional information on financial derivatives.  In the future, we will continually monitormarket conditions to evaluate whether to modify our use of financialinstruments to manage risk.

 

***(b)***                                  Fair Valueof Other Financial Instruments

The estimated fair values of other financial instruments were asfollows (this information does not claim to be a valuation of the companies asa whole):

 
|                                             |   | **December  31, 2003** |       | **December  31, 2002** |     |
|--------------------------------------------------|--------|------------------------|------------|------------------------|----------|
| **Financial Instruments**                        |   | **Carrying  Amount**   |       | **Fair  Value**        |     | **Carrying  Amount** |   | **Fair  Value** |   |
|                                             |   | **(in  millions)**     |       |
|                                             |   |                   | * *   |                   | * * |   | * * |   | * * |
| **Cinergy**(1)                                   |   |                   |       |                   |     |   |   |   |   |
| First mortgage bonds and other long-term debt(2) |   | **$**                  | **4,971**  | ** **             | **$**    | **5,297** |   | $ | 4,188 |   | $ | 4,399 |   |
|                                             |   |                   | ** ** |                   |     |   |   |   |   |
| **CG&E** and subsidiaries                    |   |                   | ** ** |                   |     |   |   |   |   |
| First mortgage bonds and other long-term debt(2) |   | **$**                  | **1,569**  | ** **             | **$**    | **1,582** |   | $ | 1,690 |   | $ | 1,743 |   |
|                                             |   |                   | ** ** |                   |     |   |   |   |   |
| **PSI**                                          |   |                   | ** ** |                   |     |   |   |   |   |
| First mortgage bonds and other long-term debt(2) |   | **$**                  | **1,720**  | ** **             | **$**    | **1,861** |   | $ | 1,372 |   | $ | 1,473 |   |
|                                             |   |                   | ** ** |                   |     |   |   |   |   |
| **ULH&P**                                    |   |                   | ** ** |                   |     |   |   |   |   |
| Other long-term debt(2)                          |   | **$**                  | **55**     | ** **             | **$**    | **61** |   | $ | 75 |   | $ | 78 |   |

 

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

(2)                                  Includesamounts reflected as *Long-term debt duewithin one year*.

 

The following methods and assumptions were used to estimate the fairvalues of each major class of instruments:

 

*(i)*          Cash and cashequivalents, Restricted deposits, and Notes payable and other short-termobligations

 

Due to the short period to maturity, the carrying amounts reflected onthe Balance Sheets approximate fair values.

 

*(ii)*      Long-term debt

 

The fair values of long-term debt issues were estimated based on thelatest quoted market prices or, if not listed on the New York Stock Exchange,on the present value of future cash flows. The discount rates used approximate the incremental borrowing costs forsimilar instruments.

 

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***(c)***                                  Concentrationsof Credit Risk

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

 

*(i)*          Trade Receivables andPhysical Power Portfolio

* *

Our concentration of credit risk with respect to trade accountsreceivable from electric and gas retail customers is limited.  The large number of customers anddiversified customer base of residential, commercial, and industrial customerssignificantly reduces our credit risk. Contracts within the physical portfolio of power marketing and tradingoperations are primarily with traditional electric cooperatives andmunicipalities and other investor-owned utilities.  At December 31, 2003, we believe the likelihood of significantlosses associated with credit risk in our trade accounts receivable or physicalpower portfolio is remote.

 

*(ii)*      Energy Trading Credit Risk

* *

**Cinergy’s** extensionof credit for energy marketing and trading is governed by a Corporate CreditPolicy.  Written guidelines document themanagement approval levels for credit limits, evaluation of creditworthiness,and credit risk mitigation procedures. Exposures to credit risks are monitored daily by the Corporate CreditRisk function, which is independent of all trading operations.  As of December 31, 2003, approximately 97percent 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.  No single non-investmentgrade counterparty accounts for more than one percent of our total creditexposure.  Energy commodity prices canbe extremely volatile and the market can, at times, lack liquidity.  Because of these issues, credit risk isgenerally greater than with other commodity trading.

 

In December 2001, Enron Corp. (Enron) filed for protection underChapter 11 of the U.S. Bankruptcy Code in the Southern District of NewYork.  We decreased our tradingactivities with Enron in the months prior to its bankruptcy filing and filed amotion with the bankruptcy court overseeing the Enron bankruptcy seekingappropriate netting of the various payables and receivables between and amongEnron and **Cinergy** entities.  We entered into a settlement agreement withEnron, which became final in January 2004. See Note 11(c)(*iii*) forfurther information.

 

We continually review and monitor our credit exposure to allcounterparties and secondary counterparties. If appropriate, we may adjust our credit reserves to attempt tocompensate for increased credit risk within the industry.  Counterparty credit limits may be adjustedon a daily basis in response to changes in a counterparty’s financial status orpublic debt ratings.

 

*(iii)*  Financial Derivatives

 

Potential exposure to credit risk also exists from our use of financialderivatives such as interest

 

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rate swaps and treasury locks. Because these financial instruments are transacted with highly ratedfinancial institutions, we do not anticipate nonperformance by any of thecounterparties.

 

**9.**              Pension and OtherPostretirement Benefits

We provide benefits to retirees in the form of pension and otherpostretirement benefits.

 

Our qualified defined benefit pension plans cover substantially all U.S.employees meeting certain minimum age and service requirements.  During 2002, eligible **Cinergy** employees were offered theopportunity to make a one-time election, effective January 1, 2003, to eithercontinue to have their pension benefit determined by the traditional definedbenefit pension formula or to have their benefit determined using a cashbalance formula.

 

The traditional defined benefit program utilizes a final average payformula to determine pension benefits. These benefits are based on:

 

•                  yearsof participation;

•                  ageat retirement; and

•                  theapplicable average Social Security wage base or benefit amount.

 

Benefits are accrued under the cash balance formula based upon apercentage of pay plus interest.  Inaddition, participants with the cash balance formula may request a lump-sumcash payment upon termination of their employment, which may result inincreased cash requirements from pension plan assets.  Benefits earned under the traditional defined benefit pensionformula ceased accruing at December 31, 2002 only for those employees whoelected the cash balance formula.  Therewas no change to retirement benefits earned through December 31, 2002 inconverting to the cash balance formula. The pension benefits of all non-union and certain union employees hiredafter December 31, 2002 are calculated using the cash balance formula.

 

The introduction of the defined benefit plan with cash balance featuresdid not have a material effect on our financial position or results ofoperations for 2003.

 

Funding for the qualified defined benefit pension plans is based onactuarially determined contributions, the maximum of which is generally theamount deductible for income tax purposes and the minimum being that requiredby the Employee Retirement Income Security Act of 1974, as amended.  The pension plans’ assets consist ofinvestments in equity and debt securities.

 

**Cinergy’s**investment strategy with respect to pension assets is designed to achieve amoderate level of overall portfolio risk in keeping with our desired riskobjective, which is established through careful consideration of planliabilities, plan funded status, and corporate financial condition.  The portfolio’s target asset allocation is60 percent equity and 40 percent debt with specified allowable ranges aroundthese targets.  Within the equitysegment, we are broadly diversified across domestic, developed international,and emerging market equities, 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 use of the “plus”sectors (e.g., high yield, developed international, emerging markets, etc.)while the

 

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“core” portfolio is a domestic, investment grade portfolio.  The use of derivatives is currently limitedto collateralized mortgage 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.

 

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**Cinergy’s** qualifiedpension plan asset allocation at September 30, 2003 and 2002 by asset categorywas as follows:

 

|                 |   | **Percentage  of Fair Value of  Plan Assets at September 30** |   |
|----------------------|--------|---------------------------------------------------------------|--------|
| **Asset Category**   |   | **2003**                                                      |   | **2002** |   |
|                 |   |                                                          |   |   |   |
| Equity securities(1) |   | **62**                                                        | **%**  | 50 | % |
| Debt securities(2)   |   | **38**                                                        | **%**  | 50 | % |

 

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(1)          The portfolio’starget asset allocation is 60 percent equity with an allowable range of 50percent to 70 percent.

(2)          The portfolio’starget asset allocation is 40 percent debt with an allowable range of 30percent to 50 percent.

 

In addition, we sponsor non-qualified pension plans (plans that do notmeet the criteria for tax benefits) that cover officers, certain other keyemployees, and non-employee directors. We began funding certain of these non-qualified plans through a rabbitrust in 1999.  This trust, whichconsists of equity (63 percent) and debt (37 percent) securities at December31, 2003, is not restricted to the payment of plan benefits and therefore, notconsidered plan assets under Statement of Financial Accounting Standards No.87, *Employers’ Accounting for Pensions*.  At December 31, 2003 and 2002, trust assetswere approximately $9 million and $8 million, respectively, and are reflectedin **Cinergy’s** Balance Sheets as *Other investments*.

 

In 2003 and 2002, **Cinergy**offered voluntary early retirement programs to certain individuals.  In accordance with Statement of FinancialAccounting Standards No. 88, *Employers’Accounting for Settlements and Curtailments of Defined Benefit Pension Plansand for Termination Benefits*(Statement 88), **Cinergy** recognized an expense of $8.5million and $39.1 million in 2003 and 2002, respectively.

 

We provide certain health care and life insurance benefits to retiredU.S. employees and their eligible dependents. These benefits are subject to minimum age and service requirements.  The health care benefits include medicalcoverage, dental coverage, and prescription drugs and are subject to certainlimitations, such as deductibles and co-payments.  Neither **CG&E** nor**ULH&P** pre-fund theirobligations for these postretirement benefits. In 1999, **PSI** beganpre-funding its obligations through a grantor trust as authorized by theIURC.  This trust, which consists ofequity (63 percent) and debt (37 percent) securities at December 31, 2003, is notrestricted to the payment of plan benefits and therefore, not considered planassets under Statement of Financial Accounting Standards No. 106, *Employers’ Accounting for Postretirement BenefitsOther Than Pensions*(Statement 106).  At December 31, 2003 and 2002, trust assets were approximately$64 million and $52 million, respectively, and are reflected in **Cinergy’s** Balance Sheets as *Other investments*.

 

Based on preliminary estimates, we expect 2004 contributions of $107million for qualified pension benefits. In addition, we expect to make contributions of $8 million and $27million in 2004 for non-qualified pension benefits and other postretirementbenefits, respectively.

 

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Our benefit plans’ costs for the past three years included thefollowing components:

 
|                                             |   | **Qualified  Pension Benefits** |       | **Non-Qualified  Pension Benefits** |   | **Other  Postretirement Benefits** |   |
|--------------------------------------------------|--------|---------------------------------|------------|-------------------------------------|--------|------------------------------------|--------|
|                                             |   | **2003**                        |       | **2002**                            |   | **2001**                           |   | **2003** |   | **2002** |   | **2001** |   | **2003** |   | **2002** |   | **2001** |   |
|                                             |   | **(in  millions)**              |       |
|                                             |   |                            |       |                                |   |                               |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Service cost                                     |   | **$**                           | **31.3**   | ** **                          | $      | 27.3                               |   | $ | 27.9 |   | **$** | **3.3** | ** ** | $ | 2.7 |   | $ | 2.1 |   | **$** | **4.1** | ** ** | $ | 3.5 |   | $ | 3.8 |   |
| Interest cost                                    |   | **85.9**                        | ** ** | 79.2                                |   | 77.5                               |   | **6.4** | ** ** | 5.1 |   | 4.8 |   | **22.4** | ** ** | 19.6 |   | 17.9 |   |
| Expected return  on plans’ assets           |   | **(80.8**                       | **)**      | (86.3                               | )      | (81.9                              | )      | **—** | ** ** | — |   | — |   | **—** | ** ** | (0.3 | ) | — |   |
| Amortization of  transition (asset) obligation   |   | **(1.0**                        | **)**      | (1.3                                | )      | (1.3                               | )      | **—** | ** ** | 0.1 |   | 0.1 |   | **3.3** | ** ** | 5.0 |   | 5.0 |   |
| Amortization of  prior service cost              |   | **4.8**                         | ** ** | 6.2                                 |   | 4.6                                |   | **1.3** | ** ** | 0.9 |   | 1.1 |   | **—** | ** ** | — |   | — |   |
| Recognized  actuarial (gain) loss                |   | **—**                      | ** ** | (5.4                                | )      | (3.2                               | )      | **2.1** | ** ** | 0.8 |   | 0.6 |   | **5.2** | ** ** | 1.1 |   | 0.1 |   |
| Voluntary early  retirement costs (Statement 88) |   | **8.5**                         | ** ** | 38.6                                |   | —                             |   | **—** | ** ** | 0.5 |   | — |   | **—** | ** ** | — |   | — |   |
| Net periodic  benefit cost                       |   | **$**                           | **48.7**   | ** **                          | $      | 58.3                               |   | $ | 23.6 |   | **$** | **13.1** | ** ** | $ | 10.1 |   | $ | 8.7 |   | **$** | **35.0** | ** ** | $ | 28.9 |   | $ | 26.8 |   |
|                                                  |        |                                 |            |                                     |        |                                    |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The net periodic benefit cost by registrant was as follows:

 

|                           |   | **Qualified  Pension Benefits** |     | **Non-Qualified  Pension Benefits** |   | **Other  Postretirement Benefits** |       |
|--------------------------------|--------|---------------------------------|----------|-------------------------------------|--------|------------------------------------|------------|
|                           |   | **2003**                        |     | **2002**                            |   | **2001**                           |       | **2003** |   | **2002** |   | **2001** |   | **2003** |   | **2002** |   | **2001** |   |
|                           |   | **(in  millions)**              |     |
|                           |   |                            |     |                                |   |                               |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Cinergy**(1)                 |   | **$**                           | **48.7** |                                | $      | 58.3                               |       | $ | 23.6 | ** ** | **$** | **13.1** |   | $ | 10.1 |   | $ | 8.7 | ** ** | **$** | **35.0** |   | $ | 28.9 |   | $ | 26.8 |   |
| **CG&E**  and subsidiaries |   | **9.7**                         |     | 7.2                                 |   | 1.9                                | ** ** | **1.0** |   | 1.1 |   | 1.7 | ** ** | **9.0** |   | 7.2 |   | 6.9 |   |
| **PSI**                        |   | **11.7**                        |     | 12.2                                |   | 7.5                                | ** ** | **0.7** |   | 0.6 |   | 0.7 | ** ** | **17.6** |   | 15.3 |   | 13.5 |   |
| **ULH&P**                  |   | **1.0**                         |     | 1.7                                 |   | 0.3                                | ** ** | **—** |   | — |   | — | ** ** | **0.9** |   | 0.4 |   | 0.4 |   |
|                                |        |                                 |          |                                     |        |                                    |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

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

 

186

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The following table provides a reconciliation of the changes in theplans’ benefit obligations and fair value of assets for 2003 and 2002, and astatement of the funded status for both years. **Cinergy** uses a September 30measurement date for its defined benefit pension plans and other postretirementbenefit plans.

 
|                                              |   | **Qualified  Pension Benefits** |        | **Non-Qualified  Pension Benefits** |   | **Other  Postretirement  Benefits** |       |
|---------------------------------------------------|--------|---------------------------------|-------------|-------------------------------------|--------|-------------------------------------|------------|
|                                              |   | **2003**                        |        | **2002**                            |   | **2003**                            |       | **2002** |   | **2003** |   | **2002** |   |
|                                              |   | **(in  millions)**              |        |
|                                              |   |                            |        |                                |   |                                |       |   |   |   |   |   |   |
| **Change  in benefit obligation**                 |   |                            |        |                                |   |                                |       |   |   |   |   |   |   |
|                                              |   |                            |        |                                |   |                                |       |   |   |   |   |   |   |
| Benefit  obligation at beginning of period        |   | **$**                           | **1,314.9** | ** **                          | $      | 1,083.5                             |       | **$** | **97.8** | ** ** | $ | 70.9 |   | **$** | **343.2** | ** ** | $ | 270.4 |   |
|                                              |   |                            | ** **  |                                |   |                                | ** ** |   |   |   | ** ** |   |   |
| Service cost                                      |   | **31.3**                        | ** **  | 27.3                                |   | **3.3**                             | ** ** | 2.7 |   | **4.1** | ** ** | 3.5 |   |
| Interest cost                                     |   | **85.9**                        | ** **  | 79.2                                |   | **6.4**                             | ** ** | 5.1 |   | **22.4** | ** ** | 19.6 |   |
| Amendments(1)                                     |   | **0.3**                         | ** **  | 43.3                                |   | **0.1**                             | ** ** | 4.5 |   | **(3.3** | **)** | (12.3 | ) |
| Actuarial loss                                    |   | **97.9**                        | ** **  | 156.5                               |   | **7.4**                             | ** ** | 20.6 |   | **54.3** | ** ** | 80.2 |   |
| Benefits paid                                     |   | **(72.5**                       | **)**       | (74.9                               | )      | **(7.4**                            | **)**      | (6.0 | ) | **(22.0** | **)** | (18.2 | ) |
|                                              |   |                            | ** **  |                                |   |                                | ** ** |   |   |   | ** ** |   |   |
| Benefit  obligation at end of period              |   | **1,457.8**                     | ** **  | 1,314.9                             |   | **107.6**                           | ** ** | 97.8 |   | **398.7** | ** ** | 343.2 |   |
|                                              |   |                            | ** **  |                                |   |                                | ** ** |   |   |   | ** ** |   |   |
| **Change  in plan assets**                        |   |                            | ** **  |                                |   |                                | ** ** |   |   |   | ** ** |   |   |
|                                              |   |                            | ** **  |                                |   |                                | ** ** |   |   |   | ** ** |   |   |
| Fair value of  plan assets at beginning of period |   | **756.5**                       | ** **  | 875.4                               |   | **—**                          | ** ** | — |   | **—** | ** ** | — |   |
|                                              |   |                            | ** **  |                                |   |                                | ** ** |   |   |   | ** ** |   |   |
| Actual return on  plan assets                     |   | **119.3**                       | ** **  | (48.0                               | )      | **—**                          | ** ** | — |   | **—** | ** ** | — |   |
| Employer  contribution                            |   | **74.0**                        | ** **  | 4.0                                 |   | **7.4**                             | ** ** | 6.0 |   | **22.0** | ** ** | 18.2 |   |
| Benefits paid                                     |   | **(72.5**                       | **)**       | (74.9                               | )      | **(7.4**                            | **)**      | (6.0 | ) | **(22.0** | **)** | (18.2 | ) |
|                                              |   |                            | ** **  |                                |   |                                | ** ** |   |   |   | ** ** |   |   |
| Fair value of  plan assets at end of period       |   | **877.3**                       | ** **  | 756.5                               |   | **—**                          | ** ** | — |   | **—** | ** ** | — |   |
|                                              |   |                            | ** **  |                                |   |                                | ** ** |   |   |   | ** ** |   |   |
| **Funded  status**                                |   | **(580.5**                      | **)**       | (558.4                              | )      | **(107.6**                          | **)**      | (97.8 | ) | **(398.7** | **)** | (343.2 | ) |
|                                              |   |                            | ** **  |                                |   |                                | ** ** |   |   |   | ** ** |   |   |
| Unrecognized  prior service cost                  |   | **35.4**                        | ** **  | 48.4                                |   | **12.3**                            | ** ** | 13.5 |   | **—** | ** ** | — |   |
| Unrecognized net  actuarial loss                  |   | **255.5**                       | ** **  | 196.2                               |   | **43.1**                            | ** ** | 37.6 |   | **175.7** | ** ** | 125.5 |   |
| Unrecognized net  transition (asset) obligation   |   | **(0.8**                        | **)**       | (1.9                                | )      | **—**                          | ** ** | 0.1 |   | **26.9** | ** ** | 33.5 |   |
|                                              |   |                            | ** **  |                                |   |                                | ** ** |   |   |   | ** ** |   |   |
| Benefit cost at  December 31                      |   | **$**                           | **(290.4**  | **)**                               | $      | (315.7                              | )          | **$** | **(52.2** | **)** | $ | (46.6 | ) | **$** | **(196.1** | **)** | $ | (184.2 | ) |
|                                              |   |                            | ** **  |                                |   |                                | ** ** |   |   |   | ** ** |   |   |
| **Amounts  recognized in balance sheets**         |   |                            | ** **  |                                |   |                                | ** ** |   |   |   | ** ** |   |   |
|                                              |   |                            | ** **  |                                |   |                                | ** ** |   |   |   | ** ** |   |   |
| Accrued benefit  liability                        |   | **$**                           | **(366.2**  | **)**                               | $      | (353.0                              | )          | **$** | **(100.5** | **)** | $ | (89.0 | ) | **$** | **(196.1** | **)** | $ | (184.2 | ) |
| Intangible asset                                  |   | **22.1**                        | ** **  | 32.6                                |   | **12.3**                            | ** ** | 13.6 |   | **—** | ** ** | — |   |
| Accumulated  other comprehensive income (pre-tax) |   | **53.7**                        | ** **  | 4.7                                 |   | **36.0**                            | ** ** | 28.8 |   | **—** | ** ** | — |   |
|                                              |   |                            | ** **  |                                |   |                                | ** ** |   |   |   | ** ** |   |   |
| Net recognized  at end of period                  |   | **$**                           | **(290.4**  | **)**                               | $      | (315.7                              | )          | **$** | **(52.2** | **)** | $ | (46.6 | ) | **$** | **(196.1** | **)** | $ | (184.2 | ) |

 

187

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----

(1)          For 2003, the amount of$0.3 million includes $8.5 million of voluntary early retirement expenses inaccordance with Statement 88, as previously discussed.  For 2002, the amounts of $43.3 million and$4.5 million include $38.6 million and $0.5 million, respectively, of voluntaryearly retirement expenses in accordance with Statement 88, as previously discussed.

 

The accumulated benefit obligation for the qualified defined benefitpension plans was $1,237.3 million and $1,101.7 million for 2003 and 2002,respectively.  The accumulated benefitobligation for the non-qualified defined benefit pension plans was $102.1million and $90.4 million for 2003 and 2002, respectively.

 

The weighted-average assumptions used to determine benefit obligationswere as follows:

 

|                                  |   | **Qualified  Pension Benefits** |       | **Non-Qualified  Pension Benefits** |   | **Other  Postretirement Benefits** |       |
|---------------------------------------|--------|---------------------------------|------------|-------------------------------------|--------|------------------------------------|------------|
|                                  |   | **2003**                        |       | **2002**                            |   | **2003**                           |       | **2002** |   | **2003** |   | **2002** |   |
|                                  |   |                            |       |                                |   |                               |       |   |   |   |   |   |   |
| Discount rate                         |   | **6.25**                        | **%**      | 6.75                                | %      | **6.25**                           | **%**      | 6.75 | % | **6.25** | **%** | 6.75 | % |
| Rate of future  compensation increase |   | **4.00**                        | ** ** | 4.00                                |   | **4.00**                           | ** ** | 4.00 |   | **N/A** | ** ** | N/A |   |

 

The weighted-average assumptions used to determine net periodic benefitcost for the years ended December 31 were as follows:

 
|                                   |   | **Qualified  Pension Benefits** |       | **Non-Qualified  Pension Benefits** |   | **Other  Postretirement Benefits** |   |
|----------------------------------------|--------|---------------------------------|------------|-------------------------------------|--------|------------------------------------|--------|
|                                   |   | **2003**                        |       | **2002**                            |   | **2001**                           |   | **2003** |   | **2002** |   | **2001** |   | **2003** |   | **2002** |   | **2001** |   |
|                                   |   |                            |       |                                |   |                               |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Discount rate                          |   | **6.75**                        | **%**      | 7.50                                | %      | 7.50                               | %      | **6.75** | **%** | 7.50 | % | 7.50 | % | **6.75** | **%** | 7.50 | % | 7.50 | % |
| Expected return  on plans’ assets |   | **9.00**                        | ** ** | 9.25                                |   | 9.00                               |   | **N/A** | ** ** | N/A |   | N/A |   | **N/A** | ** ** | 3.00 |   | N/A |   |
| Rate of future  compensation increase  |   | **4.00**                        | ** ** | 4.00                                |   | 4.50                               |   | **4.00** | ** ** | 4.00 |   | 4.50 |   | **N/A** | ** ** | N/A |   | N/A |   |

 

**Cinergy’s** expectedlong-term rate of return on plan assets is based on a calculation provided byan independent investment-consulting firm. The calculation of the expected 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 present interest and inflationrate levels underpin this process.

 

The assumptions are then modeled via a probability based multi-factorcapital market methodology.  Throughthis modeling process, a range of possible 10-year annualized returns aregenerated for each strategic asset class. Those returns falling at the 50th percentile are utilized inthe calculation of **Cinergy’s**expected long-term rate of return.  Weperiodically request a new calculation for use in validating our currentexpected long-term rate of return.

 

The assumed health care cost trend rates were as follows:

 

188

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|                                                                               |   | **2003** |       | **2002** |       |
|------------------------------------------------------------------------------------|--------|----------|------------|----------|------------|
|                                                                               |   |     | ** ** |     | ** ** |
| Health care cost trend  rate assumed for next year                                 |   | **9.00** | **%**      | 7.00     | %          |
| 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     |       |

 

189

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

 

|                                                    |   | **One-Percentage-  Point Increase** |     | **One-Percentage-  Point Decrease** |     |
|---------------------------------------------------------|--------|-------------------------------------|----------|-------------------------------------|----------|
|                                                    |   | **(in  millions)**                  |     |
|                                                    |   |                                | * * |                                | * * |
| Effect on total of service and interest cost components |   | $                                   | 4.1      |                                | $        | (3.5 | ) |
| Effect on accumulated postretirement benefit obligation |   | 52.1                                |     | (45.7                               | )        |
|                                                         |        |                                     |          |                                     |          |  |  |

 

On December 8, 2003, President Bush signed into law the MedicarePrescription Drug, Improvement and Modernization Act of 2003 (the Act).  The Act introduced a prescription drugbenefit to retirees as well as a federal subsidy to sponsors of retiree healthcare benefit plans that provide a prescription drug benefit that is actuariallyequivalent to the benefit provided by Medicare.  In January 2004, the FASB staff issued FASB Staff Position 106-1,*Accounting and Disclosure Requirements Relatedto the Medicare Prescription Drug, Improvement and Modernization Act of 2003*(FSP 106-1).  FSP 106-1 allows sponsorsof postretirement health care plans that provide a prescription drug benefit tomake a one-time election to defer accounting for certain provisions of the Actuntil further authoritative guidance is issued by FASB.  Alternatively, sponsors not electing thedeferral option must account for the effects of the Act.  **Cinergy**is required to make its election on whether it will defer accounting for theeffects of the Act by the first quarter of 2004.  **Cinergy** expects thatit will not elect the deferral option but will account for the subsidy as areduction of our accumulated postretirement benefit obligation with actuarialgain/loss treatment.

 

In accordance with the provisions of Statement 106, the Act had noeffect on **Cinergy’s** reported 2003accumulated postretirement benefit obligation, measured at September 30, 2003,or our 2003 net periodic postretirement benefit costs.  **Cinergy**expects that the FASB will issue final authoritative guidance on accounting forthe subsidy during 2004.  Depending uponthe timing of such guidance and our conclusion of whether or not to deferreflecting the effects of the Act, our net periodic postretirement benefitcosts reported during the interim periods of 2004 could change.

 

In January 2004, **Cinergy**announced to employees the creation of a new retiree Health ReimbursementAccount (HRA) option, which will impact the postretirement healthcare benefitsprovided by **Cinergy**.  HRAs are bookkeeping accounts that can beused to pay for qualified medical expenses after retirement.  The majority of employees will have theopportunity to make a one-time election to remain in **Cinergy’s** current retiree healthcare program or to move to thenew HRA option.  The HRA option has noeffect on current retirees receiving postretirement benefits from **Cinergy**. As is the case under the current retiree health program, employees whoparticipate in the HRA option will become eligible to receive their HRA benefitonly upon retirement on or after the age of 50 with at least five years ofservice.  We expect that the impact ofthe new HRA option will not be material to our other postretirement benefitcosts.

 

190

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**10.**       Income Taxes

 

The following table shows the significant components of **Cinergy’s**, **CG&E’s**, and **PSI’s**net deferred income tax liabilities as of December 31:

 
|                                                    |   | **Cinergy(1)**     |        | **CG&E  and subsidiaries** |   | **PSI**     |       |
|---------------------------------------------------------|--------|--------------------|-------------|--------------------------------|--------|-------------|------------|
|                                                    |   | **2003**           |        | **2002**                       |   | **2003**    |       | **2002** |   | **2003** |   | **2002** |   |
|                                                    |   | **(in  millions)** |        |
|                                                    |   |               |        |                           |   |        |       |   |   |   |   |   |   |
| **Deferred  Income Tax Liability**                      |   |               |        |                           |   |        |       |   |   |   |   |   |   |
| Property, plant,  and equipment                         |   | **$**              | **1,524.8** | ** **                     | $      | 1,373.6     |       | **$** | **879.0** | ** ** | $ | 803.1 |   | **$** | **569.1** | ** ** | $ | 520.3 |   |
| Unamortized  costs of reacquiring debt                  |   | **15.9**           | ** **  | 13.9                           |   | **5.8**     | ** ** | 2.8 |   | **10.1** | ** ** | 11.0 |   |
| Deferred  operating expenses and carrying costs         |   | **1.6**            | ** **  | 4.4                            |   | **1.6**     | ** ** | — |   | **—** | ** ** | 4.4 |   |
| Purchased power  tracker                                |   | **3.9**            | ** **  | 11.6                           |   | **—**  | ** ** | — |   | **3.9** | ** ** | 11.6 |   |
| RTC                                                     |   | **204.2**          | ** **  | 213.2                          |   | **204.2**   | ** ** | 213.2 |   | **—** | ** ** | — |   |
| Net energy risk  management assets                      |   | **10.0**           | ** **  | 8.8                            |   | **9.7**     | ** ** | 1.0 |   | **—** | ** ** | — |   |
| Amounts due from  customers-income taxes                |   | **47.6**           | ** **  | 37.4                           |   | **26.0**    | ** ** | 20.1 |   | **21.6** | ** ** | 17.3 |   |
| Gasification  services agreement buyout costs           |   | **85.8**           | ** **  | 89.8                           |   | **—**  | ** ** | — |   | **85.8** | ** ** | 89.8 |   |
| Other                                                   |   | **24.6**           | ** **  | 14.4                           |   | **15.3**    | ** ** | 10.9 |   | **—** | ** ** | 1.2 |   |
|                                                    |   |               | ** **  |                           |   |        | ** ** |   |   |   | ** ** |   |   |
| **Total  Deferred Income Tax Liability**                |   | **1,918.4**        | ** **  | 1,767.1                        |   | **1,141.6** | ** ** | 1,051.1 |   | **690.5** | ** ** | 655.6 |   |
|                                                    |   |               | ** **  |                           |   |        | ** ** |   |   |   | ** ** |   |   |
| **Deferred  Income Tax Asset**                          |   |               | ** **  |                           |   |        | ** ** |   |   |   | ** ** |   |   |
| Unamortized  investment tax credits                     |   | **39.3**           | ** **  | 42.5                           |   | **30.1**    | ** ** | 32.9 |   | **9.2** | ** ** | 9.6 |   |
| Accrued pension  and other postretirement benefit costs |   | **195.6**          | ** **  | 196.3                          |   | **97.9**    | ** ** | 107.5 |   | **58.2** | ** ** | 60.1 |   |
| Net energy risk  management liabilities                 |   | **8.8**            | ** **  | —                         |   | **—**  | ** ** | — |   | **8.8** | ** ** | 9.0 |   |
| Rural Utilities  Service obligation                     |   | **27.9**           | ** **  | 28.2                           |   | **—**  | ** ** | — |   | **27.9** | ** ** | 28.2 |   |
| Tax credit  carryovers                                  |   | **47.0**           | ** **  | —                         |   | **—**  | ** ** | — |   | **—** | ** ** | — |   |
| Other                                                   |   | **41.8**           | ** **  | 41.9                           |   | **28.1**    | ** ** | 28.1 |   | **12.5** | ** ** | 10.0 |   |
|                                                    |   |               | ** **  |                           |   |        | ** ** |   |   |   | ** ** |   |   |
| **Total  Deferred Income Tax Asset**                    |   | **360.4**          | ** **  | 308.9                          |   | **156.1**   | ** ** | 168.5 |   | **116.6** | ** ** | 116.9 |   |
|                                                    |   |               | ** **  |                           |   |        | ** ** |   |   |   | ** ** |   |   |
| **Net  Deferred Income Tax Liability**                  |   | **$**              | **1,558.0** | ** **                     | $      | 1,458.2     |       | **$** | **985.5** | ** ** | $ | 882.6 |   | **$** | **573.9** | ** ** | $ | 538.7 |   |

 

----

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

 

191

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The following table summarizes federal and state income taxes charged(credited) to income for **Cinergy**, **CG&E**, and **PSI**:

 
|                                                                    |   | **Cinergy(1)**     |      | **CG&E  and subsidiaries** |   | **PSI**  |   |
|-------------------------------------------------------------------------|--------|--------------------|-----------|--------------------------------|--------|----------|--------|
|                                                                    |   | **2003**           |      | **2002**                       |   | **2001** |   | **2003** |   | **2002** |   | **2001** |   | **2003** |   | **2002** |   | **2001** |   |
|                                                                    |   | **(in  millions)** |      |
|                                                                    |   |               |      |                           |   |     |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Current  Income Taxes**                                               |   |               |      |                           |   |     |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Federal                                                                 |   | **$**              | **33.5**  |                           | $      | 16.3     |   | $ | 129.4 |   | **$** | **83.9** |   | $ | 50.6 |   | $ | 135.1 |   | **$** | **44.6** |   | $ | 71.1 |   | $ | 59.9 |   |
| State                                                                   |   | **24.9**           |      | (4.1                           | )      | 9.3      |   | **11.9** |   | 0.6 |   | 7.6 |   | **17.5** |   | 9.7 |   | 4.6 |   |
| **Total  Current Income Taxes**                                         |   | **58.4**           |      | 12.2                           |   | 138.7    |   | **95.8** |   | 51.2 |   | 142.7 |   | **62.1** |   | 80.8 |   | 64.5 |   |
|                                                                    |   |               |      |                           |   |     |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Deferred  Income Taxes**                                              |   |               |      |                           |   |     |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Federal                                                                 |   |               |      |                           |   |     |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Depreciation and  other property, plant, and equipment-related items(2) |   | **129.4**          |      | 172.2                          |   | 42.7     |   | **73.8** |   | 73.6 |   | 23.3 |   | **40.8** |   | 79.6 |   | 10.7 |   |
| Pension and  other postretirement benefit costs                         |   | **22.9**           |      | (17.4                          | )      | (11.8    | )      | **9.7** |   | (4.7 | ) | (4.2 | ) | **7.4** |   | (7.4 | ) | (7.6 | ) |
| Deferred excise  taxes                                                  |   | **—**         |      | —                         |   | 14.5     |   | **—** |   | — |   | 14.5 |   | **—** |   | — |   | — |   |
| Unrealized  energy risk management transactions                         |   | **6.1**            |      | 9.0                            |   | 44.0     |   | **5.4** |   | 2.2 |   | 23.9 |   | **0.5** |   | (2.8 | ) | 11.6 |   |
| Fuel costs                                                              |   | **7.2**            |      | (22.7                          | )      | 5.7      |   | **4.6** |   | 8.8 |   | (8.0 | ) | **2.6** |   | (31.5 | ) | 13.7 |   |
| Purchased power  tracker                                                |   | **(4.6**           | )         | 1.5                            |   | 8.5      |   | **—** |   | — |   | — |   | **(6.4** | ) | 1.5 |   | 8.5 |   |
| Gasification  services agreement buyout costs                           |   | **(3.2**           | )         | (2.6                           | )      | (2.2     | )      | **—** |   | — |   | — |   | **(3.2** | ) | (2.6 | ) | (2.2 | ) |
| Tax credit  carryovers                                                  |   | **(47.0**          | )         | —                         |   | —   |   | **—** |   | — |   | — |   | **—** |   | — |   | — |   |
| Other-net                                                               |   | **(39.5**          | )         | (14.1                          | )      | 10.9     |   | **(19.7** | ) | 8.3 |   | (4.8 | ) | **(8.3** | ) | (7.5 | ) | 5.3 |   |
|                                                                    |   |               |      |                           |   |     |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Total  Deferred Federal Income Taxes**                                |   | **71.3**           |      | 125.9                          |   | 112.3    |   | **73.8** |   | 88.2 |   | 44.7 |   | **33.4** |   | 29.3 |   | 40.0 |   |
|                                                                    |   |               |      |                           |   |     |   |   |   |   |   |   |   |   |   |   |   |   |   |
| State                                                                   |   | **21.7**           |      | 30.4                           |   | 15.4     |   | **13.2** |   | 20.8 |   | 5.0 |   | **8.3** |   | 7.8 |   | 4.8 |   |
|                                                                    |   |               |      |                           |   |     |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Total  Deferred Income Taxes**                                        |   | **93.0**           |      | 156.3                          |   | 127.7    |   | **87.0** |   | 109.0 |   | 49.7 |   | **41.7** |   | 37.1 |   | 44.8 |   |
|                                                                    |   |               |      |                           |   |     |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Investment  Tax Credits-Net**                                         |   | **(7.9**           | )         | (8.2                           | )      | (9.1     | )      | **(4.7** | ) | (4.9 | ) | (5.9 | ) | **(3.2** | ) | (3.2 | ) | (3.2 | ) |
|                                                                    |   |               |      |                           |   |     |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Total  Income Taxes**                                                 |   | **$**              | **143.5** |                           | $      | 160.3    |   | $ | 257.3 |   | $ | **178.1** |   | $ | 155.3 |   | $ | 186.5 |   | **$** | **100.6** |   | $ | 114.7 |   | $ | 106.1 |   |

 

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

(2)          The increase from 2001to 2002 in deferred income taxes for depreciation and other property, plant,and equipment-related items includes a change in accounting method for taxpurposes related to capitalized costs.

 

Internal Revenue Code Section 29 provides a tax credit (nonconventionalfuel source credit) for qualified fuels produced and sold by a taxpayer to anunrelated person during the taxable year. The nonconventional fuel source credit reduced current federal incometax expense $83.7 million, $41.6 million, and $1.1 million for 2003, 2002, and2001, respectively.

 

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The following table presents a reconciliation of federal income taxes(which are calculated by multiplying the statutory federal income tax rate bybook income before federal income tax) to the federal income tax expensereported in the Statements of Income for **Cinergy**,**CG&E**, and **PSI**.

 
|                                                                       |   | **Cinergy(1)**     |       | **CG&E  and subsidiaries** |   | **PSI**  |   |
|----------------------------------------------------------------------------|--------|--------------------|------------|--------------------------------|--------|----------|--------|
|                                                                       |   | **2003**           |       | **2002**                       |   | **2001** |   | **2003** |   | **2002** |   | **2001** |   | **2003** |   | **2002** |   | **2001** |   |
|                                                                       |   | **(in  millions)** |       |
|                                                                       |   |               |       |                           |   |     |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Statutory  federal income tax provision                                    |   | **$**              | **186.0**  | ** **                     | $      | 185.7    |   | $ | 235.3 |   | **$** | **158.6** | ** ** | $ | 139.2 |   | $ | 175.2 |   | **$** | **73.0** | ** ** | $ | 109.0 |   | $ | 90.7 |   |
| Increases  (reductions) in taxes resulting from:                           |   |               | ** ** |                           |   |     |   |   | ** ** |   |   |   |   |   | ** ** |   |   |   |   |
| Amortization of  investment tax credits                                    |   | **(7.9**           | **)**      | (8.2                           | )      | (9.1     | )      | **(4.7** | **)** | (4.9 | ) | (5.9 | ) | **(3.2** | **)** | (3.2 | ) | (3.2 | ) |
| Depreciation and  other property, plant, and equipment-related differences |   | **4.3**            | ** ** | 0.2                            |   | 3.2      |   | **0.5** | ** ** | 1.0 |   | 2.6 |   | **3.7** | ** ** | (0.8 | ) | 0.6 |   |
| Preferred  dividend requirements of subsidiaries                           |   | **1.2**            | ** ** | 1.2                            |   | 1.2      |   | **—** | ** ** | — |   | — |   | **—** | ** ** | — |   | — |   |
| Income tax  credits                                                        |   | **(83.7**          | **)**      | (41.6                          | )      | (2.1     | )      | **—** | ** ** | — |   | — |   | **—** | ** ** | — |   | — |   |
| Foreign tax  adjustments                                                   |   | **5.1**            | ** ** | 3.2                            |   | (2.1     | )      | **—** | ** ** | — |   | — |   | **—** | ** ** | — |   | — |   |
| Employee Stock  Option Plan dividend                                       |   | **(6.5**           | **)**      | (3.0                           | )      | —   |   | **—** | ** ** | — |   | — |   | **—** | ** ** | — |   | — |   |
| Other-net                                                                  |   | **(1.6**           | **)**      | (3.5                           | )      | 6.2      |   | **(1.4** | **)** | (1.4 | ) | 2.0 |   | **1.3** | ** ** | (7.8 | ) | 8.6 |   |
|                                                                       |   |               | ** ** |                           |   |     |   |   | ** ** |   |   |   |   |   | ** ** |   |   |   |   |
| **Federal  Income Tax Expense**                                            |   | **$**              | **96.9**   | ** **                     | $      | 134.0    |   | $ | 232.6 |   | **$** | **153.0** | ** ** | $ | 133.9 |   | $ | 173.9 |   | **$** | **74.8** | ** ** | $ | 97.2 |   | $ | 96.7 |   |

 

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

 

The following table shows the significant components of **ULH&P’s** net deferred income taxliability as of December 31, 2003 and 2002:

 

|                                                   |   | **ULH&P**       |       |
|--------------------------------------------------------|--------|---------------------|------------|
|                                                   |   | **2003**            |       | **2002** |   |
|                                                   |   | **(in  thousands)** |       |
|                                                   |   |                | * *   |   | * * |
| **Deferred Income Tax Liability**                      |   |                |       |   |   |
| Property, plant, and equipment                         |   | **$**               | **49,662** | ** ** | $ | 44,309 |   |
| Unamortized costs of reacquiring debt                  |   | **599**             | ** ** | 652 |   |
| Amounts due from customers-income taxes                |   | **3,926**           | ** ** | 2,194 |   |
| Deferred fuel costs                                    |   | **1,631**           | ** ** | — |   |
| Other                                                  |   | **9,764**           | ** ** | 6,340 |   |
|                                                   |   |                | ** ** |   |   |
| **Total Deferred Income Tax Liability**                |   | **65,582**          | ** ** | 53,495 |   |
|                                                   |   |                | ** ** |   |   |
| **Deferred Income Tax Asset**                          |   |                | ** ** |   |   |
| Unamortized investment tax credits                     |   | **1,160**           | ** ** | 1,309 |   |
| Deferred fuel costs                                    |   | **—**          | ** ** | 1,987 |   |
| Accrued pension and other postretirement benefit costs |   | **4,444**           | ** ** | 4,410 |   |
| Other                                                  |   | **4,490**           | ** ** | 2,429 |   |
|                                                   |   |                | ** ** |   |   |
| **Total Deferred Income Tax Asset**                    |   | **10,094**          | ** ** | 10,135 |   |
|                                                   |   |                | ** ** |   |   |
| **Net Deferred Income Tax Liability**                  |   | **$**               | **55,488** | ** ** | $ | 43,360 |   |

 

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The following table summarizes federal and state income taxes charged(credited) to income for **ULH&P**:

 

|                                                                |   | **ULH&P**      |       |
|---------------------------------------------------------------------|--------|--------------------|------------|
|                                                                |   | **2003**           |       | **2002** |   | **2001** |   |
|                                                                |   | **(in thousands)** |       |
|                                                                |   |               | * *   |   | * * |   | * * |
| **Current Income Taxes**                                            |   |               |       |   |   |   |   |
| Federal                                                             |   | **$**              | **783**    | ** ** | $ | 3,250 |   | $ | 23,109 |   |
| State                                                               |   | **1,190**          | ** ** | 5,984 |   | (2,293 | ) |
| **Total Current Income Taxes**                                      |   | **1,973**          | ** ** | 9,234 |   | 20,816 |   |
|                                                                |   |               | ** ** |   |   |   |   |
| **Deferred Income Taxes**                                           |   |               | ** ** |   |   |   |   |
| Federal                                                             |   |               | ** ** |   |   |   |   |
| Depreciation and other property, plant, and equipment-related items |   | **8,032**          | ** ** | 2,797 |   | 1,042 |   |
| Pension and other benefit costs                                     |   | **258**            | ** ** | (309 | ) | (140 | ) |
| Fuel costs                                                          |   | **—**         | ** ** | (696 | ) | (7,338 | ) |
| Unamortized costs of reacquiring debt                               |   | **—**         | ** ** | (70 | ) | (30 | ) |
| Service company allocations                                         |   | **—**         | ** ** | — |   | 192 |   |
| Other-net                                                           |   | **(1,857**         | **)**      | 1,138 |   | 212 |   |
|                                                                |   |               | ** ** |   |   |   |   |
| **Total Deferred Federal Income Taxes**                             |   | **6,433**          | ** ** | 2,860 |   | (6,062 | ) |
|                                                                |   |               | ** ** |   |   |   |   |
| **Deferred State Income Taxes**                                     |   | **1,640**          | ** ** | 522 |   | (781 | ) |
|                                                                |   |               | ** ** |   |   |   |   |
| **Total Deferred Income Taxes**                                     |   | **8,073**          | ** ** | 3,382 |   | (6,843 | ) |
|                                                                |   |               | ** ** |   |   |   |   |
| **Investment Tax Credits-Net**                                      |   | **(265**           | **)**      | (267 | ) | (274 | ) |
|                                                                |   |               | ** ** |   |   |   |   |
| **Total Income Taxes**                                              |   | **$**              | **9,781**  | ** ** | $ | 12,349 |   | $ | 13,699 |   |

 

The following table presents a reconciliation of federal income taxes(which are calculated by multiplying the statutory federal income tax rate bybook income before federal income tax) to the federal income tax expensereported in the Statements of Income for **ULH&P**.

 

|                                                                       |   | **ULH&P**       |       |
|----------------------------------------------------------------------------|--------|---------------------|------------|
|                                                                       |   | **2003**            |       | **2002** |   | **2001** |   |
|                                                                       |   | **(in  thousands)** |       |
|                                                                       |   |                | * *   |   | * * |   | * * |
| Statutory federal income tax provision                                     |   | **$**               | **9,093**  | ** ** | $ | 6,298 |   | $ | 18,444 |   |
| Increases (reductions) in taxes resulting from:                            |   |                | ** ** |   |   |   |   |
| Amortization of investment tax credits                                     |   | **(265**            | **)**      | (267 | ) | (274 | ) |
| Depreciation and other property, plant, and equipment-related  differences |   | **(1,379**          | **)**      | (387 | ) | 23 |   |
| Other-net                                                                  |   | **(498**            | **)**      | 199 |   | (1,420 | ) |
|                                                                       |   |                | ** ** |   |   |   |   |
| **Federal Income Tax Expense**                                             |   | **$**               | **6,951**  | ** ** | $ | 5,843 |   | $ | 16,773 |   |

 

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**11.**       Commitments andContingencies

 

***(a)***                                  Environmental

 

*(i)*          Ozone TransportRulemakings

 

In June 1997, the Ozone Transport Assessment Group, which consisted of37 states, made a wide range of recommendations to the U.S. EnvironmentalProtection Agency (EPA) to address the impact of ozone transport on seriousnon-attainment areas (geographic areas defined by the EPA as non-compliant withozone standards) in the Northeast, Midwest, and South.  Ozone transport refers to wind-blownmovement of ozone and ozone-causing materials across city and state boundaries.

 

1.                    NitrogenOxide (NOX) State Implementation Plan (SIP) Call

 

In October 1998, the EPA finalized its ozone transport rule, also knownas the NOX SIP Call.  Itapplied to 22 states in the eastern half of the U.S., including the threestates in which our electric utilities operate, and proposed a model NOXemission allowance trading program. This rule recommended that states reduce NOX emissionsprimarily from industrial and utility sources to a certain level by May 2003.

 

In August 2000, the U.S. Circuit Court of Appeals for the District ofColumbia (Court of Appeals) extended the deadline for NOX reductionsto May 31, 2004.  The states of WestVirginia and Illinois, along with various industry groups (some of which we area member), have challenged portions of the final rule in an action filed in theCourt of Appeals.  A decision isexpected some time in the first quarter of 2004.  It is unclear whether the Court of Appeals’ decision in thismatter will result in an increase or decrease in the size of the NOXreduction requirement, or a deferral of the May 31, 2004 compliance deadline.

 

The states of Indiana and Kentucky developed final NOX SIPrules in response to the NOX SIP Call, through cap and tradeprograms, in June and July of 2001, respectively.  The EPA has approved Indiana’s and Kentucky’s SIP rules, whichhave both become effective, and has conditionally approved Ohio’s SIPrules.  Ohio Environmental ProtectionAgency is still promulgating the changes to its rules to satisfy the EPA’sconditions for approval.  **Cinergy’s** current plans for compliance withthe EPA’s NOX SIP Call would also satisfy compliance with Indiana’s,Kentucky’s, and Ohio’s SIP rules.

 

In September 2000, **Cinergy**announced a plan for its subsidiaries, **CG&E**and **PSI**, to invest in pollutioncontrol equipment and other methods to reduce NOX emissions.  This plan includes the following:

 

•                  installselective catalytic reduction units at several different generating stations;

•                  installother pollution control technologies, including new computerized combustioncontrols, at all generating stations;

•                  makecombustion improvements; and

•                  utilizethe NOX allowance market to buy or sell NOX allowances asappropriate.

 

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The current estimate for additional expenditures for this plan isapproximately $104 million and is in addition to the $685 million alreadyincurred to comply with this program.

 

*2.*                   Section 126Petitions

 

In February 1998, several northeast states filed petitions seeking theEPA’s assistance in reducing ozone in the Eastern U.S. under Section 126 of theClean Air Act (CAA).  The EPA believesthat Section 126 petitions allow a state to claim that sources in another stateare contributing to its air quality problem and request that the EPA requirethe upwind sources to reduce their emissions.

 

In December 1999, the EPA granted four Section 126 petitions relatingto NOX emissions.  Thisruling affected all of our Ohio and Kentucky facilities, as well as some of ourIndiana facilities, and required us to reduce our NOX emissions to acertain level by May 2003.  The EPAsubsequently extended the Section 126 rule compliance deadline to May 31, 2004,thus harmonizing the deadline with that for the NOX SIP Call.

 

In April 2003, the EPA issued a proposed rule withdrawing the Section126 rule in states with approved SIPs under the NOX SIP Call, whichinclude the states of Indiana and Kentucky. The proposed rule states that the EPA will withdraw the Section 126 rulein Ohio once Ohio has a fully approved SIP. As a result of these actions, we anticipate that the Section 126 rulewill be withdrawn and, as a result, not affect any of our facilities.

 

*(ii)*           Clean Air Act Lawsuit

 

In November 1999, andthrough subsequent amendments, the United States brought a lawsuit in theUnited States Federal District Court (District Court) for the Southern Districtof Indiana against **Cinergy**, **CG&E**, and **PSI** alleging various violations of the CAA.  Specifically, the lawsuit alleges that weviolated the CAA by not obtaining Prevention of Significant Deterioration(PSD), Non-Attainment New Source Review (NSR) and Ohio and Indiana SIP permitsfor various projects at our owned and co-owned generating stations.  Additionally, the suit claims that weviolated an Administrative Consent Order entered into in 1998 between EPA and **Cinergy** relating to alleged violations ofOhio’s SIP provisions governing particulate matter at Unit 1 at **CG&E’s** W.C. Beckjord Generating Station(Beckjord Station).  The suit seeks (1)injunctive relief to require installation of pollution control technology on variousgenerating units at **CG&E’s**Beckjord Station and Miami Fort Generating Station (Miami Fort Station), and **PSI’s** Cayuga Generating Station, GallagherGenerating Station, Wabash River Generating Station, and Gibson GeneratingStation (Gibson Station), and (2) civil penalties in amounts of up to $27,500per day for each violation.  Inaddition, three northeast states and two environmental groups have intervenedin the case.  The case is currently indiscovery, and the District Court has set the case for trial by jury commencingin August 2005.

 

In March 2000, the UnitedStates also filed an amended complaint in a separate lawsuit allegingviolations of the CAA relating to PSD, NSR, and Ohio SIP requirements regardingvarious generating stations, including a generating station operated by theColumbus Southern Power Company (CSP) and jointly-owned by CSP, the DaytonPower and Light Company (DP&L), and **CG&E**.  The EPA is seeking injunctive relief andcivil penalties of up to $27,500 per day for each violation.  This suit is being defended by CSP.  In April 2001, the District Court in thatcase

 

196

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ruled that the Governmentand the intervening plaintiff environmental groups could seek injunctive relieffor alleged violations that occurred more than five years before the filing ofthe complaint only.  Thus, if theplaintiffs prevail in their claims, any calculation for penalties will notstart on the date of the alleged violations, unless those alleged violations occurredafter November 3, 1994, but CSP would be forced to install the controlsrequired under the CAA.  Neither partyappealed that decision.

 

In addition, **Cinergy** and **CG&E** have been informed by DP&L that in June 2000, theEPA issued a Notice of Violation (NOV) to DP&L for alleged violations ofPSD, NSR, and SIP requirements at a generating station operated by DP&L andjointly-owned by **CG&E**.  The NOV indicated the EPA may (1) issue anorder requiring compliance with the requirements of the SIP, or (2) bring acivil action seeking injunctive relief and civil penalties of up to $27,500 perday for each violation.

 

In December 2000, **Cinergy**,**CG&E**, and **PSI** reached an agreement in principle withthe plaintiffs regarding the above matters. The complete resolution of these issues was contingent upon establishinga final agreement with the EPA and other parties.  Although we have continued to negotiate with the plaintiffs toachieve a final agreement, the plaintiffs have insisted on commitments from uswhich go beyond those contained in the agreement in principle.  At this time we believe it is unlikely thata final settlement agreement will be reached on these terms.  If a final settlement agreement is notreached, we intend to defend against the allegations, discussed above,vigorously in court.  In such an event it is notpossible to predict whether resolution of these matters would have a materialeffect on our financial position or results of operations.

 

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

 

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

 

Coal tar residues, related hydrocarbons, and various metals have beenfound at former MGP sites in Indiana, including 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).

 

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

 

**PSI** notified itsinsurance carriers of the claims related to MGP sites raised by IDEM and costsincluded in the Site Participation and Cost Sharing Agreements.  In April 1998, **PSI** filed suit in

 

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Hendricks County in the state of Indiana against its general liabilityinsurance carriers.  **PSI** sought a declaratory judgment toobligate its insurance carriers to (1) defend MGP claims against **PSI** and compensate **PSI** for its costs of investigating,preventing, mitigating, and remediating damage to property and paying claimsrelated to MGP sites or (2) pay **PSI’s**cost of defense.  The trial court issueda variety of rulings with respect to the claims and defenses in thelitigation.  **PSI**appealed certain adverse rulings to the Indiana Court ofAppeals and the appellate court has remanded the case to the trial court.  A new trial date has yet to bescheduled.  At the present time, **PSI** cannot predict the outcome of thislitigation, including the outcome of the appeals.

 

**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 andremediate the sites as outlined in the voluntary remediation plan.  As additional facts become known andinvestigation is completed, we will assess if the likelihood of incurringadditional costs becomes probable. Until all investigation and remediation is complete, we are unable todetermine the overall impact on our financial position or results ofoperations.

 

**CG&E** hasperformed site assessments on its sites where we believe MGP activities haveoccurred at some point in the past and found no imminent risk to theenvironment.

 

*(iv)*         Asbestos ClaimsLitigation

 

**CG&E** and **PSI** have been named as defendants orco-defendants in lawsuits related to asbestos at their electric generatingstations.  Currently, there areapproximately 80 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 been brought against **PSI**. The impact on **CG&E’s**and **PSI’s** financial position orresults of operations of these cases 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 $500,000 on a negligenceclaim and for **PSI** on punitivedamages.  **PSI** recently received an adverse ruling in an appeal of thatverdict and is reviewing whether to appeal the verdict to the Indiana SupremeCourt.  In addition, we have settled anumber of other lawsuits for amounts, which neither individually nor in theaggregate are material to **CG&E’s**and **PSI’s** financial position orresults of operations.

 

At this time, **CG&E** and**PSI**are not able to predict theultimate outcome of these lawsuits or the impact on **CG&E’s** and **PSI’s**financial position or results of operations.

 

***(b)***                                  Regulatory

 

*(i)*               PSI Retail ElectricRate Case

 

In December 2002, **PSI**filed a petition with the IURC seeking approval of a base retail electric rateincrease.  **PSI** has filed initial and rebuttal testimony in this case andthe final set of hearings

 

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took place in November 2003.  **PSI** filed its proposed order in December2003.  Based on updated testimony filedin October 2003 and the proposed order, **PSI**proposes an increase in annual revenues of approximately $180 million, or anaverage increase of approximately 14 percent over **PSI’s** retail electric rates in effect at the end of 2002.  An IURC decision is anticipated by the endof the first quarter of 2004.

 

*(ii)*           PSI Fuel AdjustmentCharge

 

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

 

*(iii)*       PSI Construction Work in Progress (CWIP)Ratemaking Treatment for NOX Equipment

* *

In April 2003, **PSI** filedan application with the IURC requesting that its CWIP rate adjustment mechanismbe updated for expenditures through December 2002 related to NOXequipment currently being installed at certain **PSI** generation facilities. CWIP ratemaking treatment allows for the recovery of carrying costs oncertain pollution control equipment while and after the equipment is underconstruction.  A final order was issuedin September 2003.  The order grantedsubstantially all of **PSI’s**requested relief, leaving only the issue of whether certain specific equipmentqualified for CWIP ratemaking treatment to be decided in the first half of2004.  This CWIP rate mechanismadjustment resulted in less than a one percent increase in customer rates.

 

In October 2003, **PSI** filedan application with the IURC requesting that its CWIP rate adjustment mechanismbe updated for additional expenditures through September 30, 2003, related toNOX equipment currently being installed at certain **PSI** generation facilities.  If the application is approved, it willresult in the recovery of an additional $7 million.  An order on this third CWIP update case is expected in the firsthalf of 2004.

 

**PSI’s** initial CWIPrate mechanism adjustment (authorized in July 2002) resulted in anapproximately one percent increase in customer rates.  Under the IURC’s CWIP rules, **PSI**may update its CWIP tracker at six-month intervals.  The first such update to **PSI’s** CWIP rate mechanism occurred in the firstquarter of 2003.  The IURC’s July 2002order also authorized **PSI** todefer, for subsequent recovery, post-in-service depreciation and to continuethe accrual for AFUDC.  Pursuant toStatement of Financial Accounting Standards No. 92, *Regulated Enterprises-Accounting for Phase-in Plans*, theequity component of AFUDC will not be deferred for financial reporting afterthe related assets are placed in service.

 

*(iv)*         PSI EnvironmentalCompliance Cost Recovery

 

In 2002, the Indiana General Assembly passed legislation that, amongother things, encourages the deployment of advanced technologies that reduceregulated air emissions, while allowing the continued use of high sulfurMidwest coal in existing electric generating plants.  The legislation

 

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authorizes the IURC to provide financial incentives to utilities thatdeploy such advanced technologies.  **PSI**soughtIURC approval, under this new law, of a cost tracking mechanism for **PSI’s** NOX equipment-related depreciationand operation and maintenance costs, authority to use accelerated (18-year)depreciation for its NOX compliance equipment, and approval of a NOXemission allowance purchase and sales tracker. In October 2003, **PSI**reached a settlement with the other parties to this case that provides for therelief described above for most of **PSI’s**environmental compliance equipment.  InDecember 2003, the IURC approved the settlement agreement.  Previously, the majority of these costs (thepost-in-service depreciation costs) were being deferred pursuant to the July2002 CWIP order described above, and as a result, the settlement agreement didnot have a material impact on **PSI’s**results of operations or financial condition.

 

*(v)*             PSI Purchased PowerTracker

 

The Tracker was designed to provide for the recovery of costs relatedto certain specified purchases of power necessary to meet native loadcustomers’ summer peak demand requirements to the extent such costs are notrecovered through the existing fuel adjustment clause.

 

**PSI** is authorizedto seek recovery of 90 percent of its purchased power expenses through theTracker (net of the displaced energy portion recovered through the fuelrecovery process and net of the mitigation credit portion), with the remaining10 percent deferred for subsequent recovery in **PSI’s**general retail electric rate case.  In March 2002, **PSI** filed a petition with the IURC seeking approval to extendthe Tracker process beyond the summer of 2002. A hearing was held in January 2003, and in June 2003 the IURC approvedthe extension for up to an additional two years with the ultimate determinationconcerning **PSI’s** continued use ofthe Tracker process to be made in **PSI’s**pending retail electric rate case.

 

In June 2002, **PSI** alsofiled a petition with the IURC seeking approval of the recovery through theTracker of its actual summer 2002 purchased power costs.  In May 2003, the IURC approved **PSI’s** recovery of $18 million related toits summer 2002 purchased power costs, and also authorized $2 million ofdeferred costs sought for recovery in **PSI’s**general retail electric rate case.

 

*(vi)*         CG&E Transmission andDistribution Rate Filings

 

In October 2003, **CG&E**filed an application with the PUCO seeking deferral of approximately $173million, of which approximately $42 million has been incurred as of December31, 2003, in depreciation, property taxes and carrying costs related to netadditions to transmission and distribution utility plant in service fromJanuary 2001 through December 2005. Rates are frozen in Ohio under the state’s electric restructuring lawfrom 2001 through the end of the market development period.  **CG&E**has not deferred any of these costs as of December 31, 2003.

 

**CG&E** isproposing a mechanism to recover costs related to net additions to transmissionand distribution utility plant in service after the end of the marketdevelopment period.  The mechanism wouldwork in a similar manner to the monthly customer charge the PUCO approved for **CG&E’s** accelerated natural gas mainreplacement program, discussed below****in(*vii*), which is adjusted annuallybased on expenditures in the previous year.

 

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In the alternative electric reliability and rate stabilization proposalthat **CG&E** filed in January2004 with the PUCO, which is described in more detail in Note 17 below, **CG&E** made an alternative proposal toseek deferrals of transmission and distribution utility plant in service fromJanuary 2003 through December 2004, for the PUCO to declare an end to themarket development period effective December 31, 2004, and for **CG&E** to file a transmission anddistribution base rate case in 2004 to be effective January 1, 2005.  The alternative proposal also includestracking mechanisms as described in the preceding paragraph, which wouldrecover ongoing transmission and distribution costs.

 

*(vii)*     CG&E Gas Rate Case

 

In the third quarter of 2001, **CG&E**filed a retail gas rate case with the PUCO seeking to increase base rates fornatural gas distribution service and requesting recovery through a trackingmechanism of the costs of an accelerated gas main replacement program with anestimated capital cost of $716 million over 10 years.  An order was issued in May 2002, in which the PUCO authorized abase rate increase of approximately $15 million, or 3.3 percent overall,effective May 30, 2002.  In addition,the PUCO authorized **CG&E** toimplement the tracking mechanism to recover the costs of the accelerated gasmain replacement program, subject to certain rate caps that increase in amountannually through May 2007, through the effective date of new rates in **CG&E’s** next retail gas rate case.  In April 2003, **CG&E**received approval to increase its rates under thetracking mechanism by $6.5 million. This increase was effective in May 2003.  **CG&E** filedanother application in January 2004 to increase its rates by approximately $7million under the tracking mechanism.  **CG&E** expects that the PUCO will rule onthis application in the second quarter of 2004.

 

*(viii) ULH&PGas Rate Case*

 

In the second quarter of 2001, **ULH&P** filed a retail gas rate case with the KPSCseeking to increase base rates for natural gas distribution services andrequesting recovery through a tracking mechanism of the costs of an acceleratedgas main replacement program with an estimated capital cost of $112 millionover 10 years.  Through December 31,2003, **ULH&P** hasrecovered approximately $1.4 million under this tracking mechanism.  The Kentucky Attorney General has appealedto the Franklin Circuit Court the KPSC’s approval of the tracking mechanism andthe KPSC’s orders approving the new tracking mechanism rates.  At the present time, **ULH&P** cannot predict the timing or outcome of thislitigation.

 

*(ix)*         Gas Distribution Plant

 

In June 2003, the PUCO approved an amended settlement agreement between**CG&E** and the PUCO Staff in agas distribution safety case arising out of a gas leak at a servicehead-adapter (SHA) style riser on **CG&E’s**distribution system.  The amendedsettlement agreement required **CG&E**to expend a minimum of $700,000 to replace SHA risers by December 31, 2003, andto file a comprehensive plan addressing all SHA risers on its distributionsystem.  **Cinergy** has an estimated 190,000 SHA risers on itsdistribution system, of which 155,000 are in **CG&E’s**service area and 31,000 are in **ULH&P’s**service area.  Further investigation asto whether any additional SHA risers will need maintenance or replacement isongoing.  If **CG&E** and**ULH&P**

 

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determine that replacement of all SHA risers is appropriate, wecurrently estimate that the replacement cost could be up to approximately $70million.  **CG&E** and**ULH&P**would pursue recovery of this cost through rates.  At this time, **Cinergy**,**CG&E**, and**ULH&P** cannot predict the outcome ofthis matter.

 

***(c)***                                  Other

 

*(i)*               Gas Customer Choice

 

In January 2000, Investments sold CinergyResources, Inc. (Resources), a former subsidiary, to Licking RuralElectrification, Inc., doing business as The Energy Cooperative (Energy Cooperative).  In February 2001, **Cinergy**, **CG&E**, and Resources were named as defendants in three class action lawsuitsbrought by customers relating to Energy Cooperative’s removal from the Ohio GasCustomer Choice program and the failure to deliver gas to customers.  Subsequently,these class action suits were amended and consolidated into one suit.  **CG&E** has been dismissed as a defendant in the consolidated suit.  This customer litigation is pending in theHamilton County Common Pleas Court.  Thetrial court certified a class against **CG&E**in November 2003.  A trial date has notbeen set.

 

In March 2001, **Cinergy**, **CG&E**, and Investments were named as defendants in a lawsuit filed by EnergyCooperative and Resources.  This lawsuitconcerns any obligations or liabilities Investments may have to EnergyCooperative following its sale of Resources. This lawsuit is pending in the Licking County Common Pleas Court.  Trial is anticipated to occur in November2004.  In October 2001, **Cinergy**, **CG&E**,and Investments initiated litigation against the Energy Cooperative requestingindemnification by the Energy Cooperative for the claims asserted by formercustomers in the class action litigation. We intend to vigorously defendthese lawsuits and do not believe their outcome will have a material effect onour financial position or results of operations.

 

*(ii)*           Contract Disputes

 

**Cinergy**, through asubsidiary of Investments, has been involved in negotiations to resolve acustomer billing dispute.  The primaryissue of contention between the parties related to the determinants used incalculating the monthly charge billed for electricity.  Receivables from the customer have beenrecorded at their net realizable value and in January 2004, **Cinergy** settled the dispute.  The impact of the settlement was notmaterial to our financial position or results of operations.

 

Marketing & Trading was in arbitration with Apache Corporation(Apache) concerning disputes under an agreement whereby we marketed natural gasthat Apache produced or acquired in North America.  Effective July 1, 2003, Marketing & Trading terminated itsmarketing relationship with Apache.  Thetermination of the marketing relationship ended the arbitration and alloutstanding monetary issues related to the arbitration were settled.  The impact of the settlement was notmaterial to our financial position or results of operations.

 

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*(iii)*       Enron Bankruptcy

* *

In December 2001, Enron filed for protection under Chapter 11 of theU.S. Bankruptcy Code in the Southern District of New York.  We decreased our trading activities withEnron in the months prior to its bankruptcy filing and filed a motion with thebankruptcy court overseeing the Enron bankruptcy seeking appropriate netting ofthe various payables and receivables between and among Enron and **Cinergy** entities.  Based on judicial decisions regarding the permissibility ofcertain broad netting arrangements and the results of our mediation, we enteredinto a settlement agreement with Enron, which became final on January 13,2004.  As a result of this agreement, wepaid Enron approximately $14 million of which $12 million was charged toexpense during the third quarter of 2003. We believe this resolves all of our claims with the Enron entities,except for one claim being handled outside the United States proceedinginvolving the recovery of an insignificant amount.

 

*(iv)*         Synthetic Fuel Production

 

In July 2002, Capital & Trading acquired a coal-based syntheticfuel production facility.  As ofDecember 31, 2003, Capital & Trading’s net book value in this facility wasapproximately $60 million.  Thesynthetic fuel produced at this facility qualifies for tax credits inaccordance with Section 29 of the Internal Revenue Code.  Eligibility for these credits expires after2007.  **Cinergy**received a private letter ruling from the IRS in connection with theacquisition of the facility.  To date, **Cinergy** has produced and sold approximately4.4 million tons of synthetic fuel at this facility, resulting in approximately$120 million in tax credits, including approximately $80 million in 2003.

 

In the second quarter of 2003, the IRS announced, as a result of anaudit of another taxpayer, that it had reason to question and was reviewing thescientific validity of test procedures and results that were presented asevidence the fuel underwent a significant chemical change.  The IRS recently announced that it hasfinished its review and has determined that test procedures and results used bytaxpayers may be scientifically valid if the procedures are applied in aconsistent and unbiased manner.  The IRSalso announced that it plans to impose new testing and record-keepingrequirements on synthetic fuel producers and plans to issue guidance extendingthese requirements to taxpayers already holding private letter rulings on theissue of significant chemical change.  **Cinergy** believes that any new testing orrecord-keeping requirements imposed by the IRS will not have a material effecton our financial position or results of operations.

 

*(v)*             Energy MarketInvestigations

 

In July 2003, **Cinergy**received a subpoena from the Commodity Futures Trading Commission (CFTC).  As has been previously reported by thepress, the CFTC has served subpoenas on numerous other energy companies.  The CFTC request sought certain informationregarding our trading activities, including price reporting to energy industrypublications.  The CFTC sought particularinformation concerning these matters for the period May 2000 through January 2001as to one of **Cinergy’s**employees.  Based on an initial reviewof these matters, we placed that employee on administrative leave and havesubsequently terminated his employment. **Cinergy** is continuing aninvestigation of these matters, including whether price reportinginconsistencies occurred in our operations, and has been cooperating fully withthe CFTC.

 

In August 2003, **Cinergy**,along with 38 other companies, was named as a defendant in civil

 

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litigation filed as a purported class action on behalf of all personswho purchased and/or sold New York Mercantile Exchange natural gas futures andoptions contracts between January 1, 2000 and December 31, 2002.  The complaint alleges that improper price reportingcaused damages to the class.  Twosimilar lawsuits have subsequently been filed, and these three lawsuits havebeen consolidated for pretrial purposes. Plaintiffs filed a consolidated class action complaint in January2004.  We believe this action is withoutmerit and intend to defend this lawsuit vigorously; however, we cannot predictthe outcome of this matter at this time.

 

In the second quarter of 2003, **Cinergy**received initial and follow-up third-party subpoenas from the SEC requestinginformation related to particular trading activity with one of itscounterparties who was the target of an investigation by the SEC.  **Cinergy**has fully cooperated with the SEC in connection with this matter.  In January 2004, **Cinergy** received a grand jury subpoena from the AssistantUnited States Attorney in the Southern District of Texas for informationrelating to the same trading activities being investigated by the SEC.  Specifically, the Assistant United StatesAttorney has requested information relating to communications between a formeremployee and another energy company.  Weunderstand that we are neither a target nor are we under investigation by theDepartment of Justice in relation to these communications.

 

At this time, it is not possible to predict the outcome of theseinvestigations and litigation or their impact on **Cinergy’s** financial position or results of operations;although, in the opinion of management, they are not likely to have a materialadverse effect on our financial position or results of operations.

 

*(vi)*         Patents

 

Ronald A. Katz Technology Licensing, L.P. (RAKTL) has offered us alicense to a portfolio of patents claiming that the patents may be infringed bycertain products and services utilized by us. The patents purportedly relate to various aspects of telephone callprocessing in **Cinergy**callcenters.  As of this date, no legalproceedings have been instituted against us, but if the RAKTL patents arevalid, enforceable and apply to our business, we could be required to seek alicense from RAKTL or to discontinue certain activities.  We are currently considering this matter,but lack sufficient information to assess the potential outcome at this time.

 

*(vii)*     Guarantees

 

In the ordinary course of business, **Cinergy**enters into various agreements providing financial or performanceassurances to third parties on behalf of certain unconsolidated subsidiariesand joint ventures.  These agreementsare entered into primarily to support or enhance the creditworthiness otherwiseattributed to these entities****on astand-alone basis, thereby facilitating the extension of sufficient credit toaccomplish their intended commercial purposes. The guarantees have various termination dates, from short-term (lessthan one year) to open-ended.

 

In many cases, the maximum potential amount of an outstanding guaranteeis an express term, set forth in the guarantee agreement, representing themaximum potential obligation of **Cinergy**underthat guarantee (excluding, at times, certain legal fees to which a guaranty beneficiarymay be entitled).  In those cases wherethere is no maximum potential amount expressly set forth in the guaranteeagreement, we calculate the maximum potential amount by considering the terms

 

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of the guaranteed transactions, to the extent such amount is estimable.

 

**Cinergy**hasguaranteed the payment of $25 million as of December 31, 2003, 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.  Most of the guarantees do not have a settermination date; however, the borrowings associated with the majority of theguarantees are due in the first quarter of 2005.

 

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**Cinergy Corp.** hasalso provided performance guarantees on behalf of certain unconsolidated subsidiariesand joint ventures.  These guaranteessupport performance under various agreements and instruments (such asconstruction contracts, operations and maintenance agreements, and energyservice agreements).  **Cinergy Corp.**may be liable in the event ofan unexcused breach of a guaranteed performance obligation by an unconsolidatedsubsidiary.  **Cinergy Corp.** has estimated its maximum potential amount to be$104 million under these guarantees as of December 31, 2003.  **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 contained in thecontract.  In some cases, particularlywith respect to purchase and sale agreements, the potential liability forcertain indemnification obligations is capped, in whole or in part (generallyat an aggregate amount not exceeding the sale price), and subject to adeductible amount before****anypayments would become due.** **In other cases (such asindemnifications for willful misconduct of employees in a joint venture), themaximum potential amount is not estimable given that the magnitude of anyclaims under those indemnifications would be a function of the extent ofdamages actually incurred, which is not practicable to estimate unless anduntil the event occurs.  **Cinergy** has estimated the maximum potentialamount, where estimable, to be $115 million under these indemnificationprovisions.  The termination period forthe majority of matters provided by indemnification provisions in purchase andsale agreements generally ranges from 2004 to 2009.

 

We believe the likelihood that **Cinergy**would be required to perform or otherwise incur any significantlosses associated with any or all of the guarantees described in the precedingparagraphs is remote.

 

*(viii)*    Constructionand Other Commitments

 

Forecasted construction and other committed expenditures, includingcapitalized financing costs, for the year 2004 and for the five-year period2004-2008 (in nominal dollars) are presented in the table below:

 

|                          |   | **2004**          |     | **2004-2008** |     |
|-------------------------------|--------|-------------------|----------|---------------|----------|
|                          |   | **(in millions)** |     |
|                          |   |              | * * |          | * * |
| **Cinergy**(1)                |   | **$**             | **756**  |          | $        | 4,133 |   |
| **CG&E** and subsidiaries |   | **302**           |     | 1,591         |     |
| **PSI**(2)                    |   | **336**           |     | 1,978         |     |
| **ULH&P**                 |   | **39**            |     | 212           |     |
|                               |        |                   |          |               |          |  |  |

 

----

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

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

 

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This forecast includes an estimate of expenditures in accordance withthe companies’ plans regarding environmental compliance.

 

**12.**       Jointly-Owned Plant

** **

**CG&E**, CSP, andDP&L jointly own electric generating units and related transmissionfacilities.  **PSI** is a joint-owner of Gibson Station Unit No. 5 with WabashValley Power Association, Inc. (WVPA), and Indiana Municipal Power Agency(IMPA).  Additionally, **PSI** is a joint-owner with WVPA and IMPA ofcertain transmission property and local facilities.  These facilities constitute part of the integrated transmissionand distribution systems, which are operated and maintained by **PSI**. The Statements of Income reflect **CG&E’s**and **PSI’s** portions of alloperating costs associated with the jointly-owned facilities.

 

As of December 31, 2003, **CG&E’s**and **PSI’s** investments injointly-owned plant or facilities were as follows:

 
|                               |   | **Ownership  Share** |     | **Property,  Plant, and  Equipment** |     | **Accumulated  Depreciation** |     | **Construction  Work in  Progress** |     |
|------------------------------------|--------|----------------------|----------|--------------------------------------|----------|-------------------------------|----------|-------------------------------------|----------|
|                               |   | **(in  millions)**   |     |
|                               |   |                 | * * |                                 | * * |                          | * * |                                | * * |
| **CG&E**                       |   |                 |     |                                 |     |                          |     |                                |     |
| Production:                        |   |                 |     |                                 |     |                          |     |                                |     |
| Miami Fort Station (Units 7 and 8) |   | 64.00                | %        | $334                                 |     | $132                          |     | $2                                  |     |
| Beckjord Station (Unit 6)          |   | 37.50                |     | 45                                   |     | 28                            |     | 1                                   |     |
| Stuart Station(1)                  |   | 39.00                |     | 308                                  |     | 156                           |     | 75                                  |     |
| Conesville Station (Unit 4)(1)     |   | 40.00                |     | 76                                   |     | 46                            |     | 1                                   |     |
| Zimmer Station                     |   | 46.50                |     | 1,240                                |     | 420                           |     | 16                                  |     |
| East Bend Station                  |   | 69.00                |     | 392                                  |     | 193                           |     | 3                                   |     |
| Killen Station(1)                  |   | 33.00                |     | 193                                  |     | 108                           |     | 13                                  |     |
| Transmission                       |   | Various              |     | 85                                   |     | 40                            |     | —                              |     |
|                               |   |                 |     |                                 |     |                          |     |                                |     |
| **PSI**                            |   |                 |     |                                 |     |                          |     |                                |     |
| Production:                        |   |                 |     |                                 |     |                          |     |                                |     |
| Gibson Station (Unit 5)            |   | 50.05                |     | 218                                  |     | 125                           |     | 48                                  |     |
| Transmission and local facilities  |   | 94.37                |     | 2,466                                |     | 950                           |     | —                              |     |

 

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(1)                                  Station is notoperated by **CG&E**.

 

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**13.**       Quarterly Financial Data(unaudited)

 
|                                                                                                |   | **First  Quarter**                           |       | **Second  Quarter** |       | **Third  Quarter** |       | **Fourth  Quarter** |       | **Total**  |       |
|-----------------------------------------------------------------------------------------------------|--------|----------------------------------------------|------------|---------------------|------------|--------------------|------------|---------------------|------------|------------|------------|
|                                                                                                |   | **(in  millions, except per share amounts)** |       |
| **Cinergy**(1)                                                                                      |   |                                         |       |                |       |               |       |                |       |       |       |
|                                                                                                |   |                                         |       |                |       |               |       |                |       |       |       |
| **2003**                                                                                            |   |                                         |       |                |       |               |       |                |       |       |       |
|                                                                                                |   |                                         |       |                |       |               |       |                |       |       |       |
| **Results  of Operations:**                                                                         |   |                                         |       |                |       |               |       |                |       |       |       |
| Operating  Revenues(2)                                                                              |   | **$**                                        | **1,268**  | ** **          | **$**      | **934**            | ** ** | **$**               | **1,092**  | ** ** | **$**      | **1,122** | ** ** | **$** | **4,416** |   |
| Operating Income                                                                                    |   | **255**                                      | ** ** | **138**             | ** ** | **204**            | ** ** | **212**             | ** ** | **809**    |       |
|                                                                                                |   |                                         | ** ** |                | ** ** |               | ** ** |                | ** ** |       |       |
| Income before  discontinued operations and cumulative effect of changes in accounting  principles   |   | **140**                                      | ** ** | **76**              | ** ** | **112**            | ** ** | **107**             | ** ** | **435**    |       |
| Discontinued  operations, net of tax(3)                                                             |   | **—**                                   | ** ** | **9**               | ** ** | **—**         | ** ** | **—**          | ** ** | **9**      |       |
| Cumulative  effect of changes in accounting principles, net of tax(4)                               |   | **26**                                       | ** ** | **—**          | ** ** | **—**         | ** ** | **—**          | ** ** | **26**     |       |
| Net Income                                                                                          |   | **$**                                        | **166**    | ** **          | **$**      | **85**             | ** ** | **$**               | **112**    | ** ** | **$**      | **107** | ** ** | **$** | **470** |   |
|                                                                                                |   |                                         | ** ** |                | ** ** |               | ** ** |                | ** ** |       |       |
| **Per  Share Data:**                                                                                |   |                                         | ** ** |                | ** ** |               | ** ** |                | ** ** |       |       |
| EPS                                                                                                 |   |                                         | ** ** |                | ** ** |               | ** ** |                | ** ** |       |       |
| 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(3)                                                             |   | **—**                                   | ** ** | **0.05**            | ** ** | **—**         | ** ** | **—**          | ** ** | **0.05**   |       |
| Cumulative  effect of changes in accounting principles, net of tax(4)                               |   | **0.15**                                     | ** ** | **—**          | ** ** | **—**         | ** ** | **—**          | ** ** | **0.15**   |       |
| Net Income                                                                                          |   | **$**                                        | **0.96**   | ** **          | **$**      | **0.47**           | ** ** | **$**               | **0.63**   | ** ** | **$**      | **0.60** | ** ** | **$** | **2.66** |   |
| EPS - assuming  dilution                                                                            |   |                                         | ** ** |                | ** ** |               | ** ** |                | ** ** |       |       |
| Income before  discontinued operations and cumulative effect of changes in accounting  principles   |   | **0.80**                                     | ** ** | **0.42**            | ** ** | **0.62**           | ** ** | **0.59**            | ** ** | **2.43**   |       |
| Discontinued  operations, net of tax(3)                                                             |   | **—**                                   | ** ** | **0.05**            | ** ** | **—**         | ** ** | **—**          | ** ** | **0.05**   |       |
| Cumulative  effect of changes in accounting principles, net of tax(4)                               |   | **0.15**                                     | ** ** | **—**          | ** ** | **—**         | ** ** | **—**          | ** ** | **0.15**   |       |
| Net Income                                                                                          |   | **$**                                        | **0.95**   | ** **          | **$**      | **0.47**           | ** ** | **$**               | **0.62**   | ** ** | **$**      | **0.59** | ** ** | **$** | **2.63** |   |
|                                                                                                |   |                                         |       |                |       |               |       |                |       |       |       |
| **2002**                                                                                            |   |                                         |       |                |       |               |       |                |       |       |       |
|                                                                                                |   |                                         |       |                |       |               |       |                |       |       |       |
| **Results  of Operations:**                                                                         |   |                                         |       |                |       |               |       |                |       |       |       |
| Operating  Revenues(2)                                                                              |   | $                                            | 967        |                | $          | 907                |       | $                   | 1,120      |       | $          | 1,065 |   | $ | 4,059 |   |
| Operating Income                                                                                    |   | 211                                          |       | 136                 |       | 239                |       | 214                 |       | 800        |       |
|                                                                                                |   |                                         |       |                |       |               |       |                |       |       |       |
| Income before  discontinued operations and a cumulative effect of a change in accounting  principle |   | 95                                           |       | 45                  |       | 132                |       | 125                 |       | 397        |       |
| Discontinued  operations, net of tax(3)                                                             |   | 1                                            |       | —              |       | (1                 | )          | (25                 | )          | (25        | )          |
| Cumulative  effect of a change in accounting principle, net of tax(7)                               |   | (11                                          | )          | —              |       | —             |       | —              |       | (11        | )          |
| Net Income                                                                                          |   | $                                            | 85         |                | $          | 45                 |       | $                   | 131        |       | $          | 100 |   | $ | 361 |   |
|                                                                                                |   |                                         |       |                |       |               |       |                |       |       |       |
| **Per  Share Data:**                                                                                |   |                                         |       |                |       |               |       |                |       |       |       |
| EPS                                                                                                 |   |                                         |       |                |       |               |       |                |       |       |       |
| Income before  discontinued operations and a cumulative effect of a change in accounting  principle |   | 0.57                                         |       | 0.27                |       | 0.79               |       | 0.74                |       | 2.37       |       |
| Discontinued  operations, net of tax(3)                                                             |   | 0.01                                         |       | —              |       | (0.01              | )          | (0.15               | )          | (0.15      | )          |
| Cumulative  effect of a change in accounting principle, net of tax(7)                               |   | (0.06                                        | )          | —              |       | —             |       | —              |       | (0.06      | )          |
| Net Income                                                                                          |   | $                                            | 0.52       |                | $          | 0.27               |       | $                   | 0.78       |       | $          | 0.59 |   | $ | 2.16 |   |
| EPS - assuming  dilution                                                                            |   |                                         |       |                |       |               |       |                |       |       |       |
| Income before  discontinued operations and cumulative effect of a change in accounting  principle   |   | 0.57                                         |       | 0.26                |       | 0.78               |       | 0.73                |       | 2.34       |       |
| Discontinued  operations, net of tax(3)                                                             |   | 0.01                                         |       | —              |       | (0.01              | )          | (0.15               | )          | (0.15      | )          |
| Cumulative  effect of a change in accounting principle, net of tax(7)                               |   | (0.06                                        | )          | —              |       | —             |       | —              |       | (0.06      | )          |
| Net Income                                                                                          |   | $                                            | 0.52       |                | $          | 0.26               |       | $                   | 0.77       |       | $          | 0.58 |   | $ | 2.13 |   |
|                                                                                                |   |                                         |       |                |       |               |       |                |       |       |       |
| **CG&E**  and subsidiaries                                                                      |   |                                         |       |                |       |               |       |                |       |       |       |
|                                                                                                |   |                                         |       |                |       |               |       |                |       |       |       |
| **2003**                                                                                            |   |                                         |       |                |       |               |       |                |       |       |       |
|                                                                                                |   |                                         |       |                |       |               |       |                |       |       |       |
| **Results  of Operations:**                                                                         |   |                                         |       |                |       |               |       |                |       |       |       |
| Operating  Revenues(2)                                                                              |   | **$**                                        | **704**    | ** **          | **$**      | **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(5)                               |   | **31**                                       | ** ** | **—**          | ** ** | **—**         | ** ** | **—**          | ** ** | **31**     | ** ** |
| Net Income                                                                                          |   | **117**                                      | ** ** | **51**              | ** ** | **79**             | ** ** | **84**              | ** ** | **331**    | ** ** |
|                                                                                                |   |                                         |       |                |       |               |       |                |       |       |       |
| **2002**                                                                                            |   |                                         |       |                |       |               |       |                |       |       |       |
|                                                                                                |   |                                         |       |                |       |               |       |                |       |       |       |
| **Results  of Operations:**                                                                         |   |                                         |       |                |       |               |       |                |       |       |       |
| Operating  Revenues(2)                                                                              |   | $                                            | 577        |                | $          | 466                |       | $                   | 534        |       | $          | 560 |   | $ | 2,137 |   |
| Operating Income                                                                                    |   | 155                                          |       | 101                 |       | 135                |       | 114                 |       | 505        |       |
| Net Income                                                                                          |   | 78                                           |       | 53                  |       | 72                 |       | 61                  |       | 264        |       |
|                                                                                                |   |                                         |       |                |       |               |       |                |       |       |       |
| **PSI**                                                                                             |   |                                         |       |                |       |               |       |                |       |       |       |
|                                                                                                |   |                                         |       |                |       |               |       |                |       |       |       |
| **2003**                                                                                            |   |                                         |       |                |       |               |       |                |       |       |       |
|                                                                                                |   |                                         |       |                |       |               |       |                |       |       |       |
| **Results  of Operations:**                                                                         |   |                                         |       |                |       |               |       |                |       |       |       |
| Operating  Revenues(2)                                                                              |   | **$**                                        | **412**    | ** **          | **$**      | **361**            | ** ** | **$**               | **437**    | ** ** | **$**      | **393** | ** ** | **$** | **1,603** | ** ** |
| Operating Income                                                                                    |   | **74**                                       | ** ** | **55**              | ** ** | **88**             | ** ** | **95**              | ** ** | **312**    | ** ** |
|                                                                                                |   |                                         | ** ** |                | ** ** |               | ** ** |                | ** ** |       | ** ** |
| 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(6)                               |   | **(1**                                       | **)**      | **—**          | ** ** | **—**         | ** ** | **—**          | ** ** | **(1**     | **)**      |
| Net Income                                                                                          |   | **33**                                       | ** ** | **23**              | ** ** | **38**             | ** ** | **39**              | ** ** | **133**    | ** ** |
|                                                                                                |   |                                         |       |                |       |               |       |                |       |       |       |
| **2002**                                                                                            |   |                                         |       |                |       |               |       |                |       |       |       |
|                                                                                                |   |                                         |       |                |       |               |       |                |       |       |       |
| **Results  of Operations:**                                                                         |   |                                         |       |                |       |               |       |                |       |       |       |
| Operating  Revenues(2)                                                                              |   | $                                            | 366        |                | $          | 378                |       | $                   | 471        |       | $          | 396 |   | $ | 1,611 |   |
| Operating Income                                                                                    |   | 74                                           |       | 52                  |       | 120                |       | 136                 |       | 382        |       |
| Net Income                                                                                          |   | 38                                           |       | 30                  |       | 68                 |       | 78                  |       | 214        |       |

 

----

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

(2)          EITF 02-3required that all gains and losses on energy trading derivatives be presentedon a net basis beginning January 1, 2003. This resulted in substantial reductions in reported *Operating Revenues*, *Fuel and purchased and exchanged power*expense, and *Gas purchased*expense.  However, *Operating Income* and *Net Income* were not affected by thischange.  For further information on EITF02-3 see Note 1(q)(*i*).

(3)          See Note 14 forfurther explanation.

(4)          **Cinergy** recognized a gain/(loss) on cumulative effect ofchanges in accounting principles of $39 million (net of tax) and ($13) million(net of tax) as a result of the reversal of accrued cost of removal fornon-regulated generating assets and the change in accounting of certain energyrelated contracts from fair value to accrual. See Note 1(q)(*vi*) forfurther information on the effects of changes in accounting principles.

(5)          **CG&E** recognized a gain/(loss) on cumulative effect ofchanges in accounting principles of $39 million (net of tax) and ($8) million(net of tax) as a result of the reversal of accrued cost of removal fornon-regulated generating assets and the change in accounting of certain energyrelated contracts from fair value to accrual. See Note 1(q)(*vi*) forfurther information of the effects of changes in accounting principles.

(6)          **PSI** recognized a loss on cumulative effect of a changein accounting principle of $(1) million (net of tax) as a result of a change inaccounting of certain energy related contracts from fair value to accrual.  See Note 1(q)(*vi*) for further information of the effect of a change inaccounting principle.

(7)          Uponimplementation of Statement 142, **Cinergy**recognized a non-cash impairment charge of ($11) million, net of tax, forgoodwill related to certain international assets.  See Note 1(q)(*vi*)for further information of the effect of a change in accounting principle.

 

208

----

 

**14.**       Discontinued Operations

 

During 2002, **Cinergy** begantaking steps to monetize certain non-core investments, including renewable andinternational investments within Commercial. During the second half of the year, **Cinergy**either sold or initiated plans to dispose of generation and electric and gasdistribution operations in the Czech Republic, Estonia, and South Africa.  **Cinergy**also sold investments, which were accounted for under the equity method, inrenewable investments located in Spain and California.  In total, **Cinergy**disposed of approximately $125 million of investments at a net loss, after-tax,of $7 million in 2002.  Included in thisnet loss were cumulative foreign currency translation losses of approximately$4 million, after-tax.

 

During 2003, **Cinergy**completed the disposal of its gas distribution operation in South Africa, soldits remaining wind assets in the U.S., and substantially sold or liquidated theassets of its energy marketing business in the Czech Republic.

 

As a result of the 2003 transactions, assets of approximately $140million have been sold or converted into cash and liabilities of approximately$100 million have been 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 treatment for investment disposalsinvolving entities which are consolidated and entities which are accounted forunder the equity method.  Theconsolidated entities have been presented as *Discontinuedoperations*, *net of tax*in **Cinergy’s** Statements of Incomeand as *Assets/Liabilities of DiscontinuedOperations* in **Cinergy’s**Balance Sheets.  The accompanyingfinancial statements and prior year financial statements have been reclassifiedto account for these entities as such. The disposal of the entities accounted for using the equity method arenot allowed to be presented as discontinued operations.  A gain of approximately $17 million on thesale of these entities is included in *Miscellaneous-Net*in **Cinergy’s** 2002Statements of Income.

 

209

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The table below reflects the assets and liabilities, the results ofoperations, and the income (loss) on disposal related to investments accountedfor as discontinued operations for the years ended December 31, 2003 and 2002.

 
|                                                          |   | **December 31**     |       |
|---------------------------------------------------------------|--------|---------------------|------------|
|                                                          |   | **2003**            |       | **2002** |   |
|                                                          |   | **(in  thousands)** |       |
|                                                          |   |                | * *   |   | * * |
| **Revenues**(1)                                               |   | **$**               | **22,257** |   | $ | 95,493 |   |
|                                                          |   |                |       |   |   |
| **Income (Loss) Before Taxes**                                |   | **$**               | **4,445**  |   | $ | (27,152 | ) |
|                                                          |   |                |       |   |   |
| **Income Taxes Benefit (Expense)**                            |   | **$**               | **4,441**  |   | $ | 1,991 |   |
|                                                          |   |                |       |   |   |
| **Income (Loss) from Discontinued Operations**                |   |                |       |   |   |
| Income (Loss) from operations, net of tax                     |   | **$**               | **3**      |   | $ | (829 | ) |
| Gain (Loss) on disposal, net of tax(2)                        |   | **8,883**           |       | (24,332 | ) |
|                                                          |   |                |       |   |   |
| **Total Income (Loss) from Discontinued Operations**          |   | **$**               | **8,886**  |   | $ | (25,161 | ) |
|                                                          |   |                |       |   |   |
| **Assets**                                                    |   |                |       |   |   |
| Current assets                                                |   | **$**               | **4,501**  |   | $ | 48,719 |   |
| Property, plant, and equipment-net                            |   | **—**          |       | 78,309 |   |
| Other assets                                                  |   | **—**          |       | 20,237 |   |
|                                                          |   |                |       |   |   |
| **Total Assets**                                              |   | **$**               | **4,501**  |   | $ | 147,265 |   |
|                                                          |   |                |       |   |   |
| **Liabilities**                                               |   |                |       |   |   |
| Current liabilities                                           |   | **$**               | **11,594** |   | $ | 6,632 |   |
| Long-term debt (including Long-term debt due within one year) |   | **—**          |       | 84,654 |   |
| Other                                                         |   | **—**          |       | 17,547 |   |
|                                                          |   |                |       |   |   |
| **Total Liabilities**                                         |   | **$**               | **11,594** |   | $ | 108,833 |   |

 

----

(1)          Presented forinformational purposes only.  Allresults of operations are reported net in our Statements of Income.

(2)          For 2002,approximately $17 million of this amount represents a write-down to fair value,less cost to sell, on assets classified as held for sale at December 31,2002.  The remaining loss on disposalfor 2002 represents actual losses on completed sales.

 

The losses included in the 2002 discontinued operations primarilypertain to two investments.  In onecase, the primary customer of a combined heat and power plant filed forbankruptcy resulting in a significant reduction in future expected revenuesfrom the investment.  This investmentwas sold in December 2002.  In thesecond case, the retail market of a gas distribution business did not developas expected, and we elected to exit the business rather than invest theadditional capital which would be required to reach a sustainable level ofmarket penetration.  The investment waswritten down to its realizable value in December 2002 and was subsequently soldin April 2003.

 

 

210

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**15.**       Financial Information by Business Segment

 

We conduct operations through our subsidiaries and manage ourbusinesses through the following three reportable segments:

 

•                  Commercial;

•                  RegulatedBusinesses; and

•                  PowerTechnology.

 

The following section describes the activities of our business units asof December 31, 2003.

 

Commercial manages wholesale generation and energy marketing andtrading of energy commodities. Additionally, Commercial operates and maintains our electric generatingplants including some of our jointly-owned plants.  Commercial is also responsible for all of our internationaloperations and performs energy risk management activities, trading activities,and customized energy solutions.

 

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

 

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

 

Following are the financial results by business unit.  Certain amounts for the prior year have beenrestated to reflect implementation of EITF 02-3 and other prior year amountshave been reclassified to conform to the current presentation.

 

211

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Financial results by business unit for the years ended December 31,2003, 2002, and 2001, are as indicated below:

 

**BusinessUnits**

 
|                                                                      |   | **2003**                    |       |
|---------------------------------------------------------------------------|--------|-----------------------------|------------|
|                                                                      |   | **Cinergy  Business Units** |       |   |   |   |   |   |   |
|                                                                      |   | **Commercial**              |       | **Regulated  Businesses** |   | **Power  Technology** |   | **Total** |   | **All Other (1)** |   | **Reconciling  Eliminations**(2) |   | **Consolidated** |   |
|                                                                      |   | ***(in millions)***         |       |
| Operating revenues -                                                      |   |                        | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |
| **External customers**                                                    |   | **$**                       | **1,630**  | ** ** | **$** | **2,786** | ** ** | **$** | **—** | ** ** | **$** | **4,416** | ** ** | **$** | **—** | ** ** | **$** | **—** | ** ** | **$** | **4,416** | ** ** |
| **Intersegment revenues**                                                 |   | **157**                     | ** ** | **—** | ** ** | **—** | ** ** | **157** | ** ** | **—** | ** ** | **(157** | **)** | **—** | ** ** |
| **Cost of sales -**                                                       |   |                        | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |
| **Fuel and purchased and exchanged power**                                |   |                        | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |
| **External customers**                                                    |   | **645**                     | ** ** | **513** | ** ** | **—** | ** ** | **1,158** | ** ** | **—** | ** ** | **—** | ** ** | **1,158** | ** ** |
| **Intersegment costs**                                                    |   | **—**                  | ** ** | **157** | ** ** | **—** | ** ** | **157** | ** ** | **—** | ** ** | **(157** | **)** | **—** | ** ** |
| **Gas purchased**                                                         |   | **122**                     | ** ** | **382** | ** ** | **—** | ** ** | **504** | ** ** | **—** | ** ** | **—** | ** ** | **504** | ** ** |
| **Depreciation(3)**                                                       |   | **135**                     | ** ** | **284** | ** ** | **—** | ** ** | **419** | ** ** | **—** | ** ** | **—** | ** ** | **419** | ** ** |
| **Equity in earnings (losses) of unconsolidated  subsidiaries**           |   | **14**                      | ** ** | **4** | ** ** | **(3** | **)** | **15** | ** ** | **—** | ** ** | **—** | ** ** | **15** | ** ** |
| **Interest expense(4)**                                                   |   | **94**                      | ** ** | **158** | ** ** | **17** | ** ** | **269** | ** ** | **—** | ** ** | **—** | ** ** | **269** | ** ** |
| **Income taxes**                                                          |   | **7**                       | **(5)**    | **148** | ** ** | **(11** | **)** | **144** | ** ** | **—** | ** ** | **—** | ** ** | **144** | ** ** |
| **Discontinued operations, net of tax(6)**                                |   | **9**                       | ** ** | **—** | ** ** | **—** | ** ** | **9** | ** ** | **—** | ** ** | **—** | ** ** | **9** | ** ** |
| **Cumulative effect of changes in accounting principles,  net of tax(7)** |   | **26**                      | ** ** | **—** | ** ** | **—** | ** ** | **26** | ** ** | **—** | ** ** | **—** | ** ** | **26** | ** ** |
| **Segment profit (loss)(8)**                                              |   | **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** | **(9)** | **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 category represents miscellaneous  corporate items, which are not allocated to business units for purposes of  segment performance measurement.                                                                                                                                                                                                                                                |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | The Reconciling Eliminations category eliminates the  intersegment revenues of Commercial and the intersegment costs of Regulated  Businesses.                                                                                                                                                                                                                                                               |
| (3) | The components of Depreciation include depreciation  of fixed assets and amortization of intangible assets.                                                                                                                                                                                                                                                                                                  |
| (4) | Interest income is deemed immaterial.                                                                                                                                                                                                                                                                                                                                                                        |
| (5) | The decrease in 2003, as compared to 2002, in part  reflects the effect of tax credits associated with production of synthetic  fuel beginning in July 2002.                                                                                                                                                                                                                                                 |
| (6) | For further information, see Note 14.                                                                                                                                                                                                                                                                                                                                                                        |
| (7) | In 2003, Cinergy recognized a gain/(loss) on  cumulative effect of changes in accounting principles of $39 million (net of  tax) and $(13) million (net of tax) as a result of the reversal of accrued  cost of removal for non-regulated generating assets and the change in  accounting of certain energy related contracts from fair value to accrual.  See Note 1(q)*(vi)* for further information. |
| (8) | Management utilizes Segment profit (loss), after  taxes, to evaluate segment performance.                                                                                                                                                                                                                                                                                                                    |
| (9) | The increase in 2003, as compared to 2002, is  primarily due to the transfer of generating assets from two non-regulated  affiliates.  See Note 19 for further  information.                                                                                                                                                                                                                            |

 

212

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|                                                                 |   | **2002**                    |   |
|----------------------------------------------------------------------|--------|-----------------------------|--------|
|                                                                 |   | **Cinergy  Business Units** |   |   |   |   |   |   |   |
|                                                                 |   | **Commercial**              |   | **Regulated  Businesses** |   | **Power  Technology** |   | **Total** |   | **All Other(1)** |   | **Reconciling  Eliminations(2)** |   | **Consolidated** |   |
|                                                                 |   | ***(in  millions)***        |   |
| Operating  revenues -                                                |   |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |
| External customers                                                   |   | $                           | 1,419  |   | $ | 2,640 |   | $ | — |   | $ | 4,059 |   | $ | — |   | $ | — |   | $ | 4,059 |   |
| Intersegment revenues                                                |   | 160                         |   | — |   | — |   | 160 |   | — |   | (160 | ) | — |   |
| Cost of sales -                                                      |   |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Fuel and purchased and exchanged power                               |   |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |
| External customers                                                   |   | 532                         |   | 458 |   | — |   | 990 |   | — |   | — |   | 990 |   |
| Intersegment costs                                                   |   | —                      |   | 160 |   | — |   | 160 |   | — |   | (160 | ) | — |   |
| Gas purchased                                                        |   | 77                          |   | 233 |   | — |   | 310 |   | — |   | — |   | 310 |   |
| Depreciation(3)                                                      |   | 150                         |   | 249 |   | 6 |   | 405 |   | — |   | — |   | 405 |   |
| Equity in earnings (losses) of unconsolidated subsidiaries           |   | 20                          |   | 5 |   | (10 | ) | 15 |   | — |   | — |   | 15 |   |
| Interest expense(4)                                                  |   | 102                         |   | 133 |   | 8 |   | 243 |   | — |   | — |   | 243 |   |
| Income taxes                                                         |   | 23                          | (5)    | 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                             |   | 188                         |   | 681 |   | 1 |   | 870 |   | — |   | — |   | 870 |   |
|                                                                      |        |                             |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

(1)          The All Other category represents miscellaneouscorporate items, which are not allocated to business units for purposes ofsegment performance measurement.

(2)          The Reconciling Eliminations category eliminates theintersegment revenues of Commercial and the intersegment costs of RegulatedBusinesses.

(3)          The components of Depreciation include depreciationof fixed assets and amortization of intangible assets.

(4)          Interest income is deemed immaterial.

(5)          The decrease in 2002, as compared to 2001, in partreflects the effect of tax credits associated with production of synthetic fuelbeginning in July 2002.

(6)        For further information, see Note 14.

(7)        Upon implementation of Statement 142, **Cinergy** recognized a non-cash impairmentcharge of $11 million, net of tax, for goodwill related to certaininternational assets.  See Note 1(l) forfurther information.

(8)          Management utilizes Segment profit (loss), aftertaxes, to evaluate segment performance.

 

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|                                                       |   | **2001**                    |   |
|------------------------------------------------------------|--------|-----------------------------|--------|
|                                                       |   | **Cinergy  Business Units** |   |   |   |   |   |   |   |
|                                                       |   | **Commercial**              |   | **Regulated  Businesses** |   | **Power  Technology** |   | **Total** |   | **All Other(1)** |   | **Reconciling  Eliminations(2)** |   | **Consolidated** |   |
|                                                       |   | ***(in  millions)***        |   |
| Operating  revenues -                                      |   |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |
| External customers                                         |   | $                           | 1,247  |   | $ | 2,703 |   | $ | — |   | $ | 3,950 |   | $ | — |   | $ | — |   | $ | 3,950 |   |
| Intersegment revenues                                      |   | 144                         |   | — |   | — |   | 144 |   | — |   | (144 | ) | — |   |
| Cost of sales -                                            |   |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Fuel and purchased and exchanged power                     |   |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |
| External customers                                         |   | 546                         |   | 469 |   | — |   | 1,015 |   | — |   | — |   | 1,015 |   |
| Intersegment costs                                         |   | —                      |   | 144 |   | — |   | 144 |   | — |   | (144 | ) | — |   |
| Gas purchased                                              |   | —                      |   | 397 |   | — |   | 397 |   | — |   | — |   | 397 |   |
| Depreciation(3)                                            |   | 130                         |   | 236 |   | 1 |   | 367 |   | — |   | — |   | 367 |   |
| Equity in earnings (losses) of unconsolidated subsidiaries |   | 9                           |   | — |   | (8 | ) | 1 |   | — |   | — |   | 1 |   |
| Interest expense(4)                                        |   | 108                         |   | 142 |   | 9 |   | 259 |   | — |   | — |   | 259 |   |
| Income taxes                                               |   | 93                          |   | 169 |   | (5 | ) | 257 |   | — |   | — |   | 257 |   |
| Discontinued operations, net of tax(5)                     |   | (14                         | )      | — |   | — |   | (14 | ) | — |   | — |   | (14 | ) |
| Segment profit (loss)(6)                                   |   | 188                         |   | 266 |   | (12 | ) | 442 |   | — |   | — |   | 442 |   |
| Segment assets from continuing operations                  |   | 4,836                       |   | 7,512 |   | 164 |   | 12,512 |   | 46 |   | — |   | 12,558 |   |
| Segment assets from discontinued operations                |   | 234                         |   | — |   | — |   | 234 |   | — |   | — |   | 234 |   |
| Total segment assets                                       |   | 5,070                       |   | 7,512 |   | 164 |   | 12,746 |   | 46 |   | — |   | 12,792 |   |
| Investments in unconsolidated subsidiaries                 |   | 256                         |   | — |   | 76 |   | 332 |   | — |   | — |   | 332 |   |
| Total expenditures for long-lived assets                   |   | 764                         |   | 633 |   | — |   | 1,397 |   | — |   | — |   | 1,397 |   |
|                                                            |        |                             |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

(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 and theintersegment costs of Regulated Businesses.

(3)          The components ofDepreciation include depreciation of fixed assets and amortization ofintangible assets.

(4)          Interest income is deemedimmaterial.

(5)          For further information, seeNote 14.

(6)          Management utilizes Segmentprofit (loss), after taxes, to evaluate segment performance.

 

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**Products and Services**

*(in millions)*

 
|     |   | **Revenues** |      |
|----------|--------|--------------|-----------|
|     |   | **Utility**  |      | **Wholesale  Commodity** |   |   |   |   |   |
| **Year** |   | **Electric** |      | **Gas** |   | **Total** |   | **Electric** |   | **Gas** |   | **Total** |   | **Other** |   | **Consolidated** |   |
| **2003** |   | **$**        | **2,156** | ** ** | **$** | **626** | ** ** | **$** | **2,782** | ** ** | **$** | **1,227** | ** ** | **$** | **210** | ** ** | **$** | **1,437** | ** ** | **$** | **197** | ** ** | **$** | **4,416** | ** ** |
| 2002     |   | 2,197        |      | 436 |   | 2,633 |   | 1,141 |   | 154 |   | 1,295 |   | 131 |   | 4,059 |   |
| 2001     |   | 2,101        |      | 595 |   | 2,696 |   | 1,115 |   | 61 |   | 1,176 |   | 78 |   | 3,950 |   |
|          |        |              |           |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**GeographicAreas**

**Revenues**

*(in millions)*

 
| **Year** |   | **Domestic** |      | **International** |   | **Consolidated** |       |
|----------|--------|--------------|-----------|-------------------|--------|------------------|------------|
| **2003** |   | **$**        | **4,371** | ** **        | **$**  | **45**           | ** ** | **$** | **4,416** | ** ** |
| 2002     |   | 4,011        |      | 48                |   | 4,059            |       |
| 2001     |   | 3,913        |      | 37                |   | 3,950            |       |
|          |        |              |           |                   |        |                  |            |  |  |  |

 

**Long-Lived Assets**

*(in millions)*

 
| **Year** |   | **Domestic** |       | **International** |   | **Consolidated** |       |
|----------|--------|--------------|------------|-------------------|--------|------------------|------------|
| **2003** |   | **$**        | **11,524** | ** **        | **$**  | **273**          | ** ** | **$** | **11,797** | ** ** |
| 2002     |   | 10,801       |       | 393               |   | 11,194           |       |
| 2001     |   | 10,174       |       | 428               |   | 10,602           |       |
|          |        |              |            |                   |        |                  |            |  |  |  |

 

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**16.**       Earnings Per Common Share

** **

A reconciliation of EPS to EPS - assuming dilution is presented below:

 
|                                                                                                 |   | **Income**                                     |         | **Shares**             |                   | **EPS**    |         |
|------------------------------------------------------------------------------------------------------|--------|------------------------------------------------|--------------|------------------------|------------------------|------------|--------------|
|                                                                                                 |   | ***(in thousands, except per share amounts)*** |         |
|                                                                                                 |   |                                           | *** *** |                   | *** ***           |       | *** *** |
| **Year ended December 31,  2003**                                                                    |   |                                           | ** **   |                   | ** **             |       | ** **   |
| **EPS:**                                                                                             |   |                                           | ** **   |                   | ** **             |       | ** **   |
| **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 - assuming dilution:**                                                                         |   |                                           | ** **   |                   | ** **             |       | ** **   |
| **Net income plus assumed  conversions**                                                             |   | **$**                                          | **469,772**  | ** **             | **178,473**            | ** ** | **$**        | **2.63** | ** ** |
|                                                                                                 |   |                                           | ** **   |                   | ** **             |       | ** **   |
| Year ended December 31, 2002                                                                         |   |                                           |         |                   |                   |       |         |
| EPS:                                                                                                 |   |                                           |         |                   |                   |       |         |
| 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 - assuming dilution:                                                                             |   |                                           |         |                   |                   |       |         |
| Net income plus assumed conversions                                                                  |   | $                                              | 360,576      |                   | 169,052                |       | $            | 2.13 |   |
|                                                                                                 |   |                                           |         |                   |                   |       |         |
| Year ended December 31, 2001                                                                         |   |                                           |         |                   |                   |       |         |
| EPS:                                                                                                 |   |                                           |         |                   |                   |       |         |
| Income before discontinued operations and cumulative effect of a  change in accounting principle     |   | $                                              | 456,629      |                   |         |       | $            | 2.87 |   |
| Discontinued operations, net of tax                                                                  |   | (14,350                                        | )            |         |                   | (0.09      | )            |
| Net income                                                                                           |   | $                                              | 442,279      |                   | 159,110                |       | $            | 2.78 |   |
|                                                                                                 |   |                                           |         |                   |                   |       |         |
| Effect of dilutive securities:                                                                       |   |                                           |         |                   |                   |       |         |
| Common stock options                                                                                 |   |                                 |         | 975                    |                   |       |         |
| Directors’ compensation plans                                                                   |   |                                 |         | 152                    |                   |       |         |
| Contingently issuable common stock                                                                   |   |                                 |         | 810                    |                   |       |         |
|                                                                                                 |   |                                           |         |                   |                   |       |         |
| EPS - assuming dilution:                                                                             |   |                                           |         |                   |                   |       |         |
| Net income plus assumed conversions                                                                  |   | $                                              | 442,279      |                   | 161,047                |       | $            | 2.75 |   |

 

Options to purchase shares of common stock are excluded from thecalculation of EPS -

 

216

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assuming dilution when the exercise price of these options plusunrecognized compensation expense is greater than the average market price of acommon share during the period multiplied by the number of options outstandingat the end of the period because they are anti-dilutive.  For the years 2003, 2002, and 2001,approximately 1.6 million, 3.0 million, and 2.1 million shares, respectively,were excluded from the EPS - assuming dilution calculation.

 

Also excluded from the EPS - assuming dilution calculation for theyears ended December 31, 2003 and 2002, are up to 10.6 million and 10.8 millionshares, respectively, issuable pursuant to the stock purchase contracts issuedby **Cinergy Corp.** in December 2001associated with the preferred trust securities transaction.  The number of shares issuable pursuant tothe stock purchase contracts is contingent upon the market price of **Cinergy Corp.** stock in February 2005 andcould range between 9.2 and 10.8 million shares.

 

**17.**       Deregulation

** **

**CG&E** is in amarket development period, transitioning to deregulation of electric generationand a competitive retail electric service market in the state of Ohio.  The transition period is governed by theAmended Substitute Senate Bill No. 3 (Electric Restructuring Bill) and astipulated transition plan adopted and approved by the PUCO.  The Electric Restructuring Bill provides fora market development period that began January 1, 2001, and ends no later thanDecember 31, 2005.

 

The major features of **CG&E’s**transition plan include:

 

•                  Residentialcustomer rates are frozen through December 31, 2005;

•                  Residentialcustomers received a five-percent reduction in the generation portion of theirelectric rates, effective January 1, 2001;

•                  **CG&E**will provide $4 million from 2001to 2005 in support of energy efficiency and weatherization services for lowincome customers;

•                  **CG&E** will provide shopping credits toswitching customers;

•                  The creation ofa RTC designed to recover **CG&E’s**regulatory assets and other transition costs over a ten-year period;

•                  Authority for **CG&E** to transfer its generation assetsto one or more, non-regulated affiliates to provide flexibility to manage itsgeneration asset portfolio in a manner that enhances opportunities in acompetitive marketplace;

•                  Authority for **CG&E** to apply the proceeds oftransition cost recovery to costs incurred during the transition period,including implementation costs and purchased power costs that may be incurredby **CG&E** to maintain anoperating reserve margin sufficient to provide reliable service to itscustomers;

•                  Authority for **CG&E** to adjust the amortization of itsregulatory assets and other transition costs to reflect the effects of anyshopping incentives provided to customers; and

•                  **CG&E** will provide standard offerdefault supplier service (i.e., **CG&E**will be the supplier of last resort, so that no customer will be without anelectric supplier).

 

Under **CG&E’s**transition plan, retail customers continue to receive transmission and

 

217

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distribution services from **CG&E**,but may purchase electricity from another supplier.  Retail customers that purchase electricity from another supplierreceive shopping credits from **CG&E**.  The shopping credits generally reflect thecosts of electric generation included in **CG&E’s**frozen rates.  However, shopping creditsfor the first 20 percent of electricity usage in each customer class to switchsuppliers are higher than shopping credits for subsequent switchers in order tostimulate the development of the competitive retail electric service market.

 

**CG&E**recoversits generation-related regulatory assets and certain other deferred transitioncosts through an RTC paid by all retail customers.  As the RTC is collected from customers, **CG&E** amortizes the deferred balance ofregulatory assets and other transition costs. A portion of the RTC collected from customers is recognized currently asa return on the deferred balance of regulatory assets and other transitioncosts and as reimbursement for the difference in the shopping credits providedto retail customers and the wholesale revenues from generation made availableby switched customers.  The ability of **CG&E** to recover its regulatory assetsand other transition costs is dependent on several factors, including, but notlimited to, the level of **CG&E’s**electric sales, prices in the wholesale power markets, and the amount ofcustomers switching to other electric suppliers.

 

In January 2003, **CG&E**filed an application with the PUCO for approval of a methodology to establishhow market-based rates for non-residential customers will be determined whenthe market development period ends.  Inthe filing, **CG&E** seeks toestablish a market-based standard service offer rate for non-residential customersthat do not switch suppliers and a process for establishing thecompetitively-bid generation service option required by the ElectricRestructuring Bill.  As of December 31,2002, more than 20 percent of the load of **CG&E’s**commercial and industrial customer classes had switched to other electricsuppliers, and the other public authorities group was at 19.95 percent atDecember 31, 2003.  Under its transitionplan, **CG&E** may end the marketdevelopment period for those classes of customers once 20 percent switching hasbeen achieved; however, PUCO approval of the standard service offer rate andcompetitive bidding process is required before the market development periodcan be ended.

 

In December 2003, the PUCO issued an order that the **CG&E** application filed in January 2003would proceed to a hearing and be consolidated with **CG&E’s** application to defer certain administrativetransmission charges and the application to defer costs of capital investmentsmade to their transmission and distribution system during the marketdevelopment period.  As part of thisorder, the PUCO requested that **CG&E**file a rate stabilization plan to mitigate the effects of market based pricingon retail customers while the competitive retail electric market continues tomature.  In response to this request, onJanuary 26, 2004, **CG&E** filedan offer of settlement, including an electric reliability and ratestabilization plan.  In this proposal, **CG&E** has also asked to end the marketdevelopment period for all customers effective December 31, 2004.

 

218

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The major features of **CG&E’s**electric reliability and rate stabilization plan include:

 

•                  Themarket development period would end for all customers on December 31, 2004;

•                  **CG&E** would begin to collect anon-bypassable Provider of Last Resort (POLR) charge from all customerseffective January 1, 2005.  This chargecould be increased by up to 10 percent of **CG&E’s**generation charge each year from 2005 through 2008;

•                  **CG&E** would offer its current generationrates as its market based rates until December 31, 2008;

•                  **CG&E** would request a transmission anddistribution rate increase effective January 1, 2005;

•                  **CG&E** would begin charging RTC as anexplicit wires charge;

•                  PUCOapproval of previously requested transmission and distribution deferrals andcost recovery riders (see Note 11(b)(*vi*));

•                  The five percent generation rate reductionfor residential customers would continue through 2008;

•                  Extend recovery of residential RTC from 2008through 2010.·

 

The POLR charge would allow for recovery of increased costs of fuel andpurchased power, transmission congestion, environmental compliance, homelandsecurity, taxes and maintaining an adequate reserve margin.

 

An evidentiary hearing addressing the issues described above isscheduled for the second quarter of 2004. At the current time **CG&E**is unable to predict the outcome of this proceeding or the effects it couldhave on its results of operations or financial condition.

 

**18.**       Comprehensive Income

** **

Comprehensive income includes all changes in equity during a periodexcept those resulting from investments by and distributions toshareholders.  The major componentsinclude net income, foreign currency translation adjustments, minimum pensionliability adjustment, unrealized gains and losses on investment trusts and theeffects of certain hedging activities.

 

We translate the assets and liabilities of foreign subsidiaries, whosefunctional currency (generally, the local currency of the country in which thesubsidiary is located) is not the U.S. dollar, using the appropriate exchangerate as of the end of the year.  Foreigncurrency translation adjustments are unrealized gains and losses on thedifference in foreign country currency compared to the value of the U.S.dollar.  The gains and losses areaccumulated in comprehensive income. When a foreign subsidiary is substantially liquidated, the cumulativetranslation gain or loss is removed from comprehensive income and is recognizedas a component of the gain or loss on the sale of the subsidiary in ourStatements of Income.

 

We record a minimum pension liability adjustment associated with ourdefined benefit pension

 

219

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plans when the unfunded accumulated benefit obligation is in excess ofour accrued pension liabilities and the unrecognized prior service costsrecorded as an intangible asset.  Thecorresponding offset is recorded on the Balance Sheets in *Accrued pension and other postretirement benefitcosts*.  Details of thepension plans’ assets and obligations are explained further in Note 9.

 

We record unrealized gains and losses on equity investments in trustswe have established for our benefit plans, primarily by **PSI**. See Note 9 for further details.

 

The changes in fair value of derivatives that qualify as hedges, underStatement 133, are recorded in comprehensive income.  The specific hedge accounting and the derivatives that qualifyare explained in greater detail in Note 8(a).

 

220

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The elements of *Comprehensive income*and their related tax effects for the years ended December 31, 2003, 2002, and2001 are as follows:

 
|                                                |   | **Comprehensive  Income**     |        |
|-----------------------------------------------------|--------|-------------------------------|-------------|
|                                                |   | **2003**                      |        | **2002** |   | **2001** |   |
|                                                |   | **Before-tax  Amount**        |        | **Tax  (Expense)  Benefit** |   | **Net-of-Tax  Amount** |   | **Before-tax  Amount** |   | **Tax  (Expense)  Benefit** |   | **Net-of-Tax  Amount** |   | **Before-tax  Amount** |   | **Tax  (Expense)  Benefit** |   | **Net-of-Tax  Amount** |   |
|                                                |   | ***(dollars  in thousands)*** |        |
| **Cinergy**(1)                                      |   |                          |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income                                          |   | **$**                         | **626,284** |   | **$** | **(156,512)** |   | **$** | **469,772** |   | $ | 518,840 |   | $ | (158,264) |   | $ | 360,576 |   | $ | 697,785 |   | $ | (255,506) |   | $ | 442,279 |   |
|                                                |   |                          | ** **  |   | ** ** |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Other comprehensive income (loss):                  |   |                          | ** **  |   | ** ** |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Foreign currency translation adjustment             |   | **25,311**                    | ** **  | **(8,649** | **)** | **16,662** |   | 35,574 |   | (14,034 | ) | 21,540 |   | 4,996 |   | (3,355 | ) | 1,641 |   |
| Reclassification adjustments                        |   | **(9,437**                    | **)**       | **3,303** | ** ** | **(6,134** | ) | 4,377 |   | **—** |   | 4,377 |   | **—** |   | **—** |   | **—** |   |
| Total foreign currency translation adjustment       |   | **15,874**                    | ** **  | **(5,346** | **)** | **10,528** |   | 39,951 |   | (14,034 | ) | 25,917 |   | 4,996 |   | (3,355 | ) | 1,641 |   |
| Minimum pension liability adjustment                |   | **(56,238**                   | **)**       | **22,392** | ** ** | **(33,846** | ) | (23,031 | ) | 9,268 |   | (13,763 | ) | (2,636 | ) | 1,081 |   | (1,555 | ) |
| Unrealized gain (loss) on investment trusts         |   | **11,113**                    | ** **  | **(4,356** | **)** | **6,757** |   | (8,637 | ) | 3,360 |   | (5,277 | ) | (1,345 | ) | 504 |   | (841 | ) |
| Cumulative effect of change in accounting principle |   | **—**                    | ** **  | **—** | ** ** | **—** |   | **—** |   | **—** |   | **—** |   | (4,026 | ) | 1,526 |   | (2,500 | ) |
| Cash flow hedges                                    |   | **2,516**                     | ** **  | **(990** | **)** | **1,526** |   | (32,663 | ) | 12,915 |   | (19,748 | ) | (4,477 | ) | 1,698 |   | (2,779 | ) |
| Total other comprehensive income (loss)             |   | **(26,735**                   | **)**       | **11,700** | ** ** | **(15,035** | ) | (24,380 | ) | 11,509 |   | (12,871 | ) | (7,488 | ) | 1,454 |   | (6,034 | ) |
|                                                |   |                          | ** **  |   | ** ** |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total comprehensive income                          |   | **$**                         | **599,549** | ** ** | **$** | **(144,812** | **)** | **$** | **454,737** |   | $ | 494,460 |   | $ | (146,755 | ) | $ | 347,705 |   | $ | 690,297 |   | $ | (254,052 | ) | $ | 436,245 |   |
|                                                |   |                          | ** **  |   | ** ** |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **CG&E**and subsidiaries(2)                     |   |                          | ** **  |   | ** ** |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income                                          |   | **$**                         | **529,032** | ** ** | **$** | **(197,982** | **)** | **$** | **331,050** |   | $ | 419,037 |   | $ | (155,341 | ) | $ | 263,696 |   | $ | 513,181 |   | $ | (186,527 | ) | $ | 326,654 |   |
|                                                |   |                          | ** **  |   | ** ** |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Other comprehensive income (loss):                  |   |                          | ** **  |   | ** ** |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Minimum pension liability adjustment                |   | **(13,174**                   | **)**       | **5,157** | ** ** | **(8,017** | ) | (1,423 | ) | 551 |   | (872 | ) | 106 |   | 28 |   | 134 |   |
| Unrealized gain (loss) on investment trusts         |   | **2**                         | ** **  | **(1** | **)** | **1** |   | (745 | ) | 283 |   | (462 | ) | 743 |   | (282 | ) | 461 |   |
| Cumulative effect of change in accounting principle |   | **—**                    | ** **  | **—** | ** ** | **—** |   | **—** |   | **—** |   | **—** |   | (4,026 | ) | 1,526 |   | (2,500 | ) |
| Cash flow hedges                                    |   | **2,133**                     | ** **  | **(835** | **)** | **1,298** |   | (30,960 | ) | 12,226 |   | (18,734 | ) | (4,477 | ) | 1,698 |   | (2,779 | ) |
| Total other comprehensive income (loss)             |   | **(11,039**                   | **)**       | **4,321** | ** ** | **(6,718** | ) | (33,128 | ) | 13,060 |   | (20,068 | ) | (7,654 | ) | 2,970 |   | (4,684 | ) |
|                                                |   |                          | ** **  |   | ** ** |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total comprehensive income                          |   | **$**                         | **517,993** | ** ** | **$** | **(193,661** | **)** | **$** | **324,332** |   | $ | 385,909 |   | $ | (142,281 | ) | $ | 243,628 |   | $ | 505,527 |   | $ | (183,557 | ) | $ | 321,970 |   |
|                                                |   |                          | ** **  |   | ** ** |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **PSI**                                             |   |                          | ** **  |   | ** ** |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income                                          |   | **$**                         | **233,632** | ** ** | **$** | **(100,251** | **)** | **$** | **133,381** |   | $ | 328,958 |   | $ | (114,709 | ) | $ | 214,249 |   | $ | 268,419 |   | $ | (106,086 | ) | $ | 162,333 |   |
|                                                |   |                          | ** **  |   | ** ** |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Other comprehensive income (loss):                  |   |                          | ** **  |   | ** ** |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Minimum pension liability adjustment                |   | **(19,183**                   | **)**       | **7,649** | ** ** | **(11,534** | ) | (3,534 | ) | 1,396 |   | (2,138 | ) | (76 | ) | 27 |   | (49 | ) |
| Unrealized gain (loss) on investment trusts         |   | **10,236**                    | ** **  | **(4,004** | **)** | **6,232** |   | (7,179 | ) | 2,793 |   | (4,386 | ) | (1,537 | ) | 511 |   | (1,026 | ) |
| Total other comprehensive income (loss)             |   | **(8,947**                    | **)**       | **3,645** | ** ** | **(5,302** | ) | (10,713 | ) | 4,189 |   | (6,524 | ) | (1,613 | ) | 538 |   | (1,075 | ) |
|                                                |   |                          | ** **  |   | ** ** |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total comprehensive income                          |   | **$**                         | **224,685** | ** ** | **$** | **(96,606** | **)** | **$** | **128,079** |   | $ | 318,245 |   | $ | (110,520 | ) | $ | 207,725 |   | $ | 266,806 |   | $ | (105,548 | ) | $ | 161,258 |   |

 

----

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

(2)               Individual amounts for **ULH&P** are immaterial.

 

221

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The after-tax components of *Accumulatedother comprehensive income (loss)* as of December 31, 2003, 2002, and2001 are as follows:

 
|                                                |   | **Accumulated  Other Comprehensive Income (Loss) Classification** |       |
|-----------------------------------------------------|--------|-------------------------------------------------------------------|------------|
|                                                |   | **Foreign  Currency  Translation  Adjustment**                    |       | **Minimum  Pension  Liability  Adjustment** |   | **Unrealized  Gain (Loss)  on Investment  Trusts** |   | **Cash  Flow  Hedges** |   | **Total  Other  Comprehensive  Income  (Loss)** |   |
|                                                |   | ***(dollars in thousands)***                                      |       |
|                                                |   |                                                              | * *   |   | * * |   | * * |   | * * |   | * * |
| **Cinergy**(1)                                      |   |                                                              |       |   |   |   |   |   |   |   |   |
|                                                |   |                                                              |       |   |   |   |   |   |   |   |   |
| Balance at December 31, 2000                        |   | $                                                                 | (6,072     | ) | $ | (4,780 | ) | $ | (43 | ) | $ | — |   | $ | (10,895 | ) |
| Cumulative effect of change in accounting principle |   | —                                                            |       | — |   | — |   | (2,500 | ) | (2,500 | ) |
| Current-period change                               |   | 1,641                                                             |       | (1,555 | ) | (841 | ) | (2,779 | ) | (3,534 | ) |
|                                                |   |                                                              |       |   |   |   |   |   |   |   |   |
| Balance at December 31, 2001                        |   | $                                                                 | (4,431     | ) | $ | (6,335 | ) | $ | (884 | ) | $ | (5,279 | ) | $ | (16,929 | ) |
| Current-period change                               |   | 25,917                                                            |       | (13,763 | ) | (5,277 | ) | (19,748 | ) | (12,871 | ) |
|                                                |   |                                                              |       |   |   |   |   |   |   |   |   |
| Balance at December 31, 2002                        |   | $                                                                 | 21,486     |   | $ | (20,098 | ) | $ | (6,161 | ) | $ | (25,027 | ) | $ | (29,800 | ) |
| **Current-period change**                           |   | **10,528**                                                        | ** ** | **(33,846** | **)** | **6,757** | ** ** | **1,526** | ** ** | **(15,035** | **)** |
|                                                |   |                                                              | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |
| **Balance at December 31,  2003**                   |   | **$**                                                             | **32,014** | ** ** | **$** | **(53,944** | **)** | **$** | **596** | ** ** | **$** | **(23,501** | **)** | **$** | **(44,835** | **)** |
|                                                |   |                                                              | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |
| **CG&E**and subsidiaries(2)                     |   |                                                              |       |   |   |   |   |   |   |   |   |
|                                                |   |                                                              |       |   |   |   |   |   |   |   |   |
| Balance at December 31, 2000                        |   | $                                                                 | —     |   | $ | (994 | ) | $ | — |   | $ | — |   | $ | (994 | ) |
| Cumulative effect of change in accounting principle |   | —                                                            |       | — |   | — |   | (2,500 | ) | (2,500 | ) |
| Current-period change                               |   | —                                                            |       | 134 |   | 461 |   | (2,779 | ) | (2,184 | ) |
|                                                |   |                                                              |       |   |   |   |   |   |   |   |   |
| Balance at December 31, 2001                        |   | $                                                                 | —     |   | $ | (860 | ) | $ | 461 |   | $ | (5,279 | ) | $ | (5,678 | ) |
| Current-period change                               |   | —                                                            |       | (872 | ) | (462 | ) | (18,734 | ) | (20,068 | ) |
|                                                |   |                                                              |       |   |   |   |   |   |   |   |   |
| Balance at December 31, 2002                        |   | $                                                                 | —     |   | $ | (1,732 | ) | $ | (1 | ) | $ | (24,013 | ) | $ | (25,746 | ) |
| **Current-period change**                           |   | **—**                                                        | ** ** | **(8,017** | **)** | **1** | ** ** | **1,298** | ** ** | **(6,718** | **)** |
|                                                |   |                                                              | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |
| **Balance at December 31,  2003**                   |   | **$**                                                             | **—** | ** ** | **$** | **(9,749** | **)** | **$** | **—** | ** ** | **$** | **(22,715** | **)** | **$** | **(32,464** | **)** |
|                                                |   |                                                              | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |
| **PSI**                                             |   |                                                              | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |
|                                                |   |                                                              |       |   |   |   |   |   |   |   |   |
| Balance at December 31, 2000                        |   | $                                                                 | —     |   | $ | (705 | ) | $ | 185 |   | $ | — |   | $ | (520 | ) |
| Current-period change                               |   | —                                                            |       | (49 | ) | (1,026 | ) | — |   | (1,075 | ) |
|                                                |   |                                                              |       |   |   |   |   |   |   |   |   |
| Balance at December 31, 2001                        |   | $                                                                 | —     |   | $ | (754 | ) | $ | (841 | ) | $ | — |   | $ | (1,595 | ) |
| Current-period change                               |   | —                                                            |       | (2,138 | ) | (4,386 | ) | — |   | (6,524 | ) |
|                                                |   |                                                              |       |   |   |   |   |   |   |   |   |
| Balance at December 31, 2002                        |   | $                                                                 | —     |   | $ | (2,892 | ) | $ | (5,227 | ) | $ | — |   | $ | (8,119 | ) |
| **Current-period change**                           |   | **—**                                                        | ** ** | **(11,534** | **)** | **6,232** | ** ** | **—** | ** ** | **(5,302** | **)** |
|                                                |   |                                                              | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |
| **Balance at December 31,  2003**                   |   | **$**                                                             | **—** | ** ** | **$** | **(14,426** | **)** | **$** | **1,005** | ** ** | **$** | **—** | ** ** | **$** | **(13,421** | **)** |

 

222

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----

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

(2)    Individual amounts for **ULH&P** are immaterial.

 

223

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**19.**       Transfer of Generating Assets

** **

In December 2002, the IURC approved a settlement agreement among **PSI**, the Indiana Office of the UtilityConsumer Counselor, and the IURC Testimonial Staff authorizing **PSI’s** purchases of the Henry County,Indiana and Butler County, Ohio, gas-fired peaking plants from twonon-regulated affiliates.  In February2003, the FERC issued an order under Section 203 of the Federal Power Actauthorizing **PSI’s** acquisitions ofthe plants, which occurred on February 5, 2003.  Subsequently, in April 2003, the FERC issued a tolling orderallowing additional time to consider a request for rehearing filed in responseto the February 2003 FERC order.  Atthis time, the rehearing request is still pending before the FERC, and **PSI** cannot predict the outcome of thismatter.

 

In July 2003, **ULH&P**filed an application with the KPSC requesting a certificate of publicconvenience and necessity to acquire **CG&E’s**68.9 percent 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.  InDecember 2003, the KPSC conditionally approved this application.  The transfer, which will be made at net bookvalue, will not affect current electric rates for **ULH&P’s** customers, as power will be provided under thesame terms as under the current wholesale power contract with **CG&E** through at least December 31,2006.  **ULH&P**will also seek regulatory approval for aspects of this transaction from theFERC and SEC.  At this time, **ULH&P** is unable to predict the outcomeof this matter.

 

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## **ITEM 9**.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTSON ACCOUNTING ANDFINANCIAL DISCLOSURE

 

Disclosure with respect to this Item, for each of the registrants, hasbeen previously provided on the Form 8-K dated April 30, 2002 and as amended onMay 15, 2002.

 

## **ITEM 9A**.CONTROLS AND PROCEDURES

 

Disclosure controlsand procedures are our controls and other procedures that are designed toprovide reasonable assurance that information required to be disclosed by us inthe 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 31,2003, 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 requiring disclosureis recorded, processed, summarized, and reported within the timeframe specifiedby 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, 2003 and found no change that hasmaterially affected, or is reasonably likely to materially affect, our internalcontrol over financial reporting.

 

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**PART III****ITEM 10.  DIRECTORSAND EXECUTIVE OFFICERS OF THE REGISTRANTS**

 

### **BOARD OFDIRECTORS**

 

Information regarding **Cinergy Corp.’s**directors is incorporated by reference from its definitive Proxy Statement forthe 2004 Annual Meeting of Shareholders.

 

The directors of The Cincinnati Gas & Electric Company (**CG&E**) at February 6, 2004, are asfollows:

 

•                  **R. Foster Duncan** - Mr. Duncan, age 49, isExecutive Vice President and Chief Financial Officer of **CG&E**, a position he has held sinceFebruary 2001.  He has served asdirector of **CG&E** since April2001.  His current term as directorexpires May 3, 2004.

•                  **James E. Rogers** - Mr. Rogers, age 56, isChairman of the Board and Chief Executive Officer of **CG&E**.  He hasserved as a director of **CG&E**since 1994.  His current term asdirector expires May 3, 2004.

•                  **James L. Turner** - Mr. Turner, age 44, isExecutive Vice President of **CG&E**,a position he has held since July 2000. He served as a director of **CG&E**from February 15, 1999 to April 30, 2001, at which time Mr. William J. Grealiswas elected as successor-director to Mr. Turner.  Mr. Turner was re-elected, effective October 1, 2001, assuccessor-director to Mr. Grealis.  Mr.Turner’s current term as director expires May 3, 2004.

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** 2004 Information Statement.

 

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### **EXECUTIVEOFFICERS**

 

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 February 6,2004), 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     |   | 48      |   | **Executive  Vice President**  2/01 - present**Chief Executive Officer,  Commercial Business Unit  (formerly known as the Energy Merchant Business Unit)**  2/01 - present**President, Energy Commodities Business Unit**  3/99 - 2/01**Vice President**  4/98 - 2/01**Chief Operating Officer, Energy Commodities  Business Unit**  11/98 - 3/99                    |   | **Executive  Vice****President**  2/01 - present**Vice President**4/99 - 2/01 |   | **Executive  Vice President**  2/01 - present**Vice President**  4/99 - 2/01 |
| R. Foster  Duncan(1) |   | 49      |   | **Executive  Vice President and Chief Financial Officer**  2/01 - present                                                                                                                                                                                                                                                                                            |   | **Executive  Vice President and Chief Financial Officer**  2/01 - present |   | **Executive  Vice President and Chief Financial Officer**  2/01 - present |
| Douglas F.  Esamann  |   | 46      |   | **Vice  President and Chief Financial Officer, Energy Merchant Business Unit**  2/01 - 10/01**Vice President and Chief Financial Officer,  Energy Commodities Business Unit**  3/99 - 2/01**General Manager, Business Development,  Energy Commodities Business Unit**  3/98 - 3/99                                                                                  |   |   |   | **President**10/01 - present |
| Gregory C. Ficke     |   | 51      |   | **Vice  President and Chief Information Officer, Regulated Businesses Business Unit**  2/01 - 10/01**Vice President and Chief Information  Officer, Energy Delivery Business Unit**  7/00 - 2/01**Vice President, Operations Services, Energy  Delivery Business Unit**  4/99 - 7/00**Vice President, Gas Operations, Energy  Delivery Business Unit**  12/98 - 4/99 |   | **President**  10/01 - present |   |   |

 

227

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| Lynn J. Good(2)             |   | 44 |   | **Vice  President and Controller**11/03 - present**Vice President, Financial Project Strategy**  5/03 - 11/03                                                                                                                                                                                    |   | **Vice  President and Controller**11/03 - present**Vice President, Financial Project Strategy**  5/03 - 11/03                                               |   | **Vice  President and Controller**  11/03 - present**Vice President, Financial Project Strategy**  5/03 - 11/03                                             |
|-----------------------------|--------|----|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------|
| William J.  Grealis         |   | 58 |   | **Executive  Vice President**  7/00 - present**Chief Executive Officer, Regulated  Businesses Business Unit**  2/01 - 10/01**Chief of Staff**  7/00 - 2/01**Vice President, Corporate Services, and  Chief Strategic Officer**  8/98 - 7/00**President, Cinergy Investments, Inc.**  1/95 - 3/99 |   | **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 |
| Marc E. Manly(3)            |   | 51 |   | **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)   |   | 46 |   | **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) |   | 48 |   | **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                                                                              |
| James E. Rogers             |   | 56 |   | **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(6)         |   | 44 |   | **Executive  Vice President**  10/01 - present**Chief Executive Officer**,**Regulated Businesses Business Unit**  12/01 - present**President, Regulated Businesses Business  Unit**  2/01 - 12/01**President, Energy Delivery Business Unit**  7/00 - 2/01**Vice President**4/99 - 12/01         |   | **Executive  Vice President**  7/00 - present**President**  2/99 - 7/00                                                                                     |   | **Executive  Vice President**  7/00 - 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 VicePresident and Chief Financial Officer of LG&E Energy Corp. (LG&E) (anon-affiliate of **Cinergy**) inLouisville, Kentucky since December 1998.

 

228

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(2)    Prior to joining **Cinergy**, Ms. Good was a partner with theinternational accounting firm Deloitte & Touche LLP in Cincinnati, Ohiosince May 2002.  Prior to that, she wasa partner with the international accounting firm Arthur Andersen LLP from 1992to May 2002.  While at Arthur AndersenLLP, she had regional energy responsibilities for risk consulting and internalaudit practices.

 

(3)    Prior to joining **Cinergy**, Mr. Manly was Managing Director,Law and Governmental Affairs, General Counsel and Corporate Secretary of NewPowerHoldings, Inc. (a non-affiliate of **Cinergy**)from April 2000 to August 2002.  Priorto that, he was Vice President, Chief Counsel for AT&T Consumer ServicesGroup (a non-affiliate of **Cinergy**)from January 1995 to April 2000.  OnJune 11, 2002, NewPower Holdings, Inc. and its affiliates, TNPC Holdings, Inc.and the NewPower Company, filed a petition for relief under Chapter 11 of TheUnited States Bankruptcy Code.

 

(4)    Prior to joining **Cinergy**, Mr. Murphy was Vice President andChief Risk Officer of Enron Europe, Ltd. (a non-affiliate of **Cinergy**) from January 2001 to July2002.  Prior to that, he was VicePresident 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 VicePresident, Chief Administrative Officer of LG&E (a non-affiliate of **Cinergy**) from January 1999 to May2002.  

 

(6)    Beginning in April 1998until January 2000, Mr. Turner had full responsibility for **Cinergy’s** Government and Regulatory AffairsDepartment.  Mr. Turner served as VicePresident of Customer Services from January 2000 until July 2000.

 

**Cinergy Corp.** hasadopted both a code of business conduct and ethics applicable to all of itsdirectors, officers, and employees as well as corporate governanceguidelines.  Both of these documents areavailable on **Cinergy’s** website atwww.cinergy.com.  In addition, anyamendments to or waivers from the code of business conduct and ethics will beposted on the website.  Any suchamendment or waiver would require the prior consent of the Board of Directorsor an applicable committee thereof.

 

Information regarding **Cinergy Corp.’s**audit committee required by Items 401(h) and 401(i) of Regulation S-K isincorporated by reference from its definitive Proxy Statement for the 2004Annual Meeting of Shareholders.

 

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**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 2004 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** 2004 Information Statement.

 

**ITEM 12****.  SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT**

**ANDRELATED STOCKHOLDER MATTERS**

 

Information in response to this item for **Cinergy Corp.** is incorporated by reference from its definitiveProxy Statement for the 2004 Annual Meeting of Shareholders.

 

**Cinergy Corp.** ownsall outstanding shares of common stock of **CG&E**,**CG&E’s** only voting security.

 

**CG&E’s**directors and executive officers did not beneficially own any shares of anyclass of equity security of **CG&E**as of February 6, 2004.  The beneficialownership of **Cinergy Corp.** commonstock by each director and named executive officer of **CG&E** as of February 6, 2004, is setforth in the following table:

 
| **Name of Beneficial Owner**                                  |   | **Amount and Nature of  Beneficial Ownership(1)** |   | **Percent of  Class** |   |
|---------------------------------------------------------------|--------|---------------------------------------------------|--------|-----------------------|--------|
|                                                          |   |                                              |   |                  |   |
| Michael J. Cyrus                                              |   | 388,371  shares                                   |   |                  | *      |
| R. Foster Duncan                                              |   | 176,531 shares                                    |   |                  | *      |
| William J.  Grealis                                           |   | 448,412 shares                                    |   |                  | *      |
| Marc E. Manly                                                 |   | 49,070 shares                                     |   |                  | *      |
| James E. Rogers                                               |   | 1,913,507 shares                                  |   | 1.07                  | %      |
| All directors  and executive officers as a group (10 persons) |   | 3,183,476 shares                                  |   | 1.78                  | %      |

 

----

*                    Less than 1 percent

(1)             Includes shareswhich there is a right to acquire within 60 days pursuant to the exercise ofstock options in the following amounts: Mr. Cyrus - 248,200; Mr. Duncan - 144,500; Mr. Grealis - 255,400; Mr.Manly - 40,000; Mr. Rogers - 1,225,300; and all directors and executiveofficers as a group - 2,024,926.

 

Information in response to this item for **PSI** is incorporated by reference from its2004 Information Statement.

 

230

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The following table reflects **Cinergy’s**equity compensation plan information as of December 31, 2003:

 

**Equity Compensation PlanInformation**

 
| **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       |   | 7,070,221                                                                                               |   | $                                                                                       | 29.37  |                                                                                                                                                       | 4,346,877 |   |
| Cinergy Corp.  Stock Option Plan                                |   | 1,021,923                                                                                               |   | $                                                                                       | 29.95  |                                                                                                                                                       | 1,318,500 |   |
| Cinergy Corp.  Employee Stock Purchase and Savings Plan         |   | —                                                                                                  |   | N/A                                                                                     |   | 1,482,664                                                                                                                                                  |      |
| Cinergy Corp.  Retirement Plan for Directors                    |   | 85,288                                                                                                  |   | N/A                                                                                     |   | —                                                                                                                                                     |      |
| Cinergy Corp.  Directors’ Equity Compensation Plan         |   | 22,201                                                                                                  |   | N/A                                                                                     |   | 46,771                                                                                                                                                     |      |
| Cinergy Corp.  Directors’ Deferred Compensation Plan       |   | 48,639                                                                                                  |   | N/A                                                                                     |   | 108,547                                                                                                                                                    |      |
|                                                            |   |                                                                                                    |   |                                                                                    |   |                                                                                                                                                       |      |
| **Equity  compensation plans not approved by security holders** |   |                                                                                                    |   |                                                                                    |   |                                                                                                                                                       |      |
| Cinergy Corp. UK  Sharesave Scheme                              |   | 6,876                                                                                                   |   | $                                                                                       | 25.14  |                                                                                                                                                       | 62,637    |   |
| Cinergy Corp.  401(k) Excess Plan                               |   | 76,604                                                                                                  |   | N/A                                                                                     |   | —                                                                                                                                                     |      |

 

The following information describes the equity compensation plans thathave not been approved by shareholders.

 

#### **Cinergy Corp.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 of shares are returnedto the participant.  A participant mayelect to terminate participation in the plan at any time.  Participation also will terminate if theparticipant’s employment ceases.  Upontermination of participation, all funds are returned to the participant withoutpenalty although, in certain specified circumstances, options may be exercisedearly on a pro-rata basis.

 

#### **Cinergy Corp.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 can defer additionalcompensation when they have already contributed

 

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the maximum amount (pursuant to the anti-discrimination rules forhighly compensated employees) under the 401(k) Plan.  All funds deferred are held in a rabbi trust administered by anindependent 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 2004 Annual Meeting ofShareholders.

 

Information in response to this item for **PSI** is incorporated by reference from **PSI’s** 2004 Information Statement.

 

**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 2004 Annual Meeting of Shareholders.

 

232

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**PART IV**

 

**ITEM 15****.  EXHIBITS,FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K**

 

**FINANCIAL STATEMENTS AND SCHEDULES**

 

Refer to the page captioned “Index to Financial Statements andFinancial Statement Schedules” for an index of the financial statements andfinancial statement schedules included in this report.

 

**REPORTSON FORM 8-K**

 

The following reports on Form 8-K were furnished or filed during thequarter ended December 31, 2003.

 
| **Date of Report** |   | **Registrant**     |       | **Item Furnished or Filed**                                   |       |
|--------------------|--------|--------------------|------------|---------------------------------------------------------------|------------|
|               |   |               | ** ** |                                                          | ** ** |
| October 27, 2003   |   | **Cinergy  Corp.** |       | Item 12.   Results of Operations and Financial Condition |       |

 

**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.                                                                       |   | **Cinergy  Corp.** 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. |   | **Cinergy  Corp.** 1997 Form  10-K           |
| **Instruments defining the rights of  holders, incl. Indentures** |   |                 |   |                                                                                                                                                                        |   |                                         |

 

233

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| 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                                                           |
| 4-l  |   | **Cinergy Corp. PSI**      |   | Fifty-first  Supplemental Indenture between **PSI**  and LaSalle National Bank dated February 1, 1994.                                                                                    |   | **PSI** 1993 Form 10-K                                                           |
| 4-m  |   | **Cinergy Corp. PSI**      |   | Fifty-second  Supplemental Indenture between **PSI**  and LaSalle National Bank, as Trustee, dated as of April 30, 1999.                                                                  |   | **PSI** March 31, 1999, Form 10-Q                                                |
| 4-n  |   | **Cinergy Corp. PSI**      |   | Fifty-third  Supplemental Indenture between **PSI**  and LaSalle National Bank dated June 15, 2001.                                                                                       |   | **Cinergy  Corp.** June 30,  2001, Form 10-Q                                     |
| 4-o  |   | **Cinergy Corp. PSI**      |   | Fifty-fifth  Supplemental Indenture between **PSI**  and LaSalle National Bank dated February 15, 2003.                                                                                   |   | **Cinergy  Corp.** 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.                                                                                         |   | **Cinergy  Corp.** 1996 Form  10-K                                               |
| 4-t  |   | **Cinergy Corp. PSI**      |   | Indenture dated  November 15, 1996, between **PSI**  and The Fifth Third Bank, as Trustee.                                                                                                |   | **Cinergy  Corp.** 1996 Form  10-K                                               |
| 4-u  |   | **Cinergy Corp. PSI**      |   | First  Supplemental Indenture dated November 15, 1996, between **PSI** and The Fifth Third Bank, as Trustee.                                                                              |   | **Cinergy  Corp.** 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.                                                                           |   | **Cinergy  Corp.** 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                                  |

 

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| 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.           |   | **Cinergy  Corp.** 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.            |   | **Cinergy  Corp.**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                       |
| 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.           |   | **Cinergy  Corp.** 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                       |

 

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| 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                                |
| 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                                             |
| **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.                                                                                               |   |                                                                          |
| 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.                     |   |                                                                          |
| 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                                             |

 

236

----

 
| 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. |   |                                                        |
| 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.  |   |                                                        |
| 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.     |   |                                                        |
| 10-l  |   | **Cinergy Corp. CG&E  PSI** |   | Employment  Agreement dated November 15, 2002, among **Cinergy  Corp.**, **CG&E**, and **PSI** and Marc E. Manly.                                                                              |   |                                                        |
| 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.                |   |                                                        |
| 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                          |
| 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.                                                                                      |   | **Cinergy  Corp.** 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.                                                                |   | **Cinergy  Corp.** 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.                                                                       |   | **Cinergy  Corp.** 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.                                                                       |   |                                                        |
| 10-y  |   | **Cinergy Corp.**               |   | Amendment to **Cinergy Corp.** Supplemental Executive  Retirement Plan, effective January 1, 2003, adopted December 15, 2003.                                                                      |   |                                                        |
| 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                |

 

237

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| 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.                                                                                                                                                                                                                                  |   |                                                                                 |
| 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                                 |
| 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.** |   | **Cinergy  Corp.**  Nonqualified Deferred Incentive Compensation Plan, effective January 1, 1997,  adopted December 17, 1996.                                                                                                                                                                                                                   |   | **Cinergy  Corp.** 1996 Form  10-K                                                   |
| 10-ss  |   | **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-tt  |   | **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-uu  |   | **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-vv  |   | **Cinergy Corp.** |   | Amendment to **Cinergy Corp.** Non-Union Employees’  Pension Plan, effective May 1, 2003, adopted October 10, 2003.                                                                                                                                                                                                                        |   |                                                                                 |
| 10-ww  |   | **Cinergy Corp.** |   | Amendment to **Cinergy Corp.** Non-Union Employees’  Pension Plan, effective December 1, 2003, adopted October 10, 2003.                                                                                                                                                                                                                   |   |                                                                                 |
| 10-xx  |   | **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-yy  |   | **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-zz  |   | **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-aaa |   | **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-bbb |   | **Cinergy Corp.** |   | Amendment to **Cinergy Corp.** Non-Union Employees’ 401(k)  Plan, effective December 1, 2003, adopted October 10, 2003.                                                                                                                                                                                                                    |   |                                                                                 |
| 10-ccc |   | **Cinergy Corp.** |   | Amendment to **Cinergy Corp.** Non-Union Employees’ 401(k)  Plan, effective January 1, 2004, adopted December 16, 2003.                                                                                                                                                                                                                    |   |                                                                                 |
| 10-ddd |   | **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-eee |   | **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-fff |   | **Cinergy Corp.** |   | Amendment to **Cinergy Corp.** Union Employees’ 401(k)  Plan, effective January 1, 2004, adopted December 16, 2003.                                                                                                                                                                                                                        |   |                                                                                 |

 

238

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| 10-ggg                             |   | **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-hhh                             |   | **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-iii                             |   | **Cinergy Corp.**                          |   | Amendment to **Cinergy Corp.** Union Employees’ Savings  Incentive Plan, effective January 1, 2004, adopted December 16, 2003.                                  |   |                               |
| 10-jjj                             |   | **Cinergy Corp.**                          |   | **Cinergy  Corp.** Excess  Profit Sharing plan, effective as of January 1, 2003, adopted December 20,  2002.                                                         |   |                               |
| 10-kkk                             |   | **Cinergy Corp.**                          |   | **Cinergy  Corp.** Excess  Pension Plan, as amended and restated, effective as of January 1, 1998.                                                                   |   |                               |
| 10-lll                             |   | **Cinergy Corp.**                          |   | Amendment to **Cinergy Corp.** Excess Pension Plan,  effective as of August 29, 2002.                                                                                |   |                               |
| 10-mmm                             |   | **Cinergy Corp.**                          |   | Amendment to **Cinergy Corp.** Excess Pension Plan,  effective as of January 1, 2003, adopted October 10, 2003.                                                      |   |                               |
| 10-nnn                             |   | **Cinergy Corp.**                          |   | Amendment to **Cinergy Corp.** Excess Pension Plan,  effective as of December 15, 2003.                                                                              |   |                               |
| 10-ooo                             |   | **Cinergy Corp.**                          |   | Amendment to **Cinergy Corp.** Excess Pension Plan,  effective as of January 1, 2004, adopted December 16, 2003.                                                     |   |                               |
| 10-ppp                             |   | **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-qqq                             |   | **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   |
| **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  R. Foster Duncan 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 18 U.S.C. Section 1350.  |   |                               |
| 32-b                               |   | **Cinergy Corp. CG&E  PSI  ULH&P** |   | Certification by  R. Foster Duncan pursuant to 18 U.S.C. Section 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002 18 U.S.C. Section 1350. |   |                               |

 

----

(1)     Regulation S-K 229.10(d)requires Registrants to identify the physical location, by SEC file numberreference, of all documents that are incorporated by reference and have been onfile with the SEC for more than five years. The SEC file number references for **Cinergy** and itssubsidiaries, 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 acopy of any long-term debt instrument not listed above.

 

239

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**CINERGY CORP. AND SUBSIDIARIES**

SCHEDULE II - VALUATION ANDQUALIFYING ACCOUNTSFOR THE THREE YEARS ENDED DECEMBER 31, 2003

*(inthousands)*

 
| **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** |   |
|                                 |   |                                 |       |                     |   |                            |       |                                                |    |   |   |   |   |
| **Accumulated  Provisions**          |   |                                 |       |                     |   |                            |       |                                                |    |   |   |   |   |
| **Deducted  from Applicable Assets** |   |                                 |       |                     |   |                            |       |                                                |    |   |   |   |   |
|                                 |   |                                 |       |                     |   |                            |       |                                                |    |   |   |   |   |
| Allowance for Doubtful Accounts      |   |                                 |       |                     |   |                            |       |                                                |    |   |   |   |   |
|                                 |   |                                 |       |                     |   |                            |       |                                                |    |   |   |   |   |
| **2003**                             |   | **$**                                | **16,368** | ** **               | **$**  | **3,256**                       | ** ** | **$**                                               | **302** | ** ** | **$** | **12,042** | ** ** | **$** | **—** | ** ** | **$** | **7,884** | ** ** |
|                                 |   |                                 |       |                     |   |                            |       |                                                |    |   |   |   |   |
| 2002                                 |   | $                                    | 34,110     |                     | $      | 7,883                           |       | $                                                   | 9,270   |   | $ | 34,873 |   | $ | 22 |   | $ | 16,368 |   |
|                                 |   |                                 |       |                     |   |                            |       |                                                |    |   |   |   |   |
| 2001                                 |   | $                                    | 29,951     |                     | $      | 39,693                          |       | $                                                   | 5,254   |   | $ | 40,788 |   | $ | — |   | $ | 34,110 |   |

 

240

----

 

**THECINCINNATI GAS & ELECTRIC COMPANY AND SUBSIDIARIES**

SCHEDULE II - VALUATIONAND QUALIFYING ACCOUNTSFOR THE THREE YEARS ENDED DECEMBER 31, 2003

*(inthousands)*

 
| **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** |   |
|                                 |   |                                 |       |                     |       |                            |       |                                                |       |   |   |   |   |
| **Accumulated  Provisions**          |   |                                 |       |                     |       |                            |       |                                                |       |   |   |   |   |
| **Deducted  from Applicable Assets** |   |                                 |       |                     |       |                            |       |                                                |       |   |   |   |   |
|                                 |   |                                 |       |                     |       |                            |       |                                                |       |   |   |   |   |
| Allowance for  Doubtful Accounts     |   |                                 | ** ** |                     | ** ** |                            | ** ** |                                                | ** ** |   | ** ** |   | ** ** |
|                                 |   |                                 | ** ** |                     | ** ** |                            | ** ** |                                                | ** ** |   | ** ** |   | ** ** |
| **2003**                             |   | **$**                                | **5,942**  | ** **               | **$**      | **2,900**                       | ** ** | **$**                                               | **256**    | ** ** | **$** | **7,496** | ** ** | **$** | **—** | ** ** | **$** | **1,602** | ** ** |
|                                 |   |                                 |       |                     |       |                            |       |                                                |       |   |   |   |   |
| 2002                                 |   | $                                    | 25,874     |                     | $          | 2,029                           |       | $                                                   | 6,096      |   | $ | 28,057 |   | $ | — |   | $ | 5,942 |   |
|                                 |   |                                 |       |                     |       |                            |       |                                                |       |   |   |   |   |
| 2001                                 |   | $                                    | 19,044     |                     | $          | 30,166                          |       | $                                                   | 4,089      |   | $ | 27,425 |   | $ | — |   | $ | 25,874 |   |

 

241

----

 

**PSI ENERGY, INC. AND SUBSIDIARY**

SCHEDULE II - VALUATION ANDQUALIFYING ACCOUNTSFOR THE THREE YEARS ENDED DECEMBER 31, 2003

*(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** |   |
|                                 |   |                                 |       |                     |       |                            |       |                                                |       |   |   |   |   |
| **Accumulated  Provisions**          |   |                                 |       |                     |       |                            |       |                                                |       |   |   |   |   |
| **Deducted  from Applicable Assets** |   |                                 |       |                     |       |                            |       |                                                |       |   |   |   |   |
|                                 |   |                                 |       |                     |       |                            |       |                                                |       |   |   |   |   |
| Allowance for  Doubtful Accounts     |   |                                 | ** ** |                     | ** ** |                            | ** ** |                                                | ** ** |   | ** ** |   | ** ** |
|                                 |   |                                 | ** ** |                     | ** ** |                            | ** ** |                                                | ** ** |   | ** ** |   | ** ** |
| **2003**                             |   | **$**                                | **5,656**  | ** **               | **$**      | **—**                      | ** ** | **$**                                               | **—** | ** ** | **$** | **4,546** |   | **$** | **—** | ** ** | **$** | **1,110** | ** ** |
|                                 |   |                                 |       |                     |       |                            |       |                                                |       |   |   |   |   |
| 2002                                 |   | $                                    | 6,773      |                     | $          | 2,310                           |       | $                                                   | 3,174      |   | $ | 6,579 |   | $ | 22 |   | $ | 5,656 |   |
|                                 |   |                                 |       |                     |       |                            |       |                                                |       |   |   |   |   |
| 2001                                 |   | $                                    | 9,317      |                     | $          | 8,339                           |       | $                                                   | 1,165      |   | $ | 12,048 |   | $ | — |   | $ | 6,773 |   |

 

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

SCHEDULE II - VALUATIONAND QUALIFYING ACCOUNTSFOR THE THREE YEARS ENDED DECEMBER 31, 2003

*(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** |   |
|                                 |   |                                 |       |                     |       |                            |       |                                                |       |   |   |   |   |
| **Accumulated  Provisions**          |   |                                 |       |                     |       |                            |       |                                                |       |   |   |   |   |
| **Deducted  from Applicable Assets** |   |                                 |       |                     |       |                            |       |                                                |       |   |   |   |   |
|                                 |   |                                 |       |                     |       |                            |       |                                                |       |   |   |   |   |
| Allowance for  Doubtful Accounts     |   |                                 | ** ** |                     | ** ** |                            | ** ** |                                                | ** ** |   | ** ** |   | ** ** |
|                                 |   |                                 | ** ** |                     | ** ** |                            | ** ** |                                                | ** ** |   | ** ** |   | ** ** |
| **2003**                             |   | **$**                                | **84**     | ** **               | **$**      | **—**                      | ** ** | **$**                                               | **108**    | ** ** | **$** | **—** | ** ** | **$** | **—** | ** ** | **$** | **192** | ** ** |
|                                 |   |                                 | ** ** |                     | ** ** |                            | ** ** |                                                | ** ** |   | ** ** |   | ** ** |
| 2002                                 |   | $                                    | 1,196      |                     | $          | 392                             |       | $                                                   | 2,383      |   | $ | 3,887 |   | $ | — |   | $ | 84 |   |
|                                 |   |                                 |       |                     |       |                            |       |                                                |       |   |   |   |   |
| 2001                                 |   | $                                    | 1,492      |                     | $          | 3,050                           |       | $                                                   | 4          |   | $ | 3,350 |   | $ | — |   | $ | 1,196 |   |

 

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## **SIGNATURES**

 

Pursuant to the requirements of Section 13 or 15(d) of the SecuritiesExchange Act of 1934, Cinergy Corp., The Cincinnati Gas & Electric Company,PSI Energy, Inc., and The Union Light, Heat and Power Company each has dulycaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.

 

CINERGY CORP.

THE CINCINNATI GAS & ELECTRICCOMPANY

PSI ENERGY, INC.

THE UNION LIGHT, HEAT AND POWERCOMPANY

Registrants

 
| Date:  March  3, 2004 |   |                    |
|----------------------------|--------|-------------------------|
|                       |   |                    |
|                       |   |                    |
|                       | By     | /s/ James E. Rogers     |   |
|                       |   | James E. Rogers         |   |
|                       |   | Chief Executive Officer |   |

 

244

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Pursuant to the requirements of the Exchange Act, this report has beensigned by the following persons on behalf of the indicated registrants and inthe capacities and on the dates indicated:

 

245

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| **Signature**     |                 | **Title** |                                                                | **Date** |
|-------------------|----------------------|-----------|---------------------------------------------------------------------|----------|
|              |                 |      |                                                                |     |
| **Cinergy Corp.** |                 |      |                                                                |     |
|              | Michael G. Browning* |      | Director                                                            |     | March 3, 2004 |
|              | Phillip R. Cox*      |      | Director                                                            |     | March 3, 2004 |
|              | George C. Juilfs*    |      | Director                                                            |     | March 3, 2004 |
|              | Thomas E. Petry*     |      | Director                                                            |     | March 3, 2004 |
|              |                 |      |                                                                |     |   |
|              | /s/ James E. Rogers  |      |                                                                |     |   |   |
|              | James E. Rogers      |      | Director and Chief Executive Officer  (principal executive officer) |     | March 3, 2004 |
|              | Mary L. Schapiro*    |      | Director                                                            |     | March 3, 2004 |
|              | John J. Schiff, Jr.* |      | Director                                                            |     | March 3, 2004 |
|              | Philip R. Sharp*     |      | Director                                                            |     | March 3, 2004 |
|              | Dudley S. Taft*      |      | Director                                                            |     | March 3, 2004 |
|              |                 |      |                                                                |     |   |
|              | /s/ R. Foster Duncan |      |                                                                |     |   |   |
|              | R. Foster Duncan     |      | Chief Financial Officer (principal  financial officer)              |     | March 3, 2004 |
|              |                 |      |                                                                |     |   |
|              | /s/ Lynn J. Good     |      |                                                                |     |   |   |
|              | Lynn J. Good         |      | Controller                                                          |     | March 3, 2004 |
|              |                 |      |                                                                |     |   |
| **CG&E**      |                 |      |                                                                |     |
|              | /s/ R. Foster Duncan |      |                                                                |     |   |   |
|              | R. Foster Duncan     |      | Director and Chief Financial Officer  (principal financial officer) |     | March 3, 2004 |
|              |                 |      |                                                                |     |   |
|              | /s/ James E. Rogers  |      |                                                                |     |   |   |
|              | James E. Rogers      |      | Director and Chief Executive Officer  (principal executive officer) |     | March 3, 2004 |
|              |                 |      |                                                                |     |   |
|              | James L. Turner*     |      | Director                                                            |     | March 3, 2004 |
|              |                 |      |                                                                |     |   |
|              | /s/ Lynn J. Good     |      |                                                                |     |   |   |
|              | Lynn J. Good         |      | Controller                                                          |     | March 3, 2004 |
|              |                 |      |                                                                |     |   |
| **PSI**           |                 |      |                                                                |     |
|              | Michael G. Browning* |      | Director                                                            |     | March 3, 2004 |
|              | Douglas F. Esamann*  |      | Director                                                            |     | March 3, 2004 |
|              |                 |      |                                                                |     |   |
|              | /s/ James E. Rogers  |      |                                                                |     |   |   |
|              | James E. Rogers      |      | Director and Chief Executive Officer  (principal executive officer) |     | March 3, 2004 |
|              |                 |      |                                                                |     |   |
|              | /s/ R. Foster Duncan |      |                                                                |     |   |   |
|              | R. Foster Duncan     |      | Chief Financial Officer (principal  financial officer)              |     | March 3, 2004 |
|              |                 |      |                                                                |     |   |
|              | /s/ Lynn J. Good     |      |                                                                |     |   |   |
|              | Lynn J. Good         |      | Controller                                                          |     | March 3, 2004 |
|              |                 |      |                                                                |     |   |
| **ULH&P**     |                 |      |                                                                |     |
|              |                 |      |                                                                |     |   |
|              | /s/ R. Foster Duncan |      |                                                                |     |   |   |
|              | R. Foster Duncan     |      | Director and Chief Financial Officer  (principal financial officer) |     | March 3, 2004 |
|              |                 |      |                                                                |     |   |
|              | /s/ James E. Rogers  |      |                                                                |     |   |   |
|              | James E. Rogers      |      | Director and Chief Executive Officer  (principal executive officer) |     | March 3, 2004 |
|              |                 |      |                                                                |     |   |
|              | James L. Turner*     |      | Director                                                            |     | March 3, 2004 |
|              |                 |      |                                                                |     |   |
|              | /s/ Lynn J. Good     |      |                                                                |     |   |   |
|              | Lynn J. Good         |      | Controller                                                          |     | March 3, 2004 |
|                   |                      |           |                                                                     |          |  |  |  |  |  |  |  |  |  |  |

 

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* The undersigned, by signing his name hereto, doeshereby execute this Form 10-K on behalf of the officers and directors of theregistrant indicated above by asterisks, pursuant to powers of attorney dulyexecuted by such officers and directors and incorporated by reference as anexhibit to this Form 10-K.

 

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|   | /s/ James E.  Rogers  |   |   |
|--------|-----------------------|--------|--------|
|   | James E. Rogers       |   |
|   | *Attorney-In-Fact*    |   |
|   | March 3, 2004         |   |
|   |                  |   |
|   |                  |   |
|   | /s/ R. Foster  Duncan |   |   |
|   | R. Foster Duncan      |   |
|   | *Attorney-In-Fact*    |   |
|   | March 3, 2004         |   |
|        |                       |        |        |  |

 

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